Managing

Collaborators

Dr. Alok R. Saboo

Strategic Alliances
Any cooperative effort between two or more independent organizations to
develop, manufacture, or sell products or services
• “Association to advance the common interests of members”:
− It is between two or more independent firms
− The partners share the benefits of alliances and control over the
performance of assigned tasks
− The partners contribute resources on an ongoing basis (e.g.,
information, technology, etc.)
• e.g., IBM, Siemens & Toshiba cooperate to develop a new
version of chips. Alliance can be for R&D, product
development, marketing (e.g., Laura Ashley-FedEx) etc.

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Motivation for Alliances
• Create economic value by:
− accessing complementary resources and capabilities
− leveraging existing resources and capabilities
• An alliance is an organizational form of exchange that:
− should produce a gain from trade due to
− some comparative or absolute advantage
• Implication: Choose partners that are better at something than
you are (complementary resources)

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Motivation for Alliances

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 Range of Organizational Structures

-One partner acquires

the other
-Licensing -Both manage
-Distribution -One partner
-Outsourcing dominates

Arm’s
Joint
Length Contracts Acquisitions Hierarchies
Ventures
(Market)

-Market relationship -A third cos. formed

-No closeness -Managed jointly
-Parties seldom meet -Both own equity

(Stafford 1994)
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How Strategic Alliances Create Value

Improve Current Operations

Value
Shaping the Competitive Environment
Creation

Facilitating Entry and Exit

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Improving Current Operations

Exploiting
• A partner brings increased market share
economies of and/or manufacturing capacity
scale

• A partner brings technology and/or

Learning from market knowledge
partners • Leverage co-specialized Resources

Risk and cost • A partner bears a portion of the risk

sharing and/or cost of the alliance

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Shaping the Competitive Environment

Facilitating • Partners may agree on a standard and

avoid a market battle for the standard
technology • Build nodal positions, e.g., technical
standards standards

Facilitating • Partners may communicate within an

alliance in subtle, legal ways whereas the
tacit same communication between
competitors outside an alliance would be
collusion illegal

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Facilitating Entry and Exit

Low-cost entry into • A partner provides instant access and legitimacy

new industries

Low-cost exit from • A partner is an informed buyer

industries

Managing uncertainty • Alliances may serve as ‘real options’

Low-cost entry into

• Partners provide local market knowledge, access,
new geographic and legitimacy with governments and customers
markets
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 Value Destruction in M&A: The Worst Offenders

Shareholder value destroyed based on up to 3 years post-merger analysis compared to overall stock
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Challenges to Value Creation and Allocation
• Incentives to Misappropriate Value (Cheat)
• An alliance is an exchange context in which:
− partner inputs may be difficult to monitor
− actual value creation may be difficult to monitor
− value appropriation (allocating the value) may be:
• difficult to monitor
• subject to power dynamics

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Challenges to Value Creation and Allocation

Three Forms of Misrepresenting the value

Misappropriating Adverse Selection
of inputs
Value

Providing inputs of
Moral Hazard lesser value than
Holdup promised

Exploiting the transaction-specific investment

of partners

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EXCHANGE RELATIONS IN
MARKETING

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Agency Theory
• Any exchange/ transaction arrangement is an agency relationship
− husband-wife,
− citizen – government,
− manufacturer-distributor, franchisor-franchisee, buyer-seller

• Agency is an exchange relationship which results whenever one party

(principal) depends on another (agent) to undertake some actions on
its behalf.

• Marketers (e.g., manufacturers) depend on intermediaries (e.g.,

dealers) to sell goods; they are managing agency relationships.

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Principals and Agents

Principal
e.g. Ford
Principal’s
obligation to honor
Goal the contract with
Agency contract
third party (provide
(dealership agreement or Incongruence spare parts for
contract)
warranty)

Agent Third Party

e.g. Car dealer Contract with customer on e.g. customer
behalf of principal (labor for
manufacturer implied
warranty)

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 Managing Agency Relationships: Summary

Time when parties

enter into a
relationship
Post-contractual or
Pre-contractual or
Moral hazard problem
Adverse selection problem
Problem: To ensure that the
Problem: Assessing the hidden
chosen partner uses his abilities
Qualities (abilities/ motivations)
to achieve principal’s goals
of the prospective partner (agent)
(e.g., Toyota wants to make sure that
(e.g. Toyota wants to recruit a new
The car dealer who is already hired
Dealer to sell its cars)
does its best to sell the Toyota brand)
Solutions:
Solutions:
1) Screening by Toyota (principal)
1) Toyota pays price premiums to dealer
2) Signaling by dealer (agent)
2) Toyota contracts with dealer
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Adverse Selection in Agency Relationships
• Principals and agents have separate interests
• Principal would like to deal with “good” agents
• Principal operates under asymmetric information regarding
agent’s hidden characteristics
• Agents privately knows their abilities, but reluctant to share
this information
• Risk that the selected agent (or product) may turn out to be of
low-quality: Adverse Selection Problem
− Also called hidden information problem
• E.g., Lemon problem

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Solutions to Adverse Selection problems
• Screening by Principal
− Principal selects or screens agents with right abilities and motivations
ex ante. This helps reduce private information (info. asymmetry)
• Signaling by Agents
− Screening can sometimes be very costly/ difficult for principals
− Agent can reveal its hidden qualities to the principal using signals
• Why signals work?

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 How would you react to
Zuckerberg’s statement that he
won't sell his stock for a year?

Why does Citibank

have such Warranties/
flashy buildings? Free samples guarantees

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Moral Hazard Problems
• Even good agents may deliberately fail to act in the principal’s
interests ex post
− Also called hidden action problems
• Hence, the principal must devise ways to motivate agents to
act cooperatively (i.e., act in principal’s interest) ex post.

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Contracts as Solutions to Moral Hazard
• Outcome Based Contracts
− E.g., car makers reward dealers on tangible performance outcomes
such as sales volume, number of servicing complaints, customer
satisfaction scores etc.
• Behavior Based Contracts
− E.g., Burger King demands that its franchisees maintain “clean”
premises, which is difficult to specify. So, BK will reward by behavior
(e.g., did the franchisee hire cleaning staff?)
• Contract violations (by either party) give grounds to the other
to move the court. Hence, agency theory has a legal-centric
approach to creating cooperation

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 Managing Agency Relationships: Summary

Time when parties

enter into a
relationship
Post-contractual or
Pre-contractual or
Moral hazard problem
Adverse selection problem
Problem: To ensure that the
Problem: Assessing the hidden
chosen partner uses his abilities
Qualities (abilities/ motivations)
to achieve principal’s goals
of the prospective partner (agent)
(e.g., Toyota wants to make sure that
(e.g. Toyota wants to recruit a new
The car dealer who is already hired
Dealer to sell its cars)
does its best to sell the Toyota brand)
Solutions:
Solutions:
1) Screening by Toyota (principal)
1) Toyota pays price premiums to dealer
2) Signaling by dealer (agent)
2) Toyota contracts with dealer
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Origin of Transaction Cost Analysis
• Agency theory said: “Contracts solve moral hazard problems”.
Thus, write a good contract and the relationship will run
smoothly.

• Why do we ever see a firm perform a job (“in-house”) by itself,

why can’t they always write a contract with another company
(the “market”) and get the job done through them?

• Why do we have firms?

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 How TCA differs
• TCA clarifies happens inside the firm (hierarchy) and compare
it to what happens outside (markets). In contrast, recall that
power dependence and agency theory both focus only on
market relationships.

• As we will see, markets and hierarchies emerge as alternatives

to perform the same transaction (exchange or job).

• Like agency theory, TCA will propose relationship 1)

problems and 2) solutions.

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 TCA Assumptions: Bounded Rationality

Social Man (organic rationality) Economic Man (maximizing)

• Ruled by customs, tradition, honor, • Ruled by perfect reason to maximize
feelings, relations own payoffs

• Can appear “irrational” e.g., Fights a • Infinite computational power in the

duel over honor brain to write comprehensive
contracts

Boundedly rational man

*Mind is a scare resource; Intendedly rational, but limitedly so
*Comprehensive contracting is infeasible/ costly
*Need to economize on transaction (contracting) costs

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TCA Assumptions: Opportunism
Social Man (Obedient)
• Works for the group/ relationship,
not for individual self
• Will jump in fire to save another’s
child
• Dealer who will always cooperate
unquestioningly
Economic Man
• Simple self-interest seeking
(maximizes personal payoffs in a
“gentlemanly” way)
• Advance own interest, but will not
violate contracts or oaths/ promises

Opportunistic Man
• Self interest seeking with guile: blatant form of self-seeking
• NOT everyone is opportunistic, but we do not know ex ante who is.
• Adverse selection & moral hazard as in AT (but AT does not assume
• bounded rationality, nor formalizes opportunism)
Q: Is the human nature really so dark?
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TCA Motivation
Bounded Rationality Opportunism
+ (behavioral uncertainty/
Environmental Uncertainty information asymmetry)

Cannot write Incomplete contracts

foolproof contracts will be exploited

Contracts, which were so important relationship management tool in agency theory are
fruitless in TCA. So, writing contracts ex ante (upfront) is ineffective.
Instead, other safeguarding arrangement are required on an ongoing basis (ex post).
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TCA Solutions: Internalization
• Firms can internalize the transaction (function), i.e.,
bring the function involving specific investments/
performance ambiguity in-house.

S Vertical integrate makes sense only

if you are engaging in frequent S
transactions involving specific +
B
assets. Thus, frequency of
transactions is a pre-requisite. But
B usually, most transactions are
frequent/ repeat interactions.
Market Hierarchy

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Markets vs. Hierarchies
Markets
- The term market refers to a
relationship composed of two
independent firms.
- Markets are good at
innovation due to high
powered incentives
- However, a great risk of
opportunism or non-
cooperation.
Hierarchies
- Hierarchy means internal
organization
- Incentives are flat (i.e., do not
change whether one does this
or that). So, employees are
more willing to cooperate/
accommodate
- Hierarchy resolves disputes
through Fiat or command.
Forbearance doctrine means
that the courts will not
intervene to protect integrity
of fiat. So, employees are
forced to cooperate
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TCA Solutions: Monitoring + Contracts
• Monitoring or supervising the partner can reduce behavioral
uncertainty (information asymmetry).

• To that degree, the parties may be able to rely slightly more on

contracts. However, even then contracts are not a great solution
due to their incompleteness/ loopholes

• Information technology (e.g., Electronic data interchange) can be

implemented to monitor partners/ employees

• However, partners/ employees may resisting it as they see it as a

threat to their authority, or as something which undermines their
competence/ importance
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TCA Solutions: Credible Commitments
• Another solution is to ask a partner to make “promises” to not cheat.
• Unfortunately, talk (oral promise) is cheap.
• Hence, a mechanism is required to make credible these promises
• Bilateral (reciprocal) exchange of specific assets can make commitments
credible in business relationships. They “tie the hands” of both the
partners in a relationship – the partners cannot act opportunistically each
other even if they want, because by doing so they risk losing their valuable
specific investments.

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TCA Solutions: Relational Norms
• Norms arise when parties “internalize” each other’s goals,
interests, utilities, values and philosophies,. i.e., the mindset in
short. In channels terminology, we view feelings such as
“trust”, “warmth”, “strong relationship”, “team-feeling” as
being synonymous with norms.
− Shared mindset – Parties work collaboratively
− Taken for granted codes of conduct: “Cooperatively is how we behave
in this relationship”
− Logic of Appropriateness – “Cooperatively is how we ought to behave
in this relationship”
− VS.
− Logic of consequences (e.g., for Bilateral Hostages)

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QUESTIONS? COMMENTS?

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