Abstract
Background: Strategic alliances are collaborative agreements between several partners, which enable them to achieve their strategic objectives. This way of collaboration under globalization becomes more popular. Thus achieving alliance success by managing alliance risk is of great significance for research.
Research question: The research question is to find out how strategic alliance partners mitigate risk by different mechanisms, such as contractual arrangements, trust building, and control over the alliance. Besides, it is also going to find out how these mechanisms can contribute to strategic alliance success.
Method: This study adopts a literature study, so it goes through the existing literature in the field, finds out connection and comparison between different literature and views, and aims to provide how practice can implement theoretical ideas.
Finding: The main finding of this study is to build a comprehensive conceptual framework between alliance risk and various risk-mitigating mechanisms. Besides, it also finds out the practical use of contractual arrangements, the useful ways to build up trust and control enforcement in practice.
Implication: The theoretical implication is to integrate relevant literature and develop a comprehensive conceptual framework. The managerial implication for managers and firms who are considering building up strategic alliances is how to make effective use of contracts, trust, and controls to manage alliance risk.
Acknowledgements
First I would like to express my sincere gratitude to my supervisor, Professor Jeltje van der Meer-Kooistra, for her continuous guidance and support of my master’s thesis. Through our discussions, she provided me with many useful and valuable insights for this study. I appreciate it so much that she was willing to give her time so generously to me.
Besides, I really appreciate the gradual love and support from my parents, Huashun Xie and Ming Fan. Not only the financial support that allows me to have this international study experience, their spiritual support is the true treasures to me through this whole new era of my life.
1 Introduction
As the globalization deepens nowadays, relationships between companies are getting more closely connected than before, and the way to survive in the acute competition in the global markets is for companies to collaborate together. Hence, through collaboration, companies can coordinate resources, skills and knowledge jointly and take a better part of the markets. Strategic alliances are one of the popular collaborative ways. A strategic alliance is a cooperative arrangement between two or more partners in order to achieve the strategic objectives of these partners (Das, 2011). It can be different types, such as outsourcing, licensing, franchising, (international) joint ventures and product development projects, etc. Strategic alliances can help companies to gain economies of scale, mitigate existing and potential risks, promote stability and legitimacy, make knowledge and competitive advantages accessible to each other, and establish asymmetrical power relationships (Rugman & Brewer, 2001). These effects can barely be achieved simply by arm’s length transaction or hierarchy. However, strategic alliances are always so hard to manage, due to multiple decision-making centers, lack of effective and efficient governance, constant bargaining between the alliance parties, and competition between the parties.
alliances. A balanced right of control and power can make sure that each partner is devoted to making contributions to the strategic alliance, thus avoiding the situation that one partner loses interest in the alliance because of limited control right (Franco, 2011). With regard to the characteristic of those factors aforementioned, trust building and control over an alliance are more dynamic concepts, which can be developed and enhanced during the alliance relationship. In contrast to them, a contract is more a static concept, which has been determined before the start of an alliance relationship. However, because of the fact that each party cannot foresee the whole future of their relationship or in case the alliance performance is much lower than expectation, renegotiation of the contract in the course of the relationship may be expected. Therefore, when it comes to the building-up and development of an alliance relationship, the partners set up contracts at the start of the alliance; during their collaboration, trust and control are further developed; the contracts can also be adjusted over time. Hence, contractual arrangements, trust building, and control over an alliance are all important factors in determining strategic alliance success.
alliance risk in a dynamic way in comparison with a static initial contract. Trust can act as one of the relational governance mechanisms in order to prevent opportunistic behaviors (Bierly & Gallagher, 2007; Grafton & Mundy, 2017). Moreover, control over an alliance can reduce performance risk by setting better coordination of each party’s resources and duties. Additionally, gradual renegotiations of contracts can also help solve contingency problems due to the fact that unforeseen contingencies cannot be included in the initial contract.
When and where should firms manage alliance risk? Das and Teng (1999) suggested looking at different stages of a strategic alliance, including partner selection, structuring, operation and performance evaluation. Before the collaboration begins, a firm analyzes its motives and goals for entering into a strategic alliance. The analysis can play a role in determining what its competitive advantages are, what it wants to benefit from the strategic alliance, what potential consequences it should be aware of (e.g. suffer from alliance risk), what type of strategic alliance it wants to establish, what kind of partner it should look for and fits them (Bronder & Pritzl, 1992). Next, during the partner selection phase, the firm starts to investigate various potential partners. After it has selected the partner, the contract will be negotiated followed by the execution of the collaboration. During the execution phase, the partners will control the collaboration and build trust in order to mitigate the alliance risk and to make the strategic alliance a success.
Hence, based on what is aforementioned, the research question and
sub-questions are:
How do the partners of a strategic alliance mitigate the alliance risk?
a. How do strategic alliance partners mitigate the alliance risk by means of contractual arrangements?
b. How do strategic alliance partners mitigate the alliance risk during the execution of strategic alliance by means of trust building and control over the alliance?
c. How do contractual arrangements, trust building, and control over the alliance contribute to strategic alliance success?
This study adopts a literature study method. It aims to study the mechanisms with which the partners of a strategic alliance can effectively mitigate the alliance risk. In addition, the study also considers what the risk management mechanisms refer to, which are contractual arrangements, trust building, and control over the alliance. Hence, in the end, how the mechanisms can contribute to strategic alliance success is also studied. By answering the research questions, this research will make three contributions. In the first place, it will make a contribution to the further study of strategic alliances in terms of alliance risk, contractual arrangements, trust building, control over an alliance and strategic alliance success. Secondly, it will contribute to the existing literature by integrating these concepts and reaching a more comprehensive conceptual framework. Thirdly, it will find the balance between theory and practice, discuss the implementation of theoretical ideas into practice and design a future research.
managed by the partners. With the help of the existing literature, the elements and the relationships will be discussed. Section 3 will describe the adopted research method, data collection, data analysis, and validity and reliability issues. Section 4 will discuss the main findings of the literature review, as well as some additional findings. In addition, it will analyze how these findings could be implemented in practice. Section 5 highlights the relation between this study and existing literature, the answer to the research question, the implications for theoretical use and practical use, limitation of this study and direction of future study.
2 Literature Review
2.1 Conceptual frameworkDrawing on the literature that discusses (some of) the concepts of strategic alliance risk, contract, trust and control (e.g. Das & Teng, 1996, 2001; Dekker, 2004; Langfield-Smith, 2008; Vosselman & van der Meer-Kooistra, 2009), this study has developed a conceptual framework. This conceptual framework, which is depicted in Figure 1, follows the chronological order of establishing and executing a strategic alliance.
Figure 1: Conceptual framework of this study
Below, based on the literature, each element will be described, such as (1) alliance risk, which includes relational risk and performance risk, (2) contractual arrangements, (3) trust building, (4) control over the alliance and (5) strategic alliance success. Next, the relationships between the elements will be explained, which are indicated by the arrows in the framework: (1) alliance risk vs. contractual arrangements, (2) contractual arrangements vs. trust building, (3) contractual arrangements vs. control over the alliance, (4) alliance risk vs. trust building, (5) alliance risk vs. control over the alliance, (6) trust building vs. control over the alliance, (7) trust building vs. strategic alliance success and (8) control over the alliance vs. strategic alliance success.
2.2 Elements (1) Alliance risk
Das and Teng (1996) developed an integrated risk perspective on inter-firm alliances and differentiated alliance risk into relational risk and performance risk. The two different types of alliance risk come from the two important considerations for entering an alliance: relationship and performance respectively. Besides, Gulati and Singh (1998) put forward two main control problems: appropriation concerns and coordination requirements. Based on their research, Dekker (2004) developed a framework with regard to control of inter-organizational relationships.
Relational risk
Relational risk is the negative outcomes caused by inter-firm cooperation (Das & Teng, 1996). Although the goals of the parties are partially overlapped, each strategic alliance party still has its own interests, aims and goals. Consequently, they may not fully devote themselves to the alliance (Das & Teng, 1996). Hence, the relational risk is to address the consequence of this possibility. Besides, this risk can be aroused by rational behaviors or irrational behaviors. One example of rational behaviors is opportunistic behaviors: a firm intends to take advantage of its partners with guile for its own sake. One example of irrational behaviors is loss of commitment because of under-reward: unfair future pay-offs that a firm foresees can let it lose confidence and commitment in the strategic alliance, and perform and collaborate poorly. In addition, relational risk can also stem from inappropriate use of intellectual property, misalignment of incentives, difficulty in coordinating actions, and inability or unwillingness to supply key inputs to each other (Comi & Eppler, 2009).
Performance risk
partners’ efforts, even though they fully collaborate. Performance risk is based on this precondition. Thus, it is a term to address the consequence of this possibility and it includes all kinds of hazards except cooperation-related hazards (Das & Teng, 1996). Besides, if the partners’ inadequate level of innovation cannot support the alliance’s needs, the alliance may lose its advantages in the competitive environment, which is also considered as one type of performance risk (Comi & Eppler, 2009). Additionally, the risk comes from the production that is outside the original agreement scope and partners’ inability to supply quality inputs (Comi & Eppler, 2009). (2) Contractual arrangements
Contracts are necessary for any kind of strategic alliances, and no matter the relationships and trust between the parties, contracts are unavoidable. Firms can make use of contracts as an effective governance mechanism of its relations with other firms, since contracts provide instructions about how the parties collaborate and how the collaboration proceeds (Anderson & Dekker, 2005, 2014). Moreover, contracts can help the firm to manage exchange hazards regarding relational risks and performance risks (Dekker, Kawai & Sakaguchi, 2017).
procedures and structures, etc. (Grafton & Mundy, 2017).
Contractual arrangements can be analyzed by their complexity, duration, renewal and flexibility (Dekker et al., 2017). Complexity refers to the inclusiveness of agreements, detail with which terms, clauses and issues are specified and codified, and use of provisions that facilitate adaption to anticipated contingencies (Ding, Dekker & Groot, 2013; Luo & Tan, 2003; Schepker et al., 2014). Duration is the time contracts will last. Hence, contracts can be distinguished by lasting time, for example, short-term duration or long-term duration. Renewal is a real option for the firms to terminate their relationship when the contract expires in case of underperformance, undesirable behavior and unforeseen circumstances (Dekker et al., 2017). Flexibility is associated with the terms and clauses in the contracts. It also allows the parties to renegotiate the contractual arrangements. Flexibility is particularly valuable when the level of uncertainty is high between the parties, as it allows adaption over time and avoids costly revision and renegotiation of fixed contract terms (Dekker et al., 2017).
Renegotiation of contracts is expected when static contracts cannot fend against the pressure of change for firms, and it was alluded to be a neglected phase of the process (Cellich, 1999). Therefore, it is necessary to solve the contingency problem and to manage the unforeseen future. Besides, renegotiation is also necessary if the performance of the alliance is far from expected. Renegotiation is concerned with the renewal and flexibility characteristics of contractual arrangements (Dekker et al., 2017). For example, the flexibility of contracts guarantees the parties’ right to renegotiate and the renewal assures the option to terminate. Strategic alliance partners can benefit from renegotiation by saving expenses and time rather than looking for new partners or going to court (Cellich, 1999).
(3) Trust building
Sako (1992) distinguished trust into three types: contractual trust, competence trust and goodwill trust. Contractual trust comes from specific written or oral agreements, while each party has the ethic to keep promises. Competence trust stems from a party’s capability to perform its role competently and its willingness to help others in technical and managerial aspects. Goodwill trust refers to the willingness of both parties to make open commitments. Sako (1992) also argued that the mutual trust between different parties could result in both efficient outcomes and inefficient outcomes. The efficient outcomes can stem from free information disclosure and commitment. The inefficient outcomes can result from great non-pecuniary switching costs. Meanwhile, Whipple and Frankel (2000) discussed character-based trust and competence-based trust (Gabarro, 1987). Character-based trust relates to the characteristics that are embedded in cultures and strategic objectives, while competence-based trust arises from operations and daily performance (Whipple & Frankel, 2000).
addition, Das and Teng (2001) and Langfield-Smith (2008) distinguished three types of control mechanisms that can be used in managing strategic alliances, which are behavior controls (standards and rules of operation), output controls (measurement and monitor of operation output) and social controls (shared norms, values and beliefs) (see also Eisenhardt, 1985; Ouchi, 1979).
(5) Strategic alliance success
According to the resource-based view, a firm’s competitive advantages arise from its valuable, rare, inimitable and non-substitutable resources, thus the firm should protect and develop its VRIN resources (Barney, 1991). However, the relational view claims that the competitive advantages stem from unique relationships between organizations. Relational rents are supernormal profits jointly generated in an exchange relationship; hence, either firm in isolation can barely create them (Dyer & Singh, 1998). Thus, strategic alliance success can be viewed as the creation of relational rents.
In order to answer the questions of how and which performance is assessed, Christoffersen, Plenborg and Robson (2014) denoted several dimensions that are adapted to measure alliance performance, which are assessment mode, analysis level and performance domains. The mode of assessment can be accounting information, cumulative abnormal return, stability or subjective (Christoffersen, 2013). The level of analysis can be on alliance level or from a partner’s perspective. The domains of performance can be from the operational aspect, financial aspect, or the overall aspect of operation, finance and other activities (Christoffersen et al., 2014; Hult, Ketchen, Griffith, Chabowski, Hamman, Dykes, Pollitte & Cavusgil, 2008; Venkatraman & Ramanujam, 1986).
while partners from emerging markets pay more attention to technology-related resources. This combination of local resources and technology-related resources can generate performance-enhancing resource bundles. Strategic alliance success can be considered as the assessment of the overall satisfaction of managers from both parties (Choi & Beamish, 2013). Managers from both sides can directly assess the knowledge-sharing effects. By doing that, they can decide whether the strategic alliance is beneficial for them. Therefore, if the managers are satisfied with the knowledge-sharing effects, they may consider the strategic alliance as a success. 2.3 Relationships (1) Alliance risk vs. Contractual arrangements In order to mitigate the risk of strategic alliances, the parties develop contractual arrangements. Therefore, setting up contracts is the first step during the execution of strategic alliances. It is also argued that contracts are especially detailed and inclusive when establishing non-equity alliances (Das & Teng, 1996).
Relational risk vs. Contractual arrangements
Performance risk vs. Contractual arrangements
Contracts are needed to help clarify roles, responsibilities and performance expectations of each alliance partner, thus reducing uncertainty and enhancing coordination and commitment (Handley & Angst, 2015; Jap & Ganesan, 2000). It indicates that contractual arrangements can force the alliance parties to collaborate and devote themselves to the alliance, because they have to fulfill their responsibilities and make every effort to meet the performance expectations that are included in the contract arrangements. Consequently, the contractual arrangements can help to reduce performance risk. In addition, one role of formal contracts is to manage performance risks by coordination and adaption (Malhotra & Lumineau, 2011; Williamson, 2012). Coordinating partners’ resources and activities and guiding them to adapt to each other and the alliance, can enhance collaboration and thus decrease performance risk. (2) Contractual arrangements vs. Trust building Gulati (1995) considered trust as a substitute for contractual arrangements. In a real situation, alliances’ repeated ties can create trust; and alliances with these ties usually have a lower level of details in their contracts. Reuer and Ariño (2007) also supported this point of view by confirming the role of trust and prior ties in determining contractual complexity. However, Poppo and Zenger (2002) argued that relational governance and formal contracts function as complements rather than substitutes. Thus, detailed contracts may require a high level of trust and a high level of trust may require detailed contracts. Strategic alliances can be formed between parties who do not trust each other. However, in this situation, more comprehensive formal contracts and appropriate controls will be established (Bierly & Gallagher, 2007). Therefore, the parties know that they do not trust each other if the contract contains too much detail.
informal self-enforcing agreements between firms (Grafton & Mundy, 2017). Relational contracts are dependent on various social mechanisms and other relationship-based control mechanisms; they are also related to future relationships (Baker et al., 2002; Grafton & Mundy, 2017; Williamson, 1979). However, the establishment of relational contracts usually takes much time and is also inherently fragile, since it is dependent on the shared interests of different parties and their capability to develop implicit understandings (Cao & Lumineau, 2015). By developing these implicit understandings, the parties can fully trust each other and collaborate. Nevertheless, Grafton and Mundy (2017) confirmed the substitutability and complementarity relationship between formal contracts and relational contracts. (3) Contractual arrangements vs. Control over the alliance Control arrangements can be written into contracts during the contracting stage, thus formal contracts can provide legitimacy for parties to play their control role in an inter-firm setting (Grafton & Mundy, 2017). However, there are no so-called complete contracts due to the limitation that not all contingencies can be included in the contracts (Hart, 2017). Incomplete contracts will reduce the legal enforceability, increase ambiguity and arouse opportunistic behaviors (Cao & Lumineau, 2015; Hart, 2017). Besides, they also lack the ability to support the flexibility of inter-firm relationships (Cao & Lumineau, 2015). Therefore, based on incomplete contracts, the parties will fight for the residual rights of control that are exclusive from contracts, which can also damage trust. Hart (2017) also argued that it matters which party will have the ownership of the residual control rights. But the situation also varies; sometimes it is more efficient for one party to have the residual control rights or sometimes it is better if the parties share these rights.
(4) Alliance risk vs. Trust building
regarded as an element of relational contracts that can safeguard inter-firm exchanges, thus reducing relational risk (Grafton & Mundy, 2017; Handley & Angst, 2015). Besides, Das and Teng (2001) argued that goodwill trust could reduce relational risk, because this kind of trust will bring about a reliable image and a fair reputation to convince others that the firm will not behave opportunistically. They also argued that competence trust would reduce performance risk as well. Competence trust shows the firm’s resources and its capabilities to perform, so the firm’s competences can actually contribute to the alliance’s competences (Das & Teng, 2001). In addition, the resources and capabilities can also create a competent image, so the other party can have more confidence in the partner’s ability to fulfill its tasks (Das & Teng, 2001).
Furthermore, Langfield-Smith (2008) associated a firm’s initial perception of its partners’ goodwill trust (Sako, 1992) with the firm’s initial assessment of relational risk, and a firm’s initial perception of its partners’ competence trust (Sako, 1992) with the firm’s initial assessment of performance risk. She harbored the opinion that managers’ perception of goodwill trust in a firm would impact the managers’ assessment of the relational risk of the firm’s partners. The partner’s willingness to make open commitments (goodwill trust) can demonstrate a reliable and trustworthy image, so managers intend to believe that the partner is less likely to behave opportunistically. So would managers’ competence trust perceptions impact their assessment of the partners’ performance risk. The partner’s ability to perform and its willingness to help others in technical and managerial aspects (competence trust) can also let managers believe that the alliance performance is somehow guaranteed. Langfield-Smith (2008) also discussed the source and longevity of these types of trust. They are usually from former relationships and collaborations or partner reputation in case of no former relationship. The development of this trust will be continued through the whole collaboration process.
(5) Alliance risk vs. Control over the alliance
The literature (Das & Teng, 2001; Langfield-Smith, 2008) linked three types of control mechanisms with alliance risk, and those types are (1) behavior control, (2) output control and (3) social control (Eisenhardt, 1985; Ouchi, 1979). (1) Behavior control can mitigate relational risk by setting policies and procedures to regulate opportunistic behaviors. Besides, it can also manage performance risk that results from unachieved specific outcomes by means of role specification. (2) Managers believe that when the level of performance risk is high, output control can be adopted to monitor performance, while they prefer taking advantage of behavior control to mitigate relational risk. (3) In contrast to behavior control and output control, social control is regarded as informal control by shared norms, values and beliefs (Eisenhardt, 1985; Langfield-Smith, 2008; Ouchi, 1979). It can decrease relational risk by developing goodwill trust or character-based trust that involves strategic objective, culture embeddedness and open commitments (Sako, 1992; Whipple & Frankel, 2000). Additionally, it can also lessen performance risk to a minor degree by developing mutual goals and encouraging the other side making efforts towards the same direction (Langfield-Smith, 2008).
(6) Trust building vs. Control over the alliance
Das and Teng (1998) recognized trust and control as key sources of confidence in partner cooperation. In their view, building trust can manage risk, preserve equity, help inter-firm adaption and strengthen communication, whereas control mechanisms can help to set goals, specify supervision structure and blend culture. Trust building and control mechanisms can affect the level of trust and control, thus confidence in partner cooperation.
building and control over the alliance are regarded as 2 independent concepts. The relationship between them is either substitutability or complementarity (Dekker, 2004). Its substitutability relationship suggests that trust building and formal control should be inversely related to each other, so more trust can result in less control by reducing transactions costs, facilitating dispute resolution, and allowing more flexibility in an alliance (Bierly & Gallagher, 2007), or less trust can generate more control because the partners collaborate with high vigilance against each other. Nevertheless, in highly uncertain and complex inter-firm relationships, control as well as trust is needed to cope with uncertainty and transaction complexity (van der Meer-Kooistra & Vosselman, 2000). So trust and control are both instruments for reducing uncertainty and behavioral risks (Vosselman & van der Meer-Kooistra, 2009). On the other hand, its complementarity relationship suggests that trust building and firm control are mutually reinforcing, which means that more trust can result in more control or vice versa. From a constructive approach view, trust building and formal control can be seen as active forces that help to mediate, shape and construct relationship or network (Vosselman & van der Meer-Kooistra, 2009). For instance, in Mouritsen and Thrane’s view (2006), control practices are the carriers or sources of trusts, which is also linked with the complementarity relationship.
(7) Trust building vs. Strategic alliance success
Whipple and Frankel (2000) found that trust is one of the most influential factors in strategic alliance success. Moreover, trust and commitment are considered as relationship capital in the alliance. So the development and management of this capital can influence interpersonal cooperation and teamwork, which stimulate alliance performance and create competitive advantage (Cullen, Johnson & Sakano, 2000; Jones & George, 1998).
depends on the other to satisfy mutual goals. The accomplishment of these mutual goals can be considered as strategic alliance success and create a mutual belief that the parties’ long-term aims will be eventually met (Bierly & Gallagher, 2007). Nevertheless, too much emphasis on the trustworthiness of a partner could lead to both parties’ ignorance of major issues such as strategic fit. In the long term, this can become a breakdown point of the strategic alliance, thus the strategic alliance will fail in the end (Bierly & Gallagher, 2007). (8) Control over the alliance v. Strategic alliance success Russo and Cesarani (2017) found control to be one of the success factors in the alliance operational phase. They stressed the importance and necessity of an appropriate level of control for alliance success. It allows partners to balance between collaborative aspects and competitive aspects. Thus, this balance assures that each party is jointly involved in the alliance and control, and that they have less worry about fights over control power. Nevertheless, an inadequate level of control or excessive level of control can damage the success of a strategic alliance. For example, an inadequate level of control can limit the protection and the efficient utilization of valuable resources, while an excessive level of control can destroy goodwill among partners and partners’ initiative to perform and contribute (Child, Faulkner & Tallman, 2005). Therefore, an appropriate level of control can enhance cooperation among partners and lessen potential conflicts to a great degree (Sklavounos, Rotsios & Hajidimitriou, 2015).
2.4 Literature Gap
techniques and mechanisms are still quite general. For example, they regarded ‘establishing mutual interests’, ‘individual and team trust’, and ‘joint dispute resolution’ as the three major ways to build up goodwill trust (Das & Teng, 2001, p. 272). However, where the mutual interests come from, how trust is enhanced on individual and team level, or how joint dispute is resolved, are not addressed. The existing literature lacks specificity and insights into the practical use of contractual arrangements, how trust can be built in practice and the practical enforcement of control. Therefore, this study aims to deepen the theoretical ideas of Das and Teng (2001) and to discuss how the theoretical ideas can be
implemented in practice.
3 Method
3.1 Research approach
In general, this study is a literature study (Ridley, 2012). It adopts the analysis of literature as its research method (Kothari, 2004) to investigate how the partners of a strategic alliance mitigate the alliance risk by means of contractual arrangements, trust building and control over the alliance and how these means contribute to strategic alliance success. Since the study aims at providing ideas and insights to the research field, it is also an exploratory or formulative research study, which allows the study to formulate a problem for more precise investigation, and to be flexible enough to study the problem from different aspects (Kothari, 2004). One way to do the exploratory research is through the reviewing of relevant literature, which requires that the researcher should review former works in the research field and build her work upon their works (Kothari, 2004). 3.2 Data collection This study uses secondary data as the main source. The data is collected through different means, such as books and articles in the academic journals. The way to get access to the data is to take advantage of libraries, online resources and Internet (Adams, 2007). The reason why this study mainly uses secondary data is that a great majority of representative samples are available and it is beneficial for looking for trends as well (Adams, 2007). Besides, the researcher does not need to consider other time-consuming ways to collect data, so she can better concentrate on analyzing the data and drawing a conclusion from it.
the suitable data, the researcher adopts the way to search by keywords. For instance, if she wants to have data regarding the relationship between contractual arrangements and trust building, she searches the keywords (contractual arrangements and trust building) together, or other substitutable keywords that represent the same or similar meaning, such as contracts and trust. After this step, she goes through the abstract and introduction of the literature she found and screens out the most relevant ones. In addition to searching by keywords, the researcher can also benefit from the articles’ references during the reading, thus finding more interesting and suitable data. The main method to record data is to ‘download Internet data into spreadsheets’, or to ‘collate a bank of photographs’ (Adams, 2007, p. 118).
3.3 Data analysis
3.4 Validity and reliability
This study is controlled for validity and reliability issues. Regarding validity, this study is in accordance with content validity and criterion validity. This study is interested in the elements, such as alliance risk, contractual arrangements, trust building, control over the alliance and strategic alliance success, and the relationships between them. This study conforms to content validity because the data are able to cover the construct of interest. Besides, it conforms to criterion validity in that the elements are related to each other as the researcher expects. In addition, this study is in accordance with inter-rater reliability, which appears to be across different researchers. Due to a literature study method, the researcher looks at similar or different views from various former researchers, hence she can benefit from the consistency or comparison of their views.
4 Results
This section discusses the main findings of the literature review. Besides, this section also attempts to make contributions by discussing additional findings that are derived from the literature. In addition, it discusses how the theoretical ideas can be implemented into practice. Furthermore, the section summarizes the findings and theoretical implementations. Finally, the section provides a design of future research.
4.1 Main findings
This study discusses various relationships that stem from the existing literature between five elements: alliance risks, contractual arrangements, trust building, control over the alliance and strategic alliance success. The numerous literature has confirmed that contractual arrangements, trust between strategic alliance partners and control over the alliance are all effective mechanisms to mitigate relational risk and performance risk.
Contractual arrangements can mitigate relational risk by safeguarding self-interest seeking behaviors (Das & Teng, 1996; Grafton & Mundy, 2017; Gulati, 1995). Relational risk stems from opportunistic behaviors or other kinds of self-interest seeking behaviors. Hence, the use of formal contracts can help avoid or safeguard these kinds of behaviors. However, Das and Teng (1996) and Grafton and Mundy (2017) put more emphasis on the avoidance or safeguard effects by contracts, while Gulati (1995) stressed more on how to make the behaviors predictable rather than avoid them. Besides, it can also mitigate performance risk by clarifying roles, responsibilities and performance indications of each party and by coordinating the input of resources and procedures (Handley & Angst, 2015; Jap & Ganesan, 2000; Malhotra & Lumineau, 2011; Williamson, 2012).
In addition to contractual arrangements, trust between strategic alliance partners can mitigate alliance risk by safeguarding exchanges between firms (Grafton & Mundy, 2017; Handley & Angst, 2015). Langfield-Smith (2008) also argued that managers’ initial assessment of alliance risk is affected by the initial perception of trust. Besides, trust is also associated with contracts by acting as a substitute or complement. Trust is regarded as one element of the relational contracts, which act as substitutes or complements to formal contracts (Grafton & Mundy, 2017; Gulati, 1995; Poppo & Zenger, 2002). Furthermore, to explain inter-firm exchange, contractual complexity and relational governance function as complements. Managers tend to employ greater levels of relational norms (trust) as their contracts become increasingly detailed, and tend to employ greater details in contracts if they develop greater levels of relational governance (trust) (Poppo & Zenger, 2002).
Apart from contracts and trust, an appropriate level of control over the alliance can be positive to mitigate alliance risk. First, control arrangements are included in the formal contracts. The arrangements are such as policies, production procedures and performance monitor, etc. They are used to regulate the partners’ behaviors and control the production quality, thus mitigating relational risk and performance risk (Langfield-Smith, 2008). Besides, Grafton and Mundy (2017) also acknowledged the positive use of control to manage acute inter-firm exchange risk. However, there are also worries about the residual right of control that the formal contracts can barely cover (Cao & Lumineau, 2015; Hart, 2017). This residual right can bring out fights between partners, which may also damage trust.
emphasis on the partner’s trustworthiness (Bierly & Gallagher, 2007), the alliance is likely to fail. Therefore, the establishment of strategic alliances has to carefully consider all different factors, such as culture, trustworthiness of the partner and strategic fit, etc. However, if a firm emphasizes too much the trustworthiness of its partner, probably due to former relationships or less cultural distance, it can ignore other major issues (e.g. strategic fit) that can damage the success of strategic alliance. Whether control over the alliance can also be a success factor depends on the level of control. On the one hand, an appropriate level of control is positive to strategic alliance success, especially during the operation stage, by enhancing cooperation between different parties and lessening conflicts (Russo & Cesarani, 2017; Sklavounos et al., 2015). On the other hand, an inadequate level of control or an excessive level of control is both negative to strategic alliance success (Child et al., 2005). 4.2 Additional findings Interaction between different elements This study views the mechanisms to mitigate alliance risk as separate elements. However, the interactions between them can also be effective mechanisms, for instance, the interaction between trust and control. Das and Teng (1998) argued that trust and control are parallel concepts; the level of trust can moderate the effects of control mechanisms while control mechanisms can affect the level of trust. However, some researchers suggest looking at the interaction between them. Vosselman and van der Meer-Kooistra (2009) argued that trust and control are not separated and the interaction between trust and control will lead to positive behaviors. Trust can play its relational governance role better by enhancing the control structures. Furthermore, the interaction can provide stability and durability (Vosselman & van der Meer-Kooistra, 2009). Besides, if the parties have fights over control rights, it can imply that the level of trust between the parties is low.
Apart from it, the interaction between contracts and trust also draws attention. Trust can be a substitute for formal contracts (Gulati, 1995). It indicates that companies who trust each other usually have fewer details in their contracts, or the contracts are so complex and detailed if there is no or little trust. Therefore, to some extent contracts and trust are seen as an integrated mechanism. In addition, contractual complexity and relational governance (trust) act as complements (Grafton & Mundy, 2017; Poppo & Zenger, 2002). It means that under a situation of highly detailed contracts, managers will adopt more trust, or under a high level of trust, the contracts tend to become increasingly detailed. This interaction between formal contracts and relational contract (trust) can mitigate alliance risk by developing mutual objectives and goals, and limiting opportunistic behaviors. Therefore, the elements cannot be isolated from each other and the interactions between them are also worth studying.
Management accounting view vs. Strategic view
a general concept and discuss its relation with trust and alliance risk.
External factors
This study only focuses on the internal factors (e.g. factors related to the internal context of the strategic alliance parties) that influence strategic alliance success and alliance risk management, but it ignores the external factors, such as markets and customers. The literature identifies different strategic alliance success factors, such as trust (Bierly & Gallagher, 2007; Franco, 2011; Kanungo, 2015; Wipple & Frankel, 2000; Wittmann et al., 2009), control (Franco, 2011; Russo & Cesarani, 2017), contract (Wipple & Frankel, 2000), culture (Franco, 2011; Kanungo, 2015; Wipple & Frankel, 2000), management support and clear goals, etc. However, these factors are related to the internal context of the strategic alliance parties. Although the alliance success relies on these factors, the alliance can also fail only because of bad market conditions or wrong customer orientations.
Culture
The researcher also finds another interesting element that can be incorporated in the conceptual framework, which is culture. Similar or symmetric cultural orientation is regarded as a success factor to strategic alliance (Kanungo, 2015; Whipple & Frankel, 2000). Besides, it is strongly associated with alliance risk, contractual arrangements, trust building and control. For example, the establishment of an international joint venture may require increasingly customized contracts, because both the foreign partner and the local partner want to protect their knowledge from leaking to the other side in order to keep their competitive advantages. Besides, the two parties also have to deal with how to separate or share the rights to control the strategy or operation of the joint venture.
performance risk aroused by the cultural distance between local and foreign strategic alliance partners (Das & Teng, 1996; Miller, 1992). Firms will have to face and deal with a different competitive environment where language, consumer attitude, market structure, business routine and legal system are disparate when they build up an international alliance relationship. Consequently, their existing knowledge and experience can be barely applied to the diverse environment, which can generate a high level of performance risk (Das & Teng, 1996). In addition to performance risk, opportunistic behaviors are also associated with cultural distance, thus cultural distance is also linked with relational risk. Handley and Angst (2015) found that individualistic vs. collectivistic and high vs. low uncertainty avoidance characteristics of culture would impact relational risk level and governance mode.
shaped by the frequent interaction between strategic alliance partners (Langfield-Smith, 2008). These interactions can be business meetings, dispute negotiations and other business routines. Meanwhile, formal contracts can include specific obligations, legal arrangements and responsibility of each party (Grafton & Mundy, 2017). Hence, different kinds of business routines can also be included in the contracts, for example, a regulated weekly meeting to discuss and assess the alliance relationship, or the solution of any disputes. These routines can help develop trust between firms. Furthermore, interpersonal relationships (e.g. between top managers) can also be developed and enhanced due to their regular meetings and other social activities. Besides, these regulations can also align each party and force them to go towards the same direction.
How to build trust
The literature identifies different types of trust, such as contractual trust, competence trust and goodwill trust (Sako, 1992) or character-based trust and competence trust (Gabarro, 1987) and discusses the drivers of trust (Bierly & Gallagher, 2007). However, they lack enough insights in how trust can be built up or enhanced in practice. Das and Teng (2001) argued that goodwill trust could come from mutual interests, individual and team, and joint dispute resolution, and competence trust could come from proactively collected information. However, their discussions were rather general.
in Japan, ‘I am satisfied’ may refer to ‘I am not satisfied’, because Japanese managers do not like to express their feelings directly and they also want to avoid embarrassing others. So people who are not from Japan tend to only pay attention to the words, but not the codes or meanings behind the words. Besides, trust is strongly driven by cultural similarity (Bierly & Gallagher, 2007). For instance, Japan has a strong trust-based national culture and collectivism, so a Japanese firm tends to trust a local partner, and even it is not familiar with this partner (Bierly & Gallagher, 2007). Hence, similar culture can lessen barriers that come from language and customs; thus trust can be developed.
In addition, trust can come from a good reputation and former ties (Bierly & Gallagher, 2007; Langfield-Smith, 2008). A firm’s past performance can crown the firm a good reputation owing to its capabilities to conduct the business, its openness, and its integrity with others. Because of this reputation, others are likely to trust the firm and feel confidence that the firm can accomplish its duties. From Das and Teng’s view (2001), competence trust can be built up by proactively collected information, which also indicates that a firm’s showing its capabilities can generate a trustworthy image and other firms’ confidence in it. Besides, former ties can be a proxy for trust (Gulati, 1995). Between firms that have already collaborated before or been connected before, a certain level of trust has already existed. Consequently, they are likely to collaborate again and extend their relationship.
couple not only the firms, but also managers and employees, and eventually trust is developed, which is corresponded to individual and team trust, as Das and Teng (2001) proposed.
How to control the alliance
Control discussed in the literature from the strategic field is more general, such as strategic control and operational control (Child, 2002). Hence, firms are aware that they should fight for control during contracting. For example, foreign partners prefer controlling the goals and objectives, whereas local partners prefer controlling daily operations. However, the literature from strategic field lacks guidance on how control rights are enforced in practice. There is a way to see it through management accounting literature, since control identified by management accounting is more detailed and closely associated with behaviors, planning and decision-making (Merchant & van der Stede, 2012). Besides, control can be on different levels, such as ‘individual-activity level’, ‘individual-facility level’, ‘customer/market level’ and ‘total-organization level’ (Bhimani, Horngren, Datar & Foster, 2008, p. 615).
Result control, which refers to performance measurement, key factors determination and planning, can be adapted to ensure that the strategies and objectives of the alliance are towards the right direction. Or it can also indicate any faults by measuring the performance, so managers can quickly react and make changes to the current strategy. Hence, result control is aligned with strategic control. Operational control can contain both action control, which is behavioral constraints, reviews on pre-action, action accountability and redundancy, and personnel control, which comprises selection, placement, training and job design, to ensure that the operations function well (Merchant & van der Stede, 2012).
specification and supervision), staffing and training are all effective behavior control mechanisms (Das & Teng, 2001), which are closely related to action control and personnel control. Output control can be realized through determined objectives, and planning and budgeting (Das & Teng, 2001), so it is more aligned with result control. Mutual decision-making process, and rituals, ceremonies and networking can enforce social control (Das & Teng, 2001). Mutual decision-making process can connect the firms together because they can all feel that they are participating in the alliance. Consequently, it prevents the situation that one party loses its interest to contribute to the alliance because it has no power to make decisions. Rituals, ceremonies and networking are different methods to create shared norms, values and beliefs, and thus enhancing the social tie between partners. These can also be sources of trust.
4.4 Conclusion
To conclude, strategic alliance contains both opportunities and challenges. The opportunities are getting access to supplementary services and a new customer base, increasing brand awareness and entering new markets (Buckles, 2011). However, the challenges can come from partner selection, establishment of an alliance that can be mutually beneficial to each party, building up of trust and honesty and the time to reassess the alliance (Buckles, 2011). Hence, considering alliance risk and thinking of the means to manage those risks is of major significance to the strategic alliance partners and contributes to the strategic alliance success. Alliance risks can be from both relational and performance perspectives.
contracts are formal and detailed, they are still incomplete yet. Therefore, sometimes renewal or renegotiation is required to include the unforeseen contingencies or to make change to the current under-expected performance. As the collaboration goes on, trust can also be built up and/or enhanced, which can serve as a safeguard for alliance risks. Trust can come from cultural similarities and it can also be developed due to business routines, social activities and day-by-day works (which can be included in the contracts), etc.
Besides, an appropriate level of control over the alliance can help the parties coordinate and adapt in a more efficient and effective way, hence, mitigating alliance risk. Control can be enforced on a general level (strategy or operation), or it also can be specific, such as personnel control and action control, etc. Furthermore, the interaction between contracts and trust can develop sharing objectives and goals and regulate partner’s behaviors. The interaction between trust and control can bring about a stable and durable relationship. Ultimately, all these efforts can result in a successful strategic alliance. Nevertheless, there is also the possibility of failure if the external environment (markets) performs poorly.
4.5 Design of a future case study
With respect to future study, a longitudinal case study can be adopted as the future research method (Eisenhardt, 1989). Since this study is purely a literature study, it is necessary to investigate the findings of this study in practice, thus a case study will be helpful. Besides, the insights from a case study also allow the researcher to change or refine the conceptual framework. In addition, the reason for a longitudinal study is that this study pays much attention to the full process of strategic alliance collaboration. And when and how those risk-mitigating mechanisms can be used in practice is also meaningful for the study.
establishing strategic alliance. And the reasons for its intention can be to look for complement resources, to solve its strategic demands or to develop competitive advantages. Additionally, the potential partner that the targeting firm is looking for is preferred to be a foreign partner, because in a multi-culture context, alliance risk is more severe. Besides, in a multi-culture context, the influence of contractual arrangements, trust building and control over the alliance can also be exaggerated to some extent, since they all become more acute. Concerning the duration, the future study should include the observation of different phases as the collaboration goes. Such phases are partner selection and strategic alliance execution. Apart from target selection and study duration, the future study should pay close attention to its managerial and practical contributions. Hence, the future study is also suggested to emphasize on China-Dutch strategic alliance. With the ‘One Belt and One Road Initiative’1 of China developing, numerous Chinese firms want to
establish an international collaboration, look for international partners and intend to attract foreign direct investment. It is generally acknowledged that the Netherlands and China have numerous differences in culture (Hofstede). For instance, the Netherlands has higher level of uncertainty avoidance and lower level of long-term orientation than China (Hofstede), so does it necessarily mean that Dutch companies tend to prefer more detailed and comprehensive contracts in order to avoid uncertainty such as contractual risks and they do not focus on trust for the sake of potential corporations in the future as much as Chinese companies? Therefore, Moreover, it is crucial for firms to know how to manage multi-cultures. Therefore, managing alliance risk between Dutch party and Chinese party is worth studying.
1 ‘One Belt and One Road Initiative’ is a development strategy that was proposed by the Chinese
Moreover, the future study should pay attention to how in practice the partners establish contracts and regulate control arrangements. It should also focus on how trust is developed between the partners and how general rights of control are enforced in practice. Besides, it should also focus on the interactions between contracts and trust, and between trust and control, so as to find out the effect of these interactions to mitigate alliance risk. In addition, in case of strategic alliance failure, it should also pay attention to the influences of the external
5 Discussion and Conclusion
5.1 Relation to existing literatureThis study has investigated the existing literature that discusses the elements alliance risk, contractual arrangements, trust building, control over the alliance and strategic alliance success. The researcher aimed at understanding what factors could lead to a successful strategic alliance. Various studies, such as Christoffersen et al. (2014), Franco (2011), Kanungo (2015), Russo and Cesarani (2017), Whipple and Frankel (2000), and Wittmann et al. (2009) argued that trust between the parties and control over the alliance are success factors. Drawing on these findings, the researcher searches the literature for elements that are related to trust and control, and found that alliance risk and contractual arrangements are interlinked with trust and control.
Various studies show that these elements are interlinked. For instance, Das and Teng (1996), Grafton and Mundy (2017), Malhotra and Lumineau (2011), and Williamson (2012) emphasized the relationship between alliance risk and contractual arrangements; Baker et al. (2002), Cao and Lumineau (2015), Grafton and Mundy (2017), Gulati (1995), and Poppo & Zenger (2002) referred to the relationship between contractual arrangements and trust; Bierly and Gallagher (2007), Das and Teng (1998), Das and Teng (2001), Dekker (2004), and Vosselman and van der Meer-Kooistra (2009) focused on the relationship between control and trust; Das and Teng (2001) and Langfield-Smith (2008) paid attention to the relationship between risk, trust and control. However, there is lack of integration of these elements. Hence, the researcher builds up a comprehensive conceptual framework that includes all elements and the relationships between them.
5.2 Answer to the research question
mechanisms through the whole collaboration process. During the partner selection phase, firms will analyze the potential alliance risk connected to their collaboration with potential partners. Trust between the potential parties (e.g. because of previous collaboration with potential parties or because potential parties have a reputation of trustworthy behavior) influences the outcome of such analysis as trust can minimize a firm’s concern about risk. After the selection of the partner, the collaboration begins with setting up contractual arrangements and starting the activities contractually agreed.
framework. In the refined conceptual framework that is depicted in Figure 2, trust is categorized into contractual trust, goodwill trust and competence trust (Sako, 1992). Control is categorized into social control, behavior control and output control (Das & Teng, 2001; Langfield-Smith, 2008). Market condition is newly introduced in order to explain the possibility of strategic alliance failure. Thus, the researcher can make use of this refined framework for future study. Figure 2: Refined conceptual framework Managerial implication The implication for firms and managers is making use of formal contracts, trust and control over the alliance for the management of alliance risk and the achievement of strategic alliance success. In the first place, firms should be aware of the importance of alliance risk to strategic alliance success. Therefore, firms should analyze the potential alliance risks and develop adequate mechanisms that could mitigate this risk. Mechanisms to mitigate risk are: contractual arrangements, building trust with the partners and enforcing different kinds of control over the alliance.
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