How to Assemble Alliances for a Lasting Edge

The background to his research

This study is framed within what’s known as temporary advantage theory, which is a newer theory in strategic management. It assumes that competitive advantages cannot be exploited for long. 

With most industries becoming more competitive and with imitation and innovation rates increasing, many companies cannot sustain their advantages. The only way to create superior performance is to continually create new advantage, such as developing innovative products and technologies, cutting prices, or rolling out a new advertising campaign. The frequency of taking these actions can lead to temporary advantages, so when rivals imitate your previous advantage, you're always a step ahead.

In previous research, we found that the frequency of introducing competitive moves and surprising rivals can lead to superior performance in hyper-competitive environments such as automobile manufacturing, consumer electronics, biotechnology, pharmaceuticals, personal computers, and others. In this latest study, we look at the role of alliance portfolios in affecting the frequency of competitive actions. 

Alliance portfolios and their link to competitive actions 

Firms increasingly use strategic alliances to share resources or risk or to jointly develop new products and technologies. Strategic alliances can be also formed with a manufacturer or supplier to gain access to resources that are controlled by other companies. Because firms are frequently forming a number of alliances at any point of time, they maintain an alliance portfolio.

What does this have to do with enabling a company to frequently surprise rivals through new competitive action? If a firm that’s trying to increase the frequency of its competitive actions relies only on its internal resources, then typically its costs for developing new actions will escalate and returns on R&D will drop because in a shorter period of time, you make more mistakes.  

Companies can try and avoid this by sharing resources and risks with others. So alliance portfolios can help a firm develop more competitive actions more efficiently. 

What firms should seek in alliance portfolios

Our study is based on a model we developed that defines three conditions for a company to be able to frequently introduce competitive action. The conditions are: opportunity recognition, opportunity development, and action execution. 

An alliance portfolio should bring capacities to the company to help it take frequent competitive actions. For example, if you have alliance partners with diverse knowledge and capabilities that can increase the recognition of new opportunities, and R&D alliances that can help you develop capability to evaluate and assess the feasibility of those opportunities, and at the same time you're surrounded by trustworthy partners that can help you to increase the speed to market, then you have recognition, development, and capacity all present in your alliance portfolio.

For our study, we tested a configuration of three characteristics of an alliance portfolio that would help deliver these benefits. Those characteristics are structural holes, R&D alliances, and equity alliances. A structural hole refers to an absence of ties between a firm’s alliance partners and indicates that the firm has strategic alliances with firms from distinctly different areas that offer access to diverse information. When this happens, you have the ability to connect the dots and create new combinations and innovations.

If structural holes provide access to information, R&D alliances provide knowledge or know-how. Because companies work together around technology and expand their knowledge bases, they learn how to take action and assess whether or not the action will be successful in the market.

And equity alliances are strategic alliances like joint ventures where the two companies share equity. These alliances really indicate that the partners are committed to one another. They trust each other. 

What the auto industry reveals about using alliances for competitive edge 

For the study, we looked at all the competitive moves by the big auto manufacturers over the past 16 years. We used the content analysis method, which relies on coding for key words in published news articles. The auto industry is hyper-competitive environment, where manufacturers compete with new versions of products or new products. The temporary advantages theory really explains superior performance in such industries. It's also typified by lots of complex alliances. 

We found that the interaction between all three elements (structural holes, R&D alliances, equity alliances) expands the capacity of the company to initiate competitive action. Individually, they may have some affect but the affect is amplified in the presence of the others. We found that when all three characteristics were present in an alliance portfolio, our model predicted that it would lead to on average 47 competitive actions per year versus the sample average of 33. For example, if a company’s alliance portfolio was weak in the area of R&D, they would have fewer than 26 competitive actions per year. 

What managers can glean from this research

Managers who look after alliance portfolios try to understand how knowledge from one strategic alliance can be transferred to another partnership with other partners. The model is helpful for alliance portfolio managers because it specifies what type of benefits the portfolio should provide in order to make the company competitive. Knowing, for example, that opportunity recognition is critical for the action-frequency process and knowing which of the alliance portfolio characteristics can bring that is important. 

It's also important that the model shows how they should be combined, because there are many characteristics that are redundant. They provide similar benefits. The company should create portfolios with characteristics that are distinct and provide complementary resources.

By understanding the attributes of alliance portfolios, managers can shape their alliance portfolios to maximize their benefits.

— Interview by Alan Morantz