Baylor 2012
Geoff Moore
Dr Dawn Carlson
Dr Blaine McCormick
Dr Patricia Norman
Healthcare
Luncheon
What's Happening

Success in business alliances requires a delicate balance

Company assets are often described in physical terms—the cost of office and manufacturing equipment and buildings. But core competencies and proprietary knowledge comprise the fundamental worth of companies. That’s especially true for high-technology companies.
And while corporations fiercely protect such proprietary knowledge from outsiders, they often willingly reveal it when engaging in alliances with other companies. Despite the inherent risks of revealing proprietary information, the prevalence of alliances does suggest that the advantages of such alliances outweigh the dangers.

The dynamics and tensions between companies engaged in alliances intrigued Baylor’s Patricia Norman, who set out to determine the conditions necessary to yield mutually beneficial business relationships. Norman, an assistant professor of management specializing in business strategy, has conducted a comprehensive analysis of the experiences of companies engaged in alliances. Through the statistical and anecdotal evidence Norman gathered, she has developed a set of criteria by which to measure the potential for success or failure of an alliance.

Study participants from 68 companies involved in alliances responded to Norman’s questions asking them to identify their firm’s core capabilities, to describe how they protected those capabilities, and to numerically rate the effectiveness of specific knowledge protection mechanisms. Participants said alliances were less likely to flourish if conducted under a contract laden with terms for punitive measures, pointing to better results with agreements primarily focused on identification of the information that can be shared. In conducting her research, Norman concentrated on companies in the telecommunications, computing and electronics fields because they frequently rely on alliances for development of complex products.

While non-disclosure agreements (NDAs) are widely used in structuring alliances, they are more cosmetic than functional. They may be largely ineffective without trust—a component that Norman identified as critical in an alliance. Companies typically become aware of violations of NDAs only after damage occurs. And nondisclosure agreements laden with forbidding language can repress the climate needed to build trust.

Norman, whose research into alliances is ongoing, explained that the level of trustworthiness is the product of three components: a firm’s abilities (e.g., technical skills, marketing know-how), benevolence and integrity. “Benevolence relates to whether your partner is going to perform in your interest even when he or she is in a position to take advantage of you. Integrity involves the values, such as honesty, to which a company subscribes.” Mutual investment can provide a protective measure. Alliance partners that have an ownership stake in each other are unlikely to engage in sabotage or to take unfair advantage of shared knowledge.

“Some of the literature talks about trust and equity relationships as if they are the same,” said Norman. Her findings disagree, however. “The level of trust was not necessarily related to the amount of equity—but they both act in similar ways. If you have trust, you are less likely to be taken advantage of,” Norman explained. “The same is true with equity, but for different reasons. If you have an equity investment in each other, an alliance partner is less likely to take advantage of you, because equity acts as a deterrent to that behavior. So having an equity investment with a partner you don’t trust much can give you some of the same results as a relationship built on trust.”

The most potentially problematic alliances are those involving companies with imbalances between the levels of the knowledge they will contribute and which they wish to acquire. “A firm with a demonstrated learning intent is more likely to recognize and capitalize on unintentional learning opportunities than a firm that is not focused on learning and does not have learning as a primary goal,” Norman wrote in an article published in the autumn 2002 volume of the Journal of High Technology Management Research. Opportunistic misappropriation of knowledge is less likely to occur between companies that have an equal amount of knowledge to contribute to the alliance process.

Most interesting to Norman was the revelation that companies that are more guarded stand to lose potentially more—by restricting the potential benefits they could gain in a trusting relationship. “If you share less, you lose more. I think that’s because doing so is seen as a signal that you are not acting as a true partner. If you’re being protective, that may suggest you don’t trust the partner or you are trying to get more out of the alliance than the partner is,” said Norman. “The partner then determines that this is probably not going to be a long-term, productive relationship, and decides to take advantage and gain as much as possible from you.”

Norman, a former Air Force captain who was a contracting officer overseeing vendors developing weapons systems before she joined the Baylor faculty in 1997, offers guidelines for productive alliances.
• Company executives must identify the firm’s core capabilities, and must determine which information can be shared and which must be protected. And they need to communicate that information to all employees—even those who are not directly involved in the alliance.
• Company employees should use caution in casual conversations in which sensitive information might be inadvertently revealed, and should make sure that internal memos and other documents unrelated to the alliance are kept from view.
• Each company participating in an agreement should designate an “alliance manager” dedicated to the supervision of the alliance relationship. The alliance manager is the first line of defense for knowledge protection, primarily responsible for assuring compliance with the guidelines and procedures that define the function of the alliance.

In a paper published in Business Horizons, Norman declared that lack of protective processes and mechanisms exposes a firm engaged in an alliance to potentially devastating losses. “Yet mindless institutionalized overprotection will undermine the potential gains from alliances,” wrote Norman, who said she is hopeful that the findings of her study will help companies strike the most productive balance.

HANKAMER SCHOOL OF BUSINESS