Safety in Numbers? Measuring the impact of resources on business alliance portfolios
It is no great secret why firms choose to form alliances, on an interim or long-term basis. Financial, commercial and technological gains are waiting to be made, provided that the focal firm and its partners work well in tandem and resources are pooled together.
However, the size and cohesion of the network do not offer a 100% guarantee of success. Just as the members of the alliance need to be compatible and complementary, so too do the resources, status, strategy and technological know-how that each firm brings to the network. Measuring these is the name of the game when a firm is eyeing up an alliance portfolio….
Previous research into firm alliances has established the key goals for businesses considering such a venture as value creation and the boosting of economic performance. There is also general consensus on the main attributes that each firm provides – a rich network of business connections, and technological and commercial savvy. However, what has been overlooked is how compatible and complementary these attributes are, or need to be. The success of an alliance portfolio is the sum of its parts, and so if those various parts do not gel, the chances of financial success are impacted.
Defining, distinguishing and measuring “performance”
The success of a firm alliance can be considered at two main levels – system performance (meaning the whole alliance) and goal performance (meaning each individual firm within the alliance). The former requires trust between partners, strategic and organisational capabilities, smooth knowledge exchange and an adaptable governance structure. The latter can be viewed from a host of angles – innovation, new product development, the number of patents obtained, revenue growth, market share, and market value, to name a few.
However, the focus remains on the alliance and what each firm brings to the table, in terms of underlying resources (both physical and intangible, such as R&D), strategy, status and technological complementarity. A study of the global semi-conductor industry, where the creation of alliances has risen sharply in recent years, highlights the importance not only of the amount of resources injected by each partner but how well all these pieces of the puzzle fit together.
A mix-and-match industry
The semi-conductor industry is an especially useful lens through which to examine the question of compatibility within alliances. By the very nature of the sector and the rapid rate of technological, organisational and business model change, firms very frequently set up interim and long-term collaborations. For the period 1990-2009, the number of alliances between publicly traded firms in the sector shot up from 23% to 93%. Look no further than the example of Qualcomm, a leading company in the design of modem chipsets and microprocessors, which built its alliance portfolio with a number of firms, including Hitachi, Lucent, Motorola, Panasonic, Qsound, Samsung, Sharp, Sony, TSMC, and UMC. By building multiple alliances across its value chain, Qualcomm has been able to capitalise on learning from many market segments, such as computer manufacturing and telecommunications services.
A recent study into the sector was based on data collected on firms and alliances over the period 1997-2007 in order to test the notion that the complementary nature of the assets each firm brings to the network can have just as major an impact, if not larger, than the sheer quantity of assets. Economic performance was measured via the rate of return on assets, whilst the compatibility of capital resources was gauged in terms of the commitment to and availability of expenditure. R&D compatibility was assessed in terms of intensity of R&D investment over a given period. Less tangible resources such as strategy and status required a different approach – firms formed around the same time and within the same business environment were seen to have a greater chance of sharing strategic viewpoints, while status was calculated in terms of connections. Lastly, technological complementarity was assessed in terms of scope rather than mere density of knowledge and activity.
Compatibility the key to a happy marriage
Across the board, resource compatibility was proven to be and remains key, meaning that it is the conditions within which an alliance works that ultimately make the difference, not the amount of resources brought in by each partner. In some cases, a top-heavy alliance where members are over-reliant upon the rich resources of certain other members can be a recipe for disaster. However, in the case of more successful alliances, managers shouldn’t content themselves with the skills, know-how and assets brought in upon the formation of the network. They should continue to develop new resources and skills and persist in building up status and reputation, for the good of the individual firm and the whole collective.
The issue is by no means closed. Future research into these types of joint venture could measure performance at intra-firm, portfolio and industry levels. There are also environmental, institutional, competitive and technological factors for consideration, as well as measuring in terms of market performance and the degree of technological innovation. What is clear via this sector-specific example, though, is that firms considering entering an alliance need to have not just the required amount of tools, skills and resources to succeed but also be able to match them with those of their partners to ensure that the alliance turns into a happy business marriage.
This article draws inspiration from the paper Influence of Firm and Partner Resources on Firm Performance in the Alliance Portfolio, written by Seong-Young Kim and published in M@n@gement, 17 (2), 2014.
Seong-Young Kim is an assistant professor of Strategy and Innovation at ESC Rennes School of Business, France. His research interests include Firm performance, Firm-partner resources and attributes, and Composition in Alliance portfolios, International Business and Inter-firm Networks, and Co-evolution of inter-firm relationships.