The architecture of cooperation: managing coordination costs and appropriation concerns in strategic alliances

Administrative Science Quarterly,  Dec, 1998  by Ranjay Gulati,  Harbir Singh

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Corporations have increasingly seen alliances as attractive vehicles through which they can grow and expand their scope, and the rate at which interfirm alliances have been formed in the last two decades has been unprecedented (Harrigan, 1986; Anderson, 1990). A notable characteristic of this growth has been the increasing diversity of interfirm alliances. The nationalities of partners, their motives and goals in entering alliances, and the formal structures used to organize the partnerships have all become increasingly varied. The variety of organizing structures implies that firms face numerous choices in structuring their alliances. This study examines why firms choose the specific governance structure they do in alliances. It explores some of the conditions at the inception of an alliance that influence the formal structure used to govern it.

An alliance is commonly defined as any voluntarily initiated cooperative agreement between firms that involves exchange, sharing, or co-development, and it can include contributions by partners of capital, technology, or firm-specific assets (e.g., Harrigan, 1986; Parkhe, 1993a; Gulati, 1998). The governance structure of the alliance is the formal contractual structure participants used to formalize it. Prior research has distinguished among such formal structures in terms of the degree of hierarchical elements they embody and the extent to which they replicate the control and coordination features associated with organizations, which are considered to be at the hierarchical end of the spectrum (e.g., Pisano, Russo, and Teece, 1988; Pisano, 1989; Gulati, 1995a). At one end are joint ventures, which involve partners creating a new entity in which they share equity and that most closely replicate the hierarchical control features of organizations. At the other end are alliances with no sharing of equity that have few hierarchical controls built into them.

Organizational scholars have long studied the basis for hierarchical controls within organizations and viewed them as a mechanism to manage uncertainty. Prior research on contract choices in alliances and the extent of hierarchical controls they embody has been influenced primarily by transaction cost economists, who have focused on the appropriation concerns in alliances, which originate from pervasive behavioral uncertainty and contracting problems (e.g., Pisano, Russo, and Teece, 1988; Pisano, 1989; Balakrishnan and Koza, 1993). Following this perspective, scholars have suggested that hierarchical controls are an effective response to such concerns at the time the alliance is formed. Thus, the greater the appropriation concerns, the more hierarchical the likely governance structures for organizing the alliance. The logic for hierarchical controls as a response to appropriation concerns is based on their ability to assert control by fiat, provide monitoring, and align incentives. The operation of such a logic was originally examined in make-or-buy decisions (e.g., Monteverde and Teece, 1982; Walker and Weber, 1984; Masten, Meehan, and Snyder, 1991). The same logic by which firms choose between the extremes of making or buying is also expected to operate, once firms have decided to form an alliance, in their choice of governance structure: when firms anticipate appropriation concerns, they are likely to organize alliances with more hierarchical contracts.

While researchers have made significant advances in classifying alliance governance structures and in identifying their determinants, our understanding of alliances is limited by two factors inherent in much of that research. First, the research on alliances focuses on the anticipated appropriation concerns as the primary basis of the choice of governance structure (Williamson, 1985, 1991). Building on the idea that an important feature of hierarchical controls is their ability to manage potential moral hazards, transaction cost economists suggest that hierarchical controls arise in alliances when participants anticipate such concerns. Even resource dependence theorists, who have looked primarily at the origin of ties rather than their structure, have suggested similar moral hazard concerns as a reason why firms may transform pure exchange relations into power relations (Pfeffer and Nowak, 1976).

While appropriation concerns originating from contracting obstacles, combined with pervasive behavioral uncertainty, can clearly be an important concern, once firms decide to enter an alliance, there is another set of concerns that arises from anticipated coordination costs. By coordination costs we mean the anticipated organizational complexity of decomposing tasks among partners along with ongoing coordination of activities to be completed jointly or individually across organizational boundaries and the related extent of communication and decisions that would be necessary.(1) Coordination considerations are extensive in alliances. Litwak and Hylton (1962: 399) noted that the specialized coordination in interorganizational relations is a challenge, "since there is both conflict and cooperation and formal authority structure is lacking." As a result, the anticipated interdependence resulting from the logistics of coordinating tasks can create considerable uncertainty at the outset of an alliance that is different from appropriation concerns. The uncertainty for participants concerns the way activities will be decomposed and integrated and the extent to which there is likely to be an ongoing need for mutual adaptation and adjustment.