Strategic Alliances, Network Organizations, and Ethical Responsibility

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Corporate Strategy and Strategic Alliances

The goal of corporate strategy is to define the organization's domain, i.e., the business areas in which a firm wishes to participate to maximize long-term profitability. The firm may concentrate on a single product line, but it often finds that it can create more value by leveraging resources across a larger number of business activities. This is why many corporations rush into vertical integration and diversification. However, this method of leveraging resources requires large dedicated investments, increases organizational complexity, and leads to problems of coordination and bureaucratic inefficiency. In short, vertical integration and diversification may create bureaucratic costs that exceed their benefits. For example, Ramanujam and Varadarajan (1989) found that extensive diversification tends to depress rather than enhance corporate profitability.

Is there a way to reap the benefits of vertical integration and diversification without the associated bureaucratic costs? It has been found that, under certain circumstances, firms can attain the benefits through long-term strategic alliances among firms to share the costs, risks, and profits of business operations. Through these alliances, firms narrow their internal focus and deepen their expertise in selected areas, relying on their partners to specialize in other areas of functional or technical competence. In the process, they share the risks of specialized investments, reduce internal complexity and administrative costs, and achieve greater adaptability and responsiveness to the environment. There is an extensive literature on how firms can avoid the pitfalls and reap the benefits of these alliances, e.g., Harrigan (1985), Reich & Mankin (1986), Ohmae (1989), Geringer & Hebert (1989), Hamel (1991), Kanter 1994, and Lei, Slocum, & Pitts (1997).

In addition to creating economic opportunities, strategic alliances also create challenges and threats. For example, profits must be split and knowledge shared. In the case of international joint ventures, local laws could diminish flexibility and cooperation can create competitive foreign firms (Hall, 1984). Because firms specialize in selected areas of competence, expertise and information become fragmented. For this reason, a firm may lose a critical competence in an activity that has been outsourced or may become dependent on its strategic partners.

One of the major advantages of strategic alliances is the opportunity to learn from one's partners (Ciborra, 1991). However, the learning opportunities may not be symmetrical, i.e., one firm may learn more than the other. For this reason, strategic alliance can be considered an arena of competition or even a learning battlefield (e.g., Hamel, 1991; Lei & Slocum, 1992). The term "coopetition" has been coined to describe this relationship of cooperation and competition (Dowling, Roering, Carlin, & Wisnieski, 1996). Yet, amid all this fragmentation and competition, coordination and control are necessary among firms that work together. All the firms that work together (e.g., in a network) must trust each other and accept the norms of the relationship. Strategic alliances often connect organizations to each other in a very intense way and involve contracts that must be honored if the alliances are to succeed. This is a problem of control and ethical responsibility.

Efficient Contracting and Ethical Responsibility

To analyze the nature of contracting, economists have used three approaches: transaction cost economics (Williamson, 1975), agency theory (Jensen & Meckling, 1976), and team production (Alchian & Demsetz, 1972). Williamson (1975) uses transaction costs to explain the choice between contracting internally (hierarchies) and externally (contracts). This is relevant to the choice between vertical integration (hierarchies) and strategic alliances (contracts). …