Differential Learning and Interaction in Alliance. Dynamics: A Process and Outcome. Discrepancy Model. Rajesh Kumar ⢠Kofi O. Nti. Aarhus School of Business, ...
Differential Learning and Interaction in Alliance Dynamics: A Process and Outcome Discrepancy Model Rajesh Kumar • Kofi O. Nti Aarhus School of Business, Aarhus DK-82J0, Denmark Smeal College of Business Administration, The Pennsylvania State University. University Park, Pennsylvania 16802
Abstract Our paper develops a dynamic theory of alliances by examining certain outcome and process discrepancies that may emerge as the partners interact, highlighting issues that are especially relevant in knowledge intensive alliances, such as joint R&D or product development. Firms enter into these types of alliances to create economic value and lo acquire knowledge to enhance their competencies. The degree to which the partners can realize their objectives is dependent on their absorptive capacities and the collaborative strategies adopted by the partners. Outcome and process discrepancies may emerge as collaboration unfolds. Outcome discrepancies concem the ability of the partners to achieve their economic and learning objectives. Process discrepancies relate to the partners" satisfaction with the pattem of interaction, and affect their feelings of psychological attachment to the relationship. How the partners assess and react to discrepancies shapes the developmental path of an alliance. The alliance flourishes in certain states but may collapse in others as the collaboration is subjected to environmental changes or shifts in the grand strategies of the partners. Guidelines for assessing and managing outcome and process discrepancies are suggested.
{Alliance Dynamics; Differential Leaming; Process and Outcome Discrepancies)
Introduction Our paper seeks to explain the developmental path of alliances by examining certain outcome and process discrepancies that may emerge as the partners interact. We highlight issues that are especially relevant in knowledge intensive alliances where the partners hope lo acquire new knowledge through collaboration. These types of alliances have the potential to create economic value but they are also distinguished by the fact that knowledge may be
created and differentially appropriated by the partners. We postulate that firms enter into knowledge intensive alliances with different absorptive capacities (Cohen and Levinthal 1990). Absorptive capacity is used to characterize the ability of a firm to appropriate knowledge that is generated through an alliance relationship. Absorptive capacities and the pattem of interaction mediated by changes in environmental and strategic directions determine whether the alliance reaches a desirable interorganizational equilibrium or not. An alliance that reaches an interorganizational equilibrium is likely to be harmonious and stable, creating satisfactory economic value and facilitating appropriation of knowledge by all the partners. Alliances may falter if unfavorable outcome or process discrepancies emerge. Unfavorable outcome discrepancies relate to the inability of the partners to create satisfactory economic value or leam from the alliance; unfavorable process discrepancies occur when some partners are dissatisfied with the pattem of interaction, adversely affecting their ability to sustain positive feelings of psychological attachment to the alliance relationship. The alliance may grow or collapse depending on how the partners assess and react to outcome and process discrepancies that may be created through the pattem of interaction or emerge spontaneously as the environment or the grand strategies of the partners change. Our perspective is that alliances are subject to developmental and evolutionary processes that are heavily influenced by a certain sequence of events and interactions among the partners (Ring and Van de Ven 1994, Doz 1996). Alliance outcomes depend not only on structure but also on dynamic variables that the partners must assess and manage as the relationship unfolds. We recognize the need for a dynamic theory which analyzes the "temporal interconnectedness of events" (Pettigrew 1992, Rumelt et al. 1991, Van de Ven 1992). A dynamic theory
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should seek to capture the context as well as the interrelatedness of choice decisions. Moreover, such a theory should also be sensitive to the fact that processes may unfold in a nonlinear, nonsequential way. As the environment changes the same decisions may have different effects on the process; also small changes in the environment or the decision may produce large effects on the process (Abbott 1991). We begin with an overview of our dynamic model of alliances. After that we elaborate on the significance of differential leaming in knowledge intensive alliances. Then we outline the scope and nature of interactions among the partners. Next we assess the impact of differential leaming and the pattem of interaction on outcome and process discrepancies. The resulting interorganizational equilibrium and the possible states of an alliance are discussed. Finally, the discrepancy model is developed and we spell out the dynamics of alliances as the collaboration is subjected to environmental changes and shifts in the partners' grand strategies.
An Overview of the Model Our model of alliance dynamics consists of several linked components that influence and feed back on each other, as illustrated in Figure 1. The partners collaborate by contributing resources and effort to the alliance and performing certain joint activities. The collaborative strategies adopted by the partners determine the outcomes that are realized by the alliance and what each partner obtains. Each partner evaluates the outcomes in light of expectations, giving rise to favorable or unfavorable outcome discrepancies. The partners also develop a certain managerial mechanism to govem the alliance. The collaborative strategies adopted by the partners and the managerial mechanism goveming the alliance influence each
Figure 1
Components of an Alliance
OF IMTERACTX3N
DISCREPANCES
Ol/rCOME STRATEGIES
PROCESS
PSrCHOLOGCAL ATTACHWNr
MAh4AGERIAL MECHANISM
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Other and constitute the pattem of interaction. The pattem of interaction may be judged to be unsatisfactory or unfair as the alliance evolves, generating favorable or unfavorable process discrepancies. Process discrepancies affect the partners feelings of psychological attachment to the relationship. The existing combination of outcome and process discrepancies defines the state of the alliance. How the partners assess and react to discrepancies in each state feeds back on the pattem of interaction, and the cycle is repeated. The alliance flourishes in certain states but may collapse in others as the collaboration is subjected to environmental changes or shifts in the grand strategies of the partners. Later, we will refine the mode! to highlight issues that are relevant to knowledge intensive alliances. The dynamic model of alliances outlined above belongs to the class of systems or cybernetics models where a decision maker attempts to control the evolution of a process using information about the current state of the system and how that compares with a desired state. Discrepancies between desired and current states induces certain behavior and attributions that feed back on the evolution of the process. Systems models have provided a useful framework for illuminating the dynamics of a wide range of complex organizational and economic processes (Senge 1990, Richardson 1990). Systems models have also been applied to explain behavior in organizational settings (Carver and Scheier 1981, Lord and Hanges 1987. Klein 1989). The dynamic model of alliances outlined above complements the models of Ring and Van de Ven (1994) and Doz (1996). In Ring and Van de Ven, the partners cycle through a sequence of negotiations, commitments, and executions stages. If commitments are executed in an efficient and equitable manner, the partners expand their mutual commitments; otherwise, they initiate corrective actions or reduce their commitments to the alliance. In Doz (1996), the alliance starts with a set of initial conditions that defines the tasks, interface stmcture. and expectations of the partners. The partners then cycle through a sequence of leaming, re-evaluation and readjustment stages. The partners leam by interacting in joint activities, evaluate the alliance for efficiency, and evaluate each other for equity and adaptability, and use these assessments to revise the initial conditions. Successful alliances progressively improve upon the initial conditions and make increasing commitments to the alliance; unsuccessful alliances are either constrained by initial conditions or fail in either the leaming or re-evaluation stages. Our model separates out factors relating to contributions made by the partners from those concerning their psychological
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attachment to the relationship. This reveals the importance of discrepancy assessment in the negotiation and execution stages of Ring and Van de Ven (1994) as well as the learning and the re-evaluation stages of Doz (1996). Also, our model recognizes that what a firm learns and how it may react to events in each of the stages identified in Ring and Van de Ven (1994) and Doz (1996) may be sensitive to the nature of the existing discrepancies. .,
Differential Learning and Interaction Differential Learning Leaming has been defined by management and organizational theorists in a number of different ways, but common to these definitions is the recognition that learning involves the acquisition and exploitation of new knowledge by the organization (Argyris and Schon 1978, Dogson 1991, Fiol and Lyles 1985, Senge 1990). In knowledge intensive alliances, such as product development or R&D collaboration, the linkup provides opportunities for the partners to create and exploit new knowledge to enhance their competencies (Hamel 1991) or to leam about the true value of a partner's assets and capabilities (Balakhrishnan and Koza 1993). However some firms may leam more than others when they interact through the framework of a strategic alliance; that is, differential leaming may occur. Differential leaming may alter the competitive advantage and bargaining power of the partners, and hence their claims to the fruits of collaboration. Also differential leaming may exacerbate the problems of sustaining the partners' psychological attachment to the relationship if it occurs largely because some partners are unwilling to share infonnation. We follow Cohen and Levinthal (1990) and postulate an absorptive capacity for each of the partners in a knowledge intensive alliance. Absorptive capacity characterizes the ability of a firm to understand and exploit knowledge in various domains, and may be used as a measure of the ability of a firm to appropriate knowledge from an alliance relationship. Our use of absorptive capacity in the context of alliances relates to Hamel's (1991) concept of receptivity which is defined as the ability to absorb new skills from an alliance partner. Absorptive capacity provides greater leverage because an alliance relationship may expose a firm to multiple sources of knowledge. We postulate that the knowledge appropriated by a firm depends on its absorptive capacity and the volume of alliance generated knowledge it is exposed to. The greater the absorptive capacity of a firm, the more knowledge it can appropriate when exposed to a given volume of alliance generated knowledge. Thus differential leaming
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may occur because the partners have different absorptive capacities and also because they may be exposed to different amounts of alliance generated knowledge. (See Larsson et al. (1998) for further discussion on the determinants of leaming outcomes in interorganizational collaboration; Makhija and Ganesh (1997) also note that differential leaming may occur because the partners seek different types of leaming.) In general one would expect that a firm's ability to appropriate knowledge from an alliance will depend on the quality of its employees, its knowledge base, the resources at its disposal, and its management systems. Therefore the absorptive capacity is ultimately dependent on the firm's motivational orientation, technological competence, especially the quality of human assets and organizationai culture, including the incentive structure. We would also like to stress that absorptive capacity is a characteristic of a firm that is acquired and shaped over many years in an incremental fashion. Thus a firm's absorptive capacity is not likely to change simply because it has entered into an alliance. Entering into an alliance will potentially expose the firm to a larger knowledge base but the fraction of the knowledge that it can appropriate depends largely on its prior preparation (Cohen and Levinthal 1994). Absorptive capacity is easier to improve upon if the firm already has a high level of absorptive capacity. Thus the process of accumulating absorptive capacity is history- or path-dependent and requires continuous and sustained investment. In addition, a firm that stops investing in absorptive capacity may loose its ability to appropriate knowledge in certain fields, becoming "locked out" of subsequent developments in that field (Cohen and Levinthal 1990, 1994). A firm's absorptive capacity determines its capacity to assess and appropriate explicit and tacit knowledge and integrate both types of knowledge into the organization. Explicit knowledge is codified and embedded in objects, such as books and blue prints, but tacit knowledge is experiential and intuitive, difficult to articulate, and carried in the minds of individuals (Boisot 1995). Interaction Among the Partners We postulate that interaction among the partners occurs along two major dimensions. The first dimension concems the collaborative strategies each partner adopts as the alliance unfolds. The second dimension concems the managerial mechanism goveming the alliance. The way the partners interact with each other determines alliance outcomes as well as the partners' feelings of psychological attachment to the relationship.
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To create economic value the partners must supply resources and effort to the alliance. The amount of knowledge that each firm is exposed to depends on its functional role within the alliance as well as the extent to which the partners share infonnation. If there is a great deal of information sharing, then it is likely that each partner will be exposed to the maximum amount of knowledge; if there is limited information sharing, then the knowledge a firm gets exposed to is constrained by its allocated role within the alliance, hence the distribution of knowledge among the partners is likely to be inequitable. We identify two collaborative strategies for each partner, namely, cooperative and noncooperative modes of behavior. A cooperative mode of behavior is conceptualized to mean that the partner supplies an optimal level of resources and effort to the alliance and also shares information. A noncooperative mode of behavior is the antithesis of cooperative behavior, and is defined to mean that the firm supplies a suboptimal level of resources and effort to the alliance and is also reluctant to share information. Our choice of behavior modes is similar to that of Gulati et al. (1994) but they focus on the supply of tangible investment and unobservable effort to the alliance, and define noncooperation as reneging on the supply of tangible investments or shirking on the provision of unobservable effort. We have defined cooperation to include both the "in-role" and "extra-role" dimensions of supplying resources and sharing information, respectively (Kim and Mauborgne 1996). Clearly, cooperation and noncooperation are just two extreme modes of behavior, closely related to "integrative" and "distributive" behavior in Walton and McKersie (1965), and may be viewed as an aggregation of the more extensive behavioral typology proposed by Thomas (1976) for interorganizational interactions. (Also see Larsson et al. (1998).) Firms enter into a knowledge intensive alliance with certain technological assets that can be used to create new knowledge when combined synergistically. Boisot (1995) defines technological assets as information which is "embedded in objects, documents, and the minds of individuals, and capable of generating value". A firm that adopts a cooperative mode of behavior is more likely to supply an optimal amount of technological assets to the alliance. Naturally, a firm adopting a cooperative strategy should guard against leakage of technological assets outside the scope of the collaboration to its partners. The partners also interact through the managerial mechanism they establish to govem the alliance. The managerial mechanism defines the decision making process in the alliance, the allocation of responsibilities among the partners, and how work is coordinated within the alliance. The managerial mechanism enables them to
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undertake joint or coordinated activities and provides an institutionalized environment for generating a set of mutually compatible expectations and implicit contracts among the partners. An effective managerial mechanism enhances the legitimacy of transactions between two or more firms with different organizational cultures, involving different routines and operating procedures, as well as different incentive structures. An alliance is likely to function successfully if the partners appreciate and respect these differences while seeking to achieve a harmonious relationship. A harmonious relationship implies that the alliance will not have to channel an excessive amount of management time into resolving interorganizational and personal differences, thereby promoting decisive and rapid decision making. The collaborative strategy adopted by a partner influences another partner's satisfaction with the relationship. A firm that adopts a cooperative mode of behavior is more likely to apply the necessary effort to ensure timely completion of its assignments and also subject itself to the mies and discipline imposed by the managerial mechanism. A cooperative mode of behavior improves the chances that the alliance relationship will be harmonious. Evidently, if all the firms adopt a cooperative mode of behavior, then each partner is more likely to have positive feelings of psychological attachment to the relationship, but a preponderance of noncooperative behavior is likely to produce dissatisfaction with the alliance relationship. We also observe that the partners will develop various attitudes towards the managerial mechanism goveming the alliance. As noted above, the managerial mechanism defines how the partners organize themselves to accomplish the goals of the alliance and also generates the underlying expectations and implicit contracts guiding the relationship. A partner is likely to be committed to the alliance if it is comfortable with these expectations and judges these contracts to be fair. These expectations and judgments will certainly affect behavior as well as attitudes regarding the legitimacy of transactions within the alliance. That is, a partner's psychological attachment to the alliance may diminish if it judges the managerial mechanism to be unfair. This suggests that concepts of organizational justice may be very relevant for assessing a partner's feelings of psychological attachment to an alliance relationship. Organizational justice theories suggest that negative judgments about the managerial mechanism may affect the attitudes of a partner, especially the higher order attitudes of commitment, trust, and social harmony (Alexander and Ruderman 1987, Greenberg 1987, Lind
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and Tyler 1988, Kim and Mauborgne 1991). These attitudes are precisely those that are required to sustain feelings of loyalty and psychological attachment to the alliance. These higher order attitudes are particularly stimulated by perceptions of procedural justice; namely the use of a fair process or mechanism to arrive at decision outcomes and the interpersonal conduct of the individuals responsible for decision implementation. In fact, there is a tendency for perceptions of procedural justice to enhance perceptions that decision outcomes are fair (Folger 1977). Kim and Mauborgne (1996) have shown empirically that procedural justice induces consummate cooperation from multinational subsidiaries in the implementation of global resource allocation decisions, promotes voluntary or extra-role behavior. Measures of procedural justice in their study included extensive two-way communications between organizational units and lack of discrimination and consistency in applying decision making procedures. This suggests that perceptions of procedural justice can be cultivated in knowledge intensive alliances if the managerial mechanism facilitates extensive communications and information sharing among the partners. Issues of procedural justice appeared to have been quite prominent in the demise of the alliance between Ciba Geigy and Alza analyzed in Doz (1996). This was a new product development alliance in which Alza was responsible for basic research and development activities while Ciba Geigy was responsible for clinical development and marketing of the drugs. Fmstrated by delays in the decision making process, Alza personnel began to bypass Ciba Geigy's management and scientific hierarchy "to work directly with people who interested" them (Doz 1996). This alienated a very large portion of Ciba Geigy's middle management. In addition, the middle management at Ciba Geigy resented the lavish funding given to Alza when they were caught in a budget freeze. Interestingly, Alza also became dissatisfied with the relationship when the rest of the pharmaceutical industry began to perceive Alza as a subsidiary of Ciba Geigy. It is quite clear from the above discussion that the pattem of interaction, namely the collaborative strategies adopted by the partners and managerial mechanism goveming the alliance, determines alliance outcomes and influences the partners psychological attachment to the relationship. We hypothesize that an alliance is likely to create more economic value and knowledge for its members as more partners adopt cooperative collaborative strategies. A preponderance of cooperative behavior will positively influence the partners' psychological attachment to the relationship. And the partners' psychological attachment to the relationship will be heightened if they
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judge the managerial mechanism goveming the alliance to be fair. Evidently, the alliance benefits if the partners can be continuously motivated to adopt cooperative collaborative strategies and positively value the managerial mechanism. But as we discuss later, certain factors may induce one or more of the partners to adopt a noncooperative mode of behavior or devalue the managerial mechanism as the alliance relationship unfolds.
Interorganizational Equilibrinm Firms enter into knowledge intensive alliances to create economic value and gain new knowledge to enhance a competitive position. We have argued that the extent to which a firm is able to achieve these goals depends on its absorptive capacity and the pattem of interaction that emerges among partners. We have also argued that the pattem of interaction affects the partners' feelings of psychological attachment to the alliance relationship. The partners' judgments regarding the faimess of the managerial mechanism, as well as how satisfied they are with the collaborative strategies within the alliance, influence their feelings of psychological attachment to the relationship, especially the higher order attitudinal variables of commitment, tmst, and social harmony that sustain an alliance relationship. We suppose that alliance partners begin their interaction with a certain level of psychological attachment to the alliance relationship. They also begin their interaction with some initial expectations regarding the economic value and knowledge they will appropriate from the alliance; i.e., expected outcomes from the alliance. Deviations between actual and expected outcomes produce outcome discrepancies. Process discrepancies may also emerge depending on the partners satisfaction or dissatisfaction with the pattem of interaction. A favorable outcome discrepancy means that the alliance creates satisfactory economic value and that the partners are able to appropriate knowledge from the alliance at the expected rates. Similarly, a favorable process discrepancy means that the partners are satisfied with the pattem of interaction. As illustrated in Figure 2, differences in absorptive capacity and the pattem of the interaction among the partners jointly determine alliance outcomes. Actual outcomes combined with expected outcomes may create outcome discrepancies for the partners. The existence of outcome discrepancies may affect the pattem of interaction as the partners assess and react to these discrepancies. The pattem of interaction may also produce process discrepancies as the relationship unfolds. The existence of process discrepancies may affect the partners' feelings of
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RAJESH KUMAR AND KOFI O. NTI Differential Uaming and Interaction in Alliance Dynamics Figure 2
Elements of the Model EXPECTH) OUTCOMES
REAUZED OUTCOMES
DISCREPANCIES
psychological attachment to the relationship, which will feed back on the pattem of interaction. The nature of the discrepancies experienced by the partners shapes what may be described as the "interorganizational equilibrium" in Benson (1975). According to Benson, an interorganizational network attains an equilibrium if the participating organizations engage in highly coordinated, cooperative interactions based on mutual respect and agreement on the scope of work and the managerial mechanism defining the collaboration. If discrepancies are favorable on both outcome and process dimensions, a sustainable interorganizational equilibrium is likely to emerge within the alliance. A relationship that attains an interorganizational equilibrium is likely to be hamionious and stable. By realizing favorable discrepancies on both outcome and process dimensions, the partners will be confirming each others' underlying expectations about the value of collaboration and helping to develop a mutually satisfactory pattern of interaction. This sets the foundations for increasing the stakes and expanding the scope of the alliance (Doz 1996). The alliance organization also begins to assume an independent existence, endorsing certain options and behavior and ruling out others that may be detrimental to its existence or progress. The attainment of an interorganizational equilibrium will also enhance the process of sense making within the alliance, enabling the partners to develop a common understanding about the alliance and committing themselves to act in ways that sustains the alliance. This is indeed crucial because it facilitates the emergence of psychological contracts among the partners (Ring and Van de Ven 1994). These contracts constitute the microfoundations for sustaining the alliance and carry a considerable degree of affective commitment. Failure to attain a sustainable interorganizational equilibrium will impede the ability of the alliance to create
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economic value and knowledge, and may adversely affect the partners' feelings of psychological attachment to the relationship, especially the higher order attitudinal variables of commitment, trust, and social harmony that hold the alliance together. The importance of trust in facilitating organizational and interorganizational cooperation has been noted by McCallister (1995). Trust develops from past interactions and provides information about a partner's reliability, values, and probable actions under varying circumstances (Jones et al. 1998). Failure to develop trust in an alliance may induce the partners to act defensively and opportunistically. A firm that has adopted a cooperative mode of behavior, but recognizes that it is not gaining the expected economic value or knowledge acquisition, may attribute this to noncooperation on the part of its partners. In the absence of tmst, the presence of differential leaming among the partners may cause group differences to be accentuated. A high absorptive capacity firm, which may be gaining sufficient knowledge from the alliance, may become insensitive to the plight of a low absorptive capacity firm, perhaps blaming or denigrating the latter for its inability to capitalize on alliance generated knowledge. Finally, lack of trust may compel some partners to continuously monitor the others' behavior or question their motives, raising the costs of collaboration and impeding the ability of the alliance to create economic value and knowledge.
Unfavorable Discrepancies The inability of an alliance to attain a sustainable interorganizational equilibrium arises from the existence of an unfavorable process or outcome discrepancy or the simultaneous existence of both types of discrepancies. Both types of discrepancies may occur locally or globally within an alliance. A discrepancy occurs locally if it is experienced by only a minority of firms within the alliance; the discrepancy occurs globally if a majority of the firms are experiencing it. The more localized a discrepancy the more difficult it becomes to communicate it to others or correct it by joint action. The future course of an alliance that is experiencing unfavorable discrepancies depends on how the partners assess and react to discrepancies. But alliance management becomes more challenging when unfavorable discrepancies are localized. Outcome Discrepancies Unfavorable outcome discrepancies occur when the alliance fails to achieve its objective of creating satisfactory economic value or when some partners realize that they are not leaming much from the relationship. If the discrepancy is revealed as a failure to create satisfactory economic value for the alliance it will be experienced globally since it will affect the economic value gained by all
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members. Leaming related outcome discrepancies, however, tend to be local in nature. Leaming discrepancies are local in nature if only a minority of the firms realize that they are not leaming much from the alliance. This suggests that perceptions and reactions to outcome discrepancies related to economic value creation may be different from those related to leaming. The inability of an alliance to achieve its desired objective of creating satisfactory economic value, as noted above, will be felt globally by all members. Consequently, such discrepancies are likely to induce the alliance members to jointly evaluate their common expectations of value creation as well as the pattem of the interaction within the alliance. Such an evaluation should seek to establish whether the discrepancy in value creation is caused by forces external to the alliance or by intemal factors. If the discrepancy is due to extemal forces, such as increased competition, demand contraction, changes in govemment regulation, etc., then the alliance members may need to modify their common expectations or renegotiate to supply more resources in hopes of improving performance. If the discrepancy is due to intemal factors, such as noncooperation by some alliance members, then the others should find ways to motivate the responsible finns to cooperate and apply more effort. Because the adjustments required to improve value performance may trigger a defacto renegotiation of the implicit contracts and possibly the managerial mechanism goveming the alliance, there is always the risk that the adjustment process may have adverse impact on the relationship, creating unfavorable process discrepancies as well. Trying to induce one or more of the partners to change expectations or supply more technological assets if not properly handled can set in motion centrifugal forces that will move the alliance further away from interorganizational equilibrium. CFM Intemational, an alliance between General Electric and Snecma to develop commercial jet engines, is an example of an alliance which overcame an initial and long lasting outcome discrepancy to emerge as one of the most successful alliances. Critical to its success was the fact that the partners were capable, committed, and compatible both at individual and organizational levels (Cauley de la Sierra 1995). Although CFM Intemational did not gain its first order for eight years, the alliance continued to function remarkably well. Evidently the partners were able to manage their common expectations throughout the period and continued to supply the necessary resources and effort. Both partners understood that adverse extemal factors, namely the oil crisis, had contributed to the slow development of the market and took creative steps to strengthen institutional commitments and trust to sustain
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the relationship. (See Doz (1996) for an enlightening discussion of the adjustments made by the partners to bring their organizations closer together.) In contrast, the collaboration between Borden and Meiji Milk provides a good example of a situation where an initial outcome discrepancy led to the demise of a mature alliance. Meiji marketed Borden brand products in Japan for some twenty years. As Meiji developed competencies in areas which were Borden main strengths the sales of Borden's products began to slow down. Borden reacted very negatively to the outcome discrepancy and accused the Japanese company of systematically destroying the relationship. The partners became increasingly mistrustful of each other. Shortly thereafter, the Japanese company launched a product that competed directly with Borden's Japanese brand (Cauley de la Sierra 1995). Subsequently the twenty-year relationship between the two firms was terminated in an acrimonious manner with Borden making strong public statements. Leaming related outcome discrepancies may be experienced locally or globally. The situation where leaming related outcome discrepancies are global because a majority of the firms are not achieving their leaming objectives raises issues similar to those discussed above. As before, this situation is likely to induce the alliance members to jointly evaluate their expectations regarding knowledge creation as well as the pattem of the interaction within the alliance. Such an evaluation should seek to establish whether the discrepancy in knowledge creation is due to inadequate supply of technological assets or insufficient exchange of information. Again the task of the partners is to make the necessary adjustments to improve knowledge creation or information exchange without inducing adverse changes on the higher order attitudinal variables. If leaming related outcome discrepancies are local in nature, affecting only a minority of the partners, then severe problems of identification and attribution are likely to emerge. If only a few firms are failing to achieve their leaming objectives, it may be difficult to isolate the separate effects due to low absorptive capacity and those due to insufficient knowledge creation or limited exposure to such knowledge. Thus the affected firms may be reluctant to openly reveal these discrepancies. Similarly, the firms that may not be experiencing these discrepancies may be perceived to be unsympathetic to the unfortunate ones even if they are made aware of the situation. As discussed earlier, open communication and extensive information sharing between the partners at ail time helps to develop perceptions of procedural justice among the partners, maintaining satisfaction in the managerial mechanism goveming the alliance relationship. Leaming related discrepancies that are local in nature
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pose major challenges to knowledge intensive alliances because they are difficult to detect and evaluate objectively. There is an ever-present hazard that a learning related discrepancy may be emerging locally, threatening to set in motion forces that can destroy commitment and trust in the relationship. An interesting example of a leaming related outcome discrepancy is provided by the alliance between Ciba Geigy and Alza discussed earlier. Although many other factors contributed to the demise of this alliance, what concems us here is how issues relating to information sharing adversely affected the relationship. Doz (1996) reports that suspicions grew within Alza about Ciba Geigy's ulterior motives because the latter was not perceived to be willing to share information. As quoted in Doz (1996), one key Alza employee complains, "We knew they were doing some work on TTS that they would not share with u s . . . , we always felt CG had information they should have fed back to us, but did not." Also in the background were issues of procedural justice. The Alza personnel continues, "According to the agreement, all ADDS-related research was shared, everything had to come back to us, nothing did!" Doz observes that Alza's perceptions of the trustworthiness and forthrightness of Ciba Geigy deteriorated over time as the latter built its own in-house basic research and development capabilities. Process Discrepancies Unfavorable process discrepancies occur when some firms are dissatisfied with the pattern of interaction. Process discrepancies typically occur locally, but may become global in nature depending on how the affected partners communicate or react. Also there may be considerable ambiguity surrounding the origins of a process discrepancy. Even when the existence of an unfavorable discrepancy is acknowledged by all alliance partners, there may be disagreements about its origin and how to correct it. A firm experiencing an unfavorable process discrepancy may be unsure whether the discrepancy represents a temporary aberration that should be overlooked, whether it is a challenge to the managerial mechanism, especially the norms and implicit contracts that have evolved up to date, or whether the discrepancy signals a change in the collaborative strategy of a partner. Also, the firm may not be sure if the discrepancy represents a genuine difference in values or organizational cultures, which should be respected and absorbed into the managerial mechanism. Finally, the firm experiencing a process discrepancy may be reluctant to communicate its discomfort because of the risk of worsening the relationship for all.
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Yet if the discomfort persists it will eventually have an adverse effect on the relationship. An interesting example of a contemporary alliance that is experiencing considerable process discrepancies is the one between Northwest and KLM Royal Dutch Airlines, which has been profiled by Fortune and other business magazines. The alliance originated from a 1989 leveraged buyout that enabled KLM to acquire 20 percent of Northwest Airlines. The two airlines then implemented a successful transatlantic alliance linking their hubs in Amsterdam and Detroit. Soon their market share in the intensely competitive Atlantic route rose from 7 percent to 12 percent, yielding the alliance $200 million a year in operating profits. As a result, KLM's initial investment of $400 million is valued at $1.6 billion but KLM's partners in the leveraged buyout made fabulous retums; their $40 million initial investment is valued at close to $1 billion. Despite the favorable outcomes, the alliance has been plagued with unfavorable process discrepancies during the past five years because "both sides think they know best how to run an airline, and want to call the shots" (Tully 1996). Initially the process discrepancies involved certain value and cultural differences between KLM and its American partners, but the discrepancies became intense in 1991 when oil price shocks and price wars put Northwest close to bankmptcy. In what has been described as a "gross miscommunication or a strategic maneuver," KLM proposed and then abruptly withdrew a rescue package, insisting that its American partners meet a tough list of conditions that would effectively wrest control from them (Tully 1996). Since then the alliance members have been engaged in a protracted, bitter, and dysfunctional battle for control even though they continue to reap huge profits from the alliance. Northwest has installed "poison pills" to limit KLM's share in Northwest; KLM has sued Northwest; and both partners agree that trust is gone. Participants and observers expect that "the alliance that has spawned billions and bad blood" will be terminated in due course, although they might also institute qualitative changes in the relationship to enable them to "hang on to a venture that generates $200 million in operating profits a year" (Tully 1996). Aspects of Discrepancy Assessment Assessment of process and outcome discrepancies should take environmental and organizational settings into consideration. Discrepancies should be judged against the performance of comparable alliances, when possible. Discrepancies should also be examined in light of the perceived strategy of a partner. Finally, discrepancy assessment should take into consideration the interests and biases of stakeholders who may be affected by the alliance relationship.
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Outcome discrepancies should be judged against the performance of similarly situated alliances. If similarly situated alliances are not doing any better, then the source of the discrepancies may be extemal to the partners, perhaps caused by common economic or business conditions. If comparable alliances are doing much better, then the partners should pay more attention to intemal factors, and strive to adopt the best practices of the better performers. Benchmarking provides a reasonably objective tool for assessing outcome discrepancies. Process discrepancies are harder to assess. They cannot be easily benchmarked given the diversity of managerial mechanisms and corporate cultures among organizations. Besides, process discrepancies tend to be localized, which implies that subjective factors may weigh heavily in the assessment. Firms enter into alliances to achieve certain strategic objectives. To support these objectives they channel and withdraw resources into various activities, including alliance relationships. This suggests that changes in the strategic directions of the partners should be considered in assessing both process and outcome discrepancies. For example, an outcome discrepancy may occur because a partner is channeling resources elsewhere, just as a process discrepancy may be caused by a partner's desire to use the alliance to acquire a partner. Unfavorable process and outcome discrepancies that can be consistently related to shifts in strategic directions of a partner deserve careful scrutiny. This can happen only if firms monitor the evolving strategies of their partners, using the network between the parent company and the alliance organization to check on the consistency between perceived strategies and the pattem of interaction. Alliances usually have their proponents and detractors in the constituent organizations. Those opposed to collaboration may exaggerate unfavorable discrepancies in order to alter the nature or scope of the collaboration. Proponents of collaboration, on the other hand, may tend to overlook or downplay the significance of an unfavorable discrepancy. The organizational hierarchy may also impose its own politics and protocol into the assessment of unfavorable process discrepancies. Process discrepancies are likely to be assessed more negatively if they occur at very senior levels or across multiple organizational levels. ;. , .
Alliance Dynamics The confluence of outcome and process discrepancies experienced by the alliance as well as how the partners assess and react to these discrepancies determines the developmental path of an alliance. As illustrated in Figure
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3, an alliance can be in one of four possible states at any time during its evolution: (1) Both outcome and process discrepancies are favorable; (2) Outcome discrepancies are favorable but process discrepancies are unfavorable; (3) Outcome discrepancies are unfavorable but process discrepancies are favorable; and (4) Both outcome and process discrepancies are unfavorable. Each of these states has its own dynamics and may require different actions from the partners to direct the alliance. Changes in the state of the alliance may also occur when some partners modify their expectations. When an alliance is experiencing favorable outcome and process discrepancies, collaboration will expand and the alliance will tend to be stable, gravitating toward a sustainable interorganizational equilibrium. Nevertheless, the alliance will still be subject to dynamic shocks that may move it into a neighboring state where an outcome or process discrepancy may emerge. These shocks may arise from environmental changes or intemal changes in the orientation of some partners. Environmental shifts such as changes in the legal and social climate, economic and product life cycles, technologies, and competitive entry can make the alliance stmeture ineffective or inappropriate for achieving the goals of the partners. Intemal shifts such as changes in strategic directions or expectations of some partners may lead them to devalue the alliance relationship. In the state where process and outcome discrepancies are both favorable, the main task of the partners is to keep on with the good work and to monitor the extemal environment as well as each others' grand strategies and evolving competencies to recognize potential threats and challenges to the alliance. They should also communicate and exchange information to insure that all partners have common goals, realistic outcome expectations, and positive judgments about the pattem of interaction sustaining the alliance relationship.
Figure 3
Process and Outcome Discrepancies OUTCOME FAVORABLE DISCREPANCIES
FAVORABLE DISCREPANOES
STABLE ALUANCE
UNFAVORABLE DISCREPANCIES
CONTESTED ALLIANCE
PROCESS
UNFAVORABLE DISCREPANCIES
CONTESTED ALLIANCE
UNSTABLE ALUANCE
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RAJESH KUMAR AND KOFI O. NTI Differential Uaming and Interaction in Alliance Dynamics
The successful alliance between General Electric and Snecma discussed earlier is a remarkable example of an alliance that has done all the right things to remain in a stable state despite an initial outcome discrepancy. On the other hand, the alliance between Borden and Meiji Milk was stable for almost twenty years but collapsed after an outcome discrepancy emerged. If the alliance is in a state where both process and outcome discrepancies are unfavorable, the alliance is likely to stay in the same state with both discrepancies tending to feed adversely upon each other. Consequently, the relationship will be extremely unstable. The challenge facing the partners is how to reverse both discrepancies to improve the alliance's chances of survival. However, the fact that they have to manage two different types of discrepancies will certainly create additional sources of conflict among the partners, heavily stressing the relationship. The coexistence of unfavorable process and outcome discrepancies creates a need for qualitative changes in the alliance relationship. The alliance can survive if the partners can impose a new cognitive perspective or managerial mechanism to reorient the organization. The likely course of such an alliance is that it may collapse suddenly or persist in an unstable state for a while before collapsing. •;' An interesting example of an alliance which entered an unstable state almost from the very beginning and never recovered is the one between two multinationals "NAMCO" and "Hexagon" described and tracked by Arifio and de la Torre (1998). The US based NAMCO and the French based Hexagon teamed up to develop ecological cleaners for the global market. Hexagon had the technological base and NAMCO would provide the worldwide distribution network. The market for ecological cleaners tumed out to be rather limited. The partners then went through a daunting sequence of adjustments but were never able to cooperate fully on the production and marketing of a substitute product. They questioned, modified, and canceled agreements, took unilateral decisions, and clashed over compensation and management styles (Arino and de la Torre 1998). Eventually, Hexagon chose to pursue the ecological cleaners project while NAMCO wanted to develop skin care products in Asia. The joint venture was terminated in the fourth year. If an alliance is in a state where there is only one type of unfavorable discrepancy, then its dynamics will be heavily dependent on the nature of managerial action taken to resolve the discrepancy. We describe the state where there is only one type of unfavorable discrepancy as contested. As noted earlier, the existence of an unfavorable outcome discrepancy is likely to induce the partners to assess the origin of the discrepancy and attempt
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to make the necessary adjustments in their expectations and the pattem of interaction. Similarly, the occurrence of unfavorable process discrepancies may require the firms to change behavior or modify the implicit contracts and norms goveming the alliance relationship. But because process discrepancies are harder to assess, the partners are likely to offer different explanations for the cause of the discrepancy and perhaps offer or support different measures to correct the problem. If they are successful in making the necessary adjustments, then a contested alliance will shift into a stable state where it is likely to flourish. If they fail to make the necessary adjustments, then the alliance will shift into an unstable state. That is, an alliance that is in a contested state may shift into either a stable or an unstable state. The evolution of several of the alliances discussed in this paper, such as GE/Snecma, Borden/Meiji Milk and KLM/Northwest. are consistent with the proposed dynamics. However, the transition of an alliance from a contested state into either a stable or an unstable state can also be accelerated by environmental shocks and shifts in the intemal orientation of some partners. We should also note that because subjective factors and emotions surround assessment of and reaction to process discrepancies, other stakeholders may intervene to reconstitute the alliance under new terms or terminate it.
Conclusion This paper developed a dynamic theory of alliances by examining certain outcome and process discrepancies that may emerge as the partners interact, highlighting issues that are relevant to knowledge intensive alliances, such as joint R&D and product development. Firms enter into knowledge intensive alliances to create economic value and acquire knowledge to enhance their competencies. Recognizing that the partners may have different abilities to appropriate knowledge from the collaborative relationship, we examined the implications of differences in absorptive capacities on the developmental path of these types of alliances. We argued that absorptive capacities and the pattem of interaction among the partners, together with changes in the environment and the grand strategies of the partners, determined the evolutionary path of alliances. Collaboration may lead to a sustainable interorganizational equilibrium where the alliance relationship expands and deepens. The alliance can also evolve into states where unfavorable outcome or process discrepancies may emerge. Unfavorable discrepancies may affect the partners' feelings of psychological attachment to the relationship as well as the pattem of interaction. How the partners assess and react to discrepancies in different
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RAJESH KUMAR AND KOFI O. NTI Differential Uaming and Interaction in Alliance Dynamics States determine the developmental path of an alliance. The relationship may collapse if unfavorable discrepancies are not properly managed. A major implication of the theory developed here is that the ability to identify and assess outcome and process discrepancies are critical skills for alliance management. We suggested that effective assessment of discrepancies should take the environmental and organizational settings into consideration. We observed that assessment of process discrepancies may be complicated by the presence of subjective factors and ambiguity. However, the same characteristics that stimulate leaming may also be crucial to an organization's success in identifying and managing discrepancies. This paper provides a framework for understanding the dynamics of alliances and suggests several directions for future research. First, the model developed here may be operationalized and tested empirically to reveal the relative importance of the pattem of interaction, absorptive capacity, and discrepancy management in alliance success and failure. Second, it would be useful to undertake research to identify the variety of strategies alliance managers adopt to deal with outcome and process discrepancies. A large number of alliances are intemational. The repertoire of strategies that are available to alliance partners may be constrained by the institutional and cultural environment within which the partner firms are embedded. How national culture shapes discrepancy assessment and reaction to discrepancies would be interesting to study. Our understanding of the factors for success in interorganizational collaboration will be enriched by pursuing these and other research problems suggested by the leaming and discrepancy model developed in this paper.
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Accepted by Mitchell P. Koza and Arie Y. Uwin. special editors; received March 8, 1996. This paper was with the authors for two revisions.
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