The Elements of Value
Network Alliances —
Strategies for Building Alliance Partnerships
A Deloitte Research Technology, Media and Telecommunications Study
Table of Contents
Executive 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
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Across the technology sector, in an era where the “open” business model is dominant, codevelopment 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 fulfills its value-based objectives.
Executive Summary
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 firms’ 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 firms 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 simplified? 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 influencing
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 firm’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?
Significant progress on this question can be made by exploring
current research on the management of network partnerships.
A number of key findings can then be synthesized into a
framework for capturing value through network partnerships.
This goes some way to providing a practical guide for the firm
implementing an “open” co-creation strategy.
The constructs of this framework, shown in figure 1, are
broadly categorized into three organizational capabilities
shown to be critical to firms 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 firms can
achieve new resource configurations 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 first 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 firms implementing a value-network strategy.
Figure 1. A Framework for Generating Value from a Network Alliance Strategy
Network
Alliance
Structure
Strategic
Intent
Network
Alliance
Formation
Governance
Structures
Network
Stability
Alliance
Scope
Network
Alliance
Management
Social
Capital
Relation
Dynamics
Knowledge
Transfer
Learning
Dynamics
Hub Firm
Orchestration
Deloitte Research – The Elements of Value Network Alliances
1
The Rise of the Networked Firm
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, firms 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 firms
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 profitability often dependent on a firm’s
ability to create and commercialize new technologies quickly
and efficiently, 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 firms.2 All said, using
network alliances to generate value seems more vital than ever.
2
Deloitte Research – The Elements of Value Network Alliances
The “Open” Business Model
Takes Hold
Management research has often viewed the concept of interfirm 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 benefits
of an “open,” distributed business model to fuel the growth
engines of otherwise stagnating firms.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 firms. 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 firm- growth.6
Relationships and partnerships that a firm 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 sufficiently 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 Challenges
The 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-specific alliance
management - in particular within the automotive industry and
the adoption of Japanese supply chain management practices11
- no consistent approach has emerged on the specific
routines, processes and structures with which firms 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 benefits 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 confidence
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.
Deloitte Research – The Elements of Value Network Alliances
3
The Pursuit of a
Network Alliance Strategy
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
definitions of alliance networks with which to frame the
question of why firms should pursue a collaborative strategy.
Some definitions 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 interfirm link that involves
exchange, sharing or co-development...15
Motivating Factors
The 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 firm’s competitive positioning;16 the use of alliances as
a means to reduce the production and transaction costs for
partner firms;17 and to increase the learning capacity required
to accumulate new skills or capabilities from alliance partners.18
Additionally, motivations may also differ significantly between
those firms considered technology leaders in their field 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 firms may to want
to forge alliances in order to move ahead of the leaders in the
technology-development stakes.19
The Benefits of Network Formation
Networks and alliances developed to generate value are
primarily associated with two distinct benefits for the firm
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 firm’s existing “absorptive capacity”
(its ability to assimilate and learn from new knowledge)
enhanced. Here, it is important to distinguish “knowhow” from information, with “know-how” consisting of
accumulated skills and expertise that entails a significant tacit
(or noncodifiable) 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
*
4
Deloitte Research – The Elements of Value Network Alliances
Network formation in other industries has also long been evident with some high profile 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 significantly 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 Collaboration
Most network alliance formation is driven by strategic
transformation-related goals such as innovation-based
growth objectives. Key questions on how well a firm can
execute against these strategic goals tend to focus on
comparative performance and profitability measures. As such,
strategists have often viewed firms 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
firm’s competitive environment and its opportunities and
threats therein.*23 Complementing this external positioning
perspective is the notion of a firm’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 benefit to
firms formulating an alliance strategy. Achieving competitive
advantage through distributed channels to market, such
as network alliances, can then have a direct impact on the
profitability of the firm. 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 flip side, firms thinking about an alliance strategy as a
means of gaining market share should also consider the impact
the resources owned or controlled by the firm will have on its
competitive environment. Simply put, when a firm’s resources
have the potential to be valuable, rare, hard to copy and
difficult to transfer between firms, the firm 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 flux, 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 firm’s capabilities can evolve to create value.28 Can a
network alliance be viewed as a specific 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 difficult for rivals to imitate or substitute.29
A firm’s choice of network partner firms 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 specific 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 Risks
Although the benefits can be significant, network alliance
formation also carries a number of potential threats to success.
These include being locked into unproductive relationships that
restrict a firm’s freedom to develop more lucrative alliances
elsewhere. Notwithstanding, relational risks can also include
lack of strategic fit in terms of complementary capabilities; lack
of organizational fit in terms of culture, internal processes and
systems; and a general lack of trust between the partner firms.
Added to this list of woes, concerns over inappropriate alliance
governance systems and a lack of flexible knowledge exchange
processes can prevent any network alliance from getting off
the ground in the first 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 significance to the firm.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 firm strategy. This model is focused more on overall industry forces rather than specific 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 firm 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 firms 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 firm profitability.
Deloitte Research – The Elements of Value Network Alliances
5
Structuring an Alliance Partnership
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 firm’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 specific 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” firms. In turn, these clusters provide
specific services and resources required to meet the particular
business objectives of the hub firms.**33
A Note on Equity – and Transaction
– based Structures
Governance 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 codified 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 firm leading the network (usually
called the “hub” firm), which is normally located at the center
of the partnership structure.
Analysis at these levels can enhance understanding of the hub
firm’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 firms can be achieved.
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Deloitte Research – The Elements of Value Network Alliances
A Note on Equity and Transactionbased Structures
Exploring governance mechanisms further, the issue of
managing transaction costs has proven to be influential in
determining appropriate methods for implementing a network
alliance strategy. This perspective emphasizes two main benefits
for the hub firm: efficiency from reducing the governance
cost of a transaction and strategic from optimizing a series
of relationships within a network. Achieving these benefits
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 significant 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 firms. 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 first 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 specific network structures can include those tied directly to a firm’s value chain
(VCAs – value chain alliances), which are the vertical links between independent firms 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 film/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).
Learning to Lead the
Knowledge Race
In many instances across the technology sector, firms
will pursue a network alliance strategy principally to gain
knowledge and learn from those partner firms 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 firms
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.
To mitigate the threat of such opportunism, firms 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 firm attempting to internalize
each other’s knowledge may lead to the goals of the alliance
being compromised. Rather worryingly though, it seems if
inter-firm 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 firms with substantial competitive overlap
will want to limit the alliance scope to control knowledge
sharing while still attaining the alliance goals.
Managing the Threat of
Opportunistic Behavior
In normal circumstances, network partner firms 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 firms 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 specific knowledge
or information without contributing to the overall goal of
the network partnership. This can lead to private benefits
that outweigh the overall common benefits 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 firms to glean competitive intelligence
from alliance partners. This can include information on
strategic planning and future technology development
goals, competitive benchmarking data, identification of key
personnel (who may then be enticed to leave), and codified
standard procedures data. Deep exposure to tacit knowledge
and the surrounding skills and routines in use by partner
firms is also to be expected from network participation and
therefore placed at risk of being codified for less than altruistic
purposes.41
*
This situation has been noted in the past, perhaps most famously in documented alliances
between US and Japanese firms 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).
Deloitte Research – The Elements of Value Network Alliances
7
The “Trying to Learn, Trying
to Protect” Dilemma
Building Social and Relational
Capital
Successfully meeting the objectives of a network alliance
strategy often means one firm 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 flows to avoid unintentional
leakages of valuable technology. To exchange knowledge
effectively, each of the firms 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 firms’ capability to absorb new
knowledge.43
In sectors where uncertainty precludes stability in strategic
planning, collaborative networks can enable firms to
overcome the risks and costs of specialization through internal
development. However, alliance firms need to establish trust to
offset the risks of perfidious network participants appropriating
the fully evolved capabilities of partner firms without absorbing
the prior costs of R&D. One way of building trust is to foster
sufficiently deep ties between the network players to ensure
opportunism is reduced.45
Furthermore, in many cases where firms are enticed into
alliances in the hope of winning a “learning race” - where the
use of resources is determined by the expected benefits 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 final risk with mismatched learning capacities is the
potential for partner firms’ 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 “hardto-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
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Deloitte Research – The Elements of Value Network Alliances
This is an important concept within network analysis and social
networks in particular (those networks built on social contacts
between firms). Here, the need for firms 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
confidence that a firm will have that a network partner will not
exploit the vulnerabilities of another.46
Taking this further, the degree to which partner firms 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, decisionmaking styles and similarities in general worldviews, etc. In
gauging the level of relational quality existing between two
firms, four elements are critical:
• Any previously demonstrated trustworthiness based on the
partner firms’ 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 confidence/trust
between the firms. At this stage, opinions are formed about
each firm’s organizational and technical capabilities and
ethical behavior. All of which will influence trust levels.
• The direct experience of each partner firm’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 firm’s behavior outside the
context of the alliance will also affect each firm’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 firm.
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 firm to collaborate beyond the initial
scope of the alliance agreement. Doing so can lead to further
value creating activities and ease any potential conflict
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
Levels of
“Comfort”During
Negotiations
Relational
Quality
Partner Firm
Behavior Outside
the Alliance
Partner Firm
Behavior During
Alliance
Monetizing the Good Will
In 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 sociallybased alliance formation. Network partners may then also
defer on the costly exercise of developing, monitoring and
enforcing intricate contracts. Finally, the presence of inter-firm
trust can also increase the efficiency of intra-network related
tasks with firms being able to collaborate closely without
having to adhere to costly formalized hierarchical controls.49
Deloitte Research – The Elements of Value Network Alliances
9
Pulling it all Together – Guidelines
for Structuring and Forming Value
Network Alliances
This first 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 fields of strategy, transactionbased economics and knowledge management were identified
and drawn together into a framework for capturing value
from collaborative partnerships. Summarizing these research
findings 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:
Figure 3. Alliance Structure and Formation Capabilities
Network
Alliance
Structure
Strategic
Intent
Governance
Structures
Network
Stability
Social
Capital
Relation
Dynamics
It should go without saying but firms 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 firms
• From this determination, the scope of the alliance must be
carefully planned – strategic goals should always converge
but competitive goals can differ
Network
Alliance
Formation
Alliance
Scope
Align on Strategy and Scope
• Those partner firms with significant 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 Right
Successful network alliance partnerships hinges on how firms
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
firms. 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 firms. Collaboration can
often be enhanced and productivity boosted when partner
firms have enough confidence in each other that formal
governance structures are thought unnecessary.
10
Deloitte Research – The Elements of Value Network Alliances
Manage the Learning Dynamic
Build Trust and Success will Follow
Network partnerships thrive on an open knowledge exchange
between the partner firms. 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:
In 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 sufficiently deep ties between the network players.
Some steps on the way to a successful trust strategy include:
• Be sure each of the network partner firms has similar learning
capacities to each other. Opportunism risks will be elevated
if there is a mismatch in terms of each firms’ capability to
absorb new knowledge.
• Selecting network partner firms on the basis of degree of
compatibility of corporate cultures and decision-making
styles - an important first step in the trust process.
• Minimize the potential for “learning races” to occur.
The network hub firm should carefully balance an open
collaboration environment with controlled flows 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.
• A focus on the prior relational quality attributes of the
alliance partners can enhance the comfort and confidence
levels between each partner firm. This will then provide
opportunities for each firm to collaborate beyond the initial
scope of the alliance agreement.
• Hub firms should astutely manage behavioral patterns
within and outside the context of the alliance. This will help
strengthen attitudes on trustworthiness and reputation and
ease conflict resolution that may arise during the day-to-day
running of the network partnership.
Deloitte Research – The Elements of Value Network Alliances
11
Taking the Next Step
At 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 efficiency,
and other key business expectations. By working with us, we
can help clients:
• Define the basis for success, and understand the other
party’s basis for success, including the metrics by which they
intend to judge the relationship.
• Define 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.
The Deloitte Enterprise Value Map™
12
Deloitte Research – The Elements of Value Network Alliances
Endnotes
1
Hughes, J. and Weiss, E. (2007), “Simple rules for making alliances
work”, Harvard Business Review, 85: 122-131
2
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 firm
networks: From emergence to early growth of the firm”, 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 profiting from technology” Academy of Management
Perspectives, 20: 86-88
9
Anand, B. and Khanna, T. (2000), “ Do firms 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 Press
18
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 firm,
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 firms: 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 firm 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 firms 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
Deloitte Research – The Elements of Value Network Alliances
13
28
For a discussion on how dynamic capabilities can be configured 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 LeonardBarton, 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 interfirm 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: 128152; 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
14
Deloitte Research – The Elements of Value Network Alliances
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
Author
Recent Thought Leadership
Dr. Scott Wilson
Deloitte Research
Deloitte Services LP
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• “Telecommunications Predictions, TMT Trends 2008”,
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About the Author
Scott 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.
Acknowledgments
The 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).
• “Technology Predictions, TMT Trends 2008”, Deloitte Touche
Tohmatsu
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Tohmatsu
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Tohmatsu
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Touche USA LLP
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& Telecommunications Security Survey”, Deloitte Touche
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For More Information
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