Business Relationships and Networks CS10A0151

Lecture 4

18.4.2013

Professor, Ph.D. (Tech.) Anne Jalkala

Department of Value Network Management

Department of Value Network Management

Content of the lecture

− Strategic alliances

− Approaches to managing alliances

− Trust in interorganizational relationships

− Collective real options

− Interconnectedness of business relationships

− Relationship atmosphere

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Strategic alliances

Strategic alliances

− “Voluntary arrangements [among two or more organizations] involving the exchange, sharing, or co-development of products, technologies, or services” (Gulati, 1998: 293)

Factors influencing alliance success

− Environmental uncertainty

− Lack of information about the market and task environment

− Social uncertainty

− Lack of information about the intentions of alliance partners

− Alliance partners may fear they cannot trust each other to do what is best for the alliance

Managing alliances

Two different approaches:

− Structural / Contractual approach:

− Agreements in writing between two of more parties, which are perceived as legally binding (Lyons and Mehta, 1997)

− The initial structural design is the most crucial factor in explaining alliance performance

− Contracts minimize the risk of opportunistic behavior and help coordination of tasks between the partners

− Relational approach:

− Importance of trust for safeguarding and coordinating alliances

− Ongoing relational management (fostering communication and trust) is important in explaining alliance performance

Structural and relational approaches

/ 7 (Faems et al., 2008)

Managing alliances

− Structural and relational approaches are inherently linked and mutually reinforce each other, both within and between trascactions

− Good contracts can trigger positive relational processes

− Replacing key individuals / teams can revitalize relationships

(Faems et al. 2008)

Trust in Interorganizational Relationships

Group exercise about building trust

1. Discuss and suggest different ways to build and foster trust in interorganizational relationships

2. Write your suggestions down and present them to other groups

Trust in interorganizational relationships

− Trust is an individual’s “expectations, assumptions or beliefs about the likelihood that another’s future actions will be beneficial, favorable or at least not detrimental” to the individual (Robinson, 1996: 576)

1. Competence trust

− Expectations about a partner’s ability to perform according to an agreement

2. Goodwill trust

− Expectations about a partner’s intentions to perform according to an agreement

− Trust reduces the need for formal contracts?

Trust in interorganizational relationships

− Trust is formed through social interaction

− Through social interaction each individual attempts to:

1) Assess the perceived values of the other

− “Does the individual have integrity?”

1) Know whether others have met his or her expectations

− “Did they cooperate or not?”

1) Use his or her current emotions and moods as indicators to assess the quality of the relationships

− “How do I feel based on how others treated me?”

The formation of trust

− Trust evolves through interaction when

− Values are perceived as congruent

− Positive expectations are met

− Positive emotions and moods are experienced based on how an individual has been treated by others

(Jones & George, 1998)

Social dilemma in alliances (McCarter et al. 2011)

− An alliance partner might underinvest in alliance initiatives for two reasons:

− Offensive defection

− An alliance partner may attempt to “free ride”— enjoy the created public good without contributing toward its creation.

− Defensive defection

− An alliance partner may underinvest or, in the extreme, not contribute at all—to avoid wasting resources if the alliance partner believes others also will underinvest

Solutions for increasing trust in alliances (McCarter et al. 2011)

− Structural approach

− Sanctions (e.g. monetary fines) and contracting

− Unable to cover every possible ‘free-riding’ loophole

− Danger: partners trust the contract rather than each other

− Motivational approach

− Altering how alliance partners perceive each other by communicating cooperative intent

− Danger: verbal reassurance viewed as ‘cheap talk’

− Collective real option

− Partners agree to make a small initial investment of resources to uncover the possible success of a subsequent larger-scale alliance initiative.

Collective real options (McCarter et al. 2011)

− Collective real options (initial small joint investments) create opportunities for a relational small win.

− “Concrete, complete, implemented outcomes of moderate importance”

− Small wins leads to increased trust