Managing Dynamic Capabilities in Alliance Portfolios

Table of content

List of Figures

List of Tables

0 Introduction
0.1 Purpose
0.2 Organisation

1 Resource-based View
1.1 Basics
1.2 Paradoxes and Critique
1.3 Summary

2 Dynamic Capabilities

3 Strategic Alliances and their Resource-based View Application
3.1 Definition
3.2 Resource-based View of Strategic Alliances

4 Alliance Portfolio Management
4.1 Alliance Capability
4.2 Alliance Portfolio
4.3 Alliance Portfolio Capital
4.4 Role of the Dedicated Alliance Function
4.5 Summary

5 Hypotheses
5.1 Alliance Portfolio Management
5.2 Alliance Portfolio Formation
5.3 Alliance Portfolio Governance Structure
5.4 Alliance Portfolio Synergy Creation
5.5 Role of the Dedicated Alliance Function
5.6 Leveraging Experience

6 Discussion & Conclusion

7 Future Research

Literature

List of Figures

Figure 1: Organisation of the thesis

Figure 2: Competitive advantage by Barney (1991)

Figure 3: The resource-based view by Peteraf (1993)

Figure 4: Rent creation of strategic alliances by Lavie (2006)

Figure 5: Alliance portfolio management

Figure 6: Knowledge management in strategic alliances and alliance portfolios

List of Tables

Table 1: Literature approaches to dynamic capabilities

Table 2: Examples of strategic alliances

0 Introduction

The field of strategic management deals with understanding the ways how firms achieve competitive advantage and how they create superior value. Knowledge creation is carried out by explaining phenomena that can be observed in business life and by applying and developing theories and their implications. Often, new perspectives emerge through criticism of existing models. A similar process was necessary to discover the potential of the resource-based view, which had taken almost 30 years from its first systematisation to an increasing amount of literature dealing on the topic. The resource-based view nowadays reflects one of the most important perspectives on strategic management. Basically, the resource-based view is a platform for many research streams, underlying the same basic assumptions, that presently are creating new knowledge, a better understanding and will continue to do so in the future.

In fact, the resource-based view is a result from the critics of the industry structure view and has gained its popularity from the potential which it has proven by sourcing several research ideas (Bruton et al. 2004). Initially, the resource-based view was seen as the opposite of the industry structure view, which is externally oriented whereas the resource-based view focuses on firm’s internal processes to achieve competitive advantage. From today’s point of view, an integrated ansatz is traced. Every different perspective relies on a certain number of similar assumptions with another perspective. Often, it seems possible to explain business phenomena by integrating theories into a consistent view. This approach has had potential for highly-influential strategic management theories and it has still for future research. Especially, the transaction cost theory provides valuable extensions and explanations for observations within the resource-based view (Madhok & Tallman 1998, White & Lui 2005). The same statement is valid for the integration of the resource-based view and the industry structure view. In fact, Prof. Barney who established the most cited basis for the resource-based view in 1991 considered varying embodiments for the resource-based view since the perspective is highly related to micro-economics, evolutionary economics and the industry structure view (Barney 2001). With respect to the foundation of the resource-based theory, many other perspectives emerged, such as the competence-based view, the routine-based view, the capability-based view, the dynamic capability perspective, the knowledge-based view and others. However, the resource-based view is probably the most influential theory within the field of strategic management.

This paper investigates the management of strategic alliances. Strategic alliances have been an emerging phenomenon since the early 1990’s (Arndt 2005). The research of strategic alliance is based on a mixture of theories. In fact, most of the theory development for strategic alliances built-up relative independently from research in other areas. Certainly, the complexity of the topic which integrates the perspectives of two or more firms while simultaneously retaining the perspective of the focal firm respectively the partner firm each of which pursue multiple targets with their alliance building. Thence, systematisation is difficult. Another elusive problem forms the empirical verification of performance-related frameworks. The outcomes of strategic alliances are generally difficult to specify. Often, at least some of the outcomes are highly intangible. Many relationships rely on knowledge flows. In addition, the imposition of earnings and the costs of a strategic alliance are time-consuming or even impossible because of the difficulty of separating alliance deployments from daily business deployments. The most profound problem, however, is addicted to performance measurement. Stock market returns from alliance announcements, for example, may be ambiguous. Company reports on the other hand do not exemplify alliance outcomes. Finally, empirical data will be hard to capture. Consequently, empirical research uses a wide variety of methods that seem to be more or less valid to measure performance. Alliance research concentrates on two aspects: the management of dyadic alliances and the field of networks. In addition, I assess alliance portfolios which represent the entirety of a firm’s alliances. Except for a research gap that I identified in that business area, alliance portfolio management appears to be a logic development from the increasing importance of strategic alliances for the market as well as the single firm. Thereafter, the research target of this book is described in detail in the following section.

0.1 Purpose

The text aims to contribute to the research of strategic alliance management and attempts to fill a gap in the area of alliance portfolio management by exemplifying how dynamic capabilities can be created within this context. Such a framework can be translated into several consequences for managers. The research makes a statement with respect to organisational structures of alliance management. Furthermore, it points out management tools to organise alliance knowledge management to effect superior performance from the firm’s alliance portfolio. To theoretical constitution of the gains from alliance portfolio management, I had to approach the content of alliance management. In other words, the areas of special interest for alliance management had to be determined. Thus, the first research question is:

- What are the constituting factors of an alliance capability and under which circumstances do they create additional value in an alliance portfolio?

I will review the dominant competitive factor identified from the literature for alliance success. For superior value creation, this factor – namely experience – needs to be leveraged to strengthen the benefits of alliance portfolio management. Therefore, I ask:

- How can alliance experience be leveraged, i.e. how can learning effects within the alliance capability be leveraged?
To answer those two questions, a framework for highly-competitive alliance management will be provided which expands the existing literature in two ways:
- Alliance portfolio management will be theorized and opened to empirical verification
- The role of experience leveraging in alliance management will be highlighted in providing a structure to improve alliances and alliance portfolio management.

To do so, I will describe the state of the art of research in this field step-by-step. The exact structure is described in the next section.

0.2 Organisation

This book is organised in 7 chapters as you can see from Figure 1. The first chapter will discuss the resource-based view fundamentals and introduces into the most important paradoxes of the theory. Chapter 2 adds the dynamic capability perspective which expands the resource-based view by complementing resource reconfiguration and renewal. Chapter 1 and 2 inform about the theoretical basics which is required to understand the theoretical argumentation within the framework expansion provided in this paper. Chapter 3 follows up by presenting a short overview about the importance and fundamental systematisation within the field of strategic alliances. Moreover, the phenomenon of strategic alliances and the resource-based theory will be linked in Chapter 3. Essentially, it summarizes on the focal research aspects within the area of strategic alliances by emphasizing aspects resulting from the resource-based perspective. Chapter 4 then introduces the important concepts upon which the framework offered in this paper will rely: the alliance capability and the role of alliance experience for performance, the alliance portfolio, the alliance portfolio capital and the dedicated alliance function. Interrelationships among the latter mentioned concepts will be illustrated. Nevertheless, the value creation potential of strategic alliances and alliance portfolios can seldom be achieved in real business. A framework for the differences between the potential and the realized value will be provided. At the same time, Chapter 4 presents an overview of the literature upon which the framework in form of the hypotheses is based. In Chapter 5 three categories of hypotheses are provided to answer the two research questions. The first category deals with identifying the components of an alliance capability. The second category discusses the influence of an alliance competence center – namely, a dedicated alliance function - to support the management of strategic alliances and alliance portfolios developing the alliance capability. The third category finally concretises the leveraging function of a dedicated alliance function using an example of knowledge management implementation that has been adapted to the needs of alliance portfolio management. The framework resulting from the hypotheses will be discussed in Chapter 6. Managerial implication will be addressed. Chapter 7 ultimately discusses the limitations of the framework and future research that is needed in this area.

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Figure 1: Organisation of the book

1 Resource-based View

In this chapter, I will introduce the basic ideas of the resource-based theory. The resource-based theory developed from different streams, mainly from the industrial economics perspective. At the same time the resource-based view provided an answer to the upcoming industry structure view of Michael Porter. The propositions described by Peteraf (1993) and the resource attributes explicitly discussed by Barney (1991) establish a platform for many research streams and are, in fact, responsible for many real world insights and mechanisms that the research discovered in the past few decades. After discussing the basic thoughts of the resource-based view, the text will delve into paradoxes and critiques. The reader must be aware of some restrictions of the resource-based view to better understand the implications and the argumentation underlying the resource-based view. This knowledge will simplify the access to the field of strategic alliances under the perspective of the resource-based view and the very important dynamic capability perspective.

1.1 Basics

The fundamentals of the resource-based view reflect the basic assumptions and resource attributes that relate the theory to a strategic management theory. This is the question of how to generate competitive advantage. A short introduction to the fundamentals of the resource-based view is provided. The major conclusions are finally summarized, before investigating the limitations and potential of the resource-based theory.

The field of strategic management aims at discovering how firms achieve competitive advantage. This question was raised by Smith (1776) in his famous book “The Wealth of Nations”. He discussed the issue by analysing differences in the productivity of workmen and their consequences. Since then, the strategic perspective was almost equivalent to the industrial organisations’ perspective. In 1980, Porter published his influential book “Competitive Advantage”. He postulated that competitive advantage emerges from the successful positioning as cost leader, quality leader or the positioning within a niche with sufficient entry barriers.^[1] Concurrently, the articles of Nelson & Winter (1982) and of Lippman & Rumelt (1982) were stimulating the resource-based debate based on the ideas of Smith (1776), Schumpeter (1934) and Penrose (1959) trying to explain why workman and more general firms are different. The observation that firms like IBM or General Motors constantly performed better than their competitors could not be explained by Porter or by the existing literature of the resource-based view. However, the theoretical foundations of the resource-based view provide deeper insights into how value can be created and may be sustained as required for superior performance based on the individual strengths of the firm (Barney 1991, Nelson & Winter 1982, Teece 1984, Wernerfelt 1984). The concept of gaining competitive advantage has not yet been fully understood.^[2]

The key concepts of the resource-based view, namely resources, capabilities and competitive advantage, are used in different ways in the literature. Therefore, I will briefly discuss some discussion about each of them.

Resources principally underlie two different interpretations. According to Daft (1983) and Barney (1991) firm resources cover all tangible and intangible assets and their deployment. Hence, the firm can be understood as an aggregation of resources. Grant (1991) distinguishes between the concept of resources and capabilities. He defines resources as “inputs into the production process”. They can be characterized as tradable assets controlled by an organisation. More important for the realisation of competitive advantage, though, is the capacity to utilize resources, so-called capabilities (Penrose 1959, Grant 1991, Amit & Schoemaker 1993, Henderson & Cockburn 1994, Ambrosini 2003). They are specifically-embedded into the organisation, non-tradable and purposive-operated resources (Helfat & Peteraf 2003). For instance, weapons offered by a firm at the world market may be a resource, but the offset strategy is a capability.^[3] Some authors (Grant 1991 among others) refer to the single operation or a single pattern of problem solving as a routine and only call a bundle of routines or multiple pattern of problem solving a capability. The distinction may be value-adding in a specific context to emphasize differences from the focal point of the discussion.^[4] Essential, instead, are the attributes of resources respectively capabilities for understanding competitive advantage. Many authors contributed to the ongoing discussion about the conditions of a competitive advantage (e.g. Penrose 1959, Wernerfelt 1984, Dierickx & Cool 1989, Conner 1991). I will delve into the highly influential papers of Barney (1991) and Peteraf (1993) since they represent the most comprehensive presentation of the resource-based view principles and integrate the most important frameworks of the other authors. According to Barney (1991) four conditions enable a firm to achieve a competitive advantage as shown in Figure 2. Accordingly to Barney (1991) the attributes valuable and rare originate the potential for a resource to be a source of competitive advantage.^[5] If a resource is additionally imperfectly imitable and imperfectly substitutable, it even has the potential of being source of sustainable competitive advantage.

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Figure 2: Competitive advantage by Barney (1991)

Peteraf (1993) constitutes the basic assumptions underlying the resource-based theory. The result is reproduced in Figure 3

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Figure 3: The resource-based view by Peteraf (1993)

Nelson & Winter (1982) established the idea of an evolutionary path of capabilities within the firm. Thus, firms are heterogeneous (Barney 1991). Nonetheless, the firm must at least match the marketplace equilibrium with their capabilities to withstand competition. A relative difference in higher value creation to this break-even point, will create a competitive advantage through above-average returns (Shoemaker 1980, Priem & Butler 2001b). The value creation starts from the assumption of superior (valuable) resources which are scarce. Scarcity again relates to the marketplace equilibrium i.e. they do not determine demand (Barney 1991, Peteraf 1993). The scarcity argument contributes to the difference in the resource utilisation of firms. Ex ante there will be uncertainty with regard to the value of a resource because of differences in the ability to deploy the resource. Assume a Firm A that bids for a scarce resource which is considered to be worth 50 Euro. The same resource may have the value of 52 Euro for Firm B because of heterogeneous resource configurations. Firm B’s bid at 51 Euro will be accepted. Firm B gains above-average returns of 1 Euro. However, the capability of using the resource is ex ante uncertain. Therefore, Firm B may gain a competitive advantage when the ex post value is 55 Euro resulting from the uncertainty in deploying the resource. In other words, profits may not only originate in path dependencies, but from ex ante incertainty because a capability can only create profits ex post (Makadok 2001). Long-term exploitation of the resource implies isolation from substitutability and imitation (Rumelt 1984). Isolation refers to the degree and the costs of imitation, substitution and mobility. For example, reputation may be hard to copy or to replace. From the point of view of a single firm, reputation may not even be transferable, but is causally ambiguous.^[6] Therefore, it surely has the potential of being a source of long-term competitive advantage. Barney (1991) concludes that “a firm is said to have a competitive advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitor”.

The resource-based view as an answer to the external orientated industry structure view delivers useful systematisation. It rests upon the question how to configure the internal resource base to obtain competitive advantage. Especially the concept of Barney (1991) that requires certain attributes from resources – i.e. tangible and intangible assets – contributed to understand a competitive advantage. Peteraf (1993) clarifies four assumptions which constitute the foundations of the resource-based view and emerging research in this field. The definition of competitive advantage compares strategies. The strategy which is better than the other one will provide competitive advantage. On the one hand, this logic axiomatically raises numerous insights. On the other hand, serious criticism of being tautological rises. This paradox opens the field for some paradoxes that are implicitly produced in the theory. The next section will explore the most important ones.

1.2 Paradoxes and Critique

Every theory underlies restrictions. Two striking critiques of the resource-based view are discussed below. When investigating the resource-based context, limitations – especially those two – will constantly be part of the argumentation, implicitly or explicitly. The criticism determines the boundaries within knowledge creation utilising the resource-based perspective is possible.

The resource-based view meets with criticism (e.g. Priem & Butler 2001a, Priem & Butler 2001b, Lado 2006). Until now, there is no serious disadvantage through these entrapments since the resource-based perspective generates new management knowledge. Nevertheless, scholars and practitioners must be aware of these constraints. Then they may even create new synergies for theory formation (Lado et al. 2006). I will highlight the most conceptual ones.

[...]

^[1] The position within an industry thereby depends on five forces: supplier power, buyer power, threat of substitutes, barriers to entry and rivalry within the industry.

^[2] The concept constitutes a running target. Basically, if a firm improves its organisational structure to a degree which may have the potential to achieve a competitive advantage, other firms will follow immediately. At last, when research captures the impacts on such a development, the structural change will be open for all competitors. Exceptions are surely not fully covered in the literature.

^[3] The distinction offered in examples may not be exact in any case. Instead, the concept of capabilities is complex. For the purpose of this paper, a broad discussion of these concepts outweigh the benefits. Instead, the following discussion of routines will provided a sufficient basis for understanding.

^[4] The paper will differentiate if necessary.

^[5] The attributes has to be related to the market equilibrium.

^[6] Ambiguousness implies that the source of competitive advantage is hardly identifiable. If a competitor is not able to identify the source and the origin of competitive advantage of the focal firm, the competitor will not be able to copy it.