Alliance Failure

Interfirm Rivalry and Managerial Complexity: A Conceptual Framework of Alliance Failure Author(s): Seung Ho Park and Gerardo R.
Ungson Reviewed work(s): Source: Organization Science, Vol. 12, No. 1 (Jan. - Feb., 2001), pp. 37-53 Published by: INFORMS Stable URL: http://www.jstor.org/stable/2640395 . Accessed: 26/01/2012 12:51
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Interfirm
A
Rivalry
and
Managerial
of
Complexity:
Conceptual
Framework
Alliance
Failure
Seung Ho Park * Gerardo R. Ungson

Department of Organization Management, Rutgers University, New Brunswick, New Jersey 08840 Department of Management, Graduate School of Management, University of Oregon, Eugene, Oregon 97403 park@business. rutgers.edu * bungson@oregon. uoregon.edu
Abstract
Empiricalresearchindicatesthat more than half of strategic alliancesfail, andthe outcomesof alliancefailurecan be devastating. Despitethe increased concernaboutmanaging strategic alliances,the field still lacksa theoretical framework deto scribe the conditionsand dynamicsleading to the failureof strategicalliances.This paper attemptsto distill, derive, and integratetheories across differentdisciplines into a unified framework offersa betterunderstanding alliancefailure. that of The conceptual framework focuses on two primary sourcesof alliance failure:interfirm rivalryand managerial complexity. We proposethat strategicalliancesfail becauseof the opportunistichazardsas each partner tries to maximizeits own individualinterestsinsteadof collaborative interests.Also, strategic alliancesfail becauseof the difficultiesin coordinating two independent firms(i.e., coordination costs), andin aligning operationsat the alliance level with parentfirms' long-term goals (i.e., agency costs). The paper extends the theoretical framework lookinginto a processmodel of alliancedevelby opmentandfailure. (Alliance Failure; Interfirm Rivalry; Managerial Complexity)
When two parties in an alliance cooperate at an early stage, they realize that they might compete with each other at some later stage. Nevertheless, they are willing to invest time and effort in anticipation of specific outcomes that would benefit them, even if the period of collaboration is temporary.However, both parties know that the current intention by itself is insufficient, for, once completed, they could act opportunistically by withholding important information, providing false information, or simply cheating the other. Moreover, the sheer complexity of the alliance might preclude the partners from evaluating their contributions over time, leading to perceptions that their contributions are unbalanced and asymmetric. As one partnerlearns faster about the other,
dependencies escalate, creating even more asymmetry. If the partners trust each other (confidence on the goodwill of the other), and if significant resources and commitment are expended on the alliance, these problems would be minimized. But trust and commitment are tempered by perceptions of gains and losses, equity considerations, goal conflicts, and role ambiguities between partners. Even in a highly complementary alliance, it is a daunting task to manage conflicts arising from managerial and organizational dissimilarities between the partners. Within the context of our opening vignette, several conditions affect stabilizing and destabilizing characteristics of alliances: need for specialization based on partner complementarity, problems of opportunism, complexity in monitoring behaviors, difficulty in coordinating partners, conflict in strategic directions, and manner in which trust can attenuate rivalry. These characteristics are embedded in the exchange of skills and capabilities, intentionally or unintentionally, between partners,which affect the process and outcome of the cooperative relationship. Hence, the basic concept of an alliance, particularly a partnership between competitors, juxtaposes two countervailing tendencies: cooperative activities leading to the attainmentof goals that advance the interests of both partners and competitive behaviors by one or both partners in pursuing their self-interests (Kogut 1988, Hamel 1991, Parkhe 1993a, Gulati 1999). Cast in this context, a strategic alliance represents a temporal structureof exchange relationships that generate cooperative or competitive behaviors between partners, depending on their private incentives. In recent years, alliances between erstwhile competitors have increased significantly (Gulati et al. 1994, Park and Russo 1996). Competitors are motivated to form strategic alliances with one another not only to improve their market positioning, but also with the expectation of reducing rivalry or attenuating contractual hazards. Even so, competitive factors that motivate the alliance can be
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ORGANIZATION SCIENCE,? 2001 INFORMS Vol. 12, No. 1, January-February2001, pp. 37-53
SEUNG HO PARK AND GERARDO R. UNGSON
Interfirn Rivalry and Managerial Complexity
only imperfectly redressed and can cause future problems and instability. In a broad sense, failure occurs when excessive rivalry eclipses cooperative tendencies. Despite the popularity of strategic alliances and the purportedbenefits for participatingfirms, failures abound, with the failure rate reportedat or higher than 50% (Porter 1987, Harrigan 1988, Parkhe, 1993a). From a study of large U.S. corporations during the 1950-1986 period, Porter (1987) reported the failure rate of alliances was higher than 50%, which was much higher than the failure rate of internal venturing or corporate buyouts. Alliance failure often causes several other adverse effects to participants. Studies indicate that in cross-border alliances, U.S. firms incurred more serious losses than their counterpartsbecause of an involuntary loss of potential revenues and uncompensated transfers of rent-generating resources, such as technology (Hamel et al. 1989). Other adverse effects include operational difficulties and problems, disagreements, and anxieties over the loss of proprietary information. Alliance failure is also associated with more intangible, adverse outcomes such as the loss of reputation. Despite overwhelming empirical evidence that alliances are unstable, there are still very few studies, if any, that provide comprehensive discourses on why alliances fail (Parkhe 1993a). On the surface, there is no dearth of explanations as to why strategic alliances fail: poor management, poor communications, lack of trust,competitive rivalry, lack of top management commitment, cultural differences, etc. While these reasons appear to be intuitively clear, they also tend to be anecdotal in origin, ad hoc in content, and fragmented in their development. Parkhe (1993b) criticized researchers for having noncumulatively focused on different dimensions of the strategic alliance, whose results have not been coalesced into a collectively coherent body of work. Smith et al. (1995) implore future researchers to be more systematic in their examination of the theoretical variables that promote cooperation (and competition). The lack of a comprehensive framework has led to empirical fragmentation and has encouraged static representations of alliance failure. Without a general theory of alliance failure for which boundaryconditions can be defined and tested, futureempirical tests may remain fragmented, impeding further theoretical development. The objective of this paper is to develop a theoretical framework of alliance failure. In developing this framework, two tracks were pursued. One strategy was to find systemic relationships among the different variables that account for failure in a strategic alliance. Of particular importance,however, was distinguishing between failure in a strategic alliance and that in any generic partnership
within an organization. The relevant context is: What is distinctive within a strategic alliance, as opposed to a generic partnership within an organization, that leads to particular patterns offailure? Our focus in this study is also limited to the failure of a strategic alliance as an alternative form of governance structure for interfirm transactions,not the failure of the alliance from each partner's point of view. Within a broadenedtransactionalcost framework, we postulate that alliance failure results from competitive rivalry and managerial complexity that act as destabilizing characteristics within an alliance. We also introduce some discussion of specific conditions that affect these two dimensions along the processes of managing alliances. This is undertakenby postulating ex ante, in situ, and ex post variables and conditions underlying the stage-of-growth in alliances. Using this track, countervailing tendencies are explored. The paper concludes with suggestions for future studies of alliance failure.
A Conceptual Framework of Alliance Failure

In our view, two continuing developments have impeded the introduction of a systematic and comprehensive framework of alliance failure: the contestability of different interpretations (measures) of alliance failure, and the lack of cross-fertilization between numerous theoretical schemes. While helpful in addressing specific issues on alliance management at the midrange level of analysis, they have also retarded integration and subsequent advancement at a broader level of analysis. Contestable Measures A unique nature of the alliance is the involvement of two independent firms in one frontier, which makes it elusive to assess performance of an alliance (Anderson 1990). Studies have utilized different measures, including both objective (e.g., survival, termination, duration, financial gains, etc.) and subjective or process-oriented measures (e.g., goal attainment, satisfaction, learning, competence building, etc.) to assess alliance outcomes (see Table 1 for summary). These measures may reflect the performance of strategic alliances, but in different theoretical questions. They also focus on alliance activities at different levels, i.e., either the parentfirm or the alliance levels, with different understandingof alliance goals. At the parent level, partners are often contradictory in their assessment of an alliance given the asymmetry in their goals and interests in relation to the alliance. It is possible that one partner's success means complete failure to the other partner.Local management at the alliance level also differs from their parent firms in terms of the direction of
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InterfirmRivalry and Managerial Coanplexity
the alliance. While parent firms try to fit alliance operations with their long-term strategic goals, alliance managers are more concerned with local interests as they try to adapt to market changes. Another problem in the literaturehas been the difficulty in cross-validating findings from various studies because of their use of different concepts and measures of alliance outcomes (Parkhe 1993b). Despite the proliferation of measures, there is an emerging preference for dissolution as the appropriate measure of alliance instability, if not failure. A fundamental premise is that a strategic alliance is not expected to last indefinitely and, therefore, the instability of any alliance may be measured in terms of its expected duration. It is generally believed that a strategic alliance perceived as performing successfully by the partnersis more likely to remain in operation than those viewed as less successful (Porter 1987). Hence, instability may be signaled by unexpected termination, i.e., dissolution of the collaborative relationship. Even though disagreement exists regarding whether
dissolution implies failure of a strategic alliance, there has been substantialtheoretical and empirical supportfor dissolution as a sign of downside in interfirmcollaboration. Kogut (1988) argued that dissolution typically reflects a business failure or irresolvable conflict among the partners. Porter (1987) contended that dissolution is significant because companies generally do not divest or shut down a successful alliance; dissolution happens only when the alliance is not financially viable. Not surprisingly, he found dissolution to reflect poor financial performance in one, if not both, parties. In addition to economic considerations, dissolving an ongoing cooperative structure is significant considering powerful socialpsychological motivations to preserve the cooperative relationships that entail transaction-specific investments. Investments in interfirm cooperation include not only economic and technological resources, but also social commitments and entanglements of individual agents. It is not only in the economic but also in the psychological best interests of the organizational parties to find ways to
Table 1
Summary of Performance Measures in Alliance Studies Authors Sample Size (Failure Rate) Operational Definition
Performance Measures Alliance Level Survival (Stability)
Franko(71) Tomlinson (70) Holton (81) Killing(83) Kogut (88) Beamish (87) Porter (87) Harrigan (88) Park & Russo (96) Harrigan (88) Kogut (88) Park & Ungson (97) Tomlinson (70) Good (72) Raffii (78) Holton (81) Killing(83) Beamish (87) Harrigan (88) Parkhe (93a)
1100(24.1%) 107 (50%) Conceptual 36 (30%) 149 (46.3%) 66 (45%) 300 (50.3%) 895 (54.8%) 204 (67.5%)
Liquidation/Ownership Change Termination Complete Withdrawal Liquidation/Reorganization Termination Divestiture Dissolution/Acquisition Alliance Age
Duration
Financial Performance
ROI Growth/Capital Expenditure Alliance Returns Conceptual 36 (36%) 66 (61%) 895 (54.7%) Chronic Dissatisfaction Poor-Good Mutual Agreement Mutual Agreement
Subjective Index
Composite Index Partner Level Achievement of Individual Goals and Learning
Hamel et al. (89) Koot (88) Hamel (91)
Conceptual Case studies
39
Interfir7n Rivalry and ManzagerialComnplexity
preserve their socially embedded relationship as they face adverse situations (Ring and Van de Ven 1994). In international alliances, studies often define successful collaboration as a stable business relationship that meets the needs of both partners over the long term while dissolution creates long-term political tensions (Franko 1971). Studies also show that dissolution is highly correlated with parent firms' reported dissatisfaction with the venture and perceptions of how the ventures performed relative to their initial objectives (e.g., Geringer and Herbert 1989). Given this confusion regarding the concept of alliance failure, the theoretical framework of alliance failure developed below is limited to the alliance level. In particular, our model focuses on the assessment of strategic alliances as a governance mechanism that is formed to pursue collaborative interests between two or more independent firms. Accordingly, our model does not fully address issues on alliance failure at other levels, such as parent firms, or theoretical constructs than the failure of alliances as an alternative governance mechanism for interfirmtransactions.Because our focus lies on the failure of a strategic alliance, not necessarily the failure of partners, dissolution may best reflect the concept of alliance failure as featured in our conceptual model of alliance failure.
Lack of Cross-DisciplinaryIntegration
Another problem in studying alliance failure is the proliferation of theories on the subject, with little crossfertilization. The study of cooperation and competition tends to be multifaceted and multidisciplinary, including disciplines from economics, political science, sociology, organization science, business strategy, etc. While the assumptions and approachesvary, these studies suggest that interfirm cooperation and competition are embedded in social conditions or contexts that structurethe "rules of conduct" to govern cooperative and competitive behaviors. These conditions influence how such behaviors are defined, chosen, and implemented. Not surprisingly, scholars have used a wide range of disciplines to explain the failure of strategic alliances: for example, transaction-cost economics (Buckley and Casson 1988, Parkhe 1993a), strategic behavior theory (Kogut 1988), game theory (Parkhe 1993a, Gulati et al. 1994), agency theory (Geringer and Hebert 1989), resource-based view (Eisenhard and Schoonhoven 1996), learning theory (Hamel 1991), and investment option theory (Kogut 1991) have been used to relate alliance failure to opportunistic hazards of competitive collaboration. Also, along with transaction-cost theory and agency theory (Geringer and Hebert 1989), various organization theories, such as resource dependence (Cummings 1984),
workflow interdependence theory (Cummings 1984), congruence model (Barkema et al. 1996), informationprocessing model (Mohr and Spekman 1994), evolutionary model (Koza and Lewin 1998), and strategy-structure fit model (Holton 1981) have focused on managerial and organizational problems, such as coordination costs and agency costs, to explain alliance failure. Table 2 summarizes these theoretical perspectives, which vary in substance and underlying contexts, and key metaphors and generating forces that have been used to explain the failure of strategic alliances. Although these theories were unique in their contribution to explaining alliance failure, they mostly adopted contingency approaches, with each theory addressing a small part of the relationships leading to alliance failure. So far, there has been little effort to integrate these multiple views and to look for the underlying theoretical constructs that could tie these eclectic explanations together. This explains why the field still remains so fragmented and is lacking a systematic framework to explain alliance failure. As the summary in Table 2 indicates, however, these multiple perspectives can be complementary; it appears that they converge into two primary dimensions of alliance failure: rivalry (or appropriation hazards) and managerial complexity. Below we develop a conceptual framework of alliance failure by focusing on these two dimensions, which cover most key issues as discussed in previous studies. Accordingly, multiple perspectives introduced in earlier studies lay the theoretical foundation in our attempt to develop a comprehensive theoretical framework of alliance failure, which highlights two of the dimensions most commonly addressed by these perspectives. Although not complete in integrating these multiple perspectives, we hope our effort lays the foundation for future research to develop a general theory of alliance failure.
Toward a Synthesis
Earlier we posited a strategic alliance as a temporal structure of exchange relationship that generates cooperative or competitive behaviors between partners,depending on their private incentives. Our discussion of different theoretical approaches in the preceding section suggests that alliance failure can arise from rivalry between partners, and managerial complexity. The contractual stipulation of strategic alliances, that is a hybrid of market and hierarchy, explains this dual natureof alliance failure. Principles of market and hierarchy are still operative in an alliance although the alliance is a governance mechanism meant to remedy failures of these governance structures. Strategic alliances purportedlyprotect against the hazards of market and hierarchy through partners' investment of
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SCIENCEVol. 12, No. 1, January-February 2001 ORGANIZATION
InterfirmRivalry and Managerial Complexity
Table 2
Theoretical Perspectives
on Alliance Failure Theoretical Perspectives Metaphors Mutual forbearance Opportunism Trust Behavioral transparency Reciprocity Reputation General Forces Incentives among the partners Nature of competitive rivalry Goal divergence Operational overlap Asymmetric dependence & learning
InterfirmRivalry
Transaction cost theory (Kogut 1988, Parkhe 1993a, Buckley and Casson 1988, Defillipi and Reed 1991, Park and Russo 1996) Strategic behavior theory (Kogut 1988) Game theory (Parkhe 1993a, Gulati et al. 1994) Resource dependency theory (Cummings 1984) Transactional value approach (Zajac and Olsen 1993) Resource-based view (Eisenhardt and Schoonhoven 1996) Investment option theory (Kogut 1991) Learning theory (Kogut 1988, Hamel 1991) Workf low interdependence view (Cummings 1984, Park and Russo 1996)
Managerial Complexity & Uncertainty
Information-processing model (Mohr and Spekman 1994) Organizational control (Yan and Gray 1994, Killing 1983, Geringer and Hebert 1989, Holton 1981) Organization (Cultural)congruence (Park and Ungson 1997, Barkema et al. 1996, Brown et al. 1988) Role conflict and formalization (Shenkar and Zeira 1992, Ring and Van de Ven 1994) Agency theory (Geringer and Hebert 1989) Transaction cost theory (Park and Ungson 1997, Geringer and Hebert 1989)
Conflict Dissimilarity Ambiguity Control
Uncertainty and equivocality Cultural dissimilarity Organizational misfit Excessive formalization Adaptive capacity Interpersonal dynamics
time and resources, which in return drive strong incentives for them to honor contractual terms of the alliance. Unlike this purported belief, however, studies have indicated that there still remain competitive threats to the partners,such as an involuntary loss of potential revenues and uncompensated transfers of rent-generating resources, e.g., technology (Hamel 1991). Even with minimal opportunism, partners also face difficulties in coordinating their activities toward collective operations and in linking local operations at the alliance level with the partners' long-term strategic goals. Figure 1 presents a model that explains alliance failure according to these two sources of problems: opportunistic hazards due to rivalry between partners, and coordination and agency costs resulting from complexity and uncertainty in managing a cooperative relationship. Previous studies related alliance failure mostly to competitive issues between partners (Kogut 1988, Parkhe 1993a). However, we believe managerial problems are equally-if not more-important in explaining the failure
Figure 1
|Interfirm Rivalry >
An Integrative Model of Alliance Failure

Oprunistic 70 H az
~
r t
| Asynumetric Rent/ResourceAppropriation| l Adv,erse Bargaining
~~~
|Tust. Reputation,C
Equity, Efficiey,
ALLIANCE FAILURE
I
Manageria C p | it3 Coordinatio Difficulty | Strategic, Structural | Misfit l
L
| l
1II
Bureucratic & Agency Costs Rigidity Organizational
of strategic alliances, especially in the case of crossborder alliances. From an in-depth case study, Larson (1992) concluded that economic transactions cannot be separated from the social context in which they take place. An idealized economic exchange is neither oversocialized, whose primary governance mechanism is values and norms, nor undersocialized, where partners remain as isolated and rational economic units (Larson 1992). In a cooperative relationship, partners face two
ORGANIZATION SCIENCENVOl. 12, No. 1, January-February 2001
41
prime uncertainties: uncertainties about the people and organization, and about their capabilities. The former type of uncertainty refers to a social-relations condition, the latterto an economic condition, affecting personal and economic trusts, respectively. Our model in Figure 1 addresses both economic and transaction-relatedissues and social-psychological, organizational, and managerial issues of alliance failure through the two dimensions of competitive rivalry and managerial complexity, respectively. The model also indicates that trust and commitment work as countervailing tendencies in these relationships by narrowing the disparity in the partners' competitive incentives and managerial practices. Interfirm Rivalry. In 1984, GE and Rolls Royce formed a strategic alliance to manufacturejet engines for commercial airliners. The GE-Rolls alliance seemed to be an ideal way of getting the two partners into markets where they had been weak, while enabling them to avoid some of the development costs required to design a new engine from scratch. However, this ideal fit was scrapped in two years because the two companies' cooperation in making jet engines turned into competition. Both sides realized that cooperation would not be possible given the direct competition and the lack of trust between them (Wall Street Journal 1986). The GE-Rolls alliance illustrates that even when strategic alliances between competitors are formed to improve their competitive positioning, this is not necessarily congruent to their individual goals. The same competitive motives to form an alliance accounts for the eventual demise of the alliance (Kogut 1988). Bleeke and Ernst (1993) reportedthat the success rate for alliances between competitors with similar core businesses, geographic markets, and functional skills is only about one in three. They concluded that managers typically choose direct competitors as partners in pursuit of short-term synergy through consolidation of overlapping product and market positions. However, such competitive alliances tend to fail because individual partner goals become misaligned with these collective goals, as illustrated by the GE-Rolls alliance. For so long as interfirm transactions are made within a strategic alliance, competition will motivate partners to pursue individual interests at the expense of the other partner (Parkhe 1993b). Kogut (1988) noted that even equity-based alliances, short of full ownership, cannot fully resolve the potential for competitive conflict. Empirical evidence also supports that strategic alliances between direct competitors are most likely to fail (Park and Russo 1996). Park and Russo concluded that the failure of strategic alliances is primarilyattributableto causes associated with exchange between distinct parties, and
that once an exchange is moved away from a hierarchical operation, a major transactional threshold has been breached. The presence of competition within a cooperative arrangement causes a high level of transactioncosts as partners adopt various contractual stipulations to avoid opportunistic hazards. According to a transaction cost perspective, these stipulations and costs involve those in acquiring and processing information, monitoring and administering contractual promises, and enforcing contractual promises. The potential transactioncosts also involve legal and organizational costs in coordinating activity and enforcing conventional behaviors. Formal contracts between parties typically codify only a minimal set of obligations while a broader set of obligations is determined informally (Buckley and Casson 1988). It is, however, essential that parties meet both formal and informal obligations to sustain a cooperative relationship. Because of the need for both formal and informal safeguards, Williamson (1991) described strategic alliances as inherently temporal, unstable, and disfavored, particularly in that changes in an alliance cannot be made unilaterally (as with market consent), or by fiat (as with hierarchy). The success of an alliance depends on mutual consent from partners, but this takes time, particularly when external conditions change over time. As long as an alliance remains as an alternative mode of competition, defection from the spirit of collaboration is inevitable, especially when the lawful gains from insisting upon literal enforcement exceed the discounted value of continuing the cooperative relationship. Collective benefits from an alliance are typically future-oriented and uncertain, while opportunity costs from cheating are more immediate and often tangible, which further aggravates opportunistic tendencies in an alliance. A partner's opportunistic behavior brings immediate realization of individual goals without facing the uncertainty of long-term returns. Interfirmrivalry in an alliance also makes mutual forbearance less appealing to the partners as they lack a long-term view. Buckley and Casson (1988, pp. 34-35) concurred that "a short-term view is likely to prevail when the agent expects the venture to fail because of cheating by others. The risk of prejudicing the venture through its own cheating is correspondingly low, and there may be considerable advantages in being the first to cheat because the richest pickings are available at this stage." The prisoner's dilemma also provides an insight about how competitive rivalry emerges within an alliance (Parkhe 1993a). The prisoner's dilemma problem depicts conditions under which, at each iteration, there is an incentive to deviate from an institutional rule. In a competitive alliance, application of the game theory suggests
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SEUNG HO PARK AND GERARDOR. UNGSON Jiiterfirmn ManazgerialCom7>plexity Rivalry aniid
that although each partner does better when all act cooperatively than when all act noncooperatively, any one partnercan do better by acting noncooperatively when all other partners act cooperatively. Partners face constant temptations to renege on an agreement because a partner that does not renege, while its partnerdoes, will do worse than when all partners renege. Therefore, partners sacrifice collective goals in pursuit of private self-interests, which, in turn, can result in poorer performance for both parties and failure of the alliance. Both parties in an alliance can gain considerably by divulging meaningful proprietary information. However, one party stands to lose a lot if it provides this information while the other party does not reciprocate it. In fact, the party gains the advantage by holding out. Both parties stand to lose or gain, depending on their propensity to compete or cooperate. As customarily thought, in the absence of binding contracts, adverse consequences will result in the event that both parties do not cooperate. The game theory model implies that strategic alliances fail not because of poor decision making by managers, but because of the nature of incentive structure in a prisoner's dilemma (Parkhe 1983a). This is true unless the pattern of payoff is adjusted to encourage mutual coordination of trust through continuing interaction between the partners (Zajac and Olsen 1993). Gulati et al. (1994) suggested that partners can avoid the prisoner's dilemma by restructuringthe nature of cooperative decision making. Because partnersexpect better payoffs from the alliance than they would without the alliance, they may restructure the decision making into a sequential process instead of a simultaneous one, which creates the prisoner's dilemma. Partners may initiate unilateral commitment by committing to one of the choices already available to them, creating a situation similar to mutual hostage and credible commitment. Still another perspective for understanding rivalry comes from the resource-based view of the firm. Within this perspective, firms are heterogeneous with respect to their resources/capabilities endowments. Resource endowments are sticky over any strategically relevant time frame, and absent some linkages-like alliances-firms are stuck with what they have because of imperfect mobility and complex development process of resources/ capabilities. It is easier to acquire existing resources/ capabilities from alliance partners than to develop them internally, which has been the main cause for proliferation of technological alliances in recent years (Eisenhardt and Schoonhoven 1996). It is likely in an alliance that the resource-advantaged partners will appropriate the economic rents of their less-advantaged partners.Hamel (1991) reportedthat several partnersin his study regarded
alliances as transitional devices where the primary goal was to internalize partnerskills. Reich and Mankin (1986) criticized that unintended unilateral transfer of technology competencies from U.S. firms to their Japanese partners has caused the erosion of U.S. firms' resource bases and competitive advantages. Resource appropriation is more probable in the direction of partnerswith more ambiguous, immobile resources appropriatingthe less ambiguous resources of their partners. The partners with transparent resources and capabilities are more vulnerable to resource appropriationby the other partner. The appropriation hazard is further heightened as the partners differ in their capabilities to learn and internalize external capabilities (Hamel 1991). Resource appropriationis also affected by the pattern of interdependence between the partners(Park and Russo 1996). Integrative alliances, in which the partners' contributions represent a pooling of their talents (e.g., when partnersjointly manufacture a new good), require more frequent and intensive information flow. As the interaction continues, it is possible that one of the partnerscould have opportunities to gradually expose and appropriate the other's key firm-specific assets. Studies indicate that integrative alliances face a stronger threat of appropriation hazards where partners may lose important knowhow and its competitive basis, than sequential alliances where each partner' contributionlies on a sequential path s with clear boundaries between partners. In summary, various studies have attributedthe failure of strategic alliances to interfirmrivalry by applying multiple theoretical perspectives, such as transaction-cost theory, game theory, resource-based view, learning theory, and resource dependence theory. This line of studies focuses on rivalry between partners, whose primary emphasis is on pursuing self-interests over long-term collective goals. Opportunistic hazards are inevitable in strategic alliances because of this competitive rivalry between partners. There exists a threat of each partner pursuing short-term and tangible gains by appropriating its partnerand reneging on the contracts. In a competitive alliance, it is difficult to develop trust between partners, and once each party begins to doubt the other there is often no end to it. Subsequently, strategic alliances become a costly governance structure to arrange interfirm transactions as partnerstry to employ safeguards against these potential hazards. These appropriation hazards eventually lead to the failure of the alliance. Interfirmrivalry is an issue that resides in the natureof cooperation and partners' role and disposition toward an alliance. This dimension of alliance failure is thus closely tied with partners' incentive and motivation in a cooperative relationship. Underlying rivalry between partners
43
presents a situation in which each partner weighs gains from the collective operation against individual interests as new opportunities emerge in the market. As long as this competitive uncertainty continues, it is difficult to develop trust between partners and the alliance loses its advantage as a transactionalmechanism over market and hierarchy. Interfirmrivalry, however, explains only part of the reasons for alliance failure, primarily related to economic, strategic, and transactional issues at the interorganizational level. Managerial complexity and uncertainty also poses another major problem in managing an alliance. Implementing an alliance is a difficult task because of differences in partners' managerial and organizational practices. Managerial Complexity. The AT&T-Olivetti alliance in the early 1980s, which combined Olivetti's competence in global marketing and AT&T's technological superiority, was considered a perfect match, at least in economic terms. Despite such strong economic and strategic compatibility, however, this alliance was troubled from the beginning, primarily due to managerial and organizational incompatibility. Olivetti was an extremely aggressive, fast-moving, entrepreneurialorganization while AT&T was regarded as the ultimate example of professional, technocratic management culture. As this case illustrates, strong economic and strategic complementarity and the absence of rivalry and asymmetry between partners do not necessarily lead to success. Strategic alliances also fail because they require excessive effort to coordinate and integrate two independent organizations which result in a high level of managerial complexity and uncertainty.Along with coordination costs as partnersstrive to work together, they also experience agency problems in aligning their interests with alliance managers who do not necessarily work for their parent firms' interests. In a most basic sense, alliances are formed because the gains from specialization override the costs of coordination. Specialization by discrete parties creates the need for collaboration when further specialization proves costly. For example, if PartnerA has specialized in a particular skill, such as research and development, and Partner B has a distinctive edge in manufacturing,forging an alliance between them to meet predetermined goals would be more efficient than if they had to learn each other's specialties. Coordination problems within the alliance stem from the complexity of activities that arise from specialization. Even when the overriding goal is to cooperate, the lack of information that parties need to have to enable them to coordinate their specialized activities may impede cooperation. Without the exchange of proper information
over time, partnershipscan erode into adverse, competitive situations. The complexity of activities that result from the difficulty in accessing specialized or idiosyncratic knowledge creates difficulties in communication and may prevent effective cooperation. Early writers, such as Simon (1947) and Barnard (1968), have argued that this uncertainty and complexity in information processing is why complete cooperation is not possible. In the context of alliances, greater coordination between more specialized partners is needed. The logic for collaboration is that each partner derives value from coordinating specialized activities that far exceed the costs of coordination. However, it is difficult to sustain this position over time. The dynamics of the exchange changes the balance of contributions, creating asymmetric dependence (Hamel et al. 1989). Unless this is corrected, coordination difficulties will overwhelm cooperative activities, leading to the failure of the alliance. Successful alliances require nurturingthe collaborative relationship and creating new value together, which goes far beyond simple exchange of competencies. Top managers, however, often devote more time to screening potential partners in financial terms and controlling the relationship than to managing the partnership in human terms. People-related issues are often not addressed until an alliance is formed, which may be due to the belief that these can be worked out later, or perhaps to maintain secrecy in negotiating and planning such ventures (Cascio and Serapio 1991). Strategic alliances often involve managers from different parent companies with different national, cultural, social, political, and economic backgrounds. In the case of cross-border alliances, the social context in which they operate is partly defined by the cultural and institutional backgroundof the nationalities the partnersrepresent.National culture then affects managerial behavior and moderates the relationship between structural and economic variables and performance of the alliances. It has been proposed that the similarity of cultural values may reduce misunderstanding between the partners, and that culturally distant partners experience greater difficulty in their interactions. Lane and Beamish (1990) argued that cultural compatibility between partnersis the most important factor in the survival of a global alliance, because the defects in alliances often stem from the unobtrusive influence of national culture on behavior and management systems, which may create unresolved conflicts. Partners from different national cultures tend to experience a lack of fit in organizational and strategic practices, making coordination more difficult (Park and Ungson 1997). Lack of fit with a partner's culture also leads to poor communication and mutual distrust.
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In addition to the difference in national culture, the failure of a strategic alliance is also caused by how compatible the partnersare in regardto specific organizational characteristics (Doz 1988, Yan and Gray 1994, Park and Ungson 1997). Because an alliance is a hybrid of more than two independent firms, dissimilarities in organizational structuresand processes can create problems in coordination. Brown et al. (1988) conjectured that organizational compatibility is a more significant factor than national cultural differences in explaining the outcome of an alliance. As dissimilar partners may expend time and energy to establish standard managerial routines to facilitate communication, they may incur higher costs and mistrust relative to a strategic alliance with similar partners. Disagreements over operating strategies, policies, and methods often arise even when the alliances are quite self-contained and have a minimum of interaction with other units within the foreign-based multinational partner's operations. Thus, differences of opinion about dividend payout policies, debt-equity ratios, marketing policies, quality control methods, and the like can become so great that one or more of the partnerseither wishes to withdraw from the alliance or at least is chronically unhappy with the operation of the enterprise. There is also a high degree of uncertainty and equivocality in managing an alliance. With the inherent system multiplicity, serving two bosses and two sets of expectations, alliance managers are prone to role conflicts and ambiguities (Shenkar and Zeira 1992). Alliance managers often lack information about the specific expectations of different managers in each parent firm, the different expectations of different employee groups in the alliance, and the different expectations of host country organizations with which they must interact. Alliance management thus needs to exert costly informationsearch effort to reduce these uncertainties and promote a strategic fit of allying firms with the alliance. Strategic alliances also face agency problems in integrating alliance activities with the parent firms. The employment relationship between the parent organization and alliance managers reflects the basic agency structure of a principal and an agent who have different goals and attitudes toward risk (Holton 1981). Doz (1988, p. 335) described this conflict in the following terms: "Most of them (alliance managers) had little to lose, in career terms, either because they were already marginal in their own company or, on the contrary, because their position was so secure as to be unassailable. In both cases, this allowed them to accept unusual levels of personal risks and to deviate from corporate norms in making the partnership work."
Agency problems are exacerbated by strong interdependence between the alliance and the parent organization. This is because decisions at the alliance level have direct effects on the parents' overall costs and revenues. Partly as a consequence, there should be tight and effective monitoring of the alliance in order for it to achieve its objectives (Franko 1971). Even so, it is difficult and costly to verify what alliance managers do. Alliances are typically undertaken in highly uncertain and risky settings, creating a high level of outcome uncertainty and aggravating the problems of monitoring managers' activities, much less deciding their appropriateincentives. It has been reported that most alliance managers often disregarded the impact of alliance activities on parent firms' operations (Holton 1981). The agency problem was obvious in the Yamatake-Honeywell alliance as Honeywell and the alliance both entered China and ended up in direct competition (Gomes-Casseres 1996). This conflict between parent firms and the alliance is why control has been a variable of interest in prior research (Geringer and Hebert 1989). Even though empirical findings are conflicting, the emerging patterndirectly relates management control to alliance performance (Yan and Gray 1994). Findings also suggest that problems in piloting a strategic alliance most likely occur when control is equally shared. In an unbalanced alliance, the nondominant partnerhas an a priori notice that their pursuit of individual interests may be difficult (Park and Russo 1996). Accordingly, they expect at least some ex post strategic choices to diverge from what they would have chosen. Dominant ownership can help avoid agency problems by simplifying the control process and maintaining easier integration with the parent firm's strategic direction, although incentives to cheat are greater in a dominant alliance. Yan and Gray (1994) argued that when the control is even between partners, each partner's performance, at least as assessed by its own perspective, is equal. Control helps the parent firm to achieve the full potential of their strategies and to attain their objectives by reducing agency costs. However, control may also lead to increased overhead costs because it implies more responsibility and resources for the partner(Geringerand Hebert 1989). Moreover, the exercise of extensive control (and formalization to manage the control process) over an alliance' s activities and decisions may incur a high level of bureaucraticcosts and limit the efficiency of the alliance. Excessive control by a foreign partner over a local alliance often hinders the autonomy and flexibility of the alliance and its management, which weakens potential benefits of the alliance. Therefore, it is critical to find the strategy-structurefit at which the margin between benefits
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and costs from an alliance becomes optimal. This will minimize potential agency problems, achieve tight integration between the parent firm and the alliance, and allow enough freedom for alliance managers to flexibly respond and adapt to the needs in local markets (Bleeke and Ernst 1993). The trouble in the Yamatake-Honeywell alliance illustrates the importance of maintaining balance in controlling an alliance. Honeywell's hands-off approach explains the initial success of the alliance, but the eventual conflict between Honeywell and the alliance is attributedto the weak control over the alliance. As strategic alliances fail because of economic and strategic incompatibility, alliances also fail because of difficulties in implementing the collaborative efforts and integrating them with the parent's strategic objectives. These managerialand organizationalconcerns in strategic alliances are rooted in various theoretical perspectives, such as culturalcomplementarity,information-processing model, organizational congruence, strategy-structurefit, and agency theory. These theories focus on managerial complexity and uncertainty in coordinating the relationships between partners, and between partnersand the alliance, that become the sources of coordination and agency costs and organizational rigidity of the alliance. Along with appropriationhazards, these managerial concerns incur a high level of transaction costs, especially bureaucraticcosts and agency costs, in the process of coordination. Alliance partners often end up wasting valuable time and resources to understand each other, even before the actual collaboration starts. This is what happened in the proposed alliance between Ford and Fiat in 1995. After more than a year of discussing a wide range of proposals, they realized that they could not agree on the management structure necessary to launch the alliance. The differences in management and operational structures were so severe that they decided it was impractical to enter into a cooperative relationship. It is importantto maintain flexibility at the alliance level because it is inevitable that internal and external conditions of the partnersand the alliance gradually change over time. Excessive flexibility at the alliance level, however, often becomes a serious problem in working with parent firms, causing them to withdraw their commitment to the alliance, as illustrated by the trouble in the YamatakeHoneywell alliance.
Interaction Between Interfirm Rivalry and Managerial Complexity

In the foregoing sections, we have illustrated the sources of alliance failure in terms of interfirmrivalry and managerial complexity. While they are conceptually distinctive, these two components are inseparable in practice.
Strategic alliances fail when there is strong rivalry or a high level of managerial complexity, but failure often results from the interaction between these components. These two dimensions represent strategic and managerial issues that affect partners' motivation and ability to continue the cooperative relationship. The most unstable type of alliance is one featured with a high level of rivalry and managerial complexity. There is little strategic and organizational complementarity in this type of alliance; participantsput private interests over collective interests and have difficulty in coordinating managerial and organizational differences between them. This type of alliance is likely to be between direct competitors, as indicated by strong rivalry. Accordingly, it is difficult to develop a trust-based relationship, and partners become hesitant to make a strong commitment to the collaborative operation. Such an alliance also becomes a highly inefficient governance structureto pursue interfirm transactions. Coordinationcosts are high because it is difficult to resolve organizational dissimilarities and to manage cooperative processes. The Ford-Volkswagen alliance set up in the 1980s to expand their market basis in Latin America represents a typical case of this type of alliance. Although the partners had a common goal of establishing a critical mass in Latin America's emerging markets, the alliance was an uncomfortable marriage from the beginning. Because the partners were direct competitors in most other markets, they were not willing to share their own design skills and marketing strategies with their partner. Differences in cultural values and organizational practices also made it difficult to develop a coherent strategy to challenge GM, who was a major competitor in the market. By extension, we propose that the alliances with weak rivalry and low managerial complexity are least likely to fail. Previous studies point out the importance of complementary needs for the viability and potential of an alliance (Porter and Fuller 1985). These types of alliances are based on highly complementary strategic interests between partners that can easily converge toward each other. There is thus little rivalry in the alliance and cooperative behaviors become more compelling. This would be an ideal setting for interfirmcollaboration without any serious transaction and coordination costs; the partnersare easily able to understandand trust each other because of similar cultural and organizational backgrounds and strong economic complementarity (or weak rivalry). They also become easily committed to collective interests that can be carried out even at a low level of socialization between partners,which furthercontributes to improving transactionalefficiency. We can also expect similar economic mindsets and strong organizational
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transparencybetween the partners, which help them understand each other better. Unlike the previous two types of alliances, there is much ambiguity in predicting the outcome of the alliances with either strong rivalry or high managerial complexity. The likelihood of failure in these alliances depends on how the partners manage the problems caused by either their competitive intentions or organizational and managerial dissimilarities. Firms enter strategic alliances in pursuit of their self-interests through collaboration with other firms. The first-order condition for successful alliances is the presence of complementary benefits for both partners, which cannot be acquired efficiently through individual operations. Once an alliance is formed based on partners' economic interests, its success subsequently depends on the dynamic change of each partner's economic interests and the effective implementation of alliance activities. We thus view the management of managerial and organizational dissimilarities as a second-order condition for managing successful alliances. Strategic alliances fail when either or both of these first-orderand second-order conditions are not met. An alliance is able to sustain its structureand remains as an efficient mechanism for interfirmtransactions as long as partners'economic benefits overshadow potential costs in managing the alliance. Alliance partners would be more eager to work out conflicts from managerial and organizational differences as long as potential economic benefits remain strong. Because they have strong economic incentives and are more willing to cooperate, it is also much easier to develop mutual trust. Once partners develop trust toward each other, the alliance becomes more sustainable as they can better coordinate their efforts to overcome managerial complexity and reduce coordination costs. The strong economic incentive also allows effective socialization and governance in managing the cooperative structure. Governance structuresthat are closer to a marketmechanism, such as licensing and other types of nonequity relationships, would work better in an alliance with weak rivalry but high managerial complexity. Hierarchy-like governance structures (e.g., joint ventures), involve a high degree of interdependence and coordination between partners,and interfirmcoordination becomes a highly demanding and difficult task. On the other hand, marketlike governance structures require (relatively) a much lower level of interdependence and a simpler coordination process than hierarchy-like governance structures.It is thus possible that alliances can overcome problems resulting from organizational dissimilarities by adopting a proper governance mechanism, as long as there are sufficient economic gains. This does not necessarily imply
that alliances with high managerial complexity and low rivalry do not fail. Alliances often face a situation in which coordination difficulties offset even strong economic gains. Firms would be better off adopting different transaction mechanisms for similar economic interests rather than entering into an inefficient alliance structure. The alliance among IBM, Toshiba, and Siemens illustrates a failure resulting from high coordination costs, despite strong economic interests for the partners. This alliance was set up to design and manufacture256-megabit chips, which required a high level of interaction among the partners. However, the economic potential in this alliance was soon overshadowed by difficulties in coordinating the three culturally very distinctive firms;IBM perceived Toshiba as excessively group-oriented and Siemens as overly concerned with costs and details of financial planning. Direct rivalry between partners, however, poses a serious threatto alliance success in that it is difficult to build a trust-based relationship. This lack of trust impedes the exchange of firm-specific assets to accomplish collective goals. Especially when alliances involve technology transfer, there is reluctance to provide extensive information about the technology. Expecting to be cheated, each partnertends to disguise or limit its contribution.As a result, only low-quality or insufficient information will be transferred in competitive alliances, and eventually dishonest activities will drive honest activities out of the alliances, causing the failure of the alliance (Akerlof 1970). Presumably, alliance partners can prevent these problems by adopting a tightly specified governance structure, such as hierarchy-like governance structure (e.g., equity alliances). However, these alliances cannot avoid possible transactionhazards because each party focuses more on its self-interest, given the competitiveness between the partners. These are similar to the type of intermediate governance structures Williamson (1991) referred to as a highly unstable form of governance structure. Williamson argued that intermediate types of governance structures are not impervious to opportunistic threats, and they are nothing more than a temporary arrangement for interfirmtransactions. Even if the partners in a competitive alliance can design a mechanism to govern possible opportunistic hazards, this only compounds managerial complexity as tighter monitoring is needed. In the following section, we discuss the underlying conditions that affect interfirmrivalry and managerial complexity in an alliance. In particular,it focuses on some of the process-related conditions that affect rivalry and managerial complexity differentially over time as the cooperation continues between partners.
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Toward a Process Theory of Alliance Erosion and Failure

What would make a cooperative alliance more competitive (and vice versa)? In our view, there are a number of conditions, ex ante, in situ, and ex post, that influence cooperative and competitive behaviors within an alliance, and that explain how alliances might transformover time into different types discussed earlier. These conditions are illustrated in Figure 2.
Ex Ante Conditions
Ex ante conditions refer to prevailing conditions at the time of the formation of an alliance. For the most part, these conditions influence the structureof the alliance and can predispose partners toward competitive or cooperative behavior. As developed in earlier sections, these conditions include the nature of competition (direct competitors are more likely to engage in future competitive behavior), complementarity (partners that are well matched in terms of their contributions are more likely to engage in cooperative behavior), and the perceptions of endgames (partners who recognize the downfalls of
cheating will be less likely to engage in opportunisticbehavior). In addition to rivalry, ex ante conditions cover structuring agreements that arise from the need for coordination, particularly in the context of parent-firm relationships. We noted two conditions that influence competitive and cooperative behavior: cultural incongruities (differences in corporateculture and internalpolitics create high coordination costs in an alliance) and agency issues (agency problems also occur because alliance managers have different attitudes on risk than those of the parent organization), under which coordination costs occur.
In Situ Conditions
What are the dynamics that characterize possible movements among the different types of alliances? In situ conditions relate to those that affect rivalry and managerial complexity within the course of an alliance. In a fundamental sense, these conditions are process related and strongly influence development of the alliance. Each stage of cooperation provides a receptive context for the initiation and evolution of economic exchanges in the following stage. Cooperative dynamics in a stage builds a historical context that affects the nature of cooperation in subsequent stages. Each stage of alliance evolution also runs through a cyclical process of negotiation, commitment, and execution according to the partners'evaluation of the efficiency and effectiveness of the alliances (Ring and Van de Ven 1994). The extent to which strategic alliances are affected by competitive rivalry and managerial complexity changes over time as resource exchanges and social interaction continue between partners. At each stage, alliance partnersbegin to reassess the overall values of the alliance in comparison with other types of governance arrangements,e.g., market and hierarchy, because their strategic interests and cooperative roles change over time. Empirical evidence indicates that the failure rate of equity alliances is nonmonotonic, rising in early years, but then declining after reaching a peak three or four years into the operation (Park and Russo 1996). Strategic alliances are formed with expectations of success and complementary economic benefits. The survival of strategic alliances hinges on their adaptive capabilities to such dynamic changes over time. In our view, four interrelatedfactors are salient at this stage: changes in the external environment, perceptions of balanced contributions, the pace of bilateral learning, and asymmetric dependencies. Changes in the External Environment. Volatile conditions also lead to vulnerabilities within an alliance, as these affect the partners' competitive positions. This is consistent with others who have emphasized industry and
Figure 2
The Dynamics of Erosion and Failure of Strategic Alliances
Ex Ante Conditions (InterfirnRivalry) Directcompetition Complementarity considerations Equity Perceptions endgane of
Ex Ante Conditions (Managerial Complexity) Cultural incongruities Agencyissues structures Facilitating
It Situ Conditions in environmi-ent Changes external of contributions Perceptions balanced Pace of bilateral learning Asymmetry in Changes strategic positioning
Ex Post Conditions
Trtist
Equity Perceived benefits
Alliance Failure
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environmental factors as the major reasons why organizations fail (e.g., Hannan and Freeman 1977), or why specific alliances are prone to failure (e.g., Kogut 1988). However, there is mounting evidence that alliance failure is not so much due to external factors, such as changing economic conditions, slackened demand for the product, opposition of government agencies, or changes in technological structure,but to internal factors, such as behavioral and managerial problems (Parkhe 1993b). An explanation is that once firms invest dedicated assets in an alliance, changes in the external environment become a less significant factor for alliance failure unless changes are adverse and revolutionary. One serious concern for students in economics would be the anticompetitive issue of interfirm collaboration (Berg and Friedman 1980). Some alliances, particularly joint production ventures, can in fact be anticompetitive in terms of price fixing and bid rigging. Such illegitimate ventures are merely shams to mask cartel behavior and would face legal constraints as a serious external threat to their long-term survival. The changes in the U.S. legislation have reduced the likelihood of antitrustliability in recent years. The National Cooperative Research Act of 1984 allows joint R&D to obtain partial or full immunity from triple damage suits threatening the maintenance of the ventures. The U.S. government also does not intend to condenm presumptively joint production ventures, including ventures among competitors, and will take full account of foreign competition and potential procompetitive efficiencies. Unless a venture is a disguise by a cartel to exercise market power and raise prices to consumers, it is safe from legal challenges, and its survival depends mainly on the partners' behavioral and managerial dispositions. Furthermore,if an alliance is anticompetitive, the venture fails even before its operation gets off the ground. In other words, in the process of negotiation, anticompetitive ventures are normally blocked by government agencies as illegal operations. In short, changes in the external environment can change the market positions of alliance partners,thereby triggering more competitive or cooperative activities aimed at restoring or improving prealliance market positions. The Perceptions of Balanced Contributions. The raison d'etat for alliances are complementary benefits that accrue to participatingpartners.Alliances provide access to the other firms' proprietaryknow-how, assets, human resource needs, market access needs, government and political needs, and knowledge needs. Porter and Fuller (1985) argued that an alliance is stable for as long as contributions by each partner are perceived to be balanced and equitable.
The investment of both time and resources provides incentives for parties to honor the terms of the contract. However, the balance of contributions is perceived to be equitable provided that there are sufficient monitors for partners to make these assessments. But even with the best intentions, the complexity of the alliance allows the parties to pursue disparate goals and creates the need for monitoring activities. However, because monitoring is also costly and difficult, partners may attempt to reduce their work effort. The dynamic changes in the compatibility of partners' contributions also affect the partners' bargaining positions during the course of collaboration. Dymsza (1988) illustrated that international alliances between U.S. MNCs and local partners reached a stalement and broke up once the local partners developed the capabilities to take charge of the alliance operation. Many foreign firms also start out in Japan through joint ventures, but they soon terminate these ventures once they feel confident enough to set up their own sales networks. Maintaining an alliance that does not offer significant complementary benefits to the partners generates unnecessary costs. The perceptions of equity in a cooperative relationship are a critical factor to stabilize the cooperative structure. Pace of Bilateral Learning. Perhaps the key process variable in managing an alliance is the difference in learning capability and strategic intent for learning between the partners. Strategic alliances provide an important learning mechanism for other firms' firm-specific skills. However, the asymmetry in learning and the subsequent asymmetric dependence between partnerslead to alliance failure. This asymmetry is often cited as a primaryreason for alliance failure between U.S. and Japanese firms (Hamel et al. 1989). It is also possible that changes in a s partner' competitive motives and strategic positions cause the other party's contribution less significant over time, if not obsolete. Based on in-depth case studies, Hamel (1991, p. 88) concluded that "in a narrow sense managers saw collaboration as a race to learn, but in a broader sense they saw it as a race to remain 'attractive' to their partners." Failed joint ventures, particularly in the case of Japanese and American firms, can be traced to the ability of one of the partners,e.g., Japanese partners,to learn more quickly the core skills of its partner,e.g., American partners. Learning is determined by the propensity or desire for one partner (firm) to learn the core skills of another and the degree to which partners are "transparent", that is, easy to learn about (see Hamel et al., 1989). American firms have been known to be more "transparent" about their work and attitudes compared to their Japanese or Korean counterparts.
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Asymmetry. To the extent that asymmetries in contributions occur, dependencies between alliance partners develop. Over time, one partnermay be more dependent on the other (Hamel et al. 1989). Partly as a response, the disadvantaged party may reveal more and more of its proprietary know-how to maintain its initial attractiveness. Vulnerabilities created by this situation lead to "hostage situations": The more dependent partnermay face a small number bargaining situation that is held up by the other party. This may in turn engender opportunistic behaviors from the advantaged party. Because the survival of the disadvantaged partner depends on overall alliance performance, it may become even more vulnerable to actions taken by the dominant partner.The disadvantagedpartner may initiate renegotiation of contractual terms to maintain equal or more control over the alliance, or leave the alliance altogether. Strategic alliances are also vulnerable to shifts in internal politics, as well as to wavering support by parent organizations. For example, while Honeywell was going throughcorporaterestructuringin 1986, the alliances with Machines Bull of France, NEC of Japan, and Ericsson Telephone of Sweden were all phased out. Doz (1988) argued that parochial subunit goals and corporatepolitics within top management could erode any teamwork, understanding, and tolerance of rivalry. Difficulties within the top management team, in turn, can create wide cultural gaps and poor communications at the level of middle management, where the need for collaboration is more acute. Accordingly, middle managers and staff in an alliance are often divided into these rival camps.
Ex Post Conditions
Ex post conditions relate to outcomes arising from partners' assessments of efficiency, equity, and goal attainment. Because purposes, values, and expected consequences are grounds for human choices, it is expected that continuation of an alliance will depend on such assessments. At the end of each collaborative cycle, each partnerengages in redefinition of the alliance and initiates a new loop of negotiation, commitment, and execution of cooperation. In claiming and distributing the value created by the strategic alliance, partnersmay experience conflict when they perceive divergence of interests. However, partners' perceived level of the alliance's and the partners' value, relative to other types of governance structureslike market or hierarchy and other potential partners,may change at this stage. When partnersrealize a gap in performance from their historical comparison of actual to expected value creation, they decide to terminate the cooperative relationships unless they emphasize joint value maximization supported by strong relational norms that might
have developed over time. If partners manage to build social norms for joint value maximization, partnerspursue joint searches for satisfactory outcomes to conflicting situations and unsatisfactory results of the alliances (Zajac and Olsen 1993). Each of the looping sequences of negotiation, commitment, and execution stages, or the sequence of learning-reevaluation-readjustmentin cooperative relationships, is assessed in terms of efficiency and equity. Sometimes what counts goes beyond the actual contributions made by each partner and the profits and other benefits obtained by each one. Even more important is what the partners perceive over the whole life of the operation. Strategic alliances fail when one or both partners perceive unfair treatment or an unsatisfactory ratio between compensation and contribution from the alliances. It is imperative to maintain mutually beneficial rewards for the survival of an alliance. Earlier we postulated that trust and commitment could mitigate competitive rivalry and managerial complexity. In this section, we discuss how trust emerges as a result of ex ante, in situ, and ex post conditions. As partners develop mutual understandingof each other over time, a stronger form of trust, i.e., process-based trust, starts to replace the initial characteristic-based trust (Zucker 1986), and the alliance then becomes more dependent on informal measures than it was in the earlier stages. Strategic alliances become institutionalized and take on more hierarchical characteristics (Parkhe 1993b), substantially lowering managerial complexity and coordination costs. There is a higher level of integration between partners, and social control appears as a primarygovernance mechanism. However, even though the alliance becomes less marketlike in its design and governance, it is still affected by competitive spirit (like market transactions) between partners. As the interaction between partners continues, the alliance improves its repository of knowledge assets, i.e., interpartnerrelationships and skills, and the attachment between partners. The initial role relationships and expectations become socially embedded throughrepeated interactions over time (Ring and Van de Ven 1994). These enhanced interfirmties, however, become offset as changes occur in resource fit between partnersover time. Seabright et al. (1992) maintain that resource fit deteriorates over time when there is a reduction in partners' ability to satisfy resource requirements because of the increases in a partner's resource requirements, the decreases in its exchange partner's provisions, or the increases in the opportunity set. Strategic alliances are subject to environmental as well as internal changes that are derivative changes of parent firms' management structure or strategic interests. The payoffs from strategic
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alliances may change over time, altering incentive structures for partners. Studies show that even though no violations of trust were found, strategic alliances were demised to decline or dissolve due to changes in competitive conditions and strategic direction; in particular,heavy reliance on a partner and the exchange of proprietary information represented major risks (Larson 1992). While trust and commitment provide countervailing effects for alliance stability, they do not evolve overnight and seldom come easily; they can be built only over time. As one popular resolution to the prisoner's dilemma game, authors suggested "tit-for-tat" and "mutual forbearance" as strategies to develop trust and commitment (Buckley and Casson 1988). These strategies match forbearance with forbearance but punish cheating. Therefore, one partner's forbearance or credible commitment at a stage gives rise to a positive feedback over time, while the perception of injustice initiates a negative feedback, leading to eventual failure of the alliance. Doz (1996) suggests that partnersin successful alliances were willing to make irreversible commitments first, expecting other partnersto reciprocate, but using the opportunityto build and test trust. Generally, trust emerges based on ''norms of equity," and it can be extended to an organization with a reputation for trustworthiness (Ring and Van de Ven 1994). Transaction parties become aware of the relevant party's reputationon trustthrough consulting their own experience and/orfrom the experience of others (Gulati 1999). Taken collectively, opportunism leads to an asymmetric bargaining position and the dissipation of firm-specific assets. When these costs become insurmountable, the alliance may not succeed. Over time, partner behaviors become path-dependent; there will be escalating commitment as the alliances meet the partners' individual goals and outcomes are perceived to be fairly distributed,but there will be decelerating commitment as they begin to note any sign of mistrust or lack of commitment from the other parties. The best and least costly mode of governance for an alliance would be trust and mutual commitment. A Japanese executive involved in an alliance commented that a partnershipworks on the basis of trust and commitment or not at all (Business Week 1986). American managers normally refer to formal contracts to avoid conflicts and uncertainties, while Japanese managers prefer mutual discussion and mediation to formal contracts. Japanese managers view formality and the use of third-partymanagement to control an alliance as signs of mutual distrust. Mutual trust in an alliance reduces interaction and minimizes bureaucratic complexity. It also helps partners overcome conflicting situations and unexpected difficulties.
Conclusions
Strategic alliances have become an essential element in recent corporate strategy. A review of the alliance literature reveals an extensive list of reasons for entering an alliance. Strategic alliances help firms gain marketpower and access, institutional legitimacy, and new competencies, as well as to exploit firm-specific competencies or reduce environmental uncertainty (Eisenhardt and Schoonhoven 1996). Strategic alliances also have become a powerful force in shaping a firm's global strategy. Despite these purportedbenefits, strategic alliances entail serious competitive risks, and managerial difficulties in implementing the cooperative relationships. The high failure rates documented in the literature indicate that strategic alliances are more likely to fail than to succeed. In fact, success in an alliance is now regarded as an exception rather than a rule. Although several studies attempted to explore the potential sources of alliance failure, the field still remains without a comprehensive theoretical framework. Previous studies, whether empirical or theoretical, seemed to have adopted contingency approaches focusing on a series of interactive and structural variables to explain alliance failure. This paper presents a theoretical framework that integrates these multiple explanations of alliance failure by focusing on interfirm rivalry and managerial complexity. We believe that these two dimensions could be the logical foundations to understand alliance failure that have been addressed so far in the literature.We also believe that the recent slowdown of studies on alliance failure, or alliance performance in general, is partially the result of a lack of theoretical framework that could offer a direction for furtherstudies. In this regard, we contend that this paper serves as a first step toward deepening our understandingof alliance failure and developing a general theory of alliance failure with well-defined and tested boundary conditions. To conclude, this study presents a conceptual model of alliance failure based on rivalry and managerial complexity in an alliance that affects partners' strategic interests and motivation to cooperate (or compete), and their ability to implement the cooperative structure.We further illustrate that the operation of rivalry and managerial complexity in an alliance is a dynamic function of the interplay among ex ante, in situ, and ex post conditions. These stages of development occur as a repetitive sequence in assessing each partner's contributions. Changes in external environment, perceptions of balanced contributions, the pace of bilateral learning, and asymmetric dependencies are key process variables that influence whether alliances remain highly competitive and complex, more complex than competitive, more competitive than complex, or relatively noncompetitive and
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complex. These variables also lead to pathological tendencies; more learning about the other may help promote trust, but it creates greater dependency. Underlying these stages, therefore, are social-psychological processes of sensemaking and enactment by both parties (Ring and Van de Ven 1994). A critical issue future studies should keep in mind is to clarify the concept of failure in a strategic alliance. As illustrated earlier, the outcomes and their predictors in an alliance vary according to the operational definition of alliance failure. These multiple indicators of outcome measures that have been used in previous studies are not necessarily accommodating to each other. In fact, some of the predictors are contradictory, although they may explain some form of alliance failure. For example, predictors of one party's success often indicate failure of the alliance as a governance structure. For this reason, it would be a daunting task to integrate multiple indicators of alliance failure and test them simultaneously in a single study. Rather, it would be more desirable to focus on a clearly defined concept of alliance failure to develop a theoretically and methodologically coherent study; or, studies may focus on multiple measures as long as they refer to the same level of analysis, i.e., alliance vs. partner levels. Another critical issue in future research is to follow dynamic, process-oriented approaches to study alliance failure (Koza and Lewin 1998, Yan and Zeng 1999). Recently, Koza and Lewin advocated the importance of adopting a coevolutionary perspective to study strategic alliances. Strategic alliances, like other organizational forms, emerge as an adaptive mechanism to market uncertainty, and their developments over time reflect the coevolution of distinctive firm capabilities and of industry and market activities. Studies have so far been limited to static explanations of contingency factors of alliance failure. Given the change of in situ conditions over time, partners and alliances go through similar coevolutionary cycles in terms of their motives and capabilities toward the cooperative relationships. Alliance failure is an outcome of this coevolutionary adjustmentto changes in the market, the competitive dynamics between partners, and assessment of efficiency of the alliance as an alternative governance structure.It is thus critical to adopt a dynamic perspective and historical observations of cooperative processes. Because earlier studies followed a static approach, they could explore only the beginning and the end of a cooperative alliance, but not the cooperative process in the mid-life of alliances (Yan and Zeng 1999). It would be interesting to study how partners'opportunistic tendencies evolve over time, how they react to divergent economic interests to avoid potential appropriationhazards, and how they manage ongoing conflicts due to man-
agerial and organizational dissimilarities. Another promising area for future studies is to dissect and make comparisons of determinants of alliance failure across various stages of alliance life cycle. Harrigan (1988) admonishes firms to understand the strategic impact of alliances, whether they join an alliance or not, because they will undoubtedly face competitors that cooperate with each other. By delineating the structure of alliances, as well as the dynamics that influence their development, the proposed framework illuminates the factors that can improve management of strategic alliances. It is hoped that this may be used as one guide in redirecting future studies of alliances. We also would like to think that this might redress the imbalance created by the prevailing attention to alliance success, as opposed to alliance failure. Acknowledgments
The authorsare grateful to Arvind Parkhe,Michael Gordon,Mike Russo, Jay Barney,Michael Lawless, ClaudiaSchoonhoven,and threeanonymous reviewers for their helpful comments on earlierversions of this paper.
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Interfirm Rivalry and Managerial Complexity: A Conceptual Framework of Alliance Failure Author(s): Seung Ho Park and Gerardo R.

Seung Ho Park * Gerardo R. Ungson

1526-5455 electronic ISSN

SEUNG HO PARK AND GERARDO R. UNGSON

Interfirn Rivalry and Managerial Complexity

A Conceptual Framework of Alliance Failure

12, No. 1, January-February 2001

SEUNG HO PARK AND GERARDO R. UNGSON

InterfirmRivalry and Managerial Coanplexity

Performance Measures Alliance Level Survival (Stability)

Composite Index Partner Level Achievement of Individual Goals and Learning

Hamel et al. (89) Koot (88) Hamel (91)

Conceptual Case studies

12, No. 1, January-February 2001

SEUNG HO PARK AND GERARDO R. UNGSON

Interfir7n Rivalry and ManzagerialComnplexity

SCIENCEVol. 12, No. 1, January-February 2001 ORGANIZATION

SEUNG HO PARK AND GERARDO R. UNGSON

InterfirmRivalry and Managerial Complexity

Managerial Complexity & Uncertainty

Conflict Dissimilarity Ambiguity Control

An Integrative Model of Alliance Failure

| Asynumetric Rent/ResourceAppropriation| l Adv,erse Bargaining

Bureucratic & Agency Costs Rigidity Organizational

ORGANIZATION SCIENCENVOl. 12, No. 1, January-February 2001

SEUNG HO PARK AND GERARDO R. UNGSON

InterfirmRivalry and Managerial Complexity

ORGANIZATION SCIENCE/Vo1. 12, No. 1, January-February 2001

SEUNG HO PARK AND GERARDOR. UNGSON Jiiterfirmn ManazgerialCom7>plexity Rivalry aniid

ORGANIZATION SCIENCE/Vo1. 12, No. 1, January-February 2001

SEUNG HO PARK AND GERARDO R. UNGSON

InterfirmRivalry and Managerial Complexity

ORGANIZATION SCIENCE/VOl. 12, No. 1, January-February 2001

SEUNG HO PARK AND GERARDO R. UNGSON

InterfirmRivalry and Managerial Complexity

12, No. 1, January-February 2001

SEUNG HO PARK AND GERARDO R. UNGSON

Initerfirm Rivalry and Managerial Complexity

Interaction Between Interfirm Rivalry and Managerial Complexity

ORGANIZATION SCIENCE/VO1.12, No. 1, January-February 2001

SEUNG HO PARK AND GERARDOR. UNGSON Initerfi Rivalry anidMalnagerial Complexity rm

ORGANIZATION SCIENCE/Vo1. 12, No. 1, January-Febiuary

SEUNG HO PARK AND GERARDO R. UNGSON

InterfirmRivalry and Managerial Complexity

Toward a Process Theory of Alliance Erosion and Failure

The Dynamics of Erosion and Failure of Strategic Alliances

Ex Ante Conditions (InterfirnRivalry) Directcompetition Complementarity considerations Equity Perceptions endgane of

Ex Ante Conditions (Managerial Complexity) Cultural incongruities Agencyissues structures Facilitating

Equity Perceived benefits

12, ORGANIZATION SCIENCE/Vo1. No. 1, January-February2001

SEUNG HO PARK AND GERARDO R. UNGSON

InterfirmRivalry and Managerial Conmplexity

12, ORGANIZATION SCIENCE/Vo1. No. 1, January-February2001

SEUNG HO PARK AND GERARDO R. UNGSON

Interfirmn Rivalry and Managerial Complexity

ORGANIZATION SCIENCE/Vo1. 12, No. 1, January-February 2001

SEUNG HO PARK AND GERARDO R. UNGSON

Inteifirm Rivalry and MancagerialComtplexity

ORGANIZATION SCIENCE/Vo1. 12, No. 1, January-February2001

SEUNG HO PARK AND GERARDO R. UNGSON

InterfirmRivalry and Managerial Complexity

SCIENCE/VOl. 12, No. 1, January-February 2001 ORGANIZATION

12, No. 1, January-February 2001