Manir Zaman, Felix Mavondo, Monash University. Abstract. Introduction. Conceptual Model

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1 Implications of Fit among Partnership Characteristics, Relationship Management, and Organisational Capabilities for the Measurement of Alliance Success A Research Agenda Manir Zaman, Felix Mavondo, Monash University Abstract Strategic fit or alignment is a notion that is deemed crucial in understanding how partnering firms in an alliance can translate their deployment of resources and capabilities into increased performance. This paper presents a testable model by adopting the strategic fit paradigm to examine the factors affecting alliance success. Drawing on gestalt perspective of fit, it is proposed that when fit among multiple variables is considered simultaneously and the impact on criterion variables (e.g. alliance performance) is assessed, fit should be conceptualised and assessed as profile deviation. A number of hypotheses and propositions resulting from the model are put forward. Introduction Due to increasing competitive and uncertain business environment, reliance on strategic alliances and interfirm relationships has grown considerably in recent years. Alliances involve two or more partners sharing and contributing capital, technology, or other firm specific assets through cooperative agreements. An extensive review of the alliance literature reveals that although alliances are growing at 25% p.a. globally, yet alliances have failure rates as high as 70% (e.g., Cravens, Piercy, & Cravens, 2000; Das & Teng, 1997; Parkhe, 1998). Despite somewhat paradoxical nature of the popularity of alliances versus their failure rate, their growth is expected to continue (e.g., Harbison, 1998). Thus, increasing understanding of what firms can do to enhance the probability of success is a fascinating and critical question for both researchers and practitioners. The growing body of anecdotal and empirical literature on interfirm relationships has highlighted the importance of aligning partner s organisational capability in the success of alliance performance but, the attempt to assess and identify the ideal pattern of capability fit on the achievement of a sustainable alliance outcome has remained yet inconclusive. To fill this gap, this paper aims to conceptualise and operationalise the organisational capability and proposes to examine the nature of its influence in the measurement of alliance success. The paper is organised as follows. First, the conceptual model is introduced. Next, the linkage between organisational capabilities and alliance success is discussed. This is followed by a summary of the extant literature emphasizing the linkage between partner selection processes; the management of alliance relationship and alliance performance. Then, a series of hypotheses are presented. After this, the need for the application of Gestalt approach in the assessment of strategic fit is highlighted. The conclusion brings up the final section. Conceptual Model Although there is a large and growing volume of literature on the measurement of success of strategic alliances, this research is fragmented partly because of the absence of a holistic measure of alliance success. Key success factors identified in previous studies for both domestic and international alliances are partnership characteristics (e.g., Hitt, et. al. 2000;

2 Madhok, 1995; Saxton, 1997), relationship management(e.g., Cullen, Johnson, & Sakano, 2000; Hitt et al., 2000; Lorange & Roos, 1993; Saxton, 1997) and the development of good relational capital between partners (Koza & Lewin, 2000; Madhok & Tallman, 1998; Mohr & Spekman, 1994). These studies provide only partial information on success factors because alliance outcome cannot be measured based on ex-ante (formation) and ex-post (management of relationship) factors alone. Relatively, very little attention has been given on understanding how organisational capabilities influence implementation of alliance strategy, and in turn affects alliance performance. The success of alliances stems from each partner s ability to match or align its organisational capabilities with partnership characteristics, and the management of the relationship. Therefore, drawing on the notion of strategic fit, the model we depict in Figure 1 seeks to examine both effect and form of fit between alliance strategy and organisational capabilities of individual partnering firm on alliance outcome both in terms of financial and non-financial results. Strategic fit is an important emerging concept both in strategic management and strategic marketing research (e.g. Venkatraman and Prescot, 1990; Vohries and Morgan, 2003; Xu, Cavusgil, and White, 2006). In simple terms, strategic fit refers to the match between strategy and its content. In the context of alliances, strategic fit implies the efficiency with which organisational resources and capabilities are aligned with the opportunities that an alliance presents. The basic proposition of the strategic fit literature is that the degree of congruence between strategy and its context has significant performance implications. The conceptualisation of strategic fit can be characterised by two major orientations: descriptive and normative (e.g. Venkatraman and Prescot, 1990). Our model is based on normative view because the main focus is to reconcile inconsistent finding about the impact of strategic alliances on firm performance. From a strategic fit perspective, the model proposes that successful implementation of an alliance strategy depends significantly on the existence of matching internal organisational capabilities primarily in the areas of marketing, innovation and learning. Figure 1: Performance Implications of Fit Model Partnership Characteristics Resource complementarity Partnership Compatibility Goal Congruence Relationship Management Trust Cooperation Commitment communication conflict management Organisational capability Fit Market orientation Learning orientation Innovation orientation Alliance Performance Organisational Capabilities and Alliance Outcome Organisational capability is a broad concept with many elements and attributes. Madhok (1997) refers to capabilities as a combination of resources that create higher order competencies. Hoskisson, Hitt & Ireland (2004) refer to capabilities as: the capacity to perform task or activity in an integrated manner. Other scholars (e.g., Amit & Schoemaker,

3 1993, Grant, 1991; Teece, Pisano & Shuen, 1997) have defined organisational capabilities as a firm s capacity to deploy assets, tangible or intangible, to perform a task or activity to improve performance. Examples include the capability to offer customer service or to develop new products, and innovate through learning (e.g., Lorenzoni and Lipparini, 1999). In essence, it is the ability of the organisations to reconfigure and recombine organisational resources with that of the resources and capabilities that are available through partnerships. For example, availability of resources through the alliance is important in developing organisational capabilities but resources alone do not determine successful alliance outcome. It is the pattern and quality of interactions between the organisational learning, innovativeness and employees that would impact upon performance. When organisations do not have the capabilities in transforming alliance resources into valuable products or services, the acquired resources are likely to become overhead, rather than assets to the organisation (e.g., Amit and schoemaker, 1993). We conducted a series of exploratory interviews and discussions with six senior managers of organisations who have formed alliances with other organisations. After detailed discussion, broad agreement was obtained on the importance of a number of generic capabilities for better alliance outcomes such as: commitment to serving customer needs, integration of business functions to serve target market needs, investing in learning, ability to introduce new products/service, capability of product/service differentiation, involvement of top management, involvement of line managers, provide after sales service, flexibility to adapt to unanticipated changes, and the ability to offer consistent quality. Not surprisingly, these capabilities are centred on aspects covered in previous research on marketing orientation, learning orientation and innovation orientation. Therefore, we conceptualise organisational capabilities as the ability of the partnering firm to reconfigure and recombine alliance resources and capabilities in order to achieve the desired performance. These capabilities include market orientation, learning orientation and innovation orientation of a firm. Partnership Characteristics, Relational Dynamics and Alliance Success Previous research suggest that key success factors for both domestic and international alliances are partnership characteristics (e.g., Hitt et al., 2000; Madhok, 1995; Saxton, 1997, relationship management (Cullen et al., 2000; Hitt et al., 2000; Lorange et al., 1993; Saxton, 1997) and the development of good relational capital between partners (Koza et al., 2000; Madhok et al., 1998; Mohr et al., 1994). Each component of these factors are now discussed very briefly. Partnership Characteristics Selection of an appropriate partner is a very critical decision in an alliance engagement (e.g., Hitt et al.,2000). Das & Teng (1997) suggest that there must be a certain degree of fit between the partners, which in turn increases the probability of achieving positive alliance outcomes. The literature recognises that resource complementarities, partnership compatibility, and goal congruence jointly capture the key aspects of partnership characteristics that are integral for alliance success. One of the most commonly cited motives for forming alliances by firms is to gain access to complementary resources (e.g., Chung, Singh, & Lee, 2000; Varadarajan & Cunningham, 1995). Complementary resources allow firms to combine dissimilar resources with their own resource sets creating a resource bundle that provides unique and difficult to imitate value (e.g. Harrison et. al., 2001). Partnership compatibility reflects complementarities in senior management philosophies and practices, alliance experience, organizational culture, and even firm size. Compatibility between

4 partners fosters and facilitates the reconciliation of differences between partners (e.g., De la Sierra, 1995). Kanter (1997) concludes that the compatibility of partners to adapt to each other s cultures, management practices, and procedures are likely to lessen the probability of alliance failure. Incompatibility among partners may lead to a counterproductive working relationship characterized by strife and suspicion. Goal congruence is a crucial element which affects the extent to which orientations, abilities and activities of partners can be integrated successfully (e.g., Spekman, Isabella, & MacAvoy, 1998). In an alliance context, partners may have private and common aims. But, any private aim must not be incompatible of the goals of the alliance itself. Alliance success depends on the establishment and execution of clearly defined goals, and to achieve these goals, well-defined procedures must be clearly developed by the partnering firms. Relationship Dynamics Extant literature identifies commitment, cooperation, communication, trust, and conflict management as the key determinants for the development of an effective long term inter-firm relationship (e.g., Cobianchi, 1994; Cravens, Shipp, & Cravens, 1993; Spekman et al., 1998). Scholars depict trust as an important lubricant in organisational relationships (e.g. Dwyer, Schurr, & Oh, 1987; Ganesan, 1994; Morgan & Hunt, 1994). Trust can increase cooperation, improve relationship flexibility, augment quality of relationship, and lower costs of coordinating activities (e.g., Smith, Carroll, & Ashford, 1995). Previous studies on alliances have identified trust as one of the most important critical factor affecting alliance performance (e.g. Bleeke & Ernst, 1993; Harrigan, 1986; Saxton, 1997). Cooperation offers significant advantages for alliance partners lacking in particular competencies or resources (e.g., Child and Faulkner, 1998; Dyer and Singh, 1998). Lado, Boyd and Hanlon (1997) suggest that firms exhibiting cooperative behaviour seek mutual benefits by pooling complementary resources, skills and capabilities. Commitment is a critical element of relationship capital (e.g., Madhok, 1995). Committed partners are likely to be more cooperative, communicative and flexible and demonstrate persistent willingness to make future relation- specific investments (e.g., Anderson & Weitz, 1992). Studies have also found that the alliance partners can maximise their returns by establishing relational norms through commitment that include both flexibility and solidarity (e.g., Gundlach & Murphy, 1993; Mavondo & Rodrigo, 2001; Mohr & Spekman, 1994). In order to achieve the benefits of collaboration, effective communications between partners are essential (e.g.,cummings,1984; Ohmae,1989). Successful communication is also crucial in resolving disagreements; speeding decision-making and achieving shared understanding of alliance goals. Inherent interdependencies and diverse goals of the partnering firms can create conflict in an alliance. When firms build relational capital in conjunction with an integrative approach to managing conflict, they are able to achieve alliance objectives (Kale, Singh, and Perlmutter, 2000). The foregoing arguments lead to the following hypothesis and propositions: H1(a-b): Resource complementarity is positively associated with (a) alliance success and (b) organisational performance. H2 (a): Higher level of partnership compatibility is positively related to alliance performance. H2(b): Higher level of partnership compatibility is positively related to organisational performance. H3: The greater the degree of goal congruence between the partners, the greater the degree of alliance performance and overall organisational performance. H 4(a-e): Alliance success is a function of higher levels of (a) trust, (b) cooperation, (c) commitment, (d) communication, and (e) conflict resolution capability. H5 (a-e): Alliance performance is a function of higher levels of (a) trust, (b) cooperation, (c) commitment, (d) communication, and (e) conflict resolution capability. H6: Simultaneous co-operation and competition will enhance alliance success. H7 (a-e):

5 Resource complementarity is positively associated with (a) trust, (b) cooperation, (c) commitment, (d) Communication, and (e) conflict resolution capability. H8 (a-e): Partnership compatibility is positively associated with higher levels of (a) trust, (b) cooperation, (c) commitment, (d) Communication, and (e) conflict resolution capability. H9 (a-e): Goal congruence is positively associated with higher levels of (a) trust, (b) cooperation, (c) commitment, (d) Communication, and (e) conflict resolution capability. Proposition 1: Organisational capabilities influence alliance performance. Proposition 2: Organisational capabilities influence overall organisational performance. Proposition 3: The association between partnership characteristics, relationship management and alliance success is mediated by the alignment of organisational capabilities of the alliance partners. Gestalt Approach to Assessing Strategic Fit The gestalt approach is based on the principle of synthesis of various organisational attributes and their combined effect on firm performance. The approach attempts to analyse the various components of organizations simultaneously, without assuming any directionality of relationship. Drazin and Ven de Ven (1985) conclude that high performing organizations had structures that were structurally consistent, while organizations with inconsistent structures were identified as low performing. Their concept of consistency was operationalsied as the deviation from an ideal profile (based on the characteristics of successful organisations and they argued that the larger such deviation is, the lower the firm s performance. Other researchers have also suggested that gestalts (or classifications, in general) are better than contingency models when it comes to theory building, because of their intuitive appeal and ability to explain complex, holistic phenomena within organisations (Doty and Glick, 1994). This literature specifies that when fit among multiple variables is considered simultaneously (as in holistic study of the relationship between alliance strategy and organisational capability) and the impact of criterion variables (e.g. alliance performance) is examined, fit should be conceptualised and measured as profile deviation (e.g. Doty, Glick, and Huber 1993; and Venkatraman and Prescot, 1990). A profile deviation approach views fit between alliance strategy and organisational capabilities in terms of the degree to which the organisational characteristics of individual partner differ from those of a specified profile identified as ideal for implementing the alliance strategy (e.g. Venkatraman, 1989, Zajac, 2000). Ideal profiles are defined as configurations of organisational characteristics that fit with the implementation requirements of a particular strategy and thus produce high performance (e.g., Gresov, 1989; Venkatraman, 1990). From this perspective, organisational capability fit with alliance strategy can be defined as the degree to which a firm s capability profile differs from that of a successful firm that achieves superior performance by arranging alliance activities in a way that enables the implementation of a given alliance strategy. As for alliances, ideal profiles cannot be specified from existing theory, the configuration literature advocates assessing fit with empirically derived ideal profiles (e.g. Gresov, 1989; Ketchen, Thomas and Snow, 1993). In the context of organisational capability fit with alliance strategy, this approach requires the identification of high performing alliances implementing a given strategy and a calibration of their alliance characteristics/attributes as an ideal profile for implementing that strategy (e.g., Drazin, 1985;Venkatraman, 1990).

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