STRATEGIC ALLIANCES

VEHICLE FOR A SUCCESSFUL

GLOBAL STRATEGY

BY B.V.L. NARAYANA

FPM 2, BUSINESS POLICY D-927, I.I.M.HOSTEL

INDIAN INSTITUTE OF MANAGEMENT VASTRPUR

AHEMDABAD PHONE: 91-079-26326927, 09382308005

EMAIL:BNVLAKSHMI@IIMAHD.ERNET.IN

LEARNING

CAPABILITIES

STRATEGY

PERFORMANCE

Title: Strategic Alliances: Vehicle for a successful Global Strategy Abstract: Cooperative activity between firms has increasingly become necessary because of the realization by firms that they are no more in a position to make the necessary adjustments to a highly dynamic environment which drives present day global business. Global business requires heavy investments in assets and resources, continuous reconfiguration and development of capabilities. With firms of various sizes and ages internationalizing, driven by the impetus given to entrepreneurial innovation, competitive advantage is sustainable only if firms are willing to continuously regenerate capabilities and maintain strategic agility. Making trust as the central covenant of strategy and using strategic alliances as a vehicle for implementation, firms can pursue their global strategy and not only maintain competitive advantage in their respective markets , but also successfully enter new markets. Crucial to the firm are the development of idiosyncratic capabilities of collaborative know-how and market orientation. It is proposed that collaborative know-how will have a positive effect on firm performance, mediated through organizational trust and will facilitate increased social control mechanisms in preference to formal controls. Strategic alliances contribute to competitive advantage by facilitating creation, transfer of knowledge, creation of social networks and hence social capital and facilitating access to resources. This paper attempts to look at strategic alliances as vehicles for pursuing a successful global strategy. Key words: Strategic alliances, Collaborative know-how, Trustworthiness, Global strategies.

Introduction: Strategy is centrally concerned with the process of how firms and managers respond to and exploit environmental signals. Frame works like Porters five forces, Resource based view or the transaction cost perspectives all indicate that competitive advantage arises from favorable access to resources or opportunities and exploiting these requires active interpretation of the environment by the managers (Cockburn, Henderson and Stern 2000). In the global economy, it is now possible to source capital, goods, technology, and other resources from anywhere in the world. However the enduring competitive advantage lies in knowledge, and relationships which are local (Porter 1998). Due to technological advances and globalization of many kinds of value added activities, we have seen a shift from hierarchical capitalism – where the governance of production and transaction was determined by the relative costs and benefits of using markets and firms as alternative organizational modes—to alliance capitalism—where organization of production and transaction as involving both cooperation and competition between leading wealth creating agents (Dunning 1995). Because of this shift, the fundamental assumptions of competitive forces ensuring growth through innovation and ensuring societal and individual gain are being challenged. It has already been realized that competitive forces by themselves cannot ensure an optimum innovation led growth in a dynamic environment. The other assumption may not be valid in the 21st century. Collaborative strategies offer an alternative option to firms to achieve competitive advantage in their markets. The motive for alliance capitalism may be to reduce transaction and coordinating costs of arms length transactions and leverage assets, skills and knowledge of partner firms. Alliances are the most common form of cooperative strategies seen. Successful management of alliances is a key organizational capability. Simonin (1997, 2002) identified the construct “collaborative know how” which identifies itself with a distinct firm capability which facilitates firms possessing it to achieve significantly higher alliance success rates. However the issue of how the construct contributes to alliance performance, its interaction with trust, reputation, and control and its ability to influence perceived risk are still open for research including empirical validation of the proposed relations among these constructs. This paper attempts to look at strategic alliances as vehicles for pursuing a successful global strategy. It first identifies the reasons for upsurge in cooperative strategies. It then identifies the advantages for pursuing such strategies. It then identifies the factors necessary for successful management of alliances. It then goes on to how firms need to develop crucial capabilities of collaborative know-how, market orientation and trustworthiness, which in conjunction with top management’s active interventions allow a firm to successfully pursue global strategy. The rationale for pursuing collaborative strategies: Globalization is associated with increased trade liberalization and hence changes the patterns of investment, production and distribution of multinational firms (Harvey, Novicevic and Kiessling 2001). The changing nature of competition globally necessitates firms understand that:

• competitive advantages are time sensitive,

• the need to renew strategies on a continuous basis to reestablish newer sources of competitive advantage,

• need to redefine industry boundaries and • Most importantly look at the concept of timing as a competence to maintain

competitive advantage (Grant 1996, Galunic and Rodan 1998).

This ability to continuously generate new advantages (phenomenon of hyper-competition, D’aveni 1994) requires strategic agility (the ability to modify or adjust strategies more quickly than competitors), and also the need to transcend the traditional boundaries. It also require strategies which are more focused on intangible and invisible assets as these are more mobile, less imitable and difficult to substitute and create a constantly changing series of temporary competitive advantages (Makadok 1998). Strategic agility necessitates a proactive management posture to search continuously for new sources of competitive advantage. Any firm must achieve efficiency in its current operations, manage risks associated with those operations and develop internal learning capabilities to innovate and adapt to future changes (Ghoshal 1987). This can be achieved by exploiting differences in input and output markets across the countries in which it is present, or by achieve economies of scale and scope of its different activities. The strategic task is to use the three sources of competitive advantage to optimize efficiency, risk and learning simultaneously. Since organizations are now subject to increasing number of environmental variables, to survive and grow in this highly competitive world, alliances are being entered into. The term “alliances” serves as an “umbrella” label for a host of cooperative relationships (Faulkner & Rond. 2001, pp3). These relationships can range from

• Joint ventures • Licensing agreements • Minority equity investments • Co marketing/ branding/ development agreements • Consortia • Coalitions

An alliance is commonly defined as any voluntarily initiated cooperative agreement between firms that involves exchange, sharing, or co-development, and it can include contributions by partners of capital, technology, or firm-specific assets (Gulati & Singh,1998). The growth of alliances and networks represents the amalgamation of independent resources and competencies in a firm’s search for sustainable competitive advantage. Sustained competitive advantage stems from customers perception of a consistent superiority of the attributes of a firms products as compared to its competitors. This gap in attributes is a result of a capability gap and the gap is maintained over time and which is difficult to imitate (Coyne 1986). The resource-based view provides an explanation of competitive heterogeneity based on the premise that close competitors differ in their resources and capabilities in important and durable ways. These differences in turn affect competitive advantage and disadvantage (Barney 1991). The case for making resources and capabilities of the firm as the basis for its long term strategy is on the premise that, these provide the basic direction of a firm’s strategy and they are the primary source of profit (Grant 1991). Four conditions must be met for a firm to enjoy sustained rents. Resource

heterogeneity which is the source of ricardian rents, ex-post limits to competition which maintains this heterogeneity(replenishment), imperfect factor mobility which is assured by making the resource sticky( role of capabilities) and ex ante limits to competition which allows rents to be generated and not offset by costs( role of learning)(Petraf 1993). This highlights the need of firms to continuously identify gaps between resource availability and environmental opportunities and replenish, augment and upgrade them so as to achieve the sustained ability to generate profits from rents. This covers the need to sustain existing competitive advantages and the need to generate new ones. The ability of firms to do so is termed as “dynamic capabilities”. Teece, Pisano and Shuen (1997) define dynamic capabilities as ‘the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments. The resource and capabilities gap identified by the firms can be bridged by:

• internal generation • acquisition • through cooperation

The emphasis is on acquisition of intangible assets (embedded knowledge) which cannot be easily made explicit or transferred using market mechanisms (Kogut1988).This knowledge is associated with an individual. To gain knowledge requires contact, dialogue, and thus relationships. A firm facilitates communication and coordination and building of relationships across people and groups of diverse specialized competence. A firm thus provides a sense of collectivity or togetherness which can be used by individuals to structure discourse, coordination and learning (Kogut and zander 1996). Cooperative strategies between firms, through building of relationships, allows individuals to facilitate discourse, and learning. Strategic alliances: A Vehicle for global strategy Collaboration between companies has grown at a significant rate in recent years. They are important ways to supplement a firms competencies and addressing competition (Harrigan 1988). Strategic alliances are voluntary arrangements between firms involving exchange, sharing, or co development of products, technologies, or services. They can occur as a result of a wide range of motives and goals, take a variety of forms, and occur across vertical and horizontal boundaries (Gulati, 1998). The objectives suggested behind the substantial increase in the formation of strategic alliances are risk reduction (Contractor and Lorange 1988), economies of scale, access to markets, and access to knowledge (Grant 1996, Kogut 1988). In recent times, drawing on the resource based perspectives, and treating knowledge as a strategic resource, learning has become a major objective to explain propensity of firms to enter into strategic alliances (Grant, Baden fuller 2004). Crossan et al (1999, 2003) have gone to say that organization learning may be the only sustainable competitive advantage. Organizational learning is not a trial and error process. It is much more than a rational process within the decision making activities. Organizational learning can be viewed as encoding of information from history into routines that guide behavior and is target oriented. Organizations can learn from direct experience, others experience and develop frameworks to interpret these experiences( Levitt and March 1988) Organization learning can be thus be seen as a

process of strategic organizational renewal which identifies new conditions in the environment, links this environmental change to corporate strategy and modifies this linkage over time. The fact that firms are able to source all varieties of tangible resources, capital and technology leaves them with the need to source the knowledge which will enable it to use these resources effectively. Therefore combining the resource based view and the knowledge based view of the firm, sustained competitive advantage can only be achieved by firms whose strategies enable it to continuously generate capabilities which allow it to make use of resources more efficiently than its competitors, have dynamic capabilities which enable it to generate these idiosyncratic capabilities. This requires firms to look at alliances and their management as a strategic priority. Strategic alliances contribute to competitive advantage by facilitating transfer of knowledge, creation of social networks and hence social capital and facilitating access to resources.

• Knowledge, especially tacit knowledge which is resident in people, requires

continuous interaction between people to enable transfer. Transfer of such knowledge, which forms the basis for generation of capabilities, is facilitated by alliances. The formation of an alliance reduces the risk of dissipation of knowledge while providing an ideal platform for learning (Inkpen 2000, Kogut 1988)

• The need to look at strategic alliances as a means to acquire knowledge and

generate capabilities is further strengthened by the fact that internationalization is being sought as a strategy by firms irrespective of their size, including new and entrepreneurial firms (McDougall and Oviatt 2000). This trend arising from the importance being given to entrepreneurship by national governments, has given rise to the phenomenon of born global firms. The growth of such firms is being driven by knowledge and learning, especially in dynamic environments, since they are not burdened by learning liabilities which develop with age (Autio, Sapienza and Almeida 2000).For such firms, strategic alliances are perhaps the most convenient vehicle for acquisition of resources and knowledge.

• Considering the hyper competitive environment in the present global business

context, acquisition and/or internal generation of knowledge, especially tacit knowledge requires considerable resources and time. Apart from these, opportunity for transfer of such knowledge is essential. To complete the utility of such knowledge it is also essential to have the requisite personnel who would actually enable the firm to put it to productive use. With fast changing technologies and shorter product cycles, time is of essence. Risks are also greater.

Strategic alliances, allow firms to overcome the risks 1. of investments by spreading costs of investments across partners 2. facilitate transfer of knowledge purposefully 3. Enable smaller entrepreneurial firms, who house the knowledge required

by others to generate idiosyncratic capabilities, a mechanism of purposeful exchange which reduces the risk of appropriation.

• Dyer and Singh (1998) in their relational view on attaining competitive advantage through cooperative relationships have stated that Alliances can generate relational rents when alliance partners:

1. Combine, exchange or invest in idiosyncratic assets, knowledge and resources/capabilities

2. And /or employ effective governance mechanisms that lower transaction costs

3. or permit realization of rents through synergistic combination of assets, resources/capabilities

The core of the theory is that a pair or network of firms can develop relationships that result in sustained competitive advantage.

• A cumulation of strategic alliances can lead to the formation of a social network.

1. Sociology literature views firms as lying embedded in a network of relations and that economic activity is influenced by the strength of these contacts. Network of contacts between firms is an important source of information which enables firms to use it to reduce the underlying uncertainty in business environment (Granovetter 1985). The importance of a social network is defined by the nature and purpose of the network as well as the contents of the information flowing through it.

2. A strategy of forming an alliance network can enable development of social capital (Burt 1997). The ability of the focal firm to forge an alliance network would be contingent upon its own strategic need and finding of opportunities to meet it and having inducements, in the form of accumulated technical, commercial and social capital, for other firms to join the network (Ahuja 2000b). The focal firm, which drives the network because of having initiated the alliance, can derive both informational and control benefits (by virtue of being situated between two other firms) (Ahuja 2000 a).

3. Informational advantages to firms in a social network can enable the creation of new alliances by:

• Access to information about current or potential partners about their capabilities and their trustworthiness. It can also affect the choice of organizational structures for the alliance and the key processes underlying the evolution of the alliance.

• Facilitating availability of information at the appropriate time thereby enabling decisions at the opportune moments. It can also effect the decisions along the evolutionary path of the alliance.

• The information about potential alliance partners can come out as referrals from other members of the network.

Firms with more social capital not only will have access to information about a large number of alliances, but also attract better partners for alliances. A network also signifies a higher variation in processes and there fore has a greater propensity for generating innovations.

This can be an important basis of competitive advantage. (Gulati 1998)

• With the growth of a firm, structural rearrangements using the principles of division of labor and reductionism are necessary to facilitate flow of information and facilitate coordination to improve efficiency (Thompson 1967). Although organizational forms evolve from the entrepreneurial to functional to multidivisional form, every evolution is associated with significant upheaval and resistance. Further with growth in size, the benefits of economies of scale are overwhelmed by the costs of coordination and control. The development of networks using strategic alliances favors a formation of an economic organizational form based on trust, speed and know how( Powell 1990) which facilitates organizational learning , equitable transfer of resources without the extent of transaction costs associated with hierarchies.

Having established the fact that irrespective of the size of firm, strategic alliances enable firms to acquire knowledge for use in the global arena, a firm to successfully utilize this vehicle needs to be adept at management of these. Alliance management becomes a key requirement and a capability to be acquired. Management of strategic alliances: An inter-firm alliance is an organizational structure in which each firm has limited control. Because the partners remain separate firms, there is no automatic convergence in their interests and actions. As a result, to deal with unforeseen contingencies inherent in the arrangement, the partners need to make decisions jointly. Firms entering alliances face considerable risks because of the unpredictability of the behavior of partners and the likely costs to a firm from opportunistic behavior by a partner, if it occurs. Despite the rapid growth of both domestic and international alliances in many industrial sectors, such partnerships are still considered risky (Doz, Hamel, Prahlad, 1989). The failure rates in alliances have been very high. Researchers have attributed lack of cooperation and opportunistic behavior as causes for a relatively high rate of failure in alliances (Das and Teng 1998a). The concepts of trust and control have been identified as central to potential success of alliances (Faulkner in Faulkner and Rond 2001). Success in alliances is measured by the perception of achievement of partner’s objectives, the continuance of the alliance (Yan and Gray 1994). Researchers have also proposed that firms which have achieved a higher degree of success in alliance management may be due to knowledge learnt and converted into firm capabilities (Lyles in Contractor and Lorange 1988) Considering these two facts, and the fact that alliances involve joint decision making, researchers have tried to explain alliance success by looking at trust, control and risk inherent in alliance outcomes. Partner cooperation, which is the resultant behavior of these antecedents, determines the alliance performance. Trust based management of Strategic Alliances Satisfactory cooperation is vital for the success of strategic alliances. Partner cooperation is defined as the willingness of a partner firm to pursue mutually compatible interests rather than act opportunistically. It is characterized by honest dealing, commitment, fair play, and complying with agreements. Although desirable it may not be easy to come. The need for satisfactory cooperation is dependent upon the confidence in the partner’s behavior. Confidence (opposite of risk) in partner

cooperation is the firm’s perceived certainty about partner’s satisfactory cooperation. This underscores the inherent uncertainty or risk in the aspect of partner cooperation, which needs to be reduced (Das and Teng 1998a). Risk: Risk is an important aspect of managing strategic alliances as they are an inherently risky strategy. Trust and control are the two principal determinants of risk. Trust and control jointly determine ones perceived risk. Risk is often conceptualized as variances in outcomes of importance to the risk taking subject. Perceived risk relates to estimated probabilities of several outcomes In strategic alliances risk is of two types:

1. Relational risk—risk in partner cooperation. 2. performance risk—risk in alliance performance

In strategic alliances, relational risk is defined as the probability and consequences of not having satisfactory cooperation (Das and Teng 1996). This is due to the potential for opportunistic behavior on the part of both the firms. Performance risk is the probability and consequences that alliance objectives are not achieved despite satisfactory cooperation (Das and Teng 1996). It is present in all strategies. Perceived risk is determined by trust and control. Risk as a determinant of trust and control: Risk perception determines the need for trust and control. In alliances partner firms can accept risk only up to an acceptable level. When risk is perceived to be higher than acceptable levels, there is felt need to rely on either trust or control to reduce the perceived risk to acceptable levels (Das and Teng 2001). Further alliance partner risk tolerance varies with each partner and is influenced by their risk profiles, resource profiles, competitive positions and industry dynamics. Holding control constant, a lower level of acceptable risk demands higher trust. Holding trust constant, a lower level of acceptable risk demands greater control. A lack of trust and a perception of high risk forces alliance partners to choose governance structures with tighter control mechanisms or deployment of contractual safeguards and thereby increase transaction costs. A combined use of trust and control can be used to reduce risk. Trust: Trust is a multi level phenomenon that exists at personal, firm, interorganisational levels. Researchers have distinguished between interpersonal and interorganisational trust (Curral and Inkpen 2002). Organizations themselves could become the objects of trust by members of another organization. Interorganisational relationships begin as role interactions, become personalized as individuals interact and in turn influence the institutional relationship between organizations (Ring and Van de van 1994). At inter-firm level, trust is believed to be a key element in cooperative relationships (Ring and Van de van 1992). Trust lessens concerns about opportunistic behavior, integrates partners better, and reduces formal contracting. Trust is the willingness of a party to be vulnerable to actions of another party on the expectation that the other party will perform a particular action important to the

trustor, irrespective of the ability of the trustor to monitor or control the actions of the other party (Mayer, Davis and Schoorman, 1995). Das and Teng (2001) proposed two dimensions –competence and goodwill. Researchers have stressed the importance of competence in trust. Competence trust refers to the expectation of technically competent role performance. Other terms used synonymously are ability, expertise. The other dimension of goodwill has also been referred as dependability, responsibility, integrity. The dimension of goodwill refers to the expectation that some others will have moral obligations and responsibility to place others interests above their own. Trust is a relevant factor only in risky situations. Since trust is based on positive expectations regarding goodwill and competence, it reduces the perceived risk in a relationship

1. a firms good will trust will reduce its perceived relational risk in an alliance 2. a firms competence trust will reduce its perceived performance risk

Goodwill trust indicates ones good faith, good intentions or integrity. This can be established over time and can be a source of competitive advantage. Competence is based on the various resources and capabilities of a firm. These provide the expertise needed in alliances. Over time, firms can build a reputation for competence .Competence suggests a high probability of getting things accomplished successfully. This gets converted to low performance risk. Effect of trust on control: Trust affects the effectiveness of control mechanisms. A minimum degree of trust is required in all business transactions, including partner control in alliances (Das and Teng 1998a). Trust reduces the level of resistance between partners and brings harmony to the relationship and increases mutual forbearance. Thus it makes control mechanisms more effective. Trust can manifest as greater autonomy or delegation, flexibility in contractual arrangements or use of equity only as a mechanism for distribution of alliance profits instead of control. Trust building in strategic alliances can be developed and maintained over time through the following measures:

• Risk taking is reciprocity in returning trust when a partner takes a risk to place trust in him.

• Equity preservation and maintaining fairness in alliance transactions. • Communication and proactive information exchange • Inter-firm adaptation by adjustment of ones behavior to facilitate fit among

partners or alliance and its environment. All these mechanisms allow firms to accumulate information on the basis of which trustworthiness of partners can be evaluated. (Das and Teng 1998b) Control: Control has been defined in many ways. Control is a process of regulation and monitoring the achievement of organizational goals (Das and Teng 2001). Ouchi (1977) in his seminal paper distinguished between control and structure and defined control as evaluation of behavior or of outputs. Control plays an important role in the capacity of a firm to achieve its goals. (Geringer and Hebert 1989). This can be achieved through governance structures, agreements, informal mechanisms and

managerial arrangements. Control in alliances is – control of partner and control of alliance. Control has been found to facilitate coordination and learning. Hence effective control is important for satisfactory alliance performance. Control can also lead to negative effects on alliances, resulting in increased costs of management. Thus there is a contingent relationship between managerial control and alliance performance which is moderated by trust and common goals (Yan and Gray1994). Perceived relational risk will be reduced more effectively by behavior control. The effects of control on trust: Researchers have shown control to have both detrimental and positive effects on trust. However Das and Teng (1998a) have shown that formal control may undermine trust while social control may have a positive effect on trust. Thus taking a contingency perspective, they have suggested that effect of control on trust may not be the same across all situations. Social control boosts goodwill in alliances because no specific behavior is prescribed and autonomy of partners is respected. Because partners, having been conditioned by shared values and principles believe that opportunistic behavior would violate these principles, social control facilitates building of further trust among partners. In alliances, where both performance and relational goals are set in mutual consultation, excessive controls of both output and behavioral may undermine the fine balance of trust among partners resulting in downfall in performance. It may also create dependence relationship resulting in increased degree of mistrust and further increased need for control and an increase in transaction costs. The interaction of trust, control, perceived risk and partner cooperation can be represented as follows:

TRUST BUILDING Risk taking, Equity preservation Communication Inter-firm adaptation

CONTROL MECHANISMS Goal setting Structural specification Cultural blending

TRUST LEVEL

CONTROL LEVEL CONFIDENCE

IN PARTNER COOPERATION

Perceived risk

D

I_

D

D

D

I

I

Adapted from Das and Teng-a 1998

Relationships d- Direct I-inverse

Role of firm capabilities (collaborative know-how) Researchers have also suggested that there may be systematic differences in the capabilities built over time due to learning, which may explain the relative success of some firms with alliances (Harrigan in Contractor and Lorange 1988). Experience alone is insufficient for the benefits from collaboration. This must be internalized and collaborative know how developed to contribute to future effects. Harrigan (in Contractor and Lorange 1988) has stated that firms may develop an expertise in forming joint ventures and this capability may be part of corporate strategy. Research has shown that firms learn from experience and convert this into a capability which enables them to do the same activity competently (Pennings, Barkema and Douma 1994). Simonin (1997, 2002) identified the construct “collaborative know how” which identifies itself with a distinct firm capability which facilitates firms possessing it to achieve significantly higher alliance success rates. Collaborative know how, thus represents a multi faceted capability, which is broad in scope and is more difficult to imitate. Collaborative know-how and its effect on trust: Mere experience of entering into collaborative ventures (collaborative experience) is not sufficient to give a competitive advantage to firms. The experience needs to be converted into organizational capability, through learning and internalization and sustained rejuvenation and reconfiguration. In organizations exposed to alliance formations, perceptions and use of alliances results in the formation of explicit and implicit routines (Zollo and Winter 2002,). This organizational know how further determines the effectiveness of entering and management of new collaborations. Having developed this capability, it improves the capability of the firm to improve their decision making with respect to the choosing of a collaborative strategy, assessment and selection of an alliance partner, negotiating the alliance agreement, and management of the alliance itself. The choice of an appropriate partner, who fits in with your strategic requirements, facilitates trust development in the partner. Additionally, with development of this know how, the firm attains a reputation in the industry, which facilitates reposing of trust by opposite partners. This enhancement of mutual trust facilitates reduction of risk perception, increases use of social control mechanisms, reduces the need for behavioral control, reduces transaction costs by reducing the need for elaborate governance mechanisms and thus improves alliance performance. The trust also acts as disincentive to both the partners for opportunistic behavior.

The proposed relationships are as follows:

Propositions:

• Ceterus paribus, Collaborative know how will have a positive effect on organizational trust.

• Ceterus paribus, Collaborative know-how will have a negative effect on behavioral control, mediated through organizational trust.

• Ceterus paribus, Collaborative know how will have positive effect on social control, perceived risk, mediated through organizational trust.

• Ceterus paribus, Collaborative know how will have a positive effect on alliance performance, mediated through organizational trust.

The stability and longevity of collaborative relationships is driven by the axiom that relations are continued as long as the intended benefits outweigh the benefits derived out of opportunism (net of any penalties). Strategic alliances which are formed motivated by transfer or creation of knowledge are based on stronger cooperative incentives and thus are based on the principles of reciprocity. Thus they show a greater tendency for continuation (Kogut 1989)

Other components of global strategy: The aim of strategies, in hyper competitive environments, are to create a constantly changing series of temporary competitive advantages (Makadok 1998). This means that firms must focus on their core competence and apply it to temporary arrangements with other firms to continuously generate capabilities through resources and learning sourced. This requires firms to :( Harvey, Novicevic and Kiessling 2001)

• To look at alliances and their management as a strategic priority. • Have a strategic market orientation—have organization wide generation,

dissemination and responsiveness to market intelligence and learning • There is also a need to shift to more flexible organization forms

Performance

Risk perception Relational Performance

Trust (interpersonal) Goodwill, Competence

CONTROL Output Social Behavioral

Collaborative know how

Collaborative experience

Organizational trust/ relational quality

Partner cooperation

• Shift from transactional exchanges with the customers to a more relational exchanges with them.

• It also requires firms to continuously source information about opportunities, resources required to take advantage of opportunities identified, and be aware of competitor’s moves.

Strategic market orientation: Key challenge for management lies in the implementation of strategy. Key to successful implementation resides in the ability to guide and employee behaviors on a collective basis which ultimately determines performance. Strategic market orientation pertains to organization wide generation, dissemination and responsiveness to market intelligence /learning. Degree of market orientation possessed by an organization is positively correlated to the development of market orientation. Market orientation is how an organization interacts with its environment and adjusts to changes within its context. Key capabilities include market sensing, customer linking, competitor sensing and customer service. It also includes technology monitoring, technology development, new product /service development, organizational communication. It is a behavioral culture (Dobni and Luffman 2003).Market orientation is thus a capability of the organization. Based on information collected by boundary spanning activity, firms use these inputs to fashion and reorient their strategies so as to improve their alignment with the task environment. This then determines the behavioral roles of members of the organization. By aligning correctly the behavioral roles of implementers, strategy implementation is facilitated which has a direct effect on firm performance (Dobni and Luffman 2003). Proposition: Given, the appropriate orientation of the top management, greater the degree of boundary spanning activities, higher is the degree of market orientation Boundary spanning activities: It also requires firms to continuously source information about opportunities, resources required to take advantage of opportunities identified, and be aware of competitor’s moves. Information is also required on the changes occurring in the business environment. Boundary spanning activities are a major source of such information (Thompson 1967). This refers to effective personnel interaction between an organization and other organizations in the environment. These activities can improve the quality of market based assets; create a network of formal and informal communication channels and relationships that can be valuable in times of discontinuities. These can support the dynamic capabilities of the firm. Proposition: Higher the number of network connections, greater is the degree of boundary spanning activities Role of top management: A firm’s prior history constrains its future behavior, since learning tends to based on local processes of search. Empirical evidence supports the importance of capabilities in explaining incumbent inertia and subsequent failure. These form the basis for the development of mental models and strategic beliefs that drive managerial decisions.

Acknowledging the influence off historical environment on the development of beliefs, in rapidly changing environments, top managers have difficulty in adapting their mental models, resulting in poor organizational performance (Dobni and Luffman 2003) .Given the critical influence of top management team on strategic decision making (Hambrick and Mason 1984), their search direction and focus activities influence the development of new capabilities. Search processes in a new learning environment are deeply interconnected to the way managers model their new problem and based on it develop new strategic insights. These then influence the accumulation of organizational capabilities. Successful organizations have been seen to simultaneously embrace multiple contradictory elements through an organizational structure which contains a combination of autonomy and central control. Organizations facing highly dynamic environments need top management who: (Tripsas and Gavetti 2000)

• have the ability to question current strategic beliefs( deframing skills) on a continuous basis

• Have the ability to distinguish changes that require development of new capabilities and changes that require adoption of different strategic beliefs.

• Understand their role in encouraging cognition of strategic impacts of changing business environment at all levels of managers

Trust as a source of competitive advantage: Most exchange partners are trust worthy and trust in exchange relationships will be common even without legal and contractual governance mechanisms. An exchange partner is trustworthy when it is worthy of the trust of others. Trust is an attribute of the relationship between the partners while trustworthiness is an attribute of the individual partners. Trust can be of three types based on the degree of vulnerabilities faced by firms.

• Trust is the norm in exchange when partners have no vulnerabilities to be exploited. This is a weak form of trust as it emerges by default and is not out of commitment by partners.

• Semi strong form of trust is seen when significant exchange vulnerabilities exist and partners are protected by various governing devices. Such a type of trust is found in most economic models of exchange.(Barney& Hansen 1994)

• In strong form of trust, trust emerges, despite the presence of significant vulnerabilities, independent of existence of governance mechanisms, because opportunistic behavior would violate rules, values, principles and standards which have been internalized by the partners. It is exogenous to the structure of the transaction. These unique values may reflect the firm’s history, culture or personal beliefs of critical individuals of the firm (Barney 1986).

Trustworthiness (strong form) so generated leads to reputation which facilitates reciprocity from others and facilitates cooperative relationships. It is this competence and innate character of a firm which will facilitate its successful implementation of its global strategy where it intends to use strategic alliances as the vehicles of implementation. Proposition: More trustworthy the firm is perceived, higher is its ability and propensity to enter into strategic alliances

The interplay among the components discussed above can be represented as:

Network of alliances and generation of social capital. Economic action occurs embedded in social network of relationships and thus are influenced by the position of the firms in the social network. Network of contacts between firms is an important source of information which enables firms to use it to reduce the underlying uncertainty in business environment (Granovetter 1985). Social networks can provide differential informational advantages and control benefits. Informational benefits are provided through the strength of linkages between actors in the network (relational embeddedness) and by the position they occupy in the network (structural embeddedness). Cohesion, indicating the strength of relationships, among firms allows development of shared understanding of each others behavior leading to development of trust. Status, an indicator of the position occupied by a firm in a network, impinges upon the firm a series of desirable behaviors towards other firms in the network (Gulati 1998). Firms can be connected to other firms through a wide variety of economic and social relationships, which can be considered as a social network. The importance of a social network is defined by the nature and purpose of the network as well as the contents of the information flowing through it. The focal firm by way of its attractiveness of being in position to offer technical, commercial or social capital by way of inducements can attract firms into its network and then be in a position to identify opportunities to meet its strategic needs (Ahuja 2000b) A cumulation of strategic alliances can lead to the formation of a social network. The focal firm, which drives the network because of having initiated the alliance can derive both informational and control benefits (by virtue of being situated between two other firms). A strategy of forming an alliance network can enable development of social capital (Burt 1997).Social capital consists of the stock of active connections among people: the trust, mutual understanding, and shared values and behaviors that bind the members of human networks and communities and make cooperative action possible.

Performance

Firm competencies Collaborative know-how Market orientation Competence trust Reputation Trustworthiness Absorptive capacity Dynamic capabilities Innovation

Strategic alliances Formation Management

Strategic intent

Global strategy

Top management orientation

Boundary spanning activities

Middle management

Learning efficiency

Network of alliances

Social capital

Recent research has, provided evidence that interorganizational alliances play a central role in determining a firm’s innovative capability by demonstrating that innovation occurs in networks of organizations across multiple contexts (Van de Ven et al. 1999). All these factors cumulatively can be an important basis of competitive advantage. Proposition: Higher the degree of social capital in a firm, higher is the degree of collaborative know-how Conclusion: A real alliance compromises fundamental independence of economic actors. This is an antithesis to the dominant paradigm of management meaning total control. Alliances mean sharing control and in the dominant paradigm one precludes the other. Having control does not necessarily mean better management (Ohmae 1989). By making trust as the basis of cooperative strategy, firms can be successful in their attempt to attain sustained competitive advantage in global markets. Strategic alliances can be used as vehicles for implementing global strategies. For successful implementation, firms need to develop and maintain crucial idiosyncratic capabilities of collaborative know-how, and market orientation. Trustworthiness and reputation generated by organization values and norms augment its social capital which further enhance its ability to retain competitive advantage. Top management orientation is critical for formulation and implementation of the strategy over time. Strategic alliances contribute to competitive advantage by facilitating creation, transfer of knowledge, creation of social networks and hence social capital and facilitating access to resources. Submitted by bnv lakshmi Fpm 2

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