Unilateral Commitments and the Importance of Process in Alliances

The rapid proliferation of strategic alliances during the past decade has captured the interest of both the business press and the academic literature. A number of empirical studies have documented the unprecedented growth of joint ventures in a variety of industries, and much has been made of the beginning of a new era of cooperation in which firms seek partnerships in several facets of their operations. Many see the growth of alliances as a key to sustained competitive advantage for U.S. industry.

Yet, despite the popularity and presumed strategic importance of alliances, the fact that they often fail suggests that our understanding of the appropriate ways for managing different kinds of alliances is quite limited. There are numerous cases of firms that have become disenchanted with alliances. Several studies have reported failure rates as high as 80 percent, failure that usually leads to their dissolution or acquisition by one of the partners.1 Prominent failures in the automobile industry alone include, for example, alliances between General Motors and Daewoo Corporation, General Motors and Isuzu Motors, Chrysler and Mitsubishi Motors, Chrysler and Maserati, Fiat and Nissan.

We believe that part of the reason contemporary alliances fail so often is because many partners view them, in game theory terms, as prisoner’s dilemma situations. Each partner fears that the other will get the larger payoff by acting opportunistically while it cooperates in good faith. The result is that both partners choose not to cooperate and are worse off than if they had cooperated. Conceptualizing alliances in this way, while appropriate in some instances, is restrictive, leading to the false belief that one management style fits all alliances and all stages of a particular alliance. In fact, as we will show in this paper, alliances vary considerably and, depending on their structure and how they evolve, they may need to be managed very differently from the recommendations that result from seeing them in a prisoner’s dilemma context.

One shortcoming of the prisoner’s dilemma framework is that it underestimates the importance of each partner acting unilaterally to enhance the possibility that all partners will cooperate. Our fieldwork has shown how vital unilateral commitments can be to the success of alliances. In this paper, we present a view of alliances that helps us understand why unilateral commitments can be so helpful.

We also argue that process is important.

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References

1. For a discussion of the many pitfalls associated with alliances and some examples of prominent failures, see:

J.B. Levine and J.A. Byrne, “Corporate Odd Couples: Joint Ventures Are the Rage, But the Matches Often Don’t Work Out,” Business Week, 21 July 1986, pp. 100–105; and

R.B. Reich and E.D. Mankin, “Joint Ventures with Japan Give Our Future Away,” Harvard Business Review, March-April 1986, pp. 78–86.

2. Coopers & Lybrand study, reported in Levine and Byrne (1986), p. 101.

3. An equilibrium in the game theory sense is an outcome where none of the participants can do better by choosing a different action, given that their rivals’ choices are as specified in the equilibrium. Thus, in the prisoner’s dilemma example, prisoner A cannot do better than to “not cooperate,” given that prisoner B has also chosen to “not cooperate.” The same is true for prisoner B, given prisoner A’s choice.

4. For experimental approaches to the prisoner’s dilemma, see:

R. Axelrod, The Evolution of Cooperation (New York: Basic Books, 1984).

For applications of the prisoner’s dilemma to interfirm alliances, see:

R. Johnston and P.R. Lawrence, “Beyond Vertical Integration: The Rise of Value-Added Partnerships,” Harvard Business Review, July-August 1988, pp. 94–101.

5. G. Hamel, Y. Doz, and C.K. Prahalad, “Collaborate with Your Competitors and Win,” Harvard Business Review, January-February 1989, pp. 133–139.

6. For a discussion of changes in the character of recent alliances, see:

K.J. Hladik, International Joint Ventures: An Economic Analysis of U.S. Foreign Business Partnerships (New York: Lexington Books, 1988);

D.C. Mowery, International Collaborative Ventures in U.S. Manufacturing (Cambridge, Massachusetts: Ballinger Books, 1988); and

H.V. Perlmutter and D.A. Heenan, “Cooperate to Compete Globally,” Harvard Business Review, March-April 1986, pp. 136–152.

7. For general discussions on how to manage alliances, see:

J. Main and W. Woods, “Making Global Alliances Work,” Fortune, 17 December 1990, pp. 121–126;

J.M. Geringer and L. Herbert, “Control and Performance of International Joint Ventures,” Journal of International Business Studies 19 (1988): 235–254;

R. Gulati and N. Nohria, “Mutually Assured Alliances,” Proceedings of the Academy of Management, 1992, pp. 17–21.

K.R. Harrigan, Managing for Joint Venture Success (New York: Lexington Books, 1986);

J.P. Killing, “How to Make a Global Joint Venture Work,” Harvard Business Review, May-June 1982, pp. 120–127;

Perlmutter and Heenan (1986); and

T.W. Roehl and J.F. Truitt, “Stormy Open Marriages Are Better: Evidence from U.S., Japanese, and French Cooperative Ventures in Commercial Aircraft,” Columbia Journal of World Business, Summer 1987, pp. 87–95.

8. For a summary of the McKinsey study findings, see:

J. Bleeke and D. Ernst, “The Way to Win in Cross-Border Alliances,” Harvard Business Review, November-December 1991, pp. 127–136.