Organizing Alliance Portfolio Management
Dries Faems
University of Groningen
Inge Neyens
Katholieke Universiteit Leuven
Paper presented at the EMNet 2011December 1 – 3, 2011, Limassol, Cyprus(http://emnet.univie.ac.at/)
Abstract
As firms engage in an increasing number of alliances, they face the challenge of managing such an alliance portfolio. Whereas existing studies on alliance portfolio management (APM) mainly focus on (i) alliance experience and (ii) APM best practices, they remain silent on how firms organize their APM. Based on survey data of 161 companies that engaged in technology alliances between 2006 and 2008, we identify four first-order (APM formalization, APM hierarchy, APM specialization and APM participation) and two second-order (mechanistic APM and organic APM) dimensions that explain how firms organize the management of their technology alliance portfolios. In addition, through testing the performance implications of these APM dimensions, we provide evidence that organizing alliance portfolio management is an important aspect of the alliance capability building process.
Keywords: alliances, alliance capability, alliance portfolio management, technology alliances
Introduction
In the alliance literature, the research focus has been shifting from governing individual alliances to managing alliance portfolios, i.e. goal-oriented management of all the alliances of a focal firm (Hoffmann, 2005: 121; 2007: 827). Most APM studies describe how firms rely on previous alliance experience and APM best practices to build an alliance capability. Yet, recent research provides first indications that alliance success does not only depend on accumulated alliance experiences and the use of APM best practices. Kale and Singh (2009), for instance, describe how Philips has launched a Corporate Alliance Office in order to build an alliance capability. In this description, they make clear that turning this best practice into success required strategic decision making on how to organize this corporate alliance office and how to embed this office in the broader organization. In a similar vein, Sarkar, Aulakh and Madhok (2009) conclude that building alliance portfolio capabilities involves paying attention to the effective management of different organizational processes (i.e. proactive formation, relational governance, coordination processes). Despite these first indications, a systematic analysis of how firms organize their APM and how this relates to alliance capability building is missing though (Wassmer, 2010).
In this paper, we want to address this research gap, exploring the organization of alliance portfolio management and its link with alliance capability building. In order to do so, we first empirically identify four APM dimensions (i.e. formalization, hierarchy, participation and specialization) that are theoretically grounded in organization design theory (e.g. Aiken and Hage, 1966; Damanpour, 1991; Galbraith, 1973) and that give an encompassing view on how firms can make different choices regarding the organization of APM. Subsequently, we test to what extent APM organization influences the success of a firm’s technology alliances. To conduct these analyses, we rely on a survey, comprising data from 161 technology intensive companies.
This paper provides new insights on alliance portfolio management, pointing to the organization of APM as a relevant aspect of alliance capability building. Relying on insights from innovation portfolio literature and applying concepts from traditional organization design literature, we show that firms need to make strategic decisions on how they want to organize their APM in order to improve the success of the alliance portfolio. In the particular setting of technology alliances, our data point to the advantages of an organic APM approach in which individual alliance managers are able to participate in setting alliance-related goals and policies and have substantial autonomy over their assigned tasks.
This paper is structured as follows. First, we review and connect existing APM and organizational design literature to (i) identify different dimensions on how firms organize their APM and (ii) discuss their relevance in the process of alliance capability building. Subsequently, we describe our methodology. We then present our analyses and results. Finally, we point to the main theoretical and managerial implications of our findings, discuss the main limitations of our study and identify interesting avenues for future research.
ALLIANCE PORTFOLIO MANAGEMENT AND ORGANIZATIONAL DESIGN
Alliance Portfolio Management: State-of-the-Art
In his recent review paper, Wassmer (2010: p. 19) argues that existing alliance portfolio management research mainly focuses on two distinct but interrelated topics: (i) the accumulation of alliance experience through the engagement in multiple alliances and (ii) the use of tools and practices to transform such alliance experience into alliance capabilities.
Relying on a knowledge based perspective (e.g. Grant, 1996; Grant and Baden-Fuller, 2004), several scholars (Khanna, 1998; Kale et al., 2002; Draulans et al., 2003) argue that, as firms engage in multiple alliances over time, they start building an alliance capability or ‘a firm’s ability to identify partners, initiate alliances, and engage in ongoing management and possible restructuring and termination of these alliances’ (Khanna, 1998: 351). Relying on alliance experience (i.e. number of past alliances) as an indicator of the presence of alliance capabilities, several studies provide evidence that such alliance capability has important performance implications. Anand and Khanna (2000), for instance, provide evidence that, as firms build up experience in managing joint ventures, they become more capable of creating value in such alliance arrangements. In a similar vein, Hoang and Rothaermel (2005) observe that alliance experience positively influences the ability of biotech firms to successfully complete new drug development projects in collaboration with pharmaceutical firms. Finally, Rothaermel and Deeds (2006) show that alliance experience positively moderates the relationship between a high-technology venture’s R&D alliances and its new product development.
Adopting insights from organizational learning theory (Fiol and Lyles, 1985) and evolutionary economics (Nelson and Winter, 1982), other scholars (e.g. Heimeriks and Duysters, 2007) emphasize that alliance capability building is more than just accumulating experience. Instead, they point to the need for specific tools and practices to integrate and institutionalize the alliance management knowledge that has been captured in previous alliances. Kale et al. (2002) observe that firms with a dedicated alliance function (i.e. separate organizational unit charged with the responsibility to capture prior experience) achieve greater abnormal stock market gains following alliance announcements and report higher percentages of successful alliances than firms that do not possess a dedicated alliance function. Draulans et al. (2003) provide evidence that firms, which apply advanced alliance portfolio management techniques such as frequent cross-alliance evaluation methods and alliance training, outperform other firms in terms of alliance success. Heimeriks, Duysters and Vanhaverbeke (2007) make an explicit distinction between two groups of mechanisms to transform alliance experience into alliance capability. A first group refers to a set of best practices that allows integrating the know-how, experience and knowledge on the level of the group, unit or department that has been involved in a particular alliance. Integrating best practices are those activities in which people share alliance related experiences and knowledge. Examples of integrating best practices are in-house alliance training, training in intercultural management for alliance managers, and cross-alliance evaluation. A second group contains a set of best practices that allows institutionalizing the integrated alliance know-how, experience and knowledge on the organizational level. Examples of such institutionalizing mechanisms are alliance departments, knowledge management practices that foster interaction among alliance managers from different units and a standard partner selection approach. Heimeriks et al. (2007) show that the number of integrating practices exerts a positive influence on alliance portfolio performance (i.e. the percentage of alliances in which the original goals were realized), whereas institutionalizing practices do not have significant alliance portfolio performance implications.
Organizing Alliance Portfolio Management
Relying on insights from the innovation literature, we expect that building alliance capabilities might be more than just accumulating experience and implementing a set of best practices. Innovation portfolio management studies (e.g. Cooper, Edgett and Kleinschmidt, 1999; Mikkola, 2001; Roussel, Saad and Erickson, 1991) have not only pointed to innovation experience and various tools (i.e. stage gate models, bubble diagrams, strategic selection models) as accelerators of innovation portfolio success, but also emphasized that managers have to make strategic decisions on organizational issues such as (i) the level of formal rules and procedures with respect to selection and implementation of innovation projects, (ii) the level of involvement of lower-management in innovation portfolio decisions, and (iii) the amount of innovation portfolio specialists within the company (Damanpour, 1991). Moreover, clear indications are present that such organizational decisions substantially impact the innovation portfolio success. Daft (1978) already indicated that an innovation portfolio system that is characterized by high formalization and high centralization facilitates administrative innovations but hampers technical innovations. More recently, Jansen et al. (2006) show that firms need to implement different kinds of organizational systems, representing different levels of centralization, formalization and connectedness, to effectively manage explorative and exploitative innovation projects within their portfolio.
Based on these insights, we expect that building alliance capabilities also entails effectively organizing a firm’s alliance portfolio management system. Moreover, relying on the well established organization design literature (e.g. Aiken and Hage, 1966; Mintzberg, 1980; Pugh et al., 1968), we conceptualize four different dimensions of APM organization: (i) APM formalization, (ii) APM hierarchy, (iii) APM participation and (iv) APM specialization. Below, we define these four dimensions in detail.
APM formalization. Organization design theorists define formalization[1] as (1) the presence or absence of codified rules and procedures that may determine desired behavior in advance (e.g. Blau and Schoenherr, 1971; Dalton et al., 1980; Galbraith, 1973; Pugh et al., 1968) and (2) the degree of deviation which is allowed on those standards (e.g. Aiken and Hage, 1966; Damanpour, 1991; Hage and Aiken, 1967; Hall, 1963; Mintzberg, 1980; Pfeffer, 1978; Reimann, 1973). Organizations are highly formalized in case they use many codified rules and procedures that try to minimize deviant behavior. Relying on the definition from organizational design literature, we define formalization of APM as the degree to which codified rules and procedures on alliance management are present and the degree to which these rules and procedures are used. Highly formalized APM is characterized by many codified rules and procedures concerning alliance management and allows no or limited deviation from these rules or procedures.
APM hierarchy. Hierarchy has been defined in organization design literature as the ‘extent to which members are assigned tasks and then provided with the freedom to implement them without interruption from superiors’ (Aiken and Hage, 1966; p. 498). Organizations have a strong hierarchy if the employees experience little autonomy over the assigned tasks. Relying on this definition, we define ‘APM hierarchy’ as the extent to which alliance managers are assigned with alliance management tasks and then provided with the freedom to implement them without interruption from senior management. Within an APM system with a strong hierarchy, alliance managers seldom experience freedom to implement tasks without any interruption from senior management whereas alliance managers operating in a system with a weak hierarchy experience much autonomy over their assigned tasks.
APM participation. Aiken and Hage (1966, p. 498) define participation as the ‘degree to which staff members participate in setting the goals and policies of the entire organization’. In organizations with extensive participation, employees frequently participate in agency-wide decisions. Relying on this definition, ‘APM participation’ can be described as the degree to which alliance managers participate in setting the goals and policies about APM. Within an APM system with much participation, alliance managers often participate in APM decisions; within a system with little participation, alliance managers seldom participate in such decisions.
APM specialization. According to several organization design theorists (e.g. Galbraith, 1973; Mintzberg, 1980; Pugh et al., 1968; Reimann, 1973), the dimension of specialization refers to the division of labor (or ‘official duties’) among a number of positions within the organization. Specialization thus represents the different specialties found in an organization (Damanpour, 1991). Consequently, a highly specialized organization is an organization in which a large number of different occupational types or jobs are present. We therefore argue that a highly specialized APM system largely consists of alliance functions that represent different specialties whereas a less specialized APM system refers to the presence of only a small number of alliance positions representing different specialties. For instance, a specialized APM system is characterized by a variety of specialized positions such as relationship managers, local and country alliance managers, gatekeepers and boundary spanners. Within a less specialized APM system, only a few alliance positions are implemented and only few persons are responsible for all alliance related tasks.
In sum, we argue that managers have to make strategic decisions on the level of formalization, hierarchy, participation and specialization of their alliance portfolio management system. Moreover, we expect that these decisions constitute an important part of the alliance capability building process. To test this latter hypothesis, we will first empirically explore the relevance of our four conceptual APM dimensions. Subsequently, we will test the impact of these dimensions on alliance portfolio success. The more these APM dimensions contribute to explaining variation in alliance portfolio success, the more important they are for explaining the emergence of alliance capabilities.
RESEARCH METHODOLOGY
Data Collection and Sample
To empirically examine to what extent APM organization influences alliance portfolio success, we set up an online survey study among the alliance professionals of the Association of Strategic Alliance Professionals (ASAP). We chose for this specific population of alliance professionals for two reasons. First, they are likely to have extensive knowledge on how their firm manages its alliance portfolio. Second, they are capable to understand the specific terminology and procedures used during the online questionnaire.
Before we distributed this questionnaire, we evaluated its face validity (in terms of its perceived relevance, length, clarity, completeness …) based on seven semi-structured interviews with European and American alliance professionals and 21 interviewees with managers from small or medium sized companies in the Netherlands.
We collected our data in January 2009. We used the ASAP database as it provides access to valid email addresses of 2329 organizations. We decided to send an invitation letter to those alliance professionals that we couldn’t contact by email. One week later, we sent a reminder to those alliance professionals that did not yet (fully) complete the questionnaire at that moment in time. We tried to encourage the participation of the alliance professionals in several ways. First, we promised them an executive summary report of the final results and a presentation of the first results at the ASAP Summit 2009 (February 2009), a conference in which alliance professionals can share their specialized alliance experiences. Second, we put an announcement in the ASAP newsletter and on the ASAP web page. Third, we called all non (or partial) respondents to ask for their participation.