"When Networks Matter", Douglas Reid, Queens University, at the Strategic Leadership Forum Toronto, October 3, 2002
Strategic Leadership Forum Toronto luncheon at the Ontario Club, Thursday, October 3, 2002, 12:55 p.m.
These participant's notes were created in real-time during the meeting, based on the speaker's presentation(s) and comments from the audience. These should not be viewed as
official transcripts of the meeting, but only as an interpretation by a single individual. Lapses, grammatical errors, and typing mistakes may not have been corrected. Questions about content should
be directed to the originator. These notes have been contributed by David Ing (email@example.com) at the IBM Advanced Business Institute ( http://www.ibm.com/abi ).
Introduction by Michael Koscec, (Entech Corporation), SLF-Toronto chair of the thought leadership series for the year
Reminder of upcoming events
Douglas Reid is an assistant professor of business strategy, Queen's School of Business
Teaches strategy in undergrad and graduate levels, and global strategy in executive program
Research focused on strategic alliances
Research published in the International Journal of Management Reviews
Working on two books
Conducting an Alliances in Canada 2002 Research Study: top 1500 Canadian firms
Also a consultant on alliance formation and other programs
Studied at Ivey School at Western Ontario, will convocate next year
MBA, U. of T, MPA at Queens
[Offline, I had a conversation with Douglas that he was working with Peter Keen]
Unveiling the research for the first time, today.
Profound managerial impact.
Some definition and clarification
Study requires some assumptions about cooperation in business
Send an e-mail for citations
Study is built up from work that is known to be true.
Networks, and why they matter
Research setting -- have been studying airline industry
Return is only 2% in a good year.
They produce something -- travel
Findings, what it means for business
Alliances (strategic) has become a debased term
Has more to do with internal positioning, and less with reality.
Need to be clear about terminology, because if we call everything an alliance, nothing is an alliance.
Diagram from Yoshino ∓ Rangan, Harvard 1995:
Interfirm linkages with two subtypes:
(A) Contractual agreements with two subtypes
(i) Traditional contracts, including arms-length buy/sell contracts, franchising, licensing and cross-licensing
(ii) Nontraditional contracts, including joint R∓D, joint product development, long-term sourcing agreements, joing manufacturing, joint marketing, shared distribution services, standards
setting / research consortia
(B) Equity arrangements
(i) No new equity, including minority equity investment, equity swaps
(ii) Creation of equity, including nonsubsidiary joint ventures (fifty-fifty joint ventures unequal equity joint ventures), joint ventures between subsidiaries of MNCs
(iii) Dissolution of equity, as mergers and acquisitions.
For strategic alliances, exclude the leftmost and rightmost extremes: traditional contracts at leftmost; and mergers and acquisition at rightmost.
Everything in the middle is an alliance
When someone buys something from you, they're a customer; an M∓A is a takeover.
Need to look at things that are really cooperative.
Define strategic alliance as a cooperative arrangement with an agreement between a company and one or more others ... [can have unilateral withdrawal] ...
... that enables the company to implement its strategy ... [a way to do things] ...
... that endures beyond a singles transaction...
... and which entails ...
intended mutual benefits [with an implicit assumption that both parties will be better off, and one party should be happy that the other is being successful] ...
incomplete contracts [can't resolve everything when we begin]
shared control [some control over partner's assets]
Different types of arrangements:
Independent company C created by resources contributed by parents A and B (may be equal or unequal ownership)
Partnership where the two parties own part of the other (may be unilateral or bilateral)
Common in technology industries
Contract is given to supply, produce or distribute a firm's goods or services (without equity sharing)
Simple contracts, will agree to do something
Cooperative strategy: an alliance lifecycle
Phases, analyzed [x-axis time, y-axis alliance maturity]
Evaluation and planning
How do you create value in each phase?
Alliances can be messed up at almost any point.
Studies consistently haven't told us much about anything.
50% of most strategic alliances terminate after 3 years.
After a great amount of hand-wringing, killing of trees, research, we aren't doing better with this knowledge.
Is there something else we should consider?
Is it not the partitioning, or is it personal (person-to-person) or structural?
Part of the problem in the field is the way we talk about alliances
Prototypically: start to analyze how company A and company B cooperate.
This is an insufficient context.
The real world of company is much more networked.
Companies are really embedded in networks of alliances.
Still have companies A and B, but lots of other companies that are connected to A and B.
Does all of this network stuff matter to A and B? Are they better off? Does the network add to the alliance?
The network effect on alliances has been under-researched.
Limited studies on how economic aspects of network-based interfirm exchange affects performance
Uzzi (1997) linked social structure and competition
Pooling resources between partners has been a major motivator for doing alliances.
Large number of studies:
Anderson (1990), Badaracco (1991), Bleeke and Ernst (1993), Burgers et al. (1993), Contractor and Lorange (1988), Dimaggio and Powell (1983), Grant (1996), Gullander (1976), Hamel, Doz and
Prahalad (1989), Harrigan (1983), (1985), Itami and Roehl (1987), Lorange and Roos (1992), Mitchell and Singh (1996), Richardson (1972), Singh and Mitchell (1996), Van de Ven and Walker (1984)
Resource may be tangible or intangible
Hamel (1991), Inkpen (1992), Inkpen and Beamish (1997)
Do they fit? Completementarity and fitness.
Child and Faulkner (1998), Dussauge and Garrette (1999), Das and Teng (2000)
Do the resources matter?
Determine whether there is a linkage between network-embedded resources and individual firm performance
Theorized, but not confirmed empirically
What resources matter?
If the linkage exists, why types of network-embedded resources are most important to firm performance
Partner, shared, partner's partners
Does it matter more to spend time on the choice of partner at the outset, or what you do during the alliance.
Could you choose a suboptimal partner, and still do well?
Start conditions or intradyadic dynamic changes most important to firm performance
Where to spend time -- partner qualification / selection or management of endyadic and exdyadic relationships.
Real-world example: airline industry
Air Canada is partnered with Lufthansa, most recently through Star Alliance
Lufthansa has partnerships with three companies in Europe (Air Dolomiti, Eurowings, Hahn Air) that are not partnered with Air Canada
When Air Canada thinks about working with Lufthansa, do these other carriers play a role?
Critical idea: companies will do things to mitigate resource shortages
Resource dependence -- rooted in an open system framework -- firm engage in exchanges with task environment to get resources
Meyer and Rowan (1977), Pfeffer and Salancik (1978), Scott (1987)
Preference over markets or "make" decision
Firms take purposive action to maximize organizational power through adaptations that reduce dependencies on others
Companies will adapt over time, and will try to change the world they're in.
Adaptations needed to overcome uncertainties of having to acquire resources from an environment -- Pfeffer (1978)
What will firms do to manage dependencies? (Pfeffer and Salancik (1978))
They'll adapt or alter constraints
They'll change interdependencies through merger, diversification or growth
They'll negotiate.through the enviroment with interlocking directorships or cooperative strategy
They may engage in political action.
The outcomes from successfully manage dependencies:
You improve performance
An increase in organizational power -- Pfeffer and Salancik (1978)
You mitigate organizational mortality --Ulrich and Barney (1984), Singh, House and Tucker (1986)
But do you improve performance?
Have found that people are over-measured and under-valued: measure too many things, and do too little with them
How do alliances help company survive?
Most alliances are unstable, and end prematurely - Blodgett (1992), Gomes-Casseres (1987), Kogut (1988), Park and Russo (1996), Park and Ungson (1997)
Survival is a gross measure of a lot things.
Barnard (1938:93) "nothing but the absolute test of survival is significantly objective" as a measure
Porter (1987) -- parents of successful alliances don't terminate relationships
Bane and Neubauer (1981) market exit indicates failure
Survival and market performance are related (Aldrich and Auster (1986); Evans (1987); Dunne, Roberts and Samuelson (1989)
Companies that don't survive give a signal.
JV studies have used survival and performance proxy
Brown, Rugman and Verbeke (1989); Dymsza (1988); Killing (1983); Li and Guisinger (1991); Parke (1991)
In this study, survival is the critical value to understanding performance.
Supported by research going back to 1938.
What does a partner do with networks, to improve the relationship?
Relative power increased through gaining control over resource flows -- Cook (1977)
Power explained not just by pairwise relations, but by linkages maintained by organization to broader environment on which it is dependent -- Benson (1975)
But no research linking munificense of a focal firm's network-based resource environment to the survival of an alliance in which that focal firm is a part.
Research setting: airline industry (not a paragon of virtue)
It's a dominant business
It's a production alliance, where termination likely signals poor performance
e.g. alternative is a research alliance, which has an clear end result as successful or not.
In a production alliance, don't know the alternative (i.e the road not taken)
Airlines can't do M∓A to flesh out capacity, so they need to do alliances
City-pair markets are stable, there are low cross-elasticities in substitution.
Principal resource is serving travellers.
People are interested in destinations: will buy travel based on the range of destinations offered.
Thus, research on additional destinations served, e.g. Air Canada will network into Lufthansa.
20 years of raw flight data (to 1997, at the beginning of large alliances such as Star Alliance)
Official Airline Guide
Identified 1051 code-share alliances
Screen out 137 dyads (cargo, subsidiary, bankrupcy, acqusition)
Cleaned out 111 dyads with missing information, mostly feeder carriers in the U.S.
Getting rid of these did not impact the means significantly.
Rich data source, almost a census.
Network of : C <--> A <--> D <--> B <--> E
Alliance in the dyad: A <--> B
What to measure?
Everything in the data if viewed through the lens of a focal partner, e.g. A
A has partners not connected with B, B has partners not connected with A
Why do A and B cooperate?
Actually most airlines don't measure profitability at this level.
Three things that A gets:
1. Benefits or resources from its partner, i.e. destinations that A can't reach.
2. Resources from the partner's network, i.e. partner's partners
3. Resources from the shared alliances
Could D be a substitute for B? Yes, to some extent.
What do strategic alliances remind you of?
This triggers images of commitment
Marriage failure rates is about 50% over 7 years.
The moment we think about an alliance partner as a spouse, we begin to lose.
This is not a spousal relationship.
In order to survive, each partner needs to look for more partners.
This is not the best arrangement in a marriage!
From the history of diplomacy
Diplomats represent country's interests, which change over time.
A doesn't always have to align with B -- it may get a better offer
This hair-splitting allows A to get out of a relationship with B when it no longer creates value.
A also has alternatives, e.g. can it could get a destination by C
If B is the only company that gives it that destination, A and B will stay together as an alliance.
A and B could also be competitive on some routes
The proportion of competition actually works to lower the likelihood that an alliance will succeed.
The more competition, the high the risk that one will be driven out.
With data, looking at absolute amount and changes, at ...
absolute amount of resource that A gets from B over 6 months;
then the benefit that A gets from B's partners (i.e. partner's partners);
... the resource that B gets from A;
Findings: airlines don't have a good record for keeping up stable, long-term relationships.
Mean is less than 2 years long.
Some examples confound this, e.g. Northwest Airlines - KLM
Today's chart would probably look different, because there's been some more stability.
Findings on overall industry:
Networks only matter a little bit.
What really matters is partners
Dependencies: how big you are, and how big your partner is.
At a macro level, statistics as hazard function (of death), using Cox-time-regression
Every new destination you add, you reduce the chance of termination by 0.1%.
Thus, you can change the probability of bad events happening.
Shared resources have a stabilizing effect: reduce chance of termination by 0.7%
Change in direct resources since last period
Trend line gives 0.8% reduction
i.e. if your partner sees that you're investing more, they'll be less likely to terminate.
Change in network resources from previouis period gives 0.1% reduction in chance of termination.
Non-control equity relationship gives a stabilizing effect, e.g. each partner would buy a share of the other.
Then would start differentiating.
This industry is quite segmented
When dealing with a customer the same size ...
When you increase the competition internally, you reduce the probability of success 6.9%
If you're the same size, the other partner takes any signal of competition very seriously, much more than signals of cooperation.
Shared resources give a substantial change: 0.6%
10 new desinations give a 6% probability increase.
Direct resource change from prior period: 1%
Interpretation of the above:
Manage the extent of competition with partner
Changes in resources matter more than the absolute amount.
When your airline is smaller than your partner, different results
Direct resources: 0.2% change
Internal competition hurts, with a -6.2% change
If you resources from your partner's partner, it helps you stay in
This is an amazing finding.
This says that it doesn't matter where you are in the network, just that you are in the network.
Story: don't compete with a larger partner.
If you're the larger partner, things change:
You can that your partner is putting more into the alliance.
e.g. one new destination gives 2% probability of greater success.
Large partners confer high salience on the resources from smaller partners, as a signal of commitment.
But large partners don't pay much attention to small partners
Observations: networks don't help much in moving production resources, more with information.
Size matters a lot.
Limitation of study: Only covers scale alliances, (doing the same thing), not sequential (link) alliances (upstream / downstream).
Generalizability beyond airline industry?
Yes, if sharing production.
Yes, if not worried about forward or backward in the value chain.
Research method in the 6 month framework?
The number of additional destinations.
Rule that the top three always merge with smaller players?
In the airline industry, have so much government intervention that can't monetize ownership.
If could get government out of the way, 30% to 40% of industry would exit, and then would have profitability.
Airline managers like to own assets, and alliances are definitely a second choice.
Measure of commitment to managing the relationship?
Interviewed Pierre Charbonneau at Air Canada: when you look at Lufthansa, do you care about the network?
Actually broke out data to see large to large and small to small -- with lots of effect.
Small companies borrow a lot of resource.
Some content on this website may be subject to prior copyrights.
Please contact the author(s) prior to reproduction or further distribution of the materials.