CLUSTERS OF COLLABORATION
The firm, joint ventures, alliances and clubs
INTRODUCTION
This paper looks at co-operative activity involving firms at three different levels; co-operative activity at the business level (such as joint venture), cooperative activity at firm level (alliances or partnerships between firms) and co-operative activity involving groups of firms (networks or clubs). Following Richardson, our interest is in trying to understand aspects of ‘the complex and inter-locking clusters, groups and alliances which represent cooperation fully and formally developed’ (Richardson 1972: 887). It is argued here that the key to developing such understanding lies in recognising the interaction and interplay between different levels of analysis in this context. A number of elements in the paper may be seen as following from, or consistent with, Richardson’s 1972 paper, including his ‘triple distinction’ (ibid.: 896) between firm, co-operative and market modes of resource co-ordination; the role of complementary activities in collaboration; the role of future decisions in stimulating co-operative arrangements; and the picture of the firm as a bundle of capabilities represented by appropriate knowledge, experience and skills.
In the first section below, joint venture is compared to alternative modes of organisation, and it is argued that joint venture typically appears to be clearly inferior (costly and inefficient) compared to simpler single-firm options. We then place joint venture and its alternatives into the context of corporate diversification and analyse how and when joint venture may appear as an efficient mode of organisation. The next section develops the analysis to argue that the behaviour of networks or groups at industry level cannot be understood by analysing one level in isolation, but must be seen as a phenomenon encompassing and integrating business, corporate and group levels of analysis. The chapter finishes with a short concluding section.
THE EVOLUTION OF COLLABORATIVE ACTIVITY
Complementary activities or assets have been analysed as providing basic foundations for collaborative activity (Richardson 1972; Teece 1986). A variety of skills and resources running through the value chain will be required to bring any complex venture to fruition, and not all of them may be possessed to the required degree or quality by a single firm. However, there are a variety of ways in which the different resources can be brought together. As Richardson points out, ‘Co-ordination (of complementary activities) can be effected in three ways; by direction, by co-operation, or through market transactions’ (Richardson 1972: 890). Market transactions involving the trading of assets are the obvious and traditional means through which resource deficiencies can be compensated. Direction can be readily provided by intra-firm co-ordination, and merger is one mechanism through which the possibility of such co-ordination can be effected. Thus, co-operative or collaborative activity between firms is only one way in which complementary assets may be combined to produce efficiency-oriented economic activity. this is illustrated in Figure 12.1, which shows a possible venture opportunity (the middle business unit) which could be set up with the help of resources provided by two other single business firms (the end business units). One firm could provide marketing resources (such as shared assets in marketing, distribution, advertising and/or reputation), while the other could provide technological resources (such as shared assets in plant, equipment, work force and/or R&D).
As Richardson’s distinction between direction, co-operation and market modes of co-ordination makes clear, the new venture could combine complementary assets in a variety of ways. If an asset can be directed it can also be contracted; in principle, contracts can be written through which two or more firms can co-ordinate any gain derivable from shared resources that could be obtained through direction. Licensing, leasing, rental, consultancy, commission and tie-in are examples of contractual modes that can help firms jointly exploit potential gains from asset trading or sharing.1
Figure 12.1 Joint venture strategy and structure
Any purely market solution would involve a maze of contracts between the two donor firms and the new business venture. However, both merger and joint venture would involve the installation of hierarchy to provide decision-making capabilities, and these possibilities are illustrated in Figure 12.1. The merger option is assumed here to create a multidivisional or M-form corporation (Williamson 1975) around the three business units, with each unit or division reporting to a single HQ. However, a joint venture typically adds three other elements compared to the merger solution: (1) the joint venture contract which exists as a statement of the obligations and rights of the respective parties; (2) a dual system of hierarchical control, with the respective ‘parents’ having a continuing authority relation with the joint venture ‘child’; and (3) overlapping property rights (and firm boundaries) with respect to the assets associated with the new venture opportunity. Therefore joint venture includes both market or contract and direction or hierarchical elements. In analysing the different circumstances in which the respective modes of organisation identified by Richardson might be adopted, it may be useful to split the question into two parts. First, what circumstances are likely to favour the adoption of hierarchical solutions (such as merger or joint venture) over purely market or contractual solutions? Second, what circumstances are likely to favour the adoption of a joint venture solution over the merger alternative? We shall consider both questions in turn.
As far as the first question is concerned, markets and contractual modes of organisation tend to perform effectively in allocating resources in circumstances in which goods and services are standardised, their characteristics are well specified, and there are many competing buyers and sellers (Williamson 1975). In such circumstances, the market may offer the standard gains associated with specialisation, flexibility, competitive pressure and choice. There is likely to be little point in a firm owning and producing all the assets relevant to its ventures if the market can offer a range of competing suppliers on a sufficient scale to exploit economies of scale in production. Market solutions also tend to be widely observed in cases of well-established and stable technologies in which standard or off-the-shelf solutions such as licensing, rental, leasing and franchising may be adopted.
By way of contrast, contractual solutions tend to encounter problems or break down completely in situations involving ambiguity, uncertainty and novelty. These conditions tend to hold where firms are contemplating innovative ventures, as in the case of technological innovation and market entry. If contracts cannot be well specified, then potential problems of opportunism (self-interest seeking with guile) appear (Williamson 1985). The costs of co-ordinating contracts characterised by incomplete or vague elements may be intolerable for either or both of the potential parties to the transaction, and internalised or hierarchical alternatives may be preferred at this point. Hierarchy incorporates decision-making capacity to allow for the making of future decisions relevant to a particular ventures; contracts embody past or present decisions; ‘where buyer and seller accept no obligation with respect to their future conduct however loose and implicit the obligation might be, then co-operation does not take place and we can refer to a pure market transaction’ (Richardson 1972: 886; italics mine). For example, old or established technologies may be traded between firms in the form of licences, while the R&D stage itself is typically carried out in-house within corporate boundaries. This is consistent with the findings of Davidson and McFetridge (1985), who studied 1,200 intra-firm and market technology transactions by US firms in the period 1945–78. Their study indicated that the probability of internal intra-firm hierarchical transfer was greater for R&D-intensive companies, and for newer technologies and technologies with few previous transfers.
Hierarchy may therefore make provision for future decisions to be made with respect to venture possibilities, and this can be an important attribute in venture opportunities characterised by innovative elements. However, this raises the issue of our second question above; we have two modes of hierarchical organisation in Figure 12.1: merger leading to single firm operation, and joint venture. What circumstances should lead to joint venture being preferred to single-firm or merger alternatives?
The obvious way to approach this question is to compare the characteristics of the respective modes in terms of their potential efficiency implications. We have already noted that joint venture tends to have three distinctive characteristics compared to single-firm operation; the contract itself, dual hierarchical control and overlapping firm boundaries. Each feature is likely to have efficiency implications.
The joint venture contract itself is unlikely to be a free good, but will involve managerial and legal resources to set up, administer and police. The dual control system itself is more complex and cumbersome than the simple unified hierarchy associated with the single-firm option; even if the respective parents are paragons of virtue, such dual control is likely to lead to confusion and conflict to the extent that the parents have different objectives and expectations. Add the possibility of opportunistic intent, and the potential difficulties associated with dual control are magnified. Also, overlapping firm boundaries can provide unique opportunities for one firm to observe the other, and possibly assist access to trade secrets, proprietary knowledge and other intangible assets that would normally be protected by the cloak of secrecy provided by corporate walls (Richardson 1972). The fear of this potential leakage of sources of competitive advantage to outside firms may provide a disincentive to firms considering joint venture.
Therefore, the characteristics of joint venture illustrated in Figure 12.1 all appear to represent potential barriers to joint-venture formation compared to the single-firm solution obtainable through merger. Joint venture typically has the more complex and potentially costly administrative structure, it necessitates a supporting contractual apparatus absent in single-firm operation, and it may pose the threat of leakage of intellectual property and other intangible assets. Contractual, hierarchical and property rights issues all suggest that joint venture is likely to be regarded by firms as an inferior mode of organisation to the single-firm alternative. This conclusion is consistent with the point frequently made in the managerial literature that joint venture is typically treated as a device of last resort by management (Kay 1992). This leaves us with a problem: if joint venture is an unambiguously inferior mode of organisation compared to single-firm operation, how can its existence ever be justified on efficiency grounds? Unless we are prepared to argue that firms adopting this mode are making expensive mistakes, the analysis so far must be incomplete. In the next section we explore circumstances in which joint venture might evolve as an efficient mode for combining and organising venture opportunities.
THE EVOLUTION OF COLLABORATION IN THE DIVERSIFIED FIRM
In practice it is not difficult to find examples of joint-venture activity being adopted even where it is perceived to be less efficient than the single-firm option. The obvious examples are cases in which third world governments make joint venture with a local firm a condition for market access. It does not matter if joint venture is the most expensive mode of organising activities; if it is the only mode permitted, then firms may have to take it in a Hobson’s choice situation. However, these circumstances do not appear to apply so obviously to many of the joint ventures formed between developed-country firms in recent years. Joint ventures between US, Japanese and European partners tend not to be characterised by the forced partnerships so frequently observed in Third World cases. It still leaves the puzzle of why such an apparently inferior mode of organisation should have become so prevalent in recent years.
The problem with much conventional analysis of the merits and demerits of alternative forms of organisation is that they tend to restrict consideration to the business units directly involved in the venture opportunity. For example, Figure 12.1 identifies the business units directly involved in the joint venture, their relationship with each other and the child joint venture. This is consistent with the common representation of the relationships involved in joint-venture activity. However, these business units may themselves be part of a larger diversified firm in the respective cases, and while the other businesses associated with the respective firms may not be directly involved in the venture opportunity, their existence may still have important implications for how the new venture may be organised. Figure 12.2 extends the analysis of Figure 12.1 to include this possibility.
Figure 12.2 New venture opportunity for large diversified firms
The new venture opportunity of Figure 12.1 is represented on the central oval mat in Figure 12.2. The links that might be established between it and the two donor businesses are illustrated by dotted lines. However, each donor business is itself only a division within a highly diversified firms. There are two such firms, Theta and Omega. In both cases the two firms have pursued related linked diversification (Rumelt 1986), with a series of different market and technological links exploited by the corporate strategy.
If we focus only on the region represented by the central oval mat, we shall effectively replicate the analysis of Figure 12.1. At this level, the level of business strategy, joint venture is still likely to appear as unambiguously inferior to single-firm operation which could obtain through the merger of the two firms. Analysed at this level, there is still no obvious way to make sense of joint-venture activity. However, expanding the perspective to include the respective firms in their entirety makes it clear that the single-firm option is not likely to be restricted to the donor businesses directly involved with the new venture. As Figure 12.3 makes clear, merger of Theta and Omega to fully internalise the new business opportunity would create an extremely large firm. Such a solution could be tantamount to taking a sledgehammer to crack a nut (Kay et al. 1987), points also made separately by Hennart (1988) and Buckley and Casson (1987). The expanded firm has a scale of operation an order of magnitude many times greater than that of the new venture opportunity, and any gains directly associated with the new venture may be swamped by the wider implications of the expanded firm. The full-scale merger of Theta and Omega to co-ordinate the new venture possibility may generate diseconomies as a consequence of putting together a hybrid collection of disparate and dissimilar activities. Much of the recent concern in the managerial literature with ‘focus’ and ‘sticking to the knitting’ is evidence of managerial concern with the adverse efficiency consequences of overexpansion and extreme corporate diversity. Further, both Theta and Omega may have businesses which, if combined, could attract antitrust attention and even sanctions. Consequently, the full-scale merger of Theta and Omega to exploit the new business opportunities may have significant efficiency and antitrust implications that go far beyond the efficiency implications of the merger option at the level of the new business opportunity itself. On the other hand, the efficiency implications of the joint-venture option will tend to be more highly localised around the region of the joint venture itself and its participating businesses in Figure 12.3. Otherwise, Theta and Omega retain their independence and their scale of operation is only marginally expanded to the extent of their participation in the joint venture. Therefore, while joint venture may be more costly than single-firm operation over the domain of the venture itself, single-firm options such as merger may bring with them significant additional complications. This indicates how it may be possible to reconcile the apparent general inferiority of joint venture as a mode of organisation at the level of the venture, with its adoption as a preferred mode of organisation in certain cases by highly diversified firms. Once the perspective is extended to the level of the participating firms, joint venture may be clearly seen to offer efficiency advantages for large diversified firms pursuing new ventures opportunities. As Hennart comments:
besides the obvious case when governments restrict mergers and acquisitions, joint venture will be preferred when the assets that yield the desired services are a small and inseparable part of the total assets held by both potential partners or when a merger or a total acquisition would significantly increase management costs.
(Hennart 1991: 99)
Figure 12.3 Merger and joint venture options for diversified firms
Selective disinvestment by one or other of the parties may be an alternative to full-scale merger in certain cases. For example, Theta or Omega could sell the relevant donor business to the other firm. In Figure 12.3, if Theta sold the potential donor business to Omega, it would allow the domain of the venture to be fully internalised within Omega’s corporate boundaries, with resulting expansion of Omega’s boundaries and shrinkage of Theta’s. This combines the advantages of full-scale internalisation with relatively modest adjustment in terms of the scale of the respective firms. However, such a solution may be impractical in the case of many large diversified firms such as Omega or Theta. Selling the respective donor business to the other firm would cut across an existing technological link between the donor and another division in the case of Theta, and a marketing link between the donor and another division in the case of Omega. Of course, the respective link might still be exploited by forming a co-operative agreement between the traded business and its previous owner. However, such co-ordination is what selective disinvestment was intended to avoid the need for, and so this rather negates the purpose of the whole exercise.2 Kay et al. (1987) and Hennart (1988) point out that it may be difficult to decompose or disengage the various businesses in a firm pursuing related diversification because of ‘tangled assets’ (Hennart 1988), and so selective disinvestment may not be available as a means of redesigning the boundaries of the firm to maintain a single unified hierarchy.
This leads to a simple conclusion. Corporate diversification may be the crucial trigger that stimulates joint-venture activity. Corporate strategy (diversification) can influence business strategy (joint venture). Such a perspective also helps us to make sense of a variety of related phenomena. It helps to explain why the proliferation of collaborative activity is a relatively recent phenomenon; it can be seen as essentially a post-diversification mode of organisation, the extensive diversification of the modern corporation being itself mostly a post-war phenomenon. We would also expect to find a positive link between size of firm and the level of joint-venture activity, and this tends to be confirmed by empirical analysis (Boyle 1968; Berg and Friedman 1978). Much post-war corporate diversification was merger-driven,3 which suggests that merger and joint venture may be complements as well as substitutes; it was earlier merger activity which created the precondition of diversification that led to subsequent joint-venture activity.
The essential point is that collaborative activity such as joint venture has to be analysed by looking at different levels of analysis simultaneously, that holding at the level of the venture and that holding at the level of the firm. We hope to show in the next section that more complex co-operative phenomena such as alliances and clubs or networks may also have to be analysed by recognising the influence of different levels of analysis.
THE EVOLUTION OF STRATEGIC BUSINESS ALLIANCES
Up until now we have been concerned with the development of one particular type of co-operative activity, the joint venture. This has meant looking at individual collaborative agreements in the context of business strategy. In this section we shift up a level in that we consider the possibility that cooperation may take place at the level of the firm and not just individual businesses. This is the domain of strategic business alliances, also described in the literature as coalitions or partnerships between firms.
Porter and Fuller define coalitions as ‘formal, long-term alliances between firms that link aspects of their businesses but fall short of merger’ (1986: 315). Porter and Fuller point out that strategic business alliances may encompass joint ventures, licensing arrangements, supply agreements and marketing agreements amongst other arrangements. Porter and Fuller also suggest that coalitions or alliances only be properly analysed in the context of a firm’s overall global strategy (which may involve multiple alliances; ibid.: 316), and the opportunity cost of alternative strategies must always be compared to that of alliance formation if it is to be justified as the preferred option (ibid.: 327).
Alliances link businesses of the firm by providing for future decision to be made by the firms in areas of specified mutual interest. As a solution that tends to go beyond contract and involve hierarchy as a mode of resource allocation, we would expect to find alliances at firm level to operate in similar areas to those associated with joint ventures at business level; that is, domains involving new markets and new technologies, and associated with incomplete and poorly specified problems. The surveys of this area in Porter and Fuller (1986) and Dunning (1993) suggest that issues such as these tend to be major factors encouraging alliance formation. Daimler Benz and Mitsubishi provide a good example of an alliance in practice, with the partners collaborating in a variety of link-ups at business level, Daimler Benz generally providing access to mechanical technology and European markets for Mitsubishi, and Mitsubishi providing access to electronic technology and Japanese markets for Daimler Benz (The Financial Times, 7 March 1990, and 31 December 1993).
However, it appears that the propensity to form alliances is not evenly distributed throughout industry, but tends to be particularly associated with certain sectors. One sector which appears to be especially characterised by alliance formation is biotechnology. This is illustrated by Delapierre and Mytelka (1994), who use the MERIT-CATI data base to analyse the emerging networks in the biotech-based pharmaceutical industry (Figure 12.4). They identify both intensity and clustering (nodes) of technology cooperation agreements, with major nodes in Figure 12.4 illustrated by the oval mats.
Figure 12.4 Main nodes of the networked knowledge-based oligopoly in the biotech-based pharmaceutical industry
Source: Delapierre and Mytelka (1994)
Note: Based on technology co-operation agreements established between 1985 and 1989; number of links indicated by thin lines, with four or more links indicated by heavy black lines
The first point to note is that, to the extent these technology co-operation agreements involve new or evolving technology, wholly owned or co-operative hierarchical solutions will be preferred to standard contractual solutions such as licensing. The contingent issue of which option (wholly owned or co-operative) should generally prevail in such circumstances can be made more tractable by noting that supplanting all collaboration with merger in this case would result in a single firm called the biotech based pharmaceutical industry – all firms here are eventually linked to each other through the network. Even if merger turns out consistently to be the simplest and most effective way of co-ordinating resources at the level of individual businesses in the biotechnology industry, there would clearly come a point where further merger proposals to exploit individual business-level opportunities would threaten to create outsized firms, trigger antitrust alarm bells or both. The question is not whether this would happen in such an industry, but when.
In this respect, it is useful to regard Figure 12.2 and Figure 12.4 as complementary. Figure 12.2 focuses on the complexity of linkages within firms for two hypothetical firms, while Figure 12.4 illustrates the complexity of linkages between firms for a real-world industry. If Delapierre and Mytelka’s analysis in Figure 12.4 was to be expanded to include the complexity of linkages between divisions and businesses for each of the firms in Figure 12.4, it would be transformed into a dense thicket of intra-firm and inter-firm linkages. It is difficult and indeed probably unhelpful to illustrate the full complexity of intra- and inter-firm linkages for a single industry such as biotechnology. It is easier to analyse such an industry by looking at the complexity of intra-firm linkages (Figure 12.2) and inter-firm linkages (Figure 12.4) separately. The important point as far as reading a map such as that provided by Delapierre and Mytelka in Figure 12.4 is concerned is to remember that parties such as Kodak, ICI and Mitsubishi are themselves highly diversified systems with complex systems of internal linkages. Reducing them to single points is analytically convenient in Figure 12.4; however, it is crucial to remember that this illustrates only one dimension as far as linkages is concerned, and that the resource linkages exploited between businesses within such firms may be considerably more important and extensive than the resource linkages exploited across firm boundaries through such mechanisms as technical co-operation agreements.
Thus, previous diversification on the part of firms may represent the crucial trigger that stimulates collaborative activity between firms. Hoffman-La Roche and Kodak may discount merging with each other as a means of pooling their expertise in order to exploit some common venture opportunities, just as Daimler Benz and Mitsubishi appear to have done in setting up their particular series of collaborative arrangements. However, Delapierre and Mytelka’s mapping of co-operative arrangements raises other questions. First, why are collaborative arrangements frequently arranged in clusters between pairs of corporations? Second, why do there appear to be nodes or networks of multiple firms linked together through a rich network of agreements? Third, if diversification is generally a prerequisite for the evolution of collaborative activity as we have suggested, how can we explain the extensive participation of many relatively small and specialised firms in collaborative activity? Delapierre and Mytelka (1994: 13) point out that each of the major nodes or clusters in Figure 12.4 contains one or more small biotech firms, such as Genentec and Chiron, and that this is similar to the pattern of clusters in information technology, each of which contains a semiconductor manufacturer.
To begin to explore such questions, we shall start with an example of collaborative ventures along the lines discussed in Figure 12.3, and then consider the issues that may be of importance to relevant participants as new opportunities emerge. Figure 12.5 shows three firms; the firm in the middle has been considering a new business opportunity, and, while it has the relevant technical expertise, it needs complementary marketing expertise to develop the venture. Both the other firms in Figure 12.5 possess the relevant expertise, and indeed they provide equally attractive matches in this respect as far as our original firm is concerned. As in the case of the joint venture in Figure 12.3, the venture is judged to be small scale relative to the scale of the respective firms, and so merger with either match is rejected as a potential solution. Consequently, collaboration is adopted as the preferred option in this case. Our original firm is indifferent between collaborating with either match; however, the firm on the left responds first to overtures, and a collaborative agreement jointly to exploit the new venture is set up between these two firms. Considerations such as these may lead to the appearance of collaborative activity in the first place as in Figure 12.4.
Figure 12.5 indicates that collaboration can be exclusive as well as inclusive. The corollary of the choice of the firm on the left as collaborator is the rejection of the firm on the top right in the same capacity. While this may represent a loss of opportunity for the latter firm in the context of the present venture, it may well have further consequences. Suppose that our middle firm is now considering more business opportunities and either of the other two firms could provide the requisite complementary resources, just as in the first case. While the middle firm may still be indifferent between either of the other two firms as potential collaborators considered in terms of potential resource matches, other considerations may now come into play. The location of its existing collaboration with the firm on the left may influence its decision as to which firm to choose for future collaborative agreements. The firm may be concerned about the possibility of opportunistic behaviour on the part of its collaborator, and the fact that its existing collaborative agreement with the firm on the left may be seen as providing a potential hostage helping to encourage good behaviour on the part of that firm. Indeed, the argument is symmetric, in that the other firm may perceive the co-ordination costs of collaboration to have been lessened through alliance formation as it can also use the existing collaborative agreement to encourage good behaviour on the part of its partner. This may lead to the consolidation of a formal or informal alliance between the two firms, as shown in Figure 12.6.
Figure 12.5 Collaboration
In Figure 12.6, the two diversified firms exploit multiple collaborations between business units. Formally or informally, these two firms have developed an alliance. In such cases, there can be clear and strong efficiency advantages for an alliance over alternative arrangements that take no note of the identity of business-level collaborators. Alliances can help provide an umbrella to encourage and sustain a variety of collaborative arrangements operating at business-unit level between alliance partners, just as can twinning agreements between pairs of cities or universities. Twinning agreements at the level of the overall systems can foster and sustain lower-level projects carried out between individuals, groups and departments located in the respective partners. An efficiency rationale for alliances would start by noting that they may reduce co-ordination costs and guard against potential opportunism. Cheating on a distant, isolated collaborator is one thing; projects being conducted or planned by others within your system which can be endangered by knock-on reputation or retaliatory effects are likely to represent a hostage ensuring good behaviour. What is also worth noting about such arguments is that they raise the possibility that the formation and maintenance of alliances may be characterised by path-dependency, in that ‘important influences upon the eventual outcome can be exerted by temporally remote events, including happenings dominated by chance elements rather than systematic forces’ (David 1985: 332). Firms brought into contact and subsequent alliance through earlier collaboration may find it worthwhile to maintain the partnership after the original collaboration has been wound up. Once patterns of collaboration have been established, they are likely to influence where and between which parties future collaborative agreements are established.
Figure 12.6 Alliance
In short, corporate and business strategy levels interact and influence each other. The growth of diversification (corporate strategy) stimulates collaboration (business strategy). But diversified firms that are pursuing multiple collaborative opportunities (business strategy) may seek to concentrate clusters of linkages with a limited number of partners (corporate strategy) where possible because of the reduced co-ordination costs that alliance may afford.4 Both corporate and business strategy levels contribute to this resolution; in such cases the phenomenon of alliance cannot be understood without explicitly recognising the potential influence and interplay of both levels of analysis.
Up to this point we have focused on a rationale for business-level collaboration and firm-level alliances, in both cases involving co-operating pairs. There remains the further interesting possibility that co-operation may take place at even higher levels, involving groups or nodes of firms. However, there is a simple question that turns out on closer examination to be extremely complicated in such cases; what are the boundaries of a specific alliance? In some cases this question is straightforward even for cases involving multiple firms. Airbus Industrie, with its multiple partners, and the IBM–Motorola–Apple alliance to develop the RISC microprocessor are good examples of alliances created around shared projects. However, in networks the answer is frequently less obvious.
While these issues obviously require further investigation, there is one striking pattern which is embedded in Delapierre and Mytelka’s (1994) analysis and is worth noting. Almost all the firms have more than one partner, though none has more than four. However, just as collaborative arrangements tend to cluster between selected partners, so alliances themselves appear to exhibit a strong tendency to cluster. This can be expressed in a single statement; for any given alliance, there is a strong probability that both partners share a further partner as well as specific technology cooperation agreements.
Thus, Figure 12.4 illustrates seven triads in which participating firms share partners – that is, Hoffman-La Roche–Kodak–Cetus, Merk–Chiron–Ciba-Geigy, two triads involving Smith Kline and three triads involving Japanese firms plus Genentec. The reasons for the triads are not immediately obvious. It could be that complementarities or technological convergence drew the partners together; but, whatever the particular reasons, it may be worthwhile considering possible efficiency implications of clustering partners within a club or network. Some such implications can be pursued using Figure 12.7, which adds a new firm to the analysis of Figure 12.6. Our new firm is a three-business firm based around a common marketing expertise and is shown on the mat in Figure 12.7.
Suppose that our new firm has already set up an alliance with the firm on the left, and this is embodied in three collaborative agreements between the two firms. It has two other potential venture opportunities, and in this case it could have chosen the third firm on the mat or the firm outside the mat. Suppose also, as in the previous cases, that the firm outside the mat would have provided as satisfactory a resource match as could be provided by the firm on the mat. Why should our new firm prefer the other firm on the mat over the firm outside, either as collaborator or as alliance partner?
A possible stimulus in this respect is provided by the new firm’s existing alliance with the firm on the left. If our new firm was to be adversely affected through opportunistic behaviour inflicted in other collaborative agreements or alliances, the firm’s original partner is likely to be concerned if such damage could impair the new firm’s ability to function effectively in its original partnership. A partner’s overall health (and ultimately survival) is likely to be of direct relevance in any alliance, and threats to a firm may be regarded as an indirect threat to its partners. Consequently, our new firm may be more relaxed concerning the possibility of collaborating with the other firm on the mat, given that its existing partner also has an alliance with the other firm on the mat and could presumably use the constituent collaborative agreements to coerce it into good behaviour if necessary. In short, hurt me and you might also indirectly hurt your other partner, who might retaliate. However, the potential reduction in co-ordination costs that the new firm might enjoy through being hooked into such a network or club is not limited to its transactions with the third firm, or indeed limited to the new firm itself. Each of the three firms on the mat in Figure 12.7 might enjoy increased security and associated reduction in co-ordination costs in each of its alliances through being a member of this club.
Figure 12.7 Club or network
Group sticks or carrots encouraging or enforcing responsible individual behaviour could also operate at the level of broadly defined networks or nodes of the type identified by Delapierre and Mytelka (1994). It reinforces the point made earlier that the apparently simple question ‘What are the boundaries of the alliance?’ is not so simple. It may even be the case that there may be clubs within clubs, with tightly integrated triads embedded in more loosely coupled networks or modes in some cases. If political alliances can tolerate the possibility of ‘variable geometry’ or ‘multi-speed’ coalitions, as in the case of European integration, then similar possibilities may be entertained for industrial alliances.
The efficiency implications of clubs and networks are not straightforward, but one point that can be made here is that they must involve different levels of analysis, just as did the relationships between business-level collaboration and corporate-level alliances or partnering. If networks or clubs of closely associated firms exist, then a firm’s choice of partners is likely to be influenced by the club(s) it belongs to, or would like to belong to. Similarly, what partners a firm has, or would like to have, is likely to influence the club(s) it joins. The levels interact, with choice of specific partners influencing and limiting choice of clubs, and choice of clubs influencing and limiting choice of partners. Thus, clustering in our example takes place here at three levels: clusters of collaborative agreements around individual firms (diversification driven), clustering of collaborative agreements between firms (alliance motives) and clustering of co-operating firms (club behaviour). Each level of behaviour interacts with the one above or below, and if any level of behaviour was studied in isolation, it would obscure or overlook major influences on the pattern of co-operative behaviour.
This type of approach can also help us analyse the participation of small specialised firms in collaborative agreements. We have argued that decisions such as those on technical co-operation tend to favour hierarchical solutions, while small size and specialisation favour merger solutions over collaborative alternatives. At first glance the involvement of small specialised firms in these clusters appears inconsistent with such arguments.
In fact, diversification can still be seen to exert a powerful influence over collaborative activity in such cases, though one step removed – here it is sufficient that some of the small specialised firm’s multiple partners are large and diversified for collaborative solutions to be stimulated. For example, merging Genentec and Chiron with all of their direct partners in the respective cases would force marriages of Monsanto and Mitsubishi, and Ciba-Geigy with Johnson-Johnson, respectively. This leads us into the barriers to merging diversified systems discussed earlier and illustrated in Figures 12.2 and 12.3. However, if a small specialised biotech firm was to merge with only one of its existing partners, this would only fully internalise one set of agreements while leaving the rest still to be exploited through cooperation agreements. Against the limited gains that such partial internalisation offers must be set the potential impediments to existing and future collaboration in cases where loss of independence, and assimilation within a potential or actual competitor, is seen to matter. This is illustrated in Figure 12.8, where a small specialised firm is added to the mat of Figure 12.7. This firm only has three collaborative agreements, but if the merger option was to be adopted in each case, it would indirectly lead to the combination of all four firms on the mat into a single large firm. Thus, the small single-business-unit firm illustrated in the four-firm cluster in Figure 12.8 remains independent and does not merge with any or all of its partners. Diversification still plays an important role in inhibiting further merger activity, though in this case it is the diversification of the small firm’s multiple collaborators that is particularly relevant.
It is useful to contrast this with circumstances in which clustering of collaborative agreements would tend to favour the merger alternative. If a small specialised firm has multiple actual or potential knowledge-based links with other small specialised firms, then multi-firm merger to create a multi-business firm is the obvious solution. Alternatively, if a small specialised firm has multiple actual or potential knowledge-based links with one partner, then merger with its partner is still the obvious solution, whether or not the partner is large and diversified. It is the special case of multiple partners, some of whom turn out to be large and diversified, that creates the special circumstances in which partnership arrangements are favoured over merger in systems characterised by a dense thicket of knowledge-based agreements in which a small specialised firm is involved.
Figure 12.9 puts the club or network of Figure 12.8 in a broader context by recognising that firms may have to go beyond the boundaries of particular clubs to pursue collaborative opportunities in certain cases. In Figure 12.9 two of the firms in our club have had to search outside for collaborators to provide complementary resources for new ventures. In this example we have restricted consideration to the new collaborators themselves. However, these new firms may well be members of other clubs or networks, and these clubs may be weakly linked in similar fashion to other clubs and networks, as in the interrelated nodes illustrated in Figure 12.4. Figure 12.9 now displays all the major elements contained or implied in Delapierre and Mytelka’s analysis in Figure 12.4; notably, clustering of links in the form of highly diversified firms, clustering of links within alliances, clustering of firms within clubs and involvement of small firms in collaborative activity. The perspective here sees corporate diversification as the critical trigger leading to the formation of first collaborative activity, and subsequently alliances and clubs. In this perspective there is no conflict between the relative costliness of collaborative activity, such as joint venture at business-unit level, and its proliferation in recent years. Indeed, if joint venture was not a generally inferior and inefficient mode of organisation compared to single-firm alternatives when analysed solely at individual-business level we would have expected to have seen its appearance in the earlier stages of industrial development when smaller, more specialised firms predominated. For large diversified firms, collaborative activity such as joint venture may be locally inefficient (at the level of the participating business units) but globally efficient (at the level of entire firms). This is the essential starting point for analysing the evolution of the different levels of co-operative activity that we have explored here.
Figure 12.8 Small-firm involvement in collaboration
Figure 12.9 Club and extra-club linkages
CONCLUSIONS
The perspective outlined here helps integrate multiple levels of co-operative activity in the firm; it was argued that business-, firm- and group-level cooperative activity may all be distinctive phenomena, with each level influencing the formation and maintenance of co-operation at other levels. Corporate diversification was seen as playing a crucial role in stimulating the development of co-operative activity at business level in the first place, and merger was analysed as a potential complement as well as a substitute for collaborative activity such as joint venture. The paper helps to reconcile the costliness of business-level co-operative activity such as joint venture with the proliferation of such agreements in recent years.
Co-operative activity in many sectors typically involves clustering behaviour in at least four levels: clustering of linkages within firms (diversification), clustering of co-operative agreements around firms (joint venture and other collaborative activity), clustering of agreements between selected partners (alliances) and clustering of partners themselves (networks or clubs). Analysis of, say, alliances necessarily implies co-operative behaviour at business, corporate and group or network levels. The levels typically will interact, and analysis has to recognise both the multiple levels of cooperation and their potential interaction if it is not to present an incomplete and partial analysis of the alliance phenomenon.
Finally, as Richardson points out, ‘Firms form partners for the dance, when the music stops, they can change them’ (Richardson 1972: 896). But does clustering introduce elements of stability that bond partners together when the music stops, or does fickleness and opportunism override the advantages of stable alliances and club membership? It is questions such as these that can be raised by the analysis of collaboration as a multi-level clustered phenomenon.
NOTES
1 Kay (1982) looks at this issue in more detail.
2 Similar arguments for and against selective disinvestment hold in the case of firms wishing to disinvest in businesses which might otherwise invite antitrust attention if combined with a related business of the other firm.
3 For example, Scherer and Ross (1990: 92) show that the diversification of US corporations during the period 1950–75 was largely due to merger and not internal growth.
4 This, of course, may mean that partnership considerations may override business strategy considerations. The most attractive collaborator seen from the level of individual opportunities and businesses may not be the chosen collaborator once partnership considerations are taken into account.
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