It has been said that no one is an island. Neither, in the world of business, is any
corporation. The transactions and interactions that sustain modern life are allowed
and facilitated by a web of relations between companies. These relationships can be
mutually beneficial to all partners or create asymmetric benefits for some. In their
article ,"Effect of Alliance Network Asymmetry on Firm Performance and Risk,” Ashish Sharma, Anindita Chakravarty, and Chen Zhou explore the nature of these partnerships and the conditions under which they thrive
and fail. Their research clarifies the costs and benefits of such partnerships and
provides a fuller picture of how they work.
They distinguish between direct ties and indirect ties. Direct ties are a firm’s immediate
relationships – for simplicity’s sake, let’s say a direct tie would be a “friend.”
Direct tie asymmetry refers to one firm possessing a greater number of such ties than
another. An indirect tie denotes the firm’s connections it has via another firm –
think of these as “friend of a friend” sort of connections. Likewise, indirect tie
asymmetry occurs when one firm possesses a greater number of these ties than another.
How Direct Ties Work (or Don’t)
The authors observe that the number of direct ties a firm possesses directly affects how many resources it can access from its network. For example, Roche (a multinational pharmaceutical firm) was able to augment its HIV treatment pipeline with resources from Trimeris (a domestic biotechnology firm). Both firms had ample but crucially different and complementary resources, which allowed their collaboration to be mutually beneficial. If two firms have a similar number of direct ties, “they are in a symmetric position of interdependence for resource volume, as both firms are equally dependent on each other.”
With direct ties, resources as well as needs, costs, and benefits are shared. Both parties have comparable resources, and their partnership grants each some access to the other's. But this balance is, for better or worse, easy to upset, and the resulting imbalance will create direct tie asymmetry, which “has benefits and costs for the alliance and consequently affects the focal firm's performance outcomes.”
This imbalance, though, is not necessarily bad. Like all partnerships, it has its costs and benefits. For example, if one firm comes into resources, the partner firm begins to depend more heavily on it and thus loses some of its leverage. Need, cost, and benefit are no longer mutual or equally shared. Ideally, such a relationship will still work to the advantage of both firms. A little bit of asymmetry could even help the alliance, as “the less resourceful firm gains access to larger alliance networks with proportional resource advantage.” In short, if the relationship between my firm and your firm improves – even if I need you more than you need me – my firm can still tap into your network and derive value from those advantages.
Unfortunately, it does not always work this way, and the power imbalances introduced by these asymmetries often work only to the advantage of the more connected firm. In such cases, the more powerful firm may set terms that work solely to its benefit, knowing that the less powerful firm is in no position to dispute them. For example, if you’re the dominant supplier of parts for my factory’s machines, I don’t have much leverage. If I pursue my own interests too much, you may just decide to not supply my factory with replacement parts. Or you may charge me a premium. Or you may dictate payment terms that only benefit you. Or you may require me to commit to purchasing different machines even though my current ones aren’t yet obsolete because you will soon cease production of replacement parts and there’s no suitable aftermarket parts alternative.
When these asymmetries are too great, both the firms’ relationship and performance become jeopardized by the unreliable dynamics they produce. The sort of communication successful partnerships require becomes more difficult. Then, conflict and disagreement may arise over the goals of the alliance, their value, and how best to achieve them. As the authors note, “at high levels of direct tie asymmetry, the costs of interdependence asymmetry can outweigh the benefits for the alliance, thereby decreasing the focal firm's financial performance and increasing its financial performance uncertainty.” Instead of spending time cultivating the relationship, firms experiencing high levels of direct tie asymmetry often engage in conflict, disagreement, and other counterproductive behaviors that eventually undermine performance.
How Indirect Ties Work (or Don’t)
Indirect ties likewise have their attendant costs and benefits, and what determines whether firms weather the costs or reap the benefits depends on the sort of symmetries or asymmetries partners achieve and sustain. A moderate increase in indirect tie asymmetry gives one firm greater access to institutional knowledge resources and the other to breakthrough knowledge of the sort necessary for innovation. Despite the asymmetry, mutual benefit is achieved. As such, “a moderate increase in indirect tie asymmetry should strengthen the interdependence of the alliance, as each firm depends on the other for unique knowledge resources.” Thus, each firm is impelled to commit to the partnership, which leads naturally to less miscommunication and less doubt about one another’s handling of the alliance. This moderate amount of asymmetry thus facilitates greater stability and better performance because “greater alliance stability should lower volatility in alliance returns and consequently lessen the focal firm's financial performance uncertainty. Increased alliance performance should increase returns from the alliance, thereby increasing the focal firm's financial performance.”
But if direct tie asymmetries aren’t always beneficial, then neither are their indirect counterparts. Too great a dissimilarity in knowledge resources leaves the firms “unable to leverage each other’s expertise because of a lack of common ground.” This lack of common ground can completely hinder efforts to collaborate and cooperate. Without common ground, there can be no communication or mutual understanding, especially not of the sort required for what are often large and quite technical endeavors. In short, although “as indirect tie asymmetry increases, at first the focal firm's financial performance uncertainty decreases and financial performance increases,” there is a threshold past which the alliance suffers. Sharma, Chakravarty, and Zhou conclude that “at high levels of indirect tie asymmetry, the alliance suffers because costs outweigh the benefits, thereby increasing the focal firm's financial performance uncertainty and decreasing its financial performance.”
Significance?
Failure is common. According to the authors, more than half of new product alliances fail to meet their goals. For these reasons, scholarly interest has turned to the conditions of their success. When do such alliances thrive—and why? What improves the likelihood of a successful alliance? One answer, the authors contend, may be the nature and quality of their “prealliance network ties,” the ties they have before they partner. The authors offer their theory as a way both of explaining the present failure rates and ensuring future success.
To this end, they advise managers to “be cautious when or perhaps completely avoid selecting an alliance partner ... with both high direct tie asymmetry (i.e., large difference in number of direct ties) and low total interdependence (i.e., no preexisting alliances with the partner),” and focal firms to “avoid seeking an alliance partner with which it has a large difference in interconnectivity of indirect ties and no preexisting ties.”
John Donne was, unsurprisingly, correct: no one is an island – we are all part of something bigger than ourselves. No organization exists outside an industry, and no industry lacks in complexity. To navigate that complexity often means relying on the expertise and connections of others. At the same, though, organizations and decision makers should exercise caution when formalizing alliances. Failure to do so may result in one or both organizations being shipwrecked on islands of their own making.
