the elements of value network alliances â€” - interactive digital media

A Deloitte Research Technology, Media and Telecommunications Study

The Elements of Value Network Alliances—Strategies for Building Alliance Partnerships

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Table of ContentsExecutive Summary ........................................................... 1

The Rise of the Networked Firm ....................................... 2

The Pursuit of a Network Alliance Strategy ................... 4

Structuring an Alliance Partnership .................................. 6

Learning to Lead the Knowledge Race ............................ 7

Pulling it all Together – Guidelines for Structuring and Forming Value Network Alliances . ......................... 10

Taking the Next Step ....................................................... 12

Endnotes .......................................................................... 13

As used in this document, “Deloitte” means Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.

1Deloitte Research – The Elements of Value Network Alliances

Executive Summary

Across the technology sector, in an era where the “open” business model is dominant, co-development partnerships make big promises but can often fail to deliver value. To address this issue, this research study illustrates how advances in network and alliance theory can ensure the deployment of a partnership strategy fulfi lls its value-based objectives.

Today, the number of corporate alliances continues to rise - by as much as 25 percent a year - and now accounts for nearly a third of many fi rms’ revenues and value. Yet some studies suggest the failure rate of alliances stands at an incredible 60-70 percent.1 This worrying statistic prompts many questions on why so many fi rms struggle to generate success from an alliance strategy. For instance, what are the general concerns with how network alliances are structured? Can the implementation of an alliance strategy be simplifi ed? How can alliances consistently deliver value? This study initially focuses on the formation and structure of the alliance partnership, which will be followed by an exploration of managing and measuring the performance of network alliance partnerships.

The study reveals a number of important issues infl uencing alliance strategies today. To begin with, as companies embrace convergence-based product innovation, the proliferation of the “open” business model is widely evident across the technology, media and telecommunications (TMT) sectors. Underpinning this trend is the use of networks and alliances to generate and capture value beyond a fi rm’s internal boundaries. Networks and alliances, it seems, are the gateways to success for those pursuing an “open” strategy. But what is really known about the formation and management of such an “open” approach? Signifi cant progress on this question can be made by exploring current research on the management of network partnerships.

A number of key fi ndings can then be synthesized into a framework for capturing value through network partnerships. This goes some way to providing a practical guide for the fi rm implementing an “open” co-creation strategy.

The constructs of this framework, shown in fi gure 1, are broadly categorized into three organizational capabilities shown to be critical to fi rms implementing a value network strategy. This is namely the structuring, forming and management of a network alliance partnership. Each is dynamic in nature and represents, at the broadest level, organizational and strategic routines through which fi rms can achieve new resource confi gurations to generate value from an alliance partnership. Each has a number of elements that require appropriate management to ensure effective value capture.

To explore these capabilities in more depth, the fi rst installment of the study essentially segments the framework into two parts and focuses on the issues of alliance structure and formation. In conclusion, a series of management guidelines are provided. These simple rules can then be used as appropriate mechanisms for fi rms implementing a value-network strategy.

Figure 1. A Framework for Generating Value from a Network Alliance Strategy

Network Alliance

Structure

Network Stability

Strategic Intent

Governance Structures

Network Alliance

Formation

Relation Dynamics

Alliance Scope

Social Capital

Network Alliance

Management

Hub Firm Orchestration

Knowledge Transfer

Learning Dynamics

2 Deloitte Research – The Elements of Value Network Alliances

The use of co-development networks to spark innovation and generate value continues unabated across the technology sector. Precipitated by an almost gadarene rush to embrace “open” business models as the cure-all for sputtering growth engines, fi rms are looking more and more to research and development (R&D) alliances and partnerships as the gateway for product-based value generation. However, a number of questions continue to surround their successful adoption. To begin with, are they truly a panacea for growth or just another false dawn? Indeed, if networks promise to consistently deliver value, why do so many fail when so much effort has been spent on ensuring their success? Moreover, what can fi rms do to minimize the operational risks of co-creation and derive competitive advantage from a network strategy?

After three decades of research, no clear-cut answers to these questions have emerged. However, the use of network alliances throughout this period has become an established norm in organizational strategy. This is particularly evident across the TMT sector. From the advent of technology-based entrepreneurship and the use of networks to establish a new enterprise, through to “big tech” corporations breaking free from vertical integration, networks have always played an important role in delivering value to the market. Furthermore, as market conditions shift and change, capability requirements follow suit. Using network alliances that can facilitate access to scarce resources then becomes an attractive strategic proposition. With profi tability often dependent on a fi rm’s ability to create and commercialize new technologies quickly and effi ciently, accessing skills beyond the borders of the organization is seen as critical in driving new revenues. The impact of doing so can lead to a disaggregation of value chains and as a consequence, many functional activities can then be undertaken by a multitude of different fi rms.2 All said, using network alliances to generate value seems more vital than ever.

The Rise of the Networked FirmThe “Open” Business Model Takes HoldManagement research has often viewed the concept of inter-fi rm linkages, and the resulting collaboration networks, as an opportunity to stimulate innovation through access to external knowledge.3 Lately, this has been explored in more depth and the topic of innovation through partnerships has certainly come back into vogue. In particular, Berkeley professor Henry Chesbrough has captured the imagination of many executives through a number of articles extolling the benefi ts of an “open,” distributed business model to fuel the growth engines of otherwise stagnating fi rms.4 Chesbrough makes a compelling case for developing networks and partnerships to reduce product-development costs and boost revenues in the process. Examples of this approach are shown across a diverse set of fi rms. Prominent among them are Procter and Gamble’s Connect and Develop program and IBM’s Open Source strategy - both successful examples of how to move beyond organizational boundaries to access new skills and resources and feed growth.

In parallel with this work, a broader consensus has emerged, suggesting that co-development network partnerships, and in particular those termed as “loosely coupled”5, play a central role in successful innovation-driven fi rm- growth.6

Relationships and partnerships that a fi rm can forge from this network formation can then culminate in acquiring resources and capabilities for sustaining competitive advantage.7 This underpins the basis of the “open” argument, although those who see the use of open business models as a superior paradigm for driving growth have tended to remain focused at the relations and outcomes levels. In contrast, the precise elements that deal with the critical capability issues involved at the heart of the “open” model - that of developing, deploying and managing a network alliance strategy - have not been suffi ciently documented.8 This may seem surprising since the numbers reported to date support the notion that network alliances are an effective vehicle for economic value generation.9 On the other hand, some studies suggest that the failure rate for alliances is a staggering 60-70 percent.10 Networks, it seems, are fragile and fraught with risk in operation and performance. Success is consistently hard to come by, and many executives can be left frustrated when attempting to go “open.”


Understanding the ChallengesThe biggest challenges in achieving success from a network strategy come from two issues: resource limitation and the actual management of the network alliance once formed and implemented. Although progress has been made in the past on identifying successful attributes for sector-specifi c alliance management - in particular within the automotive industry and the adoption of Japanese supply chain management practices11 - no consistent approach has emerged on the specifi c routines, processes and structures with which fi rms build and operationalize network alliances across the TMT sector.12 This study aims to provide clarity on these issues, beginning with a focus on the structure and formation of alliance partnerships. This in turn provides guidance on how the risks of alliance failure can be mitigated and places the issue within the broader topic of generating competitive advantage through a value-driven process context. Networks can then be viewed as a vehicle to aggregate resources that are no longer effective in isolation, leveraging group-based advantages along the way. Network alliances are then seen as a critical mechanism for generating value in volatile markets like the technology sector.

To understand this process of structure and formation, a number of key factors must be investigated. These include: the motivating factors behind forming a network and the expected benefi ts to be accrued, the types of alliance structures commonly in use, and the issues of learning and trust to offset the risks of opportunism that may be lurking in the background of the alliance membership. Providing guidance in each of these areas should bolster confi dence at the boardroom level and dispel the notion that, while the deployment of a value network strategy continues to promise much, in reality, it can fail to deliver competitive advantage.


Firms normally enter an alliance on the back of one basic assumption: that if two parties work together, they will achieve more than if they remain apart. But depending on scope, ownership and objectives, there are many models of collaborative partnerships in use today. From basic subcontractor agreements, through co-creation network clusters and alliance relationships, to full-blown joint ventures, there are a large number of options available. As with any exploration into the pros and cons of pursuing a particular strategy, uncertainty abounds at the initial decision stages. It can therefore be useful to provide some basic, broad defi nitions of alliance networks with which to frame the question of why fi rms should pursue a collaborative strategy. Some defi nitions of alliance networks include:

A voluntary arrangement between organizations to share skills and resources required to create and capture value from technology-based innovation.13

Or indeed simply:

A formal agreement that establishes a relationship with two or more independent entities… 14

And in the context of today’s TMT sector*, where convergent technologies permeate a turbulent market, a network alliance can be thought of as:

An independently initiated interfi rm link that involves exchange, sharing or co-development...15

The Pursuit of a Network Alliance Strategy

Motivating FactorsThe motivations for deploying a network alliance strategy can generally be grouped across three main categories: strategic transformation-related, transaction costs-related and learning/knowledge-related. Taking each in turn, much of the prior research into these areas has focused on the enhancement of a fi rm’s competitive positioning;16 the use of alliances as a means to reduce the production and transaction costs for partner fi rms;17 and to increase the learning capacity required to accumulate new skills or capabilities from alliance partners.18 Additionally, motivations may also differ signifi cantly between those fi rms considered technology leaders in their fi eld and those considered “followers.” With the former, it is reasonable to expect leaders to want to remain “solo” and thereby protect the know-how that facilitated their market dominance. Conversely, in the case of followers, such fi rms may to want to forge alliances in order to move ahead of the leaders in the technology-development stakes.19

The Benefi ts of Network FormationNetworks and alliances developed to generate value are primarily associated with two distinct benefi ts for the fi rm employing them. First, increased access to otherwise scarce skills, resources and physical assets, as well as new markets and new technologies, can be achieved. Second, access to new channels of knowledge, “know-how” and information serves as a platform for novel insight to problem solving and idea generation. In addition, new learning capabilities can be developed and the fi rm’s existing “absorptive capacity” (its ability to assimilate and learn from new knowledge) enhanced. Here, it is important to distinguish “know-how” from information, with “know-how” consisting of accumulated skills and expertise that entails a signifi cant tacit (or noncodifi able) element.20 Firms also use alliances to exploit economies of scale, reduce operation costs and share risk or uncertainty with their partners.21 And of course if orchestrated appropriately, networks can provide the platform for improved growth and innovation performance.22

Deloitte Research – The Elements of Value Network Alliances

* Network formation in other industries has also long been evident with some high profi le examples such as the US automobile industry. Here, a strategic approach to forming relationships with component suppliers wherein fewer suppliers, longer term alliances and network partners involved in the design and manufacture process has signifi cantly improved competitiveness. See, Dyer, J.H. (1996), “Specialized supplier networks as a source of competitive advantage: Evidence from the auto industry”, Strategic Management Journal, 17: 271-291


Gaining Competitive Advantage through CollaborationMost network alliance formation is driven by strategic transformation-related goals such as innovation-based growth objectives. Key questions on how well a fi rm can execute against these strategic goals tend to focus on comparative performance and profi tability measures. As such, strategists have often viewed fi rms as autonomous entities whose success is bound by their market’s industry structure, degree of competition and barriers to entry. The sources of competitive advantage are then focused at the level of the fi rm’s competitive environment and its opportunities and threats therein.*23 Complementing this external positioning perspective is the notion of a fi rm’s resources being used to build sustainable competitive advantage by leveraging internal skills, competencies and capabilities.24

Both perspectives have their merits from an alliance standpoint. For instance, the task of examining external market concentration and market power is of obvious benefi t to fi rms formulating an alliance strategy. Achieving competitive advantage through distributed channels to market, such as network alliances, can then have a direct impact on the profi tability of the fi rm. In other words, utilizing a network alliance to overcome a market’s idiosyncratic barriers to entry can be an effective way to sustain competitive advantage.25

On the fl ip side, fi rms thinking about an alliance strategy as a means of gaining market share should also consider the impact the resources owned or controlled by the fi rm will have on its competitive environment. Simply put, when a fi rm’s resources have the potential to be valuable, rare, hard to copy and diffi cult to transfer between fi rms, the fi rm has the potential to sustain competitive advantage. **26 Moreover, focusing at this resource level has the added advantage of providing a more stable basis for strategy formulation. Especially when external markets are in a state of fl ux, as they have been across the TMT sector for a number of years.27

Ultimately though, viewing alliances as a means for gaining market share from a resource perspective raises the question of how a fi rm’s capabilities can evolve to create value.28 Can a network alliance be viewed as a specifi c resource containing skills and knowledge that cannot be easily transferred or replicated elsewhere? In theory, yes, as networks are usually created through an idiosyncratic process, via the combination of unique alliances. And it may be true that in some instances, they are relatively diffi cult for rivals to imitate or substitute.29 A fi rm’s choice of network partner fi rms from a supply or demand side can then enlarge (or constrict) this provision of “hard-to-copy” resources and capabilities.30 Furthermore, companies forming network relationships are then able to pinpoint what specifi c resources generate value and better understand their particular attributes. From this understanding alone, networks and the capabilities they generate can be viewed as a practical way to sustain competitive advantage from a resource perspective.

Balancing the Rewards with the RisksAlthough the benefi ts can be signifi cant, network alliance formation also carries a number of potential threats to success. These include being locked into unproductive relationships that restrict a fi rm’s freedom to develop more lucrative alliances elsewhere. Notwithstanding, relational risks can also include lack of strategic fi t in terms of complementary capabilities; lack of organizational fi t in terms of culture, internal processes and systems; and a general lack of trust between the partner fi rms. Added to this list of woes, concerns over inappropriate alliance governance systems and a lack of fl exible knowledge exchange processes can prevent any network alliance from getting off the ground in the fi rst place. Thus, networks represent a source of both opportunity and constraint. If managed appropriately in periods of uncertainty or turbulence in the market, they can elevate in strategic signifi cance to the fi rm.31

* This view is taken from Michael Porter’s work on strategy and his development of an industrial organization framework which views competition rather than cooperation as the dominant state in fi rm strategy. This model is focused more on overall industry forces rather than specifi c actions of industry players and as such regards alliances as mainly collusive arrangements. See Porter, M.E. (1980), Competitive Strategy, Techniques for analyzing industries and competitors, New York: Free Press.

** The Resource-Based View of the fi rm has its roots in the work of British economist Edith Penrose’s The Theory of the Growth of the Firm (1959) which adopts an inward-looking view that conceptualizes fi rms as heterogeneous entities consisting of bundles of idiosyncratic resources. Latterly, this theory has been advanced by the works of Richard Rumelt (1984) and Birger Wernerfelt (1984) who argued that the internal development of resources, the nature of those resources and the different methods of employing them, are related to fi rm profi tability.


Network alliances can be structured in a variety of ways. Most can be categorized as formal or informal or more commonly, as equity or non-equity based. From this, the general nature of alliance relationships can be thought of as simply collaborative or opportunistic with interactions classed as either collegial or competitive.32 Analysis at this level can prove a useful exercise in determining how appropriate the structure is and how best the interactions should facilitate the alliance formation goals.

Beyond this level of analysis, the general focus of alliance structures remains centered on supply or demand side relationships along a fi rm’s value chain.* For instance, the recent trend of convergence-based product development across the TMT sector has led to a proliferation of supply and demand networks structured around specifi c goals related to research and development (R&D) needs. These networks predominantly include coalitions formed to meet a common technology objective. From this, clusters of alliances emerge around central, “hub” fi rms. In turn, these clusters provide specifi c services and resources required to meet the particular business objectives of the hub fi rms.**33

A Note on Equity – and Transaction – based StructuresGovernance mechanisms play a key role in structuring network alliances and can be linked to other relational attributes such as network membership and centrality. Broadly speaking, network governance includes the rules and norms that govern the network’s operations. These can be either codifi ed in the form of a formal contract or developed through simple tacit understandings that evolve over time.34 Network membership refers to the composition of the network, including resources and access to resources. Network centrality relates to the positioning and role of the fi rm leading the network (usually called the “hub” fi rm), which is normally located at the center of the partnership structure.

Analysis at these levels can enhance understanding of the hub fi rm’s industry structure, and provide insight on the competitive market environment. Moreover, by incorporating the role of strategic networks within the particular market environment, an enhanced understanding of market concentration and power between competitor fi rms can be achieved.

Structuring an Alliance PartnershipA Note on Equity and Transaction-based StructuresExploring governance mechanisms further, the issue of managing transaction costs has proven to be infl uential in determining appropriate methods for implementing a network alliance strategy. This perspective emphasizes two main benefi ts for the hub fi rm: effi ciency from reducing the governance cost of a transaction and strategic from optimizing a series of relationships within a network. Achieving these benefi ts requires the use of transaction based governance structures when transaction costs are high and the threat of opportunistic behavior from some of the network partners is likely.

The choice of transaction structure has a signifi cant impact when aligning the interests of the network partners and ensuring proper monitoring of their behavior.35 Most can be categorized as equity-based. The advantages the presence of equity brings are twofold: a network stabilizing effect and much closer interaction between network partner fi rms. This can lead to enhanced exchanges of knowledge (particularly tacit) - more than would normally occur in standard, contractually based alliances.36 From a costs perspective, equity-based alliances are also thought to be effective in alleviating onerous transaction costs. Two variations of these structures are useful in this instance. The fi rst is the “mutual hostage” approach in which shared equity aligns the interests of the network partners. Since ex-ante agreements have been made to the equity alliance, concern over investment again reduces the possibility of opportunistic behavior.37 A common second structure is the use of straightforward hierarchical supervision by the investing partners to oversee the day-to-day functioning of the alliance and to address anomalies as they emerge.

The use of transaction-based structures is in marked contrast to market exchange structures, which should be preferred when contracts are readily written (and enforced) and transaction costs are low.38

* Examples of specifi c network structures can include those tied directly to a fi rm’s value chain (VCAs – value chain alliances), which are the vertical links between independent fi rms operating at successive stages in the production chain. Several advantages are to be had with this structure, primarily on providing high levels of differentiation and integration in markets where risk and uncertainty are high. Specialist capabilities are then easily leveraged more effectively than they would be within standard “arms length” contract arrangements. See Gulati, R. (1998), “Alliances and Networks”, Strategic Management Journal, 19: 293-317

** A good example of this type of multiple network structure is Sony’s development network for “Blu-Ray” DVD technology that included an alliance with NEC who also partnered with Toshiba in developing the rival HD-DVD technology. Firms such as Pioneer, Panasonic and Philips have been supporting Blu-Ray technology in the hope it will become the standard DVD technology of the future, much in the way VHS eventually prevailed over the rival Betamax technology (somewhat ironically developed by Sony) in the 1970s/80s. Sony has also gone to great lengths in developing a Blu-Ray disc association alliance network with seven fi lm/media studios (including Warner, Paramount and potentially soon, Universal) who will support the technology by shipping content in Blu-Ray format based on assurances of tighter digital rights management provided by Sony (See “Pressure mounting on Universal to support Blu-Ray”, www.endgadget.com 7/17/07).


In many instances across the technology sector, fi rms will pursue a network alliance strategy principally to gain knowledge and learn from those partner fi rms involved in the co-creation process. Companies pursuing this objective can create organizational capabilities by integrating knowledge and learning within and across their network alliances.39 From this process, analysis of past organizational experiences can be used as the platform for developing future actions. Capability development can then become enhanced when fi rms develop appropriate routines and processes that can identify, acquire, assimilate and disseminate technological knowledge throughout the alliance partnership. However, a number of risks that may lead to a network failure are apparent during this stage.

Managing the Threat of Opportunistic BehaviorIn normal circumstances, network partner fi rms generally collaborate with the view to expanding earnings which can then be shared according to prior agreements. However, in doing so, partners may also strive to accumulate as much information or capabilities from each other as possible. As such, the risk of opportunistic behavior from other fi rms in a network alliance can be a serious threat to stability.40 In some cases, it is not uncommon for a single alliance partner to participate in a network solely to accrue specifi c knowledge or information without contributing to the overall goal of the network partnership. This can lead to private benefi ts that outweigh the overall common benefi ts of the alliance. In extreme examples, a learning race can take place wherein each network partner tries to learn as much as possible from the other’s assets before exiting the alliance.* Of equal concern, this sort of opportunistic behavior can also result in opportunities for fi rms to glean competitive intelligence from alliance partners. This can include information on strategic planning and future technology development goals, competitive benchmarking data, identifi cation of key personnel (who may then be enticed to leave), and codifi ed standard procedures data. Deep exposure to tacit knowledge and the surrounding skills and routines in use by partner fi rms is also to be expected from network participation and therefore placed at risk of being codifi ed for less than altruistic purposes.41

Learning to Lead the Knowledge Race

To mitigate the threat of such opportunism, fi rms seeking alliance partners for technology development may do well to ensure their strategic goals converge while their competitive goals differ. If partners are also competitors in end-product markets then the threat of each fi rm attempting to internalize each other’s knowledge may lead to the goals of the alliance being compromised. Rather worryingly though, it seems if inter-fi rm learning is part of the alliance scope then it will almost certainly be accompanied by both competitive and cooperative behavior by alliance partners.42 Hence, in some instances, partner fi rms with substantial competitive overlap will want to limit the alliance scope to control knowledge sharing while still attaining the alliance goals.

* This situation has been noted in the past, perhaps most famously in documented alliances between US and Japanese fi rms in the 1980s and 90s (See Doz, Y. and Hamel, G. (1998): Alliance advantage: The art of creating value through partnering, Boston, MA.: Harvard Business School Press).


The “Trying to Learn, Trying to Protect” Dilemma

Successfully meeting the objectives of a network alliance strategy often means one fi rm putting their proprietary technological knowledge at risk. Overcoming this concern requires maintaining a balanced, open knowledge exchange. The challenge is to then meet the product development goals while controlling knowledge fl ows to avoid unintentional leakages of valuable technology. To exchange knowledge effectively, each of the fi rms involved should have adequate and reasonably similar learning capacities to one another. It is likely that the alliance objectives will be compromised if there is a mismatch in terms of each fi rms’ capability to absorb new knowledge.43

Furthermore, in many cases where fi rms are enticed into alliances in the hope of winning a “learning race” - where the use of resources is determined by the expected benefi ts related to the learning - an underlying tension is usually present across the network partnership. This is often characterized by a “trying to learn, trying to protect” dilemma with alliance partners seeking to each learn and appropriate as much knowledge as possible while also trying to protect some of their own core capabilities. In this situation, determining the scope of the network alliance at the outset of the partnership can help provide more protection to exchange knowledge freely and limit opportunism. The narrower the scope of the alliance, the less likely opportunistic behavior will occur. Conversely, a more protective governance structure can allow for a broadening of the alliance scope. Firms in this instance normally use an equity-based joint venture when the scope of the alliance is broad. As previously discussed, this structure is effective in promoting knowledge sharing and ensuring proprietary knowledge protection.

One fi nal risk with mismatched learning capacities is the potential for partner fi rms’ capabilities to resemble one another over time as the levels of interaction increase in an alliance. Hence, there is a danger that the rareness and the “hard-to-copy” aspects of a resource will be threatened and that the partner with the greater learning capacity will eventually capture the biggest share of economic returns.44

Building Social and Relational CapitalIn sectors where uncertainty precludes stability in strategic planning, collaborative networks can enable fi rms to overcome the risks and costs of specialization through internal development. However, alliance fi rms need to establish trust to offset the risks of perfi dious network participants appropriating the fully evolved capabilities of partner fi rms without absorbing the prior costs of R&D. One way of building trust is to foster suffi ciently deep ties between the network players to ensure opportunism is reduced.45

This is an important concept within network analysis and social networks in particular (those networks built on social contacts between fi rms). Here, the need for fi rms to be fully embedded within the network and the notion of trust being used to mitigate any moral hazards at the outset of the partnership is prominent. Consequently, trust in this instance refers to the confi dence that a fi rm will have that a network partner will not exploit the vulnerabilities of another.46


Taking this further, the degree to which partner fi rms are comfortable and willing to rely on each other during network activities relates to their “relational quality.”47 This concept incorporates trust but goes further, involving other factors such as the degree of compatibility of corporate cultures, decision-making styles and similarities in general worldviews, etc. In gauging the level of relational quality existing between two fi rms, four elements are critical:

• Any previously demonstrated trustworthiness based on the partner fi rms’ past experiences of dealing with each other.

• The process of negotiation at the outset of the deal, which can enhance or erode comfort levels and confi dence/trust between the fi rms. At this stage, opinions are formed about each fi rm’s organizational and technical capabilities and ethical behavior. All of which will infl uence trust levels.

• The direct experience of each partner fi rm’s behavior once the alliance is in operation. This will act as a bellwether on how they view each other’s trustworthiness when faced with overcoming challenges during operations.

• The impact of each partner fi rm’s behavior outside the context of the alliance will also affect each fi rm’s perceptions and attitudes regarding each other’s trustworthiness and reputation. A more revealing insight into ethics and values in practice will then be afforded each partner fi rm.

Enhancing relational quality at these junctures can lead to successful network alliances by placing trust at the forefront of the network management process. This can then provide opportunities for each fi rm to collaborate beyond the initial scope of the alliance agreement. Doing so can lead to further value creating activities and ease any potential confl ict resolution that may arise during the day-to-day running of the network partnership.48

Figure 2. The Critical Elements of Relational Quality

Prior Trustworthiness

Partner Firm Behavior During

Alliance

Relational Quality

Levels of “Comfort”During

Negotiations

Partner Firm Behavior Outside

the Alliance

Monetizing the Good WillIn a social networking alliance, the formation of trust can also be a positive force for lowering the transaction contracting costs incurred in gathering information in more formalized alliances. In this instance, any potential transaction costs associated with reputations being sullied and/or levels of cost associated with contracts in exchange relationships can be reduced if solid levels of trust are evident within a socially-based alliance formation. Network partners may then also defer on the costly exercise of developing, monitoring and enforcing intricate contracts. Finally, the presence of inter-fi rm trust can also increase the effi ciency of intra-network related tasks with fi rms being able to collaborate closely without having to adhere to costly formalized hierarchical controls.49


This fi rst part of a study on value network alliances has focused on the initial structuring and forming of a network alliance strategy. Diverse issues across the fi elds of strategy, transaction-based economics and knowledge management were identifi ed and drawn together into a framework for capturing value from collaborative partnerships. Summarizing these research fi ndings into a series of guidelines can be useful to inform the executive decision-making process on the adoption of an “open” business model strategy. These guidelines can be simply summarized are as follows:

Pulling it all Together – Guidelines for Structuring and Forming Value Network Alliances

Figure 3. Alliance Structure and Formation Capabilities

Network Alliance

Structure

Network Stability

Strategic Intent

Governance Structures

Network Alliance

Formation

Relation Dynamics

Alliance Scope

Social Capital

Align on Strategy and ScopeIt should go without saying but fi rms embarking on a network alliance strategy should be very clear at the outset on the overall strategic goal behind the proposed collaboration. Aligning on objectives and scope ensures opportunism and the potential for competitive risks can be minimized. Companies should therefore be clear on the motivations for deploying a network alliance strategy and should determine:

• Whether the objectives of network alliance formation are primarily to build market share, reduce operations costs or accumulate new skills and capabilities from partner fi rms

• From this determination, the scope of the alliance must be carefully planned – strategic goals should always converge but competitive goals can differ

• Those partner fi rms with signifi cant competitive overlap in technology development may want to limit the alliance scope to control the level of knowledge shared without jeopardizing the alliance goals

Get the Governance RightSuccessful network alliance partnerships hinges on how fi rms operate and collaborate within the boundaries of their alliance objectives. Selection of the appropriate governance mechanism is critical to aid this process. Firms should therefore be mindful that:

• Formal structures that are equity-based can have a positive effect on stabilizing the network partnership resulting in more positive interaction between alliance partners

• Shared equity alliances help align the interests of the partner fi rms. The “mutual hostage” of equity eases the concerns of opportunism in a network partnership.

• Informal structures can be a powerful pathway to alliance success and work best where high levels of trust are in evidence between the partner fi rms. Collaboration can often be enhanced and productivity boosted when partner fi rms have enough confi dence in each other that formal governance structures are thought unnecessary.


Manage the Learning DynamicNetwork partnerships thrive on an open knowledge exchange between the partner fi rms. More often than not, this means an imbalance in risk across the alliance membership when proprietary technological knowledge is potentially up for grabs. How to maintain an open, collaborative environment is crucial. Hence:

• Be sure each of the network partner fi rms has similar learning capacities to each other. Opportunism risks will be elevated if there is a mismatch in terms of each fi rms’ capability to absorb new knowledge.

• Minimize the potential for “learning races” to occur. The network hub fi rm should carefully balance an open collaboration environment with controlled fl ows of knowledge to avoid any valuable knowledge leaks occurring.

• Focus on the scope of the network alliance at the outset of the partnership. This can help provide more protection to exchange knowledge freely and limit opportunism.

• Consider the use of equity-based partnerships when the scope of the alliance is broad. This is an effective structure when promoting knowledge-sharing and ensuring proprietary-knowledge protection.

Build Trust and Success will FollowIn volatile market environments developing trust between network partners can offset the risks of opportunism, reduce operational costs and help foster the creation of a successful alliance strategy. One way of building social capital is to cultivate suffi ciently deep ties between the network players. Some steps on the way to a successful trust strategy include:

• Selecting network partner fi rms on the basis of degree of compatibility of corporate cultures and decision-making styles - an important fi rst step in the trust process.

• A focus on the prior relational quality attributes of the alliance partners can enhance the comfort and confi dence levels between each partner fi rm. This will then provide opportunities for each fi rm to collaborate beyond the initial scope of the alliance agreement.

• Hub fi rms should astutely manage behavioral patterns within and outside the context of the alliance. This will help strengthen attitudes on trustworthiness and reputation and ease confl ict resolution that may arise during the day-to-day running of the network partnership.


Taking the Next StepAt Deloitte we have a deep understanding and proven track record of developing and managing the formation and implementation of a value network alliance strategy. The Deloitte Enterprise Value Map™ is powerful tool in helping companies identify areas where alliances can drive shareholder value—helping them understand the impact of alliances on long-term revenue growth, operating margin, asset effi ciency, and other key business expectations. By working with us, we can help clients:

The Deloitte Enterprise Value Map™

• Defi ne the basis for success, and understand the other party’s basis for success, including the metrics by which they intend to judge the relationship.

• Defi ne a common value proposition— to answer those customers who want to know the incremental value of the alliance over individual company offerings.

• Deal with the overall alliance life cycle—managing, growing, restructuring, or retiring existing alliances.

• Build internal alliance capabilities to oversee execution.


Endnotes1 Hughes, J. and Weiss, E. (2007), “Simple rules for making alliances

work”, Harvard Business Review, 85: 122-1312 Lorenzoni, G. and Baden-Fuller, C. (1995), “Creating a strategic

center to manage a web of partners”, California Management Review, Spring: 146-163

3 For instance see; Powell, W.W. et al. (1996), “Interorganizational collaboration and the locus of innovation: Networks of learning in biotechnology”, Administrative Science Quarterly, 41: 116-146; Utterback, J.M. (1994): Mastering the dynamics of innovation, Boston, MA: Harvard Business School Press; Eric Von Hippel at MIT has also explored this topic in depth from a user-generated innovation perspective see; Von Hippel, E. (1988): The Sources of Innovation, New York: Oxford University Press; Von Hippel, E. (2005): Democratizing Innovation, Cambridge MA: MIT Press; Similarly, Michael Tushman’s work has often focused on social networks to stimulate innovation, see: Tushman, M. and Scanlan, T. (1981), “Boundary Spanning Individuals: Their Role in Information Transfer and Their Antecedents.” Academy of Management Journal, 24: 289-305; Tushman, M. and O’Reilly, C. (1997): Winning through Innovation: A Practical Guide to Leading Organizational Change and Renewal, Boston, Mass.: Harvard Business School Press

4 See Chesbrough, H.W. (2007), “Why companies should have open business models”, Sloan Management Review, 48: 22-28; Chesbrough, H.W. (2006): Open business models: How to thrive in the new innovation landscape, Boston, MA: Harvard Business School Press; Chesbrough, H.W. (2003), “The era of open innovation”, Sloan Management Review, 44: 35-41

5 Karl Weick has suggested that organizations can retain elements of autonomy and separateness. See, Weick,K.E. (1976), “Educational organizations as loosely coupled systems”, Administrative Science Quarterly, 21: 1-19

6 Chesbrough (2007), op. cit.; See also, Dhanaraj, C. and Parkhe, A. (2006), “Orchestrating innovation networks”, Academy of Management Review, 31: 659-669

7 Hite, J.M. and Hesterly, W.S., (2001), “The evolution of fi rm networks: From emergence to early growth of the fi rm”, Strategic Management Journal, 22: 275-286

8 Cook, K.S. and Whitmeyer, J.M. (1992), “Two approaches to social structure: Exchange theory and network analysis”; Annual Review of Sociology, 18: 109-127; Also, Dhanaraj & Parkhe (2006) op. cit.; Helfat, C.E. (2006), “Open Innovation: The new imperative for creating and profi ting from technology” Academy of Management Perspectives, 20: 86-88

9 Anand, B. and Khanna, T. (2000), “ Do fi rms learn to create value?”, Strategic Management Journal, 21: 317-343; Bleeke, J. and Ernst, D. (1993): Collaborating to Compete, New York: John Wiley; See also Arino, A. et al. (2001), “Relational quality: Managing trust in corporate alliances”, California Management Review, 44: 109-131; Dyer, J.H. et al. (2001), “How to make strategic alliances work”, Sloan Management Review, 42: 37-43;

10 Hughes, J. and Weiss, E. (2007), “Simple rules for making alliances work”, Harvard Business Review, 85: 122-131

11 See Womack, J.P et al. (1986): The Machine that changed the world, New York: Free Press

12 Gulati, R. (1998), “Alliances and Networks”, Strategic Management Journal, 19: 293-317

13 From Ahuja, G. (2000), “Collaboration networks, structural holes and innovation: A longitudinal study”, Administrative Science Quarterly, 45: 425-455

14 Goerzen, A. (2005), “Managing alliance networks: Emerging practices of multinational corporations”, Academy of Management Executive, 19: 94-107

15 Gulati (1998), op. cit.16 Gulati et al. (2000), op. cit.17 For more on transaction-based economics see Williamson, O.E.

(1985): The economic institutions of capitalism, New York: Free Press18 Khanna, T. et al (1998), “The dynamics of learning alliances:

Competition, cooperation and relative scope”, Strategic Management Journal, 19: 193-210

19 See Oxley, J.E. and Sampson, R.C. (2004), “The scope and governance of international R&D alliances”, Strategic Management Journal, 25: 723-749

20 Kogut, B. and Zander, U. (1992), “Knowledge of the fi rm, combinative capabilities and the replication of technology”, Organization Science, 3: 383-397; See also, Gulati, R. et al. (2000), “Strategic Networks”, Strategic Management Journal, 21: 203-216

21 Kale, P. et al (2000), “Learning and protection of proprietary assets in strategic alliances: Building relational capital”, Strategic Management Journal, 21: 217-237

22 Stuart, T.E. (2000), “Interorganizational alliances and the performance of fi rms: A study of growth and innovation rates in a high-technology industry”, Strategic Management Journal, 21: 791-811

23 Porter, M.E. (1980): Competitive strategy, techniques for analyzing industries and competitors, New York: Free Press. See also Grant, R.M. (1991), “The resource based theory of competitive advantage: implications for strategy formulation”, California Management Review, 33: 114-112

24 The development of the resource-based view of the fi rm has had many well known contributions over the last two decades. These include; Barney, J. (1991), “Firm resources and sustained competitive advantage”, Journal of Management, 17: 99-120; Nelson, R.R. (1991), “Why do fi rms differ and why does it matter?” Strategic Management Journal, 12: 61-74; Peteraff, M.A. (1993), “The cornerstones of competitive advantage: A resource-based view”, Strategic Management Journal, 14: 179-191; Makadok, R. (2001), “Towards a synthesis of the resource-based and dynamic capability views of rent creation”, Strategic Management Journal, 22: 387-401

25 Porter (1980), op. cit.26 Jay Barney is credited with development of the VRIN framework for

resource analysis. For more see; Barney, J. (1986), “Strategic Factor Markets; expectations, luck and business strategy”, Management Science, 31: 1231-1241 and Barney (1991), op. cit.

27 See Grant, R.M. (1996), “Prospering in dynamically competitive environments: Organizational capability as knowledge integration”, Organization Science, 7: 375-387


28 For a discussion on how dynamic capabilities can be confi gured to generate value see; Teece, D.J. et al. (1997), “Dynamic capabilities and strategic management”, Strategic Management Journal, 18: 509-534; Eisenhardt, K.M. and Martin, J.A. (2000), “Dynamic capabilities – what are they?”, Strategic Management Journal, 21: 1105-1121; Wilson, S. (2003): Regenerating breakthrough product innovation in dynamic environments: A capabilities perspective, PhD Thesis, Cambridge University Engineering Department (UK); Harreld, J.B. et al. (2007), “Dynamic capabilities at IBM: Driving strategy into action”, California Management Review, 49: 21-43

29 For a related area of discussion of path dependency see Leonard-Barton, D. (1992), “Core capabilities and core rigidities: A paradox in managing new product development”, Strategic Management Journal, 13: 111-125

30 See Afuah, A. (2000), “How much do your co-opetitors’ capabilities matter in the face of a technological change?”, Strategic Management Journal, 21: 387-405

31 Gulati et al. (2000), op. cit.32 Khanna et al. (1998), op. cit.33 Goerzen (2005), op. cit.34 Gulati et al. (2000), op. cit.35 See Williamson (1985), op. cit. Also; Dyer, J.H. and Nobeoka, K.

(2000), “Creating and managing a high performance knowledge sharing network: The Toyota case”, Strategic Management Journal, 21: 345-368

36 See Kale et al (2000), op. cit.; also, Mowery, D.C. et al (1996), “Strategic alliances and interfi rm knowledge transfer”, Strategic Management Journal, 17:77-91

37 See Kale et al. (2000), op.cit.38 For more on market transaction-based structures see Kambil, A. and

Van Heck, E. (2002): Making Markets, Boston, MA: Harvard Business School Press

39 Grant (1996), op.cit.40 Kale et al (2000), op. cit.41 Oxley and Sampson (2004) op. cit.42 Khanna, T. et al. (1998) op. cit.43 See Lane, P.J. and Lubatkin, M. (1998), “Relative absorptive capacity

and interorganizational learning”, Strategic Management Journal, 19: 461-477

44 For more on learning capabilities see; Cohen, W.M. and Levinthal, D.A. (1990), “Absorptive Capacity: A new perspective on learning and innovation”, Administrative Science Quarterly, 35: 128-152; Lane, P.J. et al. (2001), “Absorptive capacity, learning and performance in international joint ventures”, Strategic Management Journal, Vol.22: 1139-1161; Zahra, S., George, G. (2002), “Absorptive capacity: a review, re-conceptualization and extension”, Academy of Management Review, Vol. 27: 185-203

45 From more on trust issues in alliance partnerships see: Zaheer, A. et al. (1998), “Does trust matter? Exploring the effects of interorganizational and interpersonal trust on performance”, Organization Science, 9: 141-159; Lewicki, J. et al. (1998), “Trust and distrust: New relationships and realities”, Academy of Management Review, 23: 438-458; Arino et al. (2001), op. cit.; Dyer, J. H. and Chu, W. (2003), “The Role of Trustworthiness in Reducing Transaction Costs and Improving Performance: Empirical Evidence from the United States, Japan, and Korea”, Organization Science, 14: 57-68; Birkinshaw, J. et al. (2007), “Finding, forming and performing: Creating networks for discontinuous innovation”, California Management Review, 49: 67-84

46 Barney, J.B. and Hansen, M.H. (1994), “Trustworthiness as a source of competitive advantage”, Strategic Management Journal, 15: 175-190

47 Arino et al. (2001), op. cit.48 Arino et al. (2001), op. cit.49 See Zaheer et al. (1998), op. cit. and also; Gulati, R. and Singh, H.

(1999), “The architecture of cooperation: Managing coordination costs and appropriation concerns in strategic alliances”, Administrative Science Quarterly, 43: 781-814


AuthorDr. Scott WilsonDeloitte ResearchDeloitte Services LPTel.: +1 203 708 4772Email: [email protected]

About the AuthorScott Wilson is the US Lead for technology research and thought leadership within Deloitte Research. In his research work, Scott explores the challenges of technology management, innovation and corporate strategy. He is responsible for delivering research that builds eminence and provides development of new service opportunities throughout the Deloitte US and Global Technology, Media and Telecommunications practices. Dr. Wilson has over 10 years experience in the TMT sector and has held a variety of industry and academic leadership roles. Most recently, he was part of Deloitte Consulting’s Strategy & Operations practice based out of New York working with clients in the Technology, Media and Healthcare sectors. A native of the UK, he holds Masters and PhD degrees from Cambridge University’s Engineering Department at the Centre for Technology Management.

AcknowledgmentsThe author is grateful for the feedback, comments and assistance from the following people; Ajit Kambil, Deloitte Research, Deloitte Services LP (United States), Phil Asmundson, Deloitte & Touche LLP (United States), Eric Openshaw, Deloitte Consulting LLP (United States), Doug Tuttle, Deloitte Consulting LLP (United States), Robert Dalton, Deloitte Consulting LLP (United States), Ryan Alvanos, Deloitte Research, Deloitte Services LP (United States), Laura Eselius, Deloitte Research, Deloitte Services LP (United States), Peter Koudal, Deloitte Research, Deloitte Services LP (United States), Nancy Holtz, Deloitte Services LP (United States).

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