Alliances and Networks

Strategic Management Journal, Vol. 19, 293–317 (1998)

ALLIANCES AND NETWORKS

RANJAY GULATI*J.L. Kellogg Graduate School of Management, Northwestern University, Evanston,Illinois, U.S.A.

This paper introduces a social network perspective to the study of strategic alliances. It extendsprior research, which has primarily considered alliances as dyadic exchanges and paid lessattention to the fact that key precursors, processes, and outcomes associated with alliances canbe defined and shaped in important ways by the social networks within which most firms areembedded. It identifies five key issues for the study of alliances: (1) the formation of alliances,(2) the choice of governance structure, (3) the dynamic evolution of alliances, (4) theperformance of alliances, and (5) the performance consequences for firms entering alliances.For each of these issues, this paper outlines some of the current research and debates at thefirm and dyad level and then discusses some of the new and important insights that resultfrom introducing a network perspective. It highlights current network research on alliancesand suggests an agenda for future research. 1998 John Wiley & Sons, Ltd.

Strat. Mgmt. J., Vol. 19, 293–317, 1998

INTRODUCTION

Strategic alliances between firms are now aubiquitous phenomenon. Their proliferation hasled to a growing stream of research by strategyand organizational scholars who have examinedsome of the causes and consequences of suchpartnerships, mostly at the dyadic level. In thisarticle I don’t intend to review this vast andburgeoning field of research (for a review, seeAuster, 1994). Instead, I will develop a socialnetwork perspective on some of the key questionsassociated with strategic alliances, going beyondthe dyadic level to the larger network in whichalliances are embedded. I will discuss how thisperspective provides new insights on importantfactors that may influence the behavior and per-

Key words: strategic alliances; joint ventures; socialnetworks; embeddedness* Correspondence to: Ranjay Gulati, J.L. Kellogg GraduateSchool of Management, Northwestern University, Evanston,IL 60208-2001, U.S.A.

CCC 0143–2095/98/040293–25 $17.50 1998 John Wiley & Sons, Ltd.

formance of firms. I define strategic alliances asvoluntary arrangements between firms involvingexchange, sharing, or codevelopment of products,technologies, or services. They can occur as aresult of a wide range of motives and goals, takea variety of forms, and occur across vertical andhorizontal boundaries. While I focus here onhighlighting the importance of a social networkperspective on strategic alliances, I will also dis-cuss some of the valuable contributions and cur-rent research debates at the firm and dyad levelfor each of the key questions. This discussion ofresearch on strategic alliances admittedly reflectsmy own biases and research preferences, andthere is a large amount of research on this topicthat will not fall under my purview.

From a strategic standpoint, some of the keyfacets of the behavior of firms as it relates toalliances can be understood by looking at thesequence of events in alliances. This sequencingincludes the decision to enter an alliance, thechoice of an appropriate partner, the choice ofstructure for the alliance, and the dynamic evolu-

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tion of the alliance as the relationship developsover time. While all alliances may not necessarilyprogress through the same sequence of events,nonetheless, the decisions involved constitutesome of the key behavioral issues that arise inalliances. Mirroring this sequence are the follow-ing relevant research questions: (1) Which firmsenter alliances and whom do they choose aspartners? (2) What types of contracts do firmsuse to formalize the alliance? and (3) How dothe alliance and the partners’ participation evolveover time?

A second important issue for alliances is theirperformance consequences, both in terms of theperformance of the alliance relationship itself andthe performance of firms entering alliances. Tworesearch questions focus on the performanceissue: (1) What factors influence the success ofalliances? and (2) What is the effect of allianceson the performance of firms entering them?

In this paper I will discuss these five criticalquestions for the study of strategic alliances and,for each, I will discuss current research effortsat both the dyadic and network levels and high-light some of the insights that result from anetwork perspective on the study of strategicalliances. Introducing networks into our calculusof the alliance behavior of firms allows an exam-ination of both the innate propensities or induce-ments that lead firms into alliances and also theopportunities and constraints that can influencetheir behavior.

The notion that a firm’s social connectionsguide its interest in new alliances, and providesit with opportunities to realize that interest, isclosely rooted in the processes that underlie afirm’s entry into new alliances. I first observedthis when I was conducting field interviews at anumber of firms with multiple alliances and foundthat firms don’t necessarily follow the sequenceof events that is usually offered for alliances(Gulati, 1993). A firm on its own initiative iden-tifies the need for an alliance, identifies the bestpartner available, and chooses an appropriate con-tract to formalize the alliance. Rather, I observedthat many new opportunities for alliances werepresented to firms through their existing sets ofalliance partners. In the instances in which firmsindependently initiated new alliances, they turnedto their existing relationships first for potentialpartners or sought referrals from them on poten-tial partners. The manner and extent to which

1998 John Wiley & Sons, Ltd. Strat. Mgmt. J.,Vol 19, 293–317 (1998)

firms were embedded were likely to influenceseveral key decisions, including the frequencywith which firms entered alliances, their choiceof partner, the type of contracts used, and howthe alliance developed and evolved over time.My fieldwork suggested that the social networksof prior ties not only influenced the creation ofnew ties but also affected their design, theirevolutionary path, and their ultimate success.

A BRIEF CRITIQUE OF PRIORRESEARCH ON ALLIANCES

Prior research on alliances has led to valuableinsights on the behavior of firms in alliances andthe performance consequences from such partner-ships. Three related themes run across these priorefforts. First, the unit of analysis that is usuallyadopted is the firm or the alliance. For instance,researchers have tried to identify the attributes offirms that influence their proclivity to enteralliances or their choice of partner, or to identifythe characteristics of alliances that may influencethe formal contracts used to organize them.

A second and related theme has been examin-ing the formation and performance of alliancesin an asocial context. The role of the externalenvironment is usually encapsulated withinmeasures of competitiveness in product or sup-plier markets. For instance, from a transactioncosts standpoint, this translates to the argumentthat the lower the competition, the more likelythat a firm will be exposed to ‘small numbersbargaining’ and other forms of opportunisticbehavior (Williamson, 1985). Resource depen-dence theorists, similarly, make the case that atintermediate levels of industry concentration,firms experience high levels of competitive uncer-tainty and are likely to mitigate this competitiveinterdependence by entering into frequent jointventures (Pfeffer and Nowak, 1976a). Finally,prior research on alliances has focused primarilyon firm- and industry-level factors that impelfirms to enter alliances. In his seminal book,Andrews (1971) claimed that the strategic actionsof firms are the outcome of a match between afirm’s existing competence and the availability ofnew opportunities. For the study of alliances,scholars have primarily focused on the existingcompetence (or lack thereof) that may propelfirms to enter into new alliances, but they have

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generally paid less attention to factors that maylead to the availability of and access to allianceopportunities in the first place. Thus, in Andrews’terms, they have focused primarily on the com-petence side of the conditions that propel strategicactions and not on the conditions that determinethe opportunity set firms may perceive.

The focus on the firm or alliance as the unitof analysis and the description of external contextin competitive terms has typically assumed anatomistic notion of firms evaluating alternativecourses of action and does not take into accountthe actions of other firms or the relationshipsin which they themselves are already embedded.Moreover, it ignores the interactive elements ofthe market, whereby participants discover marketinformation through their interactions in the mar-ket (Hayek, 1949; White, 1981). It is importantto recognize that although strategic alliances areessentially dyadic exchanges, key precursors, proc-esses, and outcomes associated with them can bedefined and shaped by the social networks withinwhich most firms are embedded. There is a richstrand of research in economic sociology that hasdevoted itself to explaining how economic actionsmay be influenced by the social structure of tieswithin which they are embedded (e.g., Grano-vetter, 1985). Sociologists have convincingly dem-onstrated that the distinct social structural patternsin exchange relations within markets shape theflow of information (White, 1981; Burt, 1982;Baker, 1984). This in turn provides both oppor-tunities and constraints for firms and can haveimplications for their behavior and performance.Viewed from this standpoint, much of the researchon strategic alliances represents an undersocializedaccount of firm behavior.

In recent years there has been a growinginterest in understanding the influence of thesocial context in which firms are embedded ontheir behavior and performance. A number ofresearchers have explicitly incorporated embed-dedness, broadly defined, into our understandingof strategic management questions relating to thebehavior and performance of firms (for a collec-tion of recent articles, see Baum and Dutton,1996). The social context in which firms areembedded includes a whole array of elements thatcan be classified broadly as structural, cognitive,institutional, and cultural (Zukin and DiMaggio,1990). While each of these facets can be signifi-cant, my focus in this paper will be on the


structural context, which highlights the signifi-cance of the social networks in which economicactors may be placed. Prior to discussing the keyquestions for the study of alliances, I will providea general theoretical perspective for examiningthe implications of social embeddedness on firmbehavior and performance.

SOCIAL STRUCTURE AND THEEMBEDDEDNESS OF FIRMBEHAVIOR

Building on an open systems perspective firstput forward by organizational theorists, structuralsociologists have suggested that the mostimportant facet of an organization’s environmentis its social network of external contacts (for areview, see Powell and Smith-Doerr, 1994). Theyemphasize the fact that economic action—likeany other form of social action—does not takeplace in a barren social context but, rather, isembedded in social networks of relationships. Asocial network can be defined as ‘a set of nodes(e.g., persons, organizations) linked by a set ofsocial relationships (e.g., friendship, transfer offunds, overlapping membership) of a specifiedtype’ (Laumann, Galaskiewicz, and Marsden,1978: 458).

Network perspectives build on the generalnotion that economic actions are influenced bythe social context in which they are embeddedand that actions can be influenced by the positionof actors in social networks. Embeddednessrefers to

the fact that exchanges and discussions within agroup typically have a history, and that thishistory results in the routinization and stabili-zation of linkages among members. As elementsof ongoing social structures, actors do notrespond solely to individualistically determinedinterests% a structure of relations affects theactions taken by the individual actors composingit. It does so by constraining the set of actionsavailable to the individual actors and by changingthe dispositions of those actors toward the actionsthey may take. (Marsden, 1981: 1210)

Underlying embeddedness is the quest forinformation to reduce uncertainty, a quest thathas been identified as one of the main drivers oforganizational action (Granovetter, 1985). Net-works of contact between actors can be important

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sources of information for the participants, andwhat can matter is not only the identity of themembers of a network but also the pattern ofties among them.

There have been four broad foci of priorresearch on the influence of social networks:inequality, embedding, contagion, and contin-gency (Burtet al., 1994). Research on inequalitysuggests how network connections can explaindifferences in the resources available to individ-uals, groups, or organizations, while research onembedding describes the institutions and identitiesresulting from networks and how they enabledifficult transactions. The research on contagionhas shown how networks can promote behavioralconformity by serving as conduits for both tech-nological and social information about organi-zational activities, which in turn can influence theextent to which they adopt new innovations(Davis, 1991; Haunschild, 1992). Finally, contin-gency approaches suggest how social networkscan moderate key organizational processes. Whileall four perspectives focus primarily on the conse-quences of embeddedness in social networks,recent accounts have also begun to consider someof the bases for the origin of these networks.

There are two broad analytical approaches forexamining the influence of social networks. Thefirst emphasizes the differential informationaladvantages bestowed by social networks, whilethe second highlights the control benefits actorscan generate by being advantageously positionedwithin a social network. These two benefits areanalytically distinct but also overlap, since muchof the control benefit can arise from the manipu-lation of information (Burt, 1992: 78). Networksmay provide informational benefits through twomechanisms (Granovetter, 1992). Relational em-beddedness or cohesion perspectives on networksstress the role of direct cohesive ties as a mech-anism for gaining fine-grained information. Actorswho share direct connections with each other arelikely to possess more common information andknowledge of each other. Structural embed-dedness or positional perspectives on networksgo beyond the immediate ties of firms and empha-size the informational value of the structural posi-tion these partners occupy in the network. Infor-mation travels not only through proximate ties innetworks, but through the structure of the networkitself. Both mechanisms have generally beenapplied to explain similarities in the attitudes and


behavior of actors resulting from the sharing ofinformation through networks (e.g., Burt, 1987).

Relational embeddedness typically suggests thatactors who are strongly tied to each other arelikely to develop a shared understanding of theutility of certain behavior as a result of discussingopinions in strong, socializing relations, which inturn influence their actions (Coleman, Katz, andMenzel, 1966). Cohesively tied actors are likelyto emulate each other’s behavior. Cohesion canalso be viewed as the capacity for social ties tocarry information that diminishes uncertainty andpromotes trust between actors (Granovetter, 1973;Podolny, 1994; Gulati, 1995a; Burt and Knez,1995). Thus, cohesive ties can become a uniquesource of information about the partner’s capabili-ties and reliability.

Structural embeddedness focuses on the infor-mational role of the position an organizationoccupies in the overall structure of the network.Consequently, the frame of reference shifts fromthe dyad and triad to the system (Marsden andFriedkin, 1993). In network analysis, the positionan actor occupies in the structure is a functionof the actor’s relational pattern in this network.Actors occupying similar positions need not betied with each other. Instead, they are likely tobe tied to the same set of other actors or tosimilar sets of other actors, and there is a wholearray of network measures to capture the positionan actor occupies in a network.

Scholars have frequently linked the positionactors occupy to the notion of ‘status’ and sug-gested that actors occupying similar positionsreflect distinct status groups (Podolny, 1993,1994). In sociological terms, status evokes a ser-ies of observable characteristics associated witha particular position, or ‘role,’ in a social struc-ture, that entails a relatively defined set ofexpected behaviors toward other actors. Becausean actor’s status is based on its affiliations andpatterns of interaction, it is affected by its webof affiliations and by the status of its exchangepartners. When focusing on an interorganizationalcontext, we can also view status as an attributionof the quality of products an actor–organizationprovides when the quality cannot be directlyobserved (Podolny, 1993). Following a similarlogic, the observable features associated with acertain status can also become an important signalof how members of that status are likely tobehave. Thus, status groupings resulting from


network position can provide powerful infor-mational cues for actors about the likely behaviorof others in the network.

Both perspectives of relational and structuralembeddedness highlight the informational advan-tages social networks can confer on certain actors.Another view of networks highlights the controlbenefits actors can receive and has beendeveloped furthest in the work of Burt (1992).An actor in a social network can derive controladvantages by being thetertius gaudens, or onewho is situated between two other actors. Thiscan occur either when two or more actors areafter the same relationship with a focal actor, asis the case when multiple firms want to enter analliance with a given firm, or can occur when anactor is the tertius in separate relationships withtwo actors with conflicting demands, as mayoccur for a firm that has separate alliances withtwo independent firms that may create conflictingdemands. In both such instances, firms in thetertius role can create advantages for themselvesby playing one off against the other and brokeringtension between the other players. These advan-tages can translate into concrete benefits in theform of favorable terms in their exchangerelationships with partners.

While the original focus of network researchwas on understanding how the embeddedness ofindividuals influences their behavior, a similarargument has been extended to organizations(e.g., Burt, 1982; Walker, 1988; Mizruchi, 1992;Gulati, 1995b). Firms can be interconnected withother firms through a wide array of social andeconomic relationships, each of which can consti-tute a social network. These include supplierrelationships, resource flows, trade associationmemberships, interlocking directorates, relation-ships among individual employees, and prior stra-tegic alliances. While firms may be connectedthrough a multitude of connections, each of whichcould be a social network, some may be moreor less significant than others and researchershave rarely focused on more than one networkat a time (for a review of research on interorgani-zational relationships, see Galaskiewicz, 1985a).To recognize the true importance of a socialnetwork, it is important to understand the natureand purpose of the network as well as the con-tents of information flowing through it(Stinchcombe, 1990). While much of the researchon interorganizational relationships has focused


on the networks of interlocking directorates (fora review, see Mizruchi, 1996), scholars have alsolooked at other networks, such as those betweencorporations and investment banks (Baker, 1990),among hospitals (Westphal, Gulati, and Shortell,1997), among firms resulting from prior alliances(Gulati, 1995a, 1995b), and those among corpo-rate contributions officers (Galaskiewicz, 1985b).

Only recently have scholars begun to explorethe implications of the social structure resultingfrom intercorporate networks on strategicalliances. Strategic alliances are distinctive in thatentering one constitutes a strategic action, andtheir cumulation can also become a social net-work. Thus, alliances are unique in that they canbe studied as both endogenous and exogenousfactors. The former can be examined by lookingat the influence of social networks on the forma-tion of alliances, while the latter can be assessedby considering the effects of the social networkof cumulated alliances. Both can be examinedsimultaneously by assessing the influence of thesocial network of prior alliances on its futurealliances in a longitudinal setting. Studying thedevelopment of an alliance network over timecan provide unique insights into the evolution ofnetworks, where strategic action and social struc-ture are closely intertwined. It also allows us toexamine the extent to which alliances formed byfirms may lock them into path-dependent coursesof action in the future. The normative side ofthis, of course, is that once firms understand thedynamics of alliance networks, they may choosepath-creation strategies rather than becomingpath-dependent (Garud and Rappa, 1994). As aresult, they can visualize the desired networkstructure of alliances in the future and workbackwards to define their current alliance strategy.

The same dual orientation is feasible for study-ing the performance consequences of alliancesincluding the performance of alliances themselvesand how alliances may influence the performanceof partnering firms. One way to understand theperformance consequences of social networks foralliances and for the firms entering them is tothink of social networks as bestowing firms with‘social capital’ which can become an importantbasis for competitive advantage (Burt, 1997).While the notion that actors possess social capitalhas been most developed for individuals and theirinterpersonal networks, the idea can easily beextended to organizations and their interorgani-

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zational networks (Gulati, 1997). The benefits ofsocial capital accrue to firms from the access toinformation it provides and the potential for con-trol benefits. This information can be a powerfulcatalyst, providing firms with new productiveopportunities to utilize the financial and humancapital with which they are endowed. Forinstance, the informational advantages to firmsfrom a social network can enable the creation ofnew alliances by three distinct means: access,timing, and referrals (Burt, 1992). Access refersto information about current or potential partnersas to their capabilities and trustworthiness—anexisting network can influence a firm’s choice offeasible partners and its attractiveness to otherfirms as a partner. The availability of currentinformation about alliance partners can also affectthe partnering firms’ choice of structure to for-malize the alliance, as well as key processesunderlying the dynamic evolution of the alliance.Timing entails having informational benefitsabout potential partners at the right time, whichcan be important when a firm seeking attractivepartners must approach them at the right timeand preempt their seeking alliances elsewhere. Itcan also alter the evolutionary path of the allianceby providing partners with information at criticaljunctures in the alliance, which can affect theperformance of the alliance and the benefits thefirm receives from the alliance. Referrals can beparticularly important in alliance formation, as afirm’s existing partners may refer other firms toit for alliances or to enter three-way partnerships.

In the case of alliances, firms with more socialcapital will not only have access to informationabout a larger number of alliances, but they mayalso be able to attract better partners who wantto ally with them. Furthermore, they may be ableto extract superior terms of trade because ofpossible control benefits that may ensue fromtheir social capital. The informational benefitsfrom social networks can have ramifications forthe development and ultimate success of thealliance itself. Ties that are structurally embeddedcan have fundamentally different characteristicsand life course than those that are not (Powell,1990). Embedded ties promote greater frequencyof information exchange between partners, whichcan affect the success of the alliance as well asthe performance of firms entering them.


KEY ISSUES IN ALLIANCES

The section is organized around the five keyquestions that I outlined to be critical issues forstudying strategic alliances. For each question, Ifirst discuss some of the current research anddebates at the firm and dyadic levels, followedby an examination of how introducing a socialnetwork perspective opens up an additional setof issues that can be considered.

The formation of alliances

In a review of some of the theoretical expla-nations for the formation of joint ventures, Kogut(1988a) highlighted three main motivations whichare broadly applicable to other types of alliancesas well: transaction costs resulting from smallnumbers bargaining, strategic behavior that leadsfirms to try to enhance their competitive posi-tioning or market power, and a quest for organi-zational knowledge or learning that results whenone or both partners want to acquire some criticalknowledge from the other or one partner wantsto maintain its capability while seeking anotherfirm’s knowledge.

Some of the early empirical studies on alliancesfocused on the formation of joint ventures inparticular, which entail the creation of a newentity with shared equity between partners. Theyexamined some of the strategic imperatives forjoint ventures, which included the enhancementof market power and increased efficiency. Severalstudies focused on the incidence of such alliancesacross industries and the size of firms enteringthem. The concentration of such alliances withinparticular industries in the manufacturing sectorand the heightened proclivity of larger firms toenter them led scholars to conclude that the questfor market power may be an important motivefor such ties (e.g., Pate, 1969; Berg and Fried-man, 1978). These arguments were further refinedto incorporate transaction costs as an inducementfor certain types of alliances (Stuckey, 1983) andknowledge acquisition as a salient motive formany alliances (Berg and Friedman, 1981).

Current studies on alliance formation have fol-lowed tradition and examined industry- and firm-level factors that could explain the frequencywith which alliances occur. More detailed meas-ures have been developed, and the domain ofinquiry has expanded from joint ventures to other


types of alliances. Some of the industry-levelfactors linked with alliance formation include theextent of competition, the stage of developmentof the market, and demand and competitive uncer-tainty (Harrigan, 1988; Shan, 1990; Burgers, Hill,and Kim, 1993; Eisenhardt and Schoonhoven,1996). The focus has remained on strategic fac-tors, since empirical investigations of transactioncost and knowledge-based imperatives for allianceformation have been less tractable.

The study of firm-specific imperatives hasfocused on identifying some of the inducementslikely to lead firms to enter alliances (for areview, see Harrigan and Newman, 1990). Thishas led to a rich research stream that has exam-ined which types of firms in which industriesenter what types of alliances for what reasons(Mariti and Smiley, 1983; Ghemawat, Porter, andRawlinson, 1986; Porter and Fuller, 1986). Thishas been refined within a cost–benefit frameworkin which the costs and benefits from alliances areprimarily strategic and technological and alliancesmaterialize when the benefits exceed the costs(Harrigan, 1985; Contractor and Lorange, 1988).At the firm level, scholars have sought to showthe role of resource contingencies such as stra-tegic vulnerability and incumbency on the pro-clivity of firms to enter alliances (Eisenhardt andSchoonhoven, 1996; Mitchell and Singh, 1992).Other scholars have looked at firms’ attributes,such as size, age, competitive position, productdiversity, and financial resources, as importantpredictors of their propensity to enter strategicalliances with each other (Shan, 1990; Barley,Freeman, and Hybels, 1992; Powell and Brantley,1992; Burgerset al., 1993; Shan, Walker, andKogut, 1994). The importance of resource con-siderations has been further refined by Kogut(1991), who suggested that many joint venturesoccur as options to expand in the future and areinterim mechanisms by which firms both bufferand explore uncertainty.

A second question associated with alliancebehavior of firms has to do with the question ofwith whom firms partner. Just as a person’sdecision to get married is tied to the choice andavailability of a specific partner, a firm’s decisionto enter into an alliance is closely linked with itschoice of an appropriate partner and may evenbe determined by that partner’s availability.Hence, the dyad can be a valuable unit of analysisto study the alliance behavior of firms. A research


stream that has paid attention to alliance forma-tion at this level has been resource dependencetheory. A rich literature on the formation ofrelations among social service agencies flourishedin the 1960s and 1970s (for reviews, see Galas-kiewicz, 1985a; Oliver, 1990). This research builton the original open systems model of resourceprocurement but added an exchange perspectivethat suggested that organizations enter partner-ships when they perceive critical strategic inter-dependence with other organizations in theirenvironment (e.g., Levine and White, 1961;Aiken and Hage, 1968), in which one organi-zation has resources or capabilities beneficial tobut not possessed by the other. Applied to thedyadic context, these arguments suggest that firmssought out ties with partners who could helpthem manage such strategic interdependencies.Richardson (1972), in a theoretical economicaccount, also proposed that the necessity for com-plementary resources is a key driver of inter-organizational cooperation.

In recent years, the focus of scholars studyinginterorganizational relations has shifted fromsocial service agencies to business organizations.A strategic interdependence perspective onalliance formation suggests that firms ally withthose with whom they share the greatest inter-dependence. To assess the significance of resourcedependence at the dyadic level, researchers havelinked the formation of alliances to the distri-bution of various kinds of capabilities within theindustry, such as production, marketing, distri-bution, regulatory approval, and access to newtechnologies. At the interindustry level, resourcedependence theorists have empirically tested therole of strategic interdependence by predicting thenumber of joint ventures formed across industries(Pfeffer and Nowak, 1976a, 1976b; Berg andFriedman, 1980; Duncan, 1982). Recent effortshave focused more closely on the industry leveland explored the role of resource configurationswithin an industry in predicting alliance forma-tion. They have not only revealed distinct pat-terns, such as densely linked cliques, but havealso tried to explain the observed patterns on thebasis of strategic interdependence resulting fromcountry-specific resource advantages (Shan andHamilton, 1991), the distribution of strategiccapabilities (Nohria and Garcia-Pont, 1991), andthe relative size and performance of firms(Burgers, Hill, and Kim, 1993). This research

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suggests that industry patterns in the formationof alliances indicate that firms are driven to enteralliances with each other by critical strategicinterdependence.

Although interdependence may explain tie for-mation between some firms, it may not adequatelyaccount for alliance formation. This inadequacyis clear from the fact that not all possible oppor-tunities for sharing interdependence across firmsactually materialize as alliances. An account ofalliance formation that focuses only on inter-dependence ignores how firms learn about newalliance opportunities and overcome the fearsassociated with such partnerships. Implicit in suchaccounts is the assumption that firms exist in anatomistic system in which information is freelyavailable and equally accessible to all and oppor-tunities for alliances are exogenously presented(Granovetter, 1985).

To understand why social networks and theinformation they channel are important for firmsand their alliances, we need to consider the cir-cumstances usually associated with such ties.Firms entering alliances face considerable moralhazard concerns because of the unpredictabilityof the behavior of partners and the likely coststo a firm from opportunistic behavior by a partner,if it occurs. Despite the rapid growth of bothdomestic and international alliances in manyindustrial sectors, such partnerships are still con-sidered risky (Business Week, 1986; Kogut, 1989;Hamel, Doz and Prahalad, 1989). A partner mayeither free-ride by limiting its contributions to analliance or simply behave opportunistically. Suchconcerns are further compounded by the unpre-dictable character of such relationships. Rapidchanges in the environment may lead organi-zations to alter their needs and orientation, thusaffecting their ongoing partnerships. For organi-zations to build ties that effectively address theirneeds while minimizing the risks posed by suchconcerns, they must be aware of the existence oftheir potential partners and have an idea of theirneeds and requirements. Organizations also needinformation about the reliability of those partners,especially when success depends heavily uponthe partners’ behavior (Bleeke and Ernst, 1991).

Sociologists have suggested that economicactors address concerns of opportunism in eco-nomic transactions by embedding transactions inthe social context in which those transactionsoccur. Faced with uncertainty about a partner,


actors adopt a more social orientation and resortto existing networks to discover information thatlowers search costs and alleviates the risk ofopportunism. Granovetter (1985: 490) noted that‘the widespread preference for transacting withindividuals of known reputation implies that feware actually content to rely on either generalizedmorality or institutional arrangements to guardagainst trouble.’ A person resorts to ‘trustedinformants’ who have dealt with the potentialpartner and found him or her trustworthy, or,even better, to ‘information from one’s own pastdealings with that person’ (Granovetter, 1985:490).

The embeddedness of firms in social networkscan both restrict and enable the alliances a firmenters. By influencing the extent to which firmshave access to information about potential part-ners, social networks can alter the opportunityset firms perceive for viable alliances. Similarly,networks constrain the extent to which potentialpartners are aware of a focal firm and thus mayconstrain its set of choices for alliances. This isvividly illustrated by the influence of one suchsocial network, the cumulation of prior alliances,on the subsequent alliances by firms. As thetypical comments by a manager I interviewedindicate, firm managers embed their new ties byrelying extensively on their partners from pastalliances for information:

They are familiar with many of our projects fromtheir very inception and if there is potential foran alliance we discuss it. Likewise, we learnabout many of their product goals very early onand we actively explore alliance opportunitieswith them. (Gulati, 1993: 84)

Such comments suggest that firms are influencedin their ability to enter new partnerships by thesocial network of their past alliances.

Several recent studies have explored the impor-tance of social embeddedness on the formationof alliances by firms. The first question examinedhas been at the firm level—which firms enter intoalliances? Evidence suggests that the proclivity offirms to enter alliances is influenced not only bytheir financial and technological attributes (treatedas proxies for strategic imperatives), but also byhow they are embedded in social networksbetween firms. For instance, several studies haveused the social network of prior alliances betweenfirms to show that firms that had more prior


alliances, were more centrally situated in thealliance network, or had more focused networks,were more likely to enter into new alliances anddid so with greater frequency (Kogut, Shan, andWalker, 1992; Gulati, 1993, 1997). Similiar find-ings have been reported for the influence offirm centrality in various other networks on theirlikelihood of entering new alliances. These net-works include alliance networks among biotech-nology firms (Powell, Koput, and Smith-Doerr,1996), semiconductor firms and their patentcitation networks (Podolny and Stuart, 1995), andthose of top management teams of semiconductorfirms (Eisenhardt and Schoonhoven, 1996). Eachnetwork highlights a different underlying socialprocess that enables central firms to enteralliances more frequently. Nonetheless, thesestudies strongly suggest that the embeddednessof firms is an important influence on theiralliance behavior.

The influence of social embeddedness on theformation of new alliances has also been observedat the dyad level, with a focus on who partnerswith whom. In a study of alliance formation overa 20-year period, Gulati (1995b) examined thefactors explaining which of all possible dyadsentered alliances during the observed time period.The social context examined was the cumulationof prior alliances between firms. The observedsocial structural effects resulted from both thedirect and indirect ties of firms with each other.Previously allied firms were likely to engage infurther alliances. This was confirmed in commentsby alliance executives such as: ‘We have closeworking relationships with most of our alliancepartners. As a result, we are familiar with manyof their own goals and capabilities. Since theyalso know about our specific skills and needs,many new deals are created interactively withthem.’ The results also provided evidence of theinformational benefits of indirect ties betweenfirms, both one-level-removed indirect ties andmore distant ties. Previously unconnected firmswere more likely to enter an alliance if they hadcommon partners or were less distant from eachother in the alliance network.

Structural embeddedness can also influence thechoice of partner in alliances. The cues providedby the position of organizations enlarge the realmof potential partners about which an organizationcan havea priori information beyond the circleof organizations directly or indirectly tied to it.


The status of an organization in the networkaffects its reputation and visibility in the system.The greater this reputation, the wider the organi-zation’s access to a variety of sources ofknowledge, and the richer the collaborativeexperience, which makes it an attractive partner.The signaling properties of status are particularlyimportant in uncertain environments, where theattractiveness of a potential partner can be gaugedfrom its status, which in turn depends on theorganizations (or type of organizations) alreadytied to this partner (Podolny, 1994). Thisphenomenon has important behavioral conse-quences. If the status of whom they partner withenhances their own attractiveness, organizationswill have a tendency to seek high-status partners.Although special reasons, such as the controlof a new technology, may prompt a high-statusorganization to cooperate with a low-status player,the ‘homophily principle’ in terms of status thatoperates under conditions of uncertainty makesthis an unlikely occurrence (Gulati and Gargi-ulo, 1997).

The formation of dyadic ties between particularfirms has also been studied in vertical alliancesbetween buyers and suppliers. For instance, schol-ars have examined the extent to which Japaneseautomotive assemblers recreate their relationshipsin Japan in their North American operations(Martin, Mitchell, and Swaminathan, 1995). Theevidence suggests that in addition to an array ofstrategic factors associated with the characteristicsof the buyer and supplier, an important consider-ation in the recreation of ties was the historyof prior engagements in which these firms areembedded. The longer the prior history betweentwo firms, the more likely they were to recreatethese ties in North America. This suggests thatthe social embeddedness of firms influences thecreation of vertical alliances between firms.

The social explanation offered by the reportedstudies that highlight the role of embeddednessdoes not contradict the economic motivations foralliances. Firms don’t form alliances as symbolicsocial affirmations of their social networks but,rather, base alliances on concrete strategic com-plementarities that they have to offer each other.It does suggest that the conditions of mutualeconomic advantage are necessary but not suf-ficient conditions for the formation of an alliancebetween two firms. While considerations of indi-vidual quest for resources and complementarity

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are relevant, it is a firm’s social connections thathelp it identify new alliance opportunities andchoose specific partners that possess such comple-mentary assets.

As highlighted earlier, firms are embedded inmultiple social networks and the implications ofthese manifold ties on alliance formation remainan open question. The evidence that exists thusfar highlights the significance of one social net-work at a time on new alliances. The possibleimplications of the simultaneous and possiblyconflicting influence of multiple social networkson alliance formation have yet to be systemati-cally examined. For instance, one of the mostwidely studied interorganizational networks hasbeen board interlocks, and yet the implicationsof such ties and other interfirm networks onalliances has largely been overlooked untilrecently (Gulati and Westphal, 1997). Further-more, the broader institutional context in whichsuch networks are placed can also be influential(Dacin, Hitt, and Levitas, 1997).

Governance structure of alliances

A notable characteristic of the dramatic growthof strategic alliances in the last two decades hasbeen the increasing diversity of such alliances.The nationalities of partners, their motives andgoals in entering alliances, and the formal con-tractual structures used to organize the partner-ships, called the governance structure, have allbecome increasingly varied. While alliances maybe considered a distinct form of governance thatis different from markets or hierarchies, there isalso considerable variation in the formal structureof alliances themselves (Powell, 1990). The var-iety of organizing structures implies that firmsface an array of choices in structuring theiralliances. Prior research has distinguished amongalliance structures in terms of the degree of hier-archical elements they embody and the extent towhich they replicate the control and coordinationfeatures associated with organizations, which areconsidered to be at the hierarchical end of thespectrum (e.g., Harrigan 1987; Hennart, 1988;Osborn and Baughn, 1990; Teece, 1992). At oneend are joint ventures, which involve partnerscreating a new entity in which they share equityand which most closely replicate the hierarchicalcontrol features of organizations. At the other endare alliances with no sharing of equity that havefew hierarchical controls built into them.


Organizational scholars have long studied thediversity of structures within organizations andviewed structure as a mechanism to manageuncertainty. Prior research on contract choices inalliances and the extent of hierarchical controlsthey embody has been influenced primarily bytransaction cost economists, who have focused onthe appropriation concerns in alliances, whichoriginate from contracting hazards and behavioraluncertainty at the time of their formation (e.g.,Pisano, Russo, and Teece, 1988; Pisano, 1989;Balakrishnan and Koza, 1993; Oxley, 1997). Fol-lowing this perspective, scholars have suggestedthat hierarchical controls are an effective responseto such concerns as they are anticipated at thetime the alliance is formed. The logic for hier-archical controls as a response to appropriationconcerns is based on the ability of such controlsto assert control by fiat, enable monitoring, andalign incentives. The operation of such a logicwas originally examined in the classic make-or-buy decisions (e.g., Walker and Weber, 1984;Masten, Meehan, and Snyder, 1991). The samelogic by which firms choose between the extremesof making or buying a component is alsoexpected to operate once firms have decided toform an alliance in their choice of governancestructure. The greater the appropriation concerns,the more hierarchical the governance structuresfor organizing the alliance are likely to be.

An important shortcoming with such priorapproaches has been their implicit treatment ofeach transaction as a discrete independent event(Doz and Prahalad, 1991). This leads to temporalreductionism since it treats alliances as occurringin an ahistorical context. Firms may very wellhave a longer history with each other throughtheir entering multiple strategic alliances overseveral years. One of the executives who special-ized in alliances for his firm that I interviewedhighlighted this point:

We originally initiated technology partnershipswith a number of key industry players in themid-1980s. These in turn have led to numerousrepeated alliances with the same set of firms.With each partner maintaining on-site staff at ourfacilities that was only to be expected. (Gulati,1993: 84)

Empirical studies on the governance ofalliances have unfortunately continued in thetransaction cost economics tradition, treating eachalliance as independent and considering the activi-


ties it includes at the time of its formation assingularly reflecting the transaction costsassociated with it. The approach taken is thusstatic: it specifies the unit of analysis to be eachtransaction and not the economic relationship andthus ignores the possibility of a social structureresulting from repeated alliances and the emergentprocesses resulting from prior interactionsbetween partners that may alter their calculuswhen they are choosing contracts in alliances(Ring and Van de Ven, 1992; Gulati, 1995a;Dyer and Singh, 1997; Nickerson and Silverman,1997). Furthermore, it would be useful to con-sider the implications of structural embeddednesswhich would suggest the importance of the over-all network in which individual transactions andalso economic relationships are situated.

An important implication of the embeddednessof firms in social networks is the enhanced trustbetween firms. Trust between firms refers to theconfidence that a partner will not exploit thevulnerabilities of the other (Barney and Hansen,1994). A social network of prior ties can promotetrust through two possible means. First, by serv-ing as effective referral networks, the prior socialstructure makes firms aware of each other’s exist-ence. Take, for instance, the comments of one ofthe executives responsible for alliance decisionsthat I interviewed:

In some cases we realize that perhaps our skillsdon’t really match for a project, and our partnermay refer us to another firm about whom wewere unaware%. An important aspect of thisreferral business is of course about vouching forthe reliability of that firm. Thus, if one of ourlong-standing partners suggests one of their ownpartners as a good fit for our needs, we usuallyconsider it very seriously. (Gulati, 1993: 84)

Through these ongoing interactions, firms notonly learn about each other but may also developtrust around norms of equity, or ‘knowledge-based trust’ (Shapiro, Sheppard, and Cheraskin,1992). There are strong cognitive and emotionalbases for such trust, which are perhaps mostvisible among individual organization members.Macaulay (1963: 63) observed how close per-sonal ties emerged between individuals in organi-zations that contracted with each other; thesepersonal relationships in turn ‘exert pressures forconformity to expectations.’ Similarly, Ring andVan de Ven (1989, 1994) pointed to theimportant role of informal, personal connections


across organizations in determining the govern-ance structure used to organize their transactions.Second, social networks can serve as an importantbasis for ‘enforceable’ or ‘deterrence-based’ trust(Kreps, 1990; Raub and Weesie, 1990; Shapiroet al., 1992; Burt and Knez, 1995). The antici-pated utility from a tie with a given partnerand those with shared partners motivates goodbehavior. Each partner’s awareness that the otherhas much to lose from behaving opportunisticallyenhances its confidence in the other. Potentialsanctions include loss of repeat business with thesame partner, loss of other points of interactionbetween the two firms, and loss of reputation.

How is trust between two firms likely to altertheir choice of contracts in subsequent alliances?An important concern of firms entering allianceshas to do with appropriation and relates to thepredictability of their partners’ behavior. Adetailed contract is one mechanism for makingbehavior predictable, and another is trust. Bothknowledge-based trust resulting from mutualawareness and equity norms and deterrence-basedtrust arising from reputational concerns creates‘self-enforcing’ safeguards in an exchangerelationship and can substitute for contractualsafeguards (Bradach and Eccles, 1989; Powell,1990). As a result, where there is trust, appropri-ation concerns are likely to be mitigated, andorganizations may not choose to rely on detailedcontracts to ensure predictability. In a study ofthe choice of governance structures in strategicalliances, I found that firms select contractualforms for their alliances not only on the basisof the activities they include and the relatedappropriation concerns they anticipate at the out-set, but also the existence of the social networkof prior alliances in which the partners may beembedded (Gulati, 1995a). What emerges fromthis account is an image of alliance formation inwhich cautious contracting gives way to looserpractices as partners become increasingly embed-ded in a social network of prior ties. Familiaritybetween organizations through prior alliancesdoes indeed breed trust which enables firms toprogressively use less hierarchical structures inorganizing new alliances.

Several provocative articles have questionedthe role of transaction costs and appropriationconcerns in alliances. Powell (1990) suggestedthat alliances and other such exchange relation-ships don’t necessarily fall on the market-

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hierarchy continuum put forth by transaction costeconomics but, rather, constitute a distinct formof governance that he calls the network form. Heused the term ‘network’ to classify such dyadicties because many such ties are deeply embeddedin a multiplicity of relationships. This study posessome important questions for future research onthe governance structure of alliances. In parti-cular, if we are to go beyond the confines ofmarket and hierarchy as the dual anchors aroundwhich we study the governance structure ofalliances, it becomes imperative to begin con-sidering some of the alternative dimensions alongwhich we can examine such structure (see alsoStinchcombe, 1986).

In another important critique of transaction costeconomics applications to alliances, Zajac andOlsen (1993) pointed to two additional short-comings. First, transaction cost accounts in gen-eral focus on single-party cost minimization whilealliances are inherently dyadic exchanges, whichraises the question of whose costs are minimized.Relatedly, alliances are not only about costminimization but also about joint value maxi-mization, an issue neglected previously. Second,the structural emphasis of transaction cost eco-nomics leads it to neglect important processualissues resulting from their ongoing nature.Alliances are usually not one-off transactions but,rather, entail continuing exchange and adjust-ments, as a result of which process issues becomesalient (Khanna, 1997).

Another concern with the transaction costapproach stems from the fact that it has focusedentirely on appropriation concerns that originatefrom the presence of contracting hazards andbehavioral uncertainty. While appropriation canclearly be an important concern, there is alsoanother set of concerns for firms enteringalliances resulting from coordination costs. Suchanticipated costs arise from the likely inter-dependence of tasks across organizational bound-aries and the complexity of coordinating activitiesto be completed jointly or individually. Coordi-nation considerations are extensive in alliances.In an empirical study of over 1500 alliances,my colleague and I found that the deliberationsunderlying the choice of alliance structure at thetime an alliance is formed are not dominated byconcerns of appropriation, as previously sug-gested, but by considerations associated withmanaging coordination costs resulting from the


anticipated ongoing coordination of tasks acrosspartners (Gulati and Singh, 1997). This studyalso suggests that social structure of trustingrelationships are distinctive in addressing bothcoordination costs and appropriation concerns,and this is reflected in the nature of contractsused when firms are embedded in social networks.The presence of interfirm trust is an extraordinarylubricant for alliances that involve considerableinterdependence and task coordination betweenpartners, since firms with prior network connec-tions are likely to have a greater awareness ofthe rules, routines, and procedures each follows.Such a social structure can thus enable them towork together closely, if necessary, all withoutthe need for formal hierarchical controls.

Prior research on the governance structure ofalliances has primarily focused on the impli-cations of embeddedness in one type of socialnetwork, the network of prior alliances, yet therole of the multiplicity of social and economiccontexts in which firms are embedded on theirchoice of alliances remains underexplored. Theremay also be implications from the embeddednessof firms in other types of social networks suchas board interlocks, that could influence thedesign of alliances, but this has yet to be exam-ined. Firms are also embedded in a social struc-ture of dependence that can alter the likely powerdynamics in a potential alliance. Firms are likelyto anticipate such conditions and modify thestructure of their relationship accordingly (Baker,1990). The economic context can influence thestructure as well. For instance, the extent ofmarket overlap between the partners and withinthe alliance, also known as ‘relative scope,’ caninfluence the likelihood of competitive dynamicsbetween the partners (Harrigan, 1987; Khanna,Gulati, and Nohria, 1998). Firms may anticipatethe likelihood of such dynamics in an allianceand alter the structure to address those concernsif they arise.

Dynamic evolution of alliances and networks

There has been considerable interest in un-covering some of the dynamic processes thatunderlie the development of individual alliances.Such dyadic exchanges can be transformed sig-nificantly beyond their original design and man-date once they are under way. The varying evolu-tionary paths alliances follow can have significant


consequences for their performance (Harrigan,1985, 1986). Thus, understanding the evolutionof alliances can provide critical insights into howsuch ties can be better managed. Using detailedclinical studies of individual alliances, scholarshave sought to uncover some of the formal andinformal processes and key stages that unfold inalliances (Hamel, 1991; Larson, 1992; Ring andVan de Ven, 1994; Doz, 1996). Considerableefforts have been devoted to understanding someof the factors that influence this development andpossible stages through which alliances may pro-ceed.

In recent years, scholars have studied the roleof the initial conditions under which alliancesare formed in their subsequent development. Forinstance, Gulatiet al. (1994) have introduced theidea that each partner’s comprehension of analliance’s pay-offs is crucial for understandingthe incentives to cooperate and for realizing thepossible ways each can unilaterally influence thealliance’s outcome (see also, Parkhe, 1993). Thepossible consequences of changing pay-offs oncethe alliance is under way were also discussed. Ina related study, Khannaet al. (1998) introducedthe concept of a firm’s ‘relative scope,’ whichcaptures the initial conditions likely to influencethe competitive and cooperative dynamics and foreach firm is the ratio of the scope of the allianceto the total set of markets in which the firm isactive. This measure was used to establish test-able propositions that suggest that the opportunityset of each firm outside the particular alliancecrucially affects its behavior within the alliance.Thus, the extent of market overlap in activitiesbetween the partners and with the alliance canbe an important determinant of the likely behaviorof partners. This coincides with prior efforts thatlinked initial asymmetries between partners withthe ultimate success of the alliance (Harrigan,1986). Scholars have also begun to look at thecombined impact of initial imprinting conditionsand adaptive processes on the ultimate behaviorand performance in an alliance (Hamelet al.,1989; Doz, 1996). Evidence seems to suggestthat while initial conditions such as the objectivesof partners, their adeptness at learning, and thenature of the environment and interorganizationalcontext do assert an influence over the develop-ment of an alliance (Hamel, 1991), the evolutionof some alliances may in fact be akin to apunctuated equilibrium model in which there may


be discrete stages that occur due to discontinuouschanges in the environment (Gray and Yan,1997).

The rich insights from these detailed clinicaland theoretical accounts have advanced ourunderstanding of the dynamics within alliancesenormously. The focus of these efforts hasremained at the dyadic level of exchange, how-ever, with their primary emphasis on uncoveringsome of the important interpartner dynamics.Similar behavioral processes can span dyads andoccur within networks as well but remain to beexplored. For instance, individual contactsbetween firms through social networks can affectthe decision processes that may occur inside thosefirms (Gulati, 1993). Boundary-spanning individ-uals can have crucial influence on the decisionmaking not only within their own organizationsbut also in partner organizations. When alliancesentail the creation of new entities, such as jointventures, they can lead to conflicting identities forindividuals involved, who may be torn betweenloyalties to the venture itself and to the parentorganization from which they originally came.Furthermore, when network-level decisions mustbe made among clusters of firms, specific multi-lateral negotiations and dynamics may be poorlyunderstood. Firms may also use their networkcontacts to create control benefits proactively byutilizing their advantageous position in social net-works to play one partner off against the other.They may also seek to manage their network tosustain such advantages (Lorenzoni and Baden-Fuller, 1995). Such dynamic processes related topotential control benefits have yet to be examined.

The dynamics of behavior over time can beobserved at the level of networks as well. Severalscholars have suggested that clusters of firms withdense ties with each other may pursue collectivestrategies in conjunction with the competitivestrategies of their individual members (Astley andFombrun, 1983; Bresser, 1988). This has led tonew forms of competition in which networks offirms compete with each other (Gomes-Casseres,1994). Such networks of firms could include bothhorizontally and vertically connected firms. In anilluminating study, Nohria and Garcia-Pont(1991) demonstrated the importance of horizontalalliances in shaping the global automotive indus-try into distinct ‘strategic blocks,’ which eitherbring together firms with complementary differ-ences or pool together firms with supplementary

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similarities, and can become a basis for compe-tition within the industry. Similarly, scholarsfocusing on the supply chain of large manufac-turers, particularly in the automotive industry,have examined how vertical networks and indi-vidual ties within them have become structuredover time (Dyer, 1996; Helper, 1991; Lawrenceand Gulati, 1997).

While prior studies have provided new insightsinto the structure of both horizontal and verticalnetworks, important questions still remain aboutthe growth and development of interorganizationalalliance networks (for a review, see Grandori andSoda, 1995). The shaping of such a dynamicinterorganizational network can be influenced inimportant ways by exogenous factors, such as thenature of competition and critical industry events(Madhavan, Koka, and Prescott, 1998). In arecent study, my colleague and I suggested thatthe production of interorganizational alliance net-works is driven by a dynamic process involvingboth exogenous resource dependencies, whichprompt organizations to seek cooperation, and an‘endogenous embeddedness’ dynamic, in whichthe emerging network progressively orients thechoice of partners (Gulati and Gargiulo, 1997).Alliance networks are not static social structuresin which organizations embed new alliances: theyare also evolutionary products of these ties. Asa result, new ties are influenced by the socialnetwork of prior ties in which they are embedded.Yet, when observed over time, the formation ofnew ties in each period alters the very samenetwork that influenced their creation. This resultsin an endogenous network dynamic betweenembedded organizational action and the networkstructure that guides but is also transformed bythat action. As the social network grows, thenew ties contribute to the differentiation amongorganizations by their specific direct and indirectrelations and by the structural positions organi-zations occupy in the emerging network. This‘structural differentiation’ enables organizationsto discriminate among partners in terms of theirparticular relational and structural profiles. As theavailable information grows, organizations seek-ing to build partnerships can become less relianton exogenous factors and instead are moreinfluenced by the network in which they areembedded.

The influence of networks on firms may alsochange over time if the content of information


flowing through those networks changes. Afterall, networks have influence primarily throughtheir channeling of information. Thus, if one isto observe dynamics at the network level, it isalso valuable to assess how the content of infor-mation flowing through those networks maychange over time. In a study of the influence ofhospital networks on the extent and form ofadoption of total quality management programsby hospitals, my colleagues and I observed thatthe nature of information transmitted about totalquality management through the network varieddepending on the stage of institutionalization ofthe innovation (Westphalet al., 1997). In theearly periods, when total quality management wasless institutionalized, the information flowingthrough networks was about the technologicalattributes of total quality management, while lateron, when total quality management became moreinstitutionalized, the information transmitted hadstronger institutional elements in it. This changingnature of information in turn affected the influ-ence of social networks on the type of totalquality management programs hospitals adopted.As a result, the effect of social networks onthe adoption of administrative innovations wascontingent on the stage of its institutionalizationas an innovation. Studying changes in informationflows in the networks that influence alliances mayprovide valuable insights (Stinchcombe, 1990).

Performance of alliances

The performance of alliances has received lessattention than other areas because of some oner-ous research obstacles, which include measuringalliance performance and the logistical challengesof collecting the rich data necessary to assessthese issues in greater detail. As a result, itremains one of the most exciting and under-explored areas. Numerous studies have reporteddramatically high failure rates of alliances, andseveral practitioners have sought to identify themagical formula for alliance success (e.g., Kanter,1989; Bleeke and Ernst, 1991). This wish listincludes: flexibility in management of thealliance, building trust with partners, regularinformation exchange with the partners, construc-tive management of conflict, continuity of bound-ary personnel responsible for the interfacebetween the firm and the alliance, managing part-ner expectations, and so on. The focus of the


research generating such lists has primarily beenat the alliance level, with efforts targeted at iden-tifying antecedent conditions and emergent proc-esses that can influence performance.

The primary approach to empirical studies ofthe performance of alliances has been to examinethe termination of an alliance. Several carefulempirical inquiries have yielded importantinsights into some of the key factors that maybe associated with the termination of alliances,including industry and dyadic conditions such asconcentration and growth rates, country of originof partners as developed or developing, the pres-ence of concurrent ties, partner asymmetry, agedependence or the duration of the alliance, thecompetitive overlap between the partners, andcharacteristics of the venture itself such as auton-omy and flexibility (Beamish, 1985; Harrigan,1986; Levinthal and Fichman, 1988; Kogut,1989). While these studies have provided valuableinsights into the termination of alliances, theirimportance for understanding the performance ofan allianceper seis limited by two factors. First,studying failure by looking at terminations fails todistinguish between natural and untimely deaths.Many successful alliances terminate because theyare predestined to do so by the parent firms atthe very outset. In other instances, an alliancemay simply be a transitional arrangement that theparents plan to terminate when their objectivesare met or when they have valuable new infor-mation that makes viable an acquisition or divesti-ture of that business (Kogut, 1991; Bleeke andErnst, 1991; Balakrishnan and Koza, 1993). Insome instances, the transformation of a venturemay actually indicate successful adaptation toenvironmental shifts (Gomes-Casseres, 1987).Also, not all ongoing alliances are necessarilysuccessful, and some may be continuing moreout of inertia or the high exit costs associatedwith dismantling it than because of the inherentsuccess of the partnership. Second, studies ofalliance terminations and alliance failureimplicitly consider performance as an either–orcondition. This is clearly not the case, and a moreaccurate assessment would focus on gradations ofperformance in alliances.

One of the vexatious obstacles to studyingperformance, and also one of the problems withthe many studies that have reported high failurerates for alliances, is measuring performance itself(Anderson, 1990). Given the multifaceted objec-


tives of many alliances, performance can be dif-ficult to measure with financial outcomes. Fur-thermore, in most cases, such measures simplydon’t exist. A further complication results fromthe dyadic nature of alliances. Sometimes per-formance is asymmetric: one firm achieves itsobjectives while the other fails to do so. Forinstance, several cases have been reported ofalliances in which one partner had raced to learnthe other’s skills while the other did not haveany such intentions (Hamelet al., 1989; Hamel,1991; Khanna et al., 1998). Despite thesemeasurement obstacles, researchers have gonebeyond the initial efforts that equated alliancetermination with failure, to try to uncover someof the factors associated with the success ofalliances. These require detailed surveys or care-ful fieldwork on alliances that uncovers the multi-ple facets of alliance performance and considersthe perspectives of all the partners in the alliance.In a set of pioneering studies, Harrigan (1985,1986) used both archival and survey data toassess factors that might influence the perform-ance of alliances, with performance measuredboth by the survival of the alliance and by parti-cipants’ assessment of success. More recently,marketing and strategy scholars have turned toeven more extensive surveys, which have beenadministered to the individual managers respon-sible for the alliance from each partner (Heideand Minor, 1992; Parkhe, 1993). Such approachesenable the collection of a host of measures, sub-jective and objective, on which performance canbe assessed, as well as an examination of dyadicasymmetries in perceptions.

While there have been advances in assessingthe performance of alliances, few of these effortshave considered the impact of social networks inwhich firms are placed on the relative perform-ance of their alliances. Once we acknowledge theimportance of the multiplicity of social networksin which firms are placed, we can overcomesuch dyadic reductionism and examine whetheralliances that are embedded to a greater or lesserdegree in various networks perform better orworse than others and why. While there havebeen several efforts to explore differences in‘embedded’ ties between firms and those that areless proximate they tend to infer and don’tdirectly assess whether embedded ties themselvesperform any better than other ties. The inferenceis based on an aggregate assessment of the sur-

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vival properties of firms and its association withthe extent of embedded ties those firms haveentered and not on a direct assessment of therelative success of individual alliances. Further-more, such approaches generally treat embed-dedness as an either–or proposition and havefocused primarily on relational embeddednessresulting from proximate ties, while paying lessattention to the importance of structural embed-dedness.

While such studies have advanced our under-standing of the nature and importance of embed-ded ties, an important extension would be tofocus directly on the performance of alliancesand whether the extent of embeddedness in socialnetworks is an important factor. The extent towhich an alliance is embedded is likely to influ-ence its performance for several reasons. Bybeing proximately situated in an alliance, thepartnering firms are likely to have greater confi-dence and trust in each other, both because theyhave greater information and because the networkcreates a natural deterrent for bad behavior thatwill damage reputation. Trust not only enablesgreater exchange of information, it also promotesease of interaction and a flexible orientation onthe part of each partner. All of these can createenabling conditions under which the success ofan alliance is much more likely.

There is some evidence that alliances withembedded ties may perform better or last longerthan others. One of the first set of studies on thefactors associated with alliance terminations foundthat alliances between firms with a prior historyof ties were less likely to terminate (Kogut,1989). In another important set of studies, Levin-thal and Fichman (1988) and Seabright, Levin-thal, and Fichman (1992) found that the durationof exchange relationships is not only influencedby changes that may occur in task conditions thatalter the extent of resource interdependence, butthere may be ‘dyadic attachments’ between firmsthat lead to the persistence of such ties. Suchattachments are conditioned by the social struc-ture in which firms are embedded and includeindividual attachments resulting from the conti-nuity of boundary spanners in the partneringorganizations and structural attachments arisingfrom the history of interaction between theorganizations. Such social structures can limitorganizational perceptions of likely opportunisticbehavior by partners and, as a result, firms may


be more willing to make nonrecoverable invest-ments, which can enhance the performance of thealliance. Survey-based evidence further confirmsthat both interpersonal and interorganizational-level trust can be influential in the performanceof exchange relationships (Zaheer, McEvily, andPerrone, 1997).

More recently, in a study of supplier relation-ships in the automotive industry, a colleague andI directly examined the performance differencesacross various types of exchange relationships(Gulati and Lawrence, 1997). This study wasdistinctive in that it used a detailed survey toexplicitly measure the performance of eachrelationship with both subjective and objectivemeasures and examine its connection with precisemeasures of the extent of embeddedness. Wefound that, on average, more embedded tierelationships performed better than alternativesourcing arrangements but were particularly effec-tive in situations of high uncertainty. Furthermore,there were performance differences across embed-ded ties as well, which resulted from how theywere organized.

As firms have entered alliances with growingfrequency, many prominent firms, such as GeneralElectric, Corning, Motorola, IBM, and Hewlett-Packard, have found themselves in hundreds ofalliances. While issues concerning the man-agement of individual alliances are still importantand merit further consideration, new issuesresulting from managing a portfolio of allianceshave arisen. This opens up numerous questionsabout the cooperative capabilities of firms. Evi-dence suggests that there may be systematic dif-ferences in the cooperative capabilities that firmsbuild up as they have more experience withalliances and that the extent of this learning mayaffect the relative success of those firms withalliances (Lyles, 1988). This poses questionsabout what such capabilities are and what mightbe some systematic tactics firms use to internalizesuch capabilities. At least some of these capabili-ties include: identifying valuable alliance oppor-tunities and good partners, using appropriategovernance mechanisms, developing interfirmknowledge-sharing routines, making requisiterelationship-specific asset investments, and initiat-ing necessary changes to the partnership as itevolves while also managing partner expectations(Doz, 1996; Dyer and Singh, 1997). The factthat a firm may have entered a wide array of


alliances also suggests that it has to si-multaneously manage this portfolio and addressconflicting demands from different alliance part-ners. Furthermore, if the firm is at the center ofa network, it must pay particular attention toa series of strategic and organizational issues(Lorenzoni and Baden-Fuller, 1995). Developingsuch a portfolio perspective on alliances meritsfurther consideration, especially since many firmsare now situated in an array of alliances.

The performance of alliances remains one ofthe most interesting and also one of the mostvexing questions. We now know that embeddedties differ in fundamental ways from other tiesand that there may even be an associationbetween the extent of embedded ties a firm entersand its survival, but we have less understandingof the extent to which alliances with embeddedties actually perform better or worse than otheralliances and why. Furthermore, the focus hasprimarily been on the effects of relational embed-dedness and we know little about the conse-quences of structural embeddedness on the per-formance of alliances. This and the question ofthe capabilities firms may need to manage amultiplicity of alliances are important items fora future research agenda.

Alliances and performance consequences forfirms

Do firms benefit from entering strategic alliances?This question is distinct from the previous onewhich looked at the performance of alliancesthemselves, and instead, it focuses on the per-formance consequences of alliances for the firmsentering them. Since many other activities besidesalliances can also influence the performance offirms, it can be difficult to empirically link thealliance activity of firms with their performance.As a result, scholars have looked for a variety ofdirect and indirect means to test this relationship.

To estimate the effect of individual allianceson firm performance, several researchers haveconducted event study analyses on the stock mar-ket effects of alliance announcements (e.g., Kohand Venkatraman, 1991). This connection hasbeen further refined as scholars have examinedthe differential benefits firms receive from differ-ent types of alliances and how this is influencedby the conditions under which they have beenformed (e.g., Balakrishnan and Koza, 1993;


Anand and Khanna, 1997). Inasmuch as the stockmarket reactions portend the likely future out-come from alliances, these results provide mixedevidence of the beneficial consequences ofalliances for firms entering them.

Researchers have also looked at the perform-ance consequences for firms from their socialnetwork of cumulative alliances. One approachhas been to try to explain the performance offirms by the extent of their alliance activity, aftercontrolling for other possible factors that mayinfluence firm performance. In an early study,Berg, Duncan, and Friedman (1982) found anegative relationship between joint venture inci-dence and firms’ rates of return in the chemicalindustry but could not definitively establish thecausal relationship between the two—did jointventures lead to poor performance or vice versa?More recently, some researchers have also nar-rowed the domain of performance explained byalliances and focused on the consequences fromtechnology alliances for the patenting activitiesof firms and for their performance (Hagedoornand Schakenraad, 1994; Mowery, Oxley, and Sil-verman, 1996). This has been extended by linkingfirm performance not only to the frequency ofpast alliances but also to the firm’s position ininterorganizational networks (Zaheer and Zaheer,1997; Ahuja, 1996).

Yet another approach to assess the aggregateinfluence of alliances on firm performance hasbeen to examine the relationship between theextent to which firms are embedded in alliancesand the likelihood of their survival. Thus, survivalof firms is considered as a proxy for performance(e.g., Baum and Oliver, 1991, 1992; Uzzi, 1996).The alliances studied on which firm survival maydepend have been those with vertical suppliersand with key institutions in the environment. Theresults of these studies suggest that such ties aregenerally beneficial in enhancing survivalchances. This may not always be the case andnumerous contingencies that may alter thisrelationship have been also proposed (Singh andMitchell, 1996). The challenge has been to sepa-rate out factors beyond embeddedness that mayalso have an influence on survival and look atthis in a longitudinal setting.

There have been several studies that have docu-mented the varying performance benefits thatJapanese firms, as well as those of other nationalorigins, have received from their vertical alliances

310 R. Gulati

in particular (Helper, 1990; Cusumano and Takei-shi, 1991; Dyer, 1996). Several of these studieshave not only directly examined the relative per-formance of individual alliances, but have triedto ascertain their effects on the performance offirms entering them. These studies suggest thatclose vertical ties that are characterized by richinformation exchange and long-term commitmentscan lead to greater cooperation and joint activitiesbetween the partners and higher levels of asset-specific investments, all of which translate intoconcrete performance benefits for the firms form-ing such ties (Helper, 1991; Heide and Miner,1992). Extensive empirical evidence in the auto-motive industry suggests there are significant dif-ferentials in cost, quality, and new product devel-opment across automotive manufacturers that aredriven primarily by the extent to which theyoutsource and the nature of those relationships.

The approaches to studying alliances and firmperformance discussed thus far have paid scantattention to the overarching networks in whichfirms may be embedded. Even studies connectingthe cumulative number of prior alliances with thesurvival of firms have only considered relationalembeddedness, or the proximate ties in whichfirms are placed, and not the overall network andthe position of firms in that network. This is notonly a question of whether the sum is more thanits parts, for by examining the entire social net-work one can also examine the possible deleteri-ous consequences of competitive networks formedby rival firms. Such extensions can easily bemade. For instance, rather than focusing only onthe proximate ties a firm has entered, it is alsopossible to isolate the network to which the firmprimarily belongs and examine whether member-ship in certain networks is more beneficial thanothers. This shifts the analytical focus away fromsimply the number of prior ties to membershipin particular networks.

Gomes-Casseres (1994) has looked at severalindustries in which networks, rather than firms,have become the organizing level at which firmscompete with each other. As a result, the perform-ance of a firm is influenced by the networks towhich it belongs. This has been enlarged to con-sider the relative success of competing networksof firms in particular geographic regions(Saxenian, 1990; Gerlach, 1992). Such appro-aches which highlight the relative success ofparticular networks can be further refined to iden-


tify the specific characteristics of the network thatmay enable the network to provide positive bene-fits to its members. For instance, in a study ofhospitals and health care networks, my colleaguesand I suggest that not all networks provide equalbenefits to their members, and some networks arebetter than others (Gulati, Shortell, and Westphal,1997). We further identified several key networkfactors that may mediate the effect of networkmembership on firm performance and explainwhy some networks provide greater benefits totheir members than others. Two natural extensionof these studies would look not only at thenetwork characteristics but also the position ofindividual organizations within the network inwhich they are placed. This could alert us bothto possible informational benefits and to controlbenefits that may result from particular locationsin specific networks. Furthermore, it would befruitful to assess the performance effects acrossthe multiplicity of networks in which firms areembedded. Other possible concerns include whocontrols the network and why and possible limitsand constraints to the growth of networks.

CONCLUSION

The primary focus of research on alliances hasbeen to ask the ‘why’ question, which focuseson understanding some of the reasons firms enteralliances, structure them in certain ways, manageand change them, and the performance benefitssought from them. One of the problems with anorientation toward ‘why’ questions is that they aresyntactically inclined to teleological or functionalanswers (Granovetter, 1994). More important, thisleads to an avoidance of the ‘how’ question,which focuses on some of the conditions underwhich certain behavior and performance outcomesare likely (Oliver, 1990). This paper poses the‘how’ question for alliances and highlights animportant set of conditions deriving from thesocial networks in which firms come to be placedthat influences their behavior and performancerelated to alliances. It demonstrates how socialnetworks can be influential in the creation andsuccess of alliances and shows how a perspectiveinformed by the structural embeddedness of firmscan provide important new insights into some ofthe key current issues on strategic alliances.

This paper suggests that social networks are


valuable conduits of information that provide bothopportunities and constraints for firms and haveimportant behavioral and performance impli-cations for their alliances. By channeling infor-mation, social networks enable firms to discovernew alliance opportunities and can thus influencehow often and with whom those firms enter intoalliances. Once two firms decide to enter analliance, their relative proximity in the networkmay influence the specific governance structureused to formalize the alliance. The extent towhich two partners are socially embedded canalso influence their subsequent behavior andaffect the likely future success of the alliance. Afirm’s portfolio of alliances and its network posi-tion in an industry can have a profound influenceon its overall performance. I highlight severalrecent studies, including some of my own, thathave developed a socially informed account ofthe alliance behavior by firms and examined someof these issues. Table 1 summarizes the compari-son I draw between dyadic and network perspec-tives for each of the key questions on alliances.

This table highlights each of the five key issueson alliances identified in this paper and the relatedempirical questions. It illustrates how the con-sideration of the role of social embeddedness offirms enlarges the realm of inquiry away fromdyads towards broader units which include eco-nomic relationships and the overall networks inwhich firms are placed.

Introducing social networks to the study ofstrategic alliances can provide valuable insightsinto strategic alliances but can also make animportant contribution to the study of social net-works. The creation of an alliance is an importantstrategic action, yet the cumulation of suchalliances also constitutes a social network. Givenour limited understanding of the dynamics ofnetworks, alliances provide a unique arena inwhich action and structure are closely inter-connected and the dynamic coevolution of networkscan be examined (e.g., Gulati and Gargiulo,1997). Furthermore, the study of interorgani-zational networks is now a burgeoning field ofinquiry in and of itself, and strategic allianceshave become an important set of ties in whichfirms have become engaged and that thus meritsfurther examination (for a collection of articleson interorganizational relationships, see Mizruchiand Schwartz, 1987). Combining insights onalliance networks with those on interpersonal net-


works can result in an important cross-level per-spective of interorganizational relationships(Galaskiewicz, 1985b; Zaheeret al., 1997; Gulatiand Westphal, 1997).

The theoretical orientation guiding this paperhas been the embeddedness perspective, whichhighlights the significance of the social relation-ships in which actors are situated for their futurebehavior and performance. I would like to empha-size that introducing such a perspective does notpreclude the possibility of traditionally examiningstrategic imperatives or diminish their importance.These are indeed complementary elements and infact blend together if we consider the creationand manipulation of networks to be part andparcel of strategic behavior (Burt, 1992). Further-more, the embeddedness of firms can be morebroadly defined than its social relationships orstructural embeddedness to include institutional,cultural, and political elements (Zukin andDiMaggio, 1990). Each of these other facets canhave consequences for the study of strategicalliances, both independently and together, andremain to be thoroughly examined. Ultimately, itis important to develop a more complete, sociallyinformed account of each of the key issues out-lined here that relate to strategic alliances.

A social network perspective on alliances canhave both descriptive and normative outcomesthat provide valuable insights for theories of stra-tegic management, organizational theory, andsociology. Incorporating social network factorsinto our account of the alliance behavior of firmsnot only provides us with a more accurate rep-resentation of the key influences on the strategicactions of firms, but has important implicationsfor managerial practice as well, many of whichhave yet to be explored. For instance, an under-standing of the network dynamics that influencethe formation of new alliances can provideinsights for managers on the path-dependent proc-esses that may lock them into certain courses ofaction as a result of constraints from their currentties. They may choose to anticipate such concernsand proactively initiate selective network contactsthat enhance their informational capabilities.Thus, by examining the specific way in whichsocial networks may constrain firms’ futureactions and channel opportunities, firms them-selves can begin to take a more forward-lookingstance in the new ties they enter. They can beproactive in designing their networks and con-

312 R. Gulati

Table 1. Dyadic and network perspectives on key issues for strategic alliances

Research issue Empirical questions Dyadic perspective Network perspective

1. The formation of Which firms enter Financial and technological Social network factors thatalliances alliances? imperatives that lead firms may constrain and also

Whom do firms choose to enter alliances create opportunities foras alliance partners? Complementarities that firms to discover alliance

lead them to choose prospects and choosespecific partners (e.g., specific partners (e.g.,Pfeffer and Nowak, 1976a; Kogutet al., 1992; Gulati,Mariti and Smiley, 1983) 1995b; Gulati and

Westphal, 1997)

2. The governance of Whichex antefactors Transaction costs, Social networks that mayalliances influence the choice of interdependence, and mitigateex ante

governance structure? power asymmetries (e.g., appropriation concerns andPisanoet al., 1988; coordination costs that canHarrigan, 1987) affect the choice of

governance structure (e.g.,Zajac and Olsen, 1993;Gulati, 1995a; Gulati andSingh, 1997)

3. The evolution of Whichex antefactors Social and behavioral Social, behavioral andalliances and and evolutionary dynamics between partners competitive dynamics thatnetworks processes influence the in alliances (e.g., Ring and occur across organizational

development of Van De Ven, 1994; Doz boundaries among groupsindividual alliances and 1996) of firms in alliancesnetworks? (Nohria and Garcia-Pont,

1991; Gomes-Casseres,1994)The emergence anddevelopment of a socialnetwork (e.g., Gulati andGargiulo, 1997)

4. The performance of How should the Examination of Firm capabilities thatalliances performance of terminations as alliance enhance the success of

alliances be measured? failure (e.g., Kogut, alliances (Doz, 1996; DyerWhich factors influence 1988b) and Singh, 1997)the performance of Partner characteristics and Influence of comembershipalliances? evolutionary dynamics that of partners in social

affect the success of networks on the success ofalliances (e.g., Harrigan, their joint alliances (e.g.,1986) Levinthal and Fichman,

1988; Kogut, 1989; Zaheeret al., 1997; Gulati andLawrence, 1997)

5. Performance Do firms receive social Event studies of stock Influence of membershipadvantages for firms and economic benefits market reactions to in social networks andentering alliances from their alliances? alliance announcements relative position in the

(e.g., Anand and Khanna, network on the1996) performance and survivalSurvival of firms entering of firms (e.g., Dyer, 1996;alliances (e.g., Baum and Gulatiet al., 1997)Oliver, 1991, 1992)



sidering the ramifications on their future choicesof each new tie they form. They may also se-lectively position themselves in networks toderive possible control benefits as well. Similarly,there are numerous insights that result fromunderstanding the complexities associated withmanaging a portfolio of alliances and therelational capabilities required to do so success-fully. Ultimately, managers want to know how tomanage individual alliances, and a recognition ofsome of the dynamics at both the dyadic andnetwork levels that influence the evolution andeventual performance of alliances can beextremely beneficial. The challenge for scholarsstudying networks and alliances is to bridge thechasm between theory and practice and translatesome of their important insights for managers ofthe alliances we study.

ACKNOWLEDGEMENTS

I would like to thank the following individualsfor their helpful comments on this paper: GautamAhuja, Jeff Dyer, Monica Higgins, Tarun Khanna,Rakesh Khurana, Ravi Madhavan, J. Peter Mur-mann, Arvind Parkhe, Pam Popielarz, HayagreevaRao, Peter Ring, Mohan Sawhney, and Ed Zajac.

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Documents

Alliances and Networks