Organizing to Implement Strategic Alliances

One of the most important determinants of the success of strategic alliances is their
organization. The primary purpose of organizing a strategic alliance is to enable partners in
the alliance to gain all the benefits associated with cooperation while minimizing the
probability that cooperating firm will cheat on their cooperative agreements.
A variety of tools and mechanisms can be used to help realize the value of alliance
and minimize the threat of cheating. These include contracts, equity investments, firm
reputations, joint ventures, and trust.
Explicit Contracts and legal Sanctions
One way to avoid cheating in strategic alliances is for the parties to an alliance to
anticipate the ways in which cheating may occur (including adverse selection, moral hazard,
and hold up) and to write explicit contracts that define legal liability if cheating does occur.
Writing the explicit contract were called nonequity alliances. This contract may require
parties in a strategic alliance to make available to the alliance certain proprietary technologies
or processes.
Equity Investments
The effectiveness of contracts can be enhanced by having partners in an alliance make
equity investments in each other. When Firm A buys a substantial equity positions in its
alliance partner, Firm B, the market value of Firm A now depends to some extent, on the
economic performance of that partner. The incentive of firm A to cheat Firm B falls, for to do
so would be to reduce the economic performance of Firm B and thus the value of Firm As
investment in its partner. These kinds of strategic alliances are called equity alliances. Many
firms use cross-equity investments to help manage their strategic alliances.
Firm Reputations
A third constraint on incentives to cheat in strategic alliances exists in the effect that a
reputation for cheating has on a firms future opportunities. Information about an alliance
partner that has cheated is likely to become widely known. A firm with a reputation as a
cheater is not likely to be able to develop strategic alliances with other partners in the future,
despite any special resources or capabilities that it might be able to bring to an alliance.