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The French food giant Groupe Danone, long a leader in the Chinese market for beverages and food products, has recently seen its position in this enormous market deteriorate drastically. The reason: Danone’s strategic partnership with Hangzhou Wahaha Group Co. Ltd. is breaking up. Wahaha became the dominant player in the Chinese bottled water and other nonalcoholic beverage market through its 1996 alliance with Danone. But by 2007, Wahaha was blaming Danone for setting up competing joint ventures with other local companies, such as Robust, Aquarius, Mengniu Dairy and Bright Dairy & Food, while Danone was suing Wahaha for using the brand outside the scope of their joint ventures. Wahaha retaliated by dragging several Danone officials to court for conflict of interest because of their simultaneous membership on the boards of the Wahaha-Danone joint venture and other competing joint ventures Danone had in China. As a result, the relationship further deteriorated, and over 30 lawsuits were eventually filed on three different continents. By the end of 2009, a settlement was reached in which Danone pulled out of the alliance, which had accounted for a dominant share of the French company’s sales in China of almost US$3 billion — about 10% of its total worldwide sales.
Danone’s bungled approach to the formation of corporate alliances probably resulted in the destruction of several billion dollars’ worth of market capitalization. Our study of how companies make decisions on the formation of alliances shows that this sort of dysfunctional behavior is all too common. Most companies now maintain an alliance portfolio comprising multiple simultaneous alliances with different partners.1 In the global air transportation industry, for example, most airlines maintain broad portfolios of code-sharing alliances with other carriers, which allow them to significantly extend their route networks by offering services to their partners’ destinations. In 1994, the average number of alliances per airline company was only four. By 2008, however, the picture had changed dramatically: The average alliance portfolio size across the industry had increased to 12, with some airlines engaging simultaneously in as many as 30 or 40 alliances.2 Despite this proliferation of corporate collaborations, research reveals a troublesome pattern.
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1. See, for example, S. Parise and A. Casher, “Alliance Portfolios: Designing and Managing Your Network of Business-Partner Relationships,” Academy of Management Executive 17, no. 4 (2003): 25-39; W.H. Hoffmann, “Strategies for Managing a Portfolio of Alliances,” Strategic Management Journal 28, no. 8 (2007): 827-856; and U. Wassmer, “Alliance Portfolios: A Review and Research Agenda,” Journal of Management 36, no. 1 (2010): 141-171.
2. “Airline Business Alliance Survey,” Airline Business, 1994-2008.
3. J.J. Reuer and R. Ragozzino, “Agency Hazards and Alliance Portfolios,” Strategic Management Journal 27, no. 1 (2006): 27-43.
4. P. Kale, J.H. Dyer and H. Singh, “Alliance Capability, Stock Market Response and Long-Term Alliance Success: The Role of the Alliance Function,” Strategic Management Journal 23, no. 8 (2002): 747-767; and P. Kale, J.H. Dyer and H. Singh, “Value Creation and Success in Strategic Alliances: Alliancing Skills and the Role of Alliance Structure and Systems,” European Management Journal 19, no. 5 (2001): 463-471.
5. P.J. Buckley and M. Casson, “A Theory of Cooperation in International Business,” in “Cooperative Strategies in International Business,” ed. F.J. Contractor and P. Lorange (Lexington, Massachusetts: Lexington Books, 1988): 31-53; A. Madhok and S.B. Tallman, “Resources, Transactions and Rents: Managing Value Through Interfirm Collaborative Relationships,” Organization Science 9, no. 3 (1998): 326-339; S.H. Park and D. Zhou, “Firm Heterogeneity and Competitive Dynamics in Alliance Formation,” Academy of Management Review 30, no. 3 (2005): 531-554; and S. White and S.S. Lui, “Distinguishing Costs of Cooperation and Control in Alliances,” Strategic Management Journal 26, no. 10 (2005): 913-932.
6. Buckley and Casson, “Theory of Cooperation”; J. Koh and N. Venkatraman, “Joint Venture Formations and Stock Market Reactions: An Assessment in the Information Technology Sector,” Academy of Management Journal 34, no. 4 (1991): 869-892; and Madhok and Tallman, “Resources, Transactions and Rents.”
7. J.H. Dyer, P. Kale and H. Singh, “How to Make Strategic Alliances Work,” MIT Sloan Management Review 42, no. 4 (summer 2001): 37-43.
8. P. Dussauge, “Alliances, Joint-Ventures and Chinese Multinationals,” in “Chinese Multinationals,” ed. J.P. Larçon (Hackensack, New Jersey: World Scientific Publishing Company, 2008).
10. K. Schwartz, “USAir Ends Code Share with British Airways,” The Associated Press, Oct. 24, 1996.
11. D.A. Levinthal, “Organizational Adaptation and Environmental Selection: Interrelated Processes of Change,” Organization Science 2, no. 1 (1991): 140-145.