Gulati 1998

Strategic Management Journal, Vol.
19, 293317 (1998)
ALLIANCES AND NETWORKS

RANJAY GULATI*
J.L. Kellogg Graduate School of Management, Northwestern University, Evanston,
Illinois, U.S.A.
This paper introduces a social network perspective to the study of strategic alliances. It extends
prior research, which has primarily considered alliances as dyadic exchanges and paid less
attention to the fact that key precursors, processes, and outcomes associated with alliances can
be defined and shaped in important ways by the social networks within which most firms are
embedded. It identifies five key issues for the study of alliances: (1) the formation of alliances,
(2) the choice of governance structure, (3) the dynamic evolution of alliances, (4) the
performance of alliances, and (5) the performance consequences for firms entering alliances.
For each of these issues, this paper outlines some of the current research and debates at the
firm and dyad level and then discusses some of the new and important insights that result
from introducing a network perspective. It highlights current network research on alliances
and suggests an agenda for future research. 1998 John Wiley & Sons, Ltd.
Strat. Mgmt. J., Vol. 19, 293317, 1998
INTRODUCTION formance of firms. I define strategic alliances as

voluntary arrangements between firms involving
Strategic alliances between firms are now a exchange, sharing, or codevelopment of products,
ubiquitous phenomenon. Their proliferation has technologies, or services. They can occur as a
led to a growing stream of research by strategy result of a wide range of motives and goals, take
and organizational scholars who have examined a variety of forms, and occur across vertical and
some of the causes and consequences of such horizontal boundaries. While I focus here on
partnerships, mostly at the dyadic level. In this highlighting the importance of a social network
article I dont intend to review this vast and perspective on strategic alliances, I will also dis-
burgeoning field of research (for a review, see cuss some of the valuable contributions and cur-
Auster, 1994). Instead, I will develop a social rent research debates at the firm and dyad level
network perspective on some of the key questions for each of the key questions. This discussion of
associated with strategic alliances, going beyond research on strategic alliances admittedly reflects
the dyadic level to the larger network in which my own biases and research preferences, and
alliances are embedded. I will discuss how this there is a large amount of research on this topic
perspective provides new insights on important that will not fall under my purview.
factors that may influence the behavior and per- From a strategic standpoint, some of the key
facets of the behavior of firms as it relates to
alliances can be understood by looking at the
Key words: strategic alliances; joint ventures; social
networks; embeddedness
sequence of events in alliances. This sequencing
includes the decision to enter an alliance, the
* Correspondence to: Ranjay Gulati, J.L. Kellogg Graduate
School of Management, Northwestern University, Evanston, choice of an appropriate partner, the choice of
IL 60208-2001, U.S.A. structure for the alliance, and the dynamic evolu-
CCC 01432095/98/04029325 $17.50

1998 John Wiley & Sons, Ltd.
294 R. Gulati
tion of the alliance as the relationship develops firms were embedded were likely to influence
over time. While all alliances may not necessarily several key decisions, including the frequency
progress through the same sequence of events, with which firms entered alliances, their choice
nonetheless, the decisions involved constitute of partner, the type of contracts used, and how
some of the key behavioral issues that arise in the alliance developed and evolved over time.
alliances. Mirroring this sequence are the follow- My fieldwork suggested that the social networks
ing relevant research questions: (1) Which firms of prior ties not only influenced the creation of
enter alliances and whom do they choose as new ties but also affected their design, their
partners? (2) What types of contracts do firms evolutionary path, and their ultimate success.
use to formalize the alliance? and (3) How do
the alliance and the partners participation evolve
over time? A BRIEF CRITIQUE OF PRIOR
A second important issue for alliances is their RESEARCH ON ALLIANCES
performance consequences, both in terms of the
performance of the alliance relationship itself and Prior research on alliances has led to valuable
the performance of firms entering alliances. Two insights on the behavior of firms in alliances and
research questions focus on the performance the performance consequences from such partner-
issue: (1) What factors influence the success of ships. Three related themes run across these prior
alliances? and (2) What is the effect of alliances efforts. First, the unit of analysis that is usually
on the performance of firms entering them? adopted is the firm or the alliance. For instance,
In this paper I will discuss these five critical researchers have tried to identify the attributes of
questions for the study of strategic alliances and, firms that influence their proclivity to enter
for each, I will discuss current research efforts alliances or their choice of partner, or to identify
at both the dyadic and network levels and high- the characteristics of alliances that may influence
light some of the insights that result from a the formal contracts used to organize them.
network perspective on the study of strategic A second and related theme has been examin-
alliances. Introducing networks into our calculus ing the formation and performance of alliances
of the alliance behavior of firms allows an examin an asocial context. The role of the external
ination of both the innate propensities or induce- environment is usually encapsulated within
ments that lead firms into alliances and also the measures of competitiveness in product or sup-
opportunities and constraints that can influence plier markets. For instance, from a transaction
their behavior. costs standpoint, this translates to the argument
The notion that a firms social connections that the lower the competition, the more likely
guide its interest in new alliances, and provides that a firm will be exposed to small numbers
it with opportunities to realize that interest, is bargaining and other forms of opportunistic
closely rooted in the processes that underlie a behavior (Williamson, 1985). Resource depen-
firms entry into new alliances. I first observed dence theorists, similarly, make the case that at
this when I was conducting field interviews at a intermediate levels of industry concentration,
number of firms with multiple alliances and found firms experience high levels of competitive uncer-
that firms dont necessarily follow the sequence tainty and are likely to mitigate this competitive
of events that is usually offered for alliances interdependence by entering into frequent joint
(Gulati, 1993). A firm on its own initiative iden- ventures (Pfeffer and Nowak, 1976a). Finally,
tifies the need for an alliance, identifies the best prior research on alliances has focused primarily
partner available, and chooses an appropriate con- on firm- and industry-level factors that impel
tract to formalize the alliance. Rather, I observed firms to enter alliances. In his seminal book,
that many new opportunities for alliances were Andrews (1971) claimed that the strategic actions
presented to firms through their existing sets of of firms are the outcome of a match between a
alliance partners. In the instances in which firms firms existing competence and the availability of
independently initiated new alliances, they turned new opportunities. For the study of alliances,
to their existing relationships first for potential scholars have primarily focused on the existing
partners or sought referrals from them on poten- competence (or lack thereof) that may propel
tial partners. The manner and extent to which firms to enter into new alliances, but they have
1998 John Wiley & Sons, Ltd. Strat. Mgmt. J., Vol 19, 293317 (1998)
Alliances and Networks 295
generally paid less attention to factors that may structural context, which highlights the signifi-
lead to the availability of and access to alliance cance of the social networks in which economic
opportunities in the first place. Thus, in Andrews actors may be placed. Prior to discussing the key
terms, they have focused primarily on the com- questions for the study of alliances, I will provide
petence side of the conditions that propel strategic a general theoretical perspective for examining
actions and not on the conditions that determine the implications of social embeddedness on firm
the opportunity set firms may perceive. behavior and performance.
The focus on the firm or alliance as the unit
of analysis and the description of external context
in competitive terms has typically assumed an SOCIAL STRUCTURE AND THE
atomistic notion of firms evaluating alternative EMBEDDEDNESS OF FIRM
courses of action and does not take into account BEHAVIOR
the actions of other firms or the relationships
in which they themselves are already embedded. Building on an open systems perspective first
Moreover, it ignores the interactive elements of put forward by organizational theorists, structural
the market, whereby participants discover market sociologists have suggested that the most
information through their interactions in the mar- important facet of an organizations environment
ket (Hayek, 1949; White, 1981). It is important is its social network of external contacts (for a
to recognize that although strategic alliances are review, see Powell and Smith-Doerr, 1994). They
essentially dyadic exchanges, key precursors, proc- emphasize the fact that economic actionlike
esses, and outcomes associated with them can be any other form of social actiondoes not take
defined and shaped by the social networks within place in a barren social context but, rather, is
which most firms are embedded. There is a rich embedded in social networks of relationships. A
strand of research in economic sociology that has social network can be defined as a set of nodes
devoted itself to explaining how economic actions (e.g., persons, organizations) linked by a set of
may be influenced by the social structure of ties social relationships (e.g., friendship, transfer of
within which they are embedded (e.g., Grano- funds, overlapping membership) of a specified
vetter, 1985). Sociologists have convincingly dem- type (Laumann, Galaskiewicz, and Marsden,
onstrated that the distinct social structural patterns 1978: 458).
in exchange relations within markets shape the Network perspectives build on the general
flow of information (White, 1981; Burt, 1982; notion that economic actions are influenced by
Baker, 1984). This in turn provides both oppor- the social context in which they are embedded
tunities and constraints for firms and can have and that actions can be influenced by the position
implications for their behavior and performance. of actors in social networks. Embeddedness
Viewed from this standpoint, much of the research refers to
on strategic alliances represents an undersocialized
account of firm behavior. the fact that exchanges and discussions within a
In recent years there has been a growing group typically have a history, and that this
history results in the routinization and stabili-
interest in understanding the influence of the zation of linkages among members. As elements
social context in which firms are embedded on of ongoing social structures, actors do not
their behavior and performance. A number of respond solely to individualistically determined
researchers have explicitly incorporated embed- interests % a structure of relations affects the
dedness, broadly defined, into our understanding actions taken by the individual actors composing
it. It does so by constraining the set of actions
of strategic management questions relating to the available to the individual actors and by changing
behavior and performance of firms (for a collec- the dispositions of those actors toward the actions
tion of recent articles, see Baum and Dutton, they may take. (Marsden, 1981: 1210)
1996). The social context in which firms are
embedded includes a whole array of elements that Underlying embeddedness is the quest for
can be classified broadly as structural, cognitive, information to reduce uncertainty, a quest that
institutional, and cultural (Zukin and DiMaggio, has been identified as one of the main drivers of
1990). While each of these facets can be signifi- organizational action (Granovetter, 1985). Net-
cant, my focus in this paper will be on the works of contact between actors can be important
296 R. Gulati
sources of information for the participants, and behavior of actors resulting from the sharing of
what can matter is not only the identity of the information through networks (e.g., Burt, 1987).
members of a network but also the pattern of Relational embeddedness typically suggests that
ties among them. actors who are strongly tied to each other are
There have been four broad foci of prior likely to develop a shared understanding of the
research on the influence of social networks: utility of certain behavior as a result of discussing
inequality, embedding, contagion, and contin- opinions in strong, socializing relations, which in
gency (Burt et al., 1994). Research on inequality turn influence their actions (Coleman, Katz, and
suggests how network connections can explain Menzel, 1966). Cohesively tied actors are likely
differences in the resources available to individ- to emulate each others behavior. Cohesion can
uals, groups, or organizations, while research on also be viewed as the capacity for social ties to
embedding describes the institutions and identities carry information that diminishes uncertainty and
resulting from networks and how they enable promotes trust between actors (Granovetter, 1973;
difficult transactions. The research on contagion Podolny, 1994; Gulati, 1995a; Burt and Knez,
has shown how networks can promote behavioral 1995). Thus, cohesive ties can become a unique
conformity by serving as conduits for both tech- source of information about the partners capabili-
nological and social information about organi- ties and reliability.
zational activities, which in turn can influence the Structural embeddedness focuses on the infor-
extent to which they adopt new innovations mational role of the position an organization
(Davis, 1991; Haunschild, 1992). Finally, contin- occupies in the overall structure of the network.
gency approaches suggest how social networks Consequently, the frame of reference shifts from
can moderate key organizational processes. While the dyad and triad to the system (Marsden and
all four perspectives focus primarily on the conse- Friedkin, 1993). In network analysis, the position
quences of embeddedness in social networks, an actor occupies in the structure is a function
recent accounts have also begun to consider some of the actors relational pattern in this network.
of the bases for the origin of these networks. Actors occupying similar positions need not be
There are two broad analytical approaches for tied with each other. Instead, they are likely to
examining the influence of social networks. The be tied to the same set of other actors or to
first emphasizes the differential informational similar sets of other actors, and there is a whole
advantages bestowed by social networks, while array of network measures to capture the position
the second highlights the control benefits actors an actor occupies in a network.
can generate by being advantageously positioned Scholars have frequently linked the position
within a social network. These two benefits are actors occupy to the notion of status and sug-
analytically distinct but also overlap, since much gested that actors occupying similar positions
of the control benefit can arise from the manipu- reflect distinct status groups (Podolny, 1993,
lation of information (Burt, 1992: 78). Networks 1994). In sociological terms, status evokes a ser-
may provide informational benefits through two ies of observable characteristics associated with
mechanisms (Granovetter, 1992). Relational em- a particular position, or role, in a social struc-
beddedness or cohesion perspectives on networks ture, that entails a relatively defined set of
stress the role of direct cohesive ties as a mech- expected behaviors toward other actors. Because
anism for gaining fine-grained information. Actors an actors status is based on its affiliations and
who share direct connections with each other are patterns of interaction, it is affected by its web
likely to possess more common information and of affiliations and by the status of its exchange
knowledge of each other. Structural embed- partners. When focusing on an interorganizational
dedness or positional perspectives on networks context, we can also view status as an attribution
go beyond the immediate ties of firms and empha- of the quality of products an actororganization
size the informational value of the structural posi- provides when the quality cannot be directly
tion these partners occupy in the network. Infor- observed (Podolny, 1993). Following a similar
mation travels not only through proximate ties in logic, the observable features associated with a
networks, but through the structure of the network certain status can also become an important signal
itself. Both mechanisms have generally been of how members of that status are likely to
applied to explain similarities in the attitudes and behave. Thus, status groupings resulting from
network position can provide powerful infor- on the networks of interlocking directorates (for
mational cues for actors about the likely behavior a review, see Mizruchi, 1996), scholars have also
of others in the network. looked at other networks, such as those between
Both perspectives of relational and structural corporations and investment banks (Baker, 1990),
embeddedness highlight the informational advan- among hospitals (Westphal, Gulati, and Shortell,
tages social networks can confer on certain actors. 1997), among firms resulting from prior alliances
Another view of networks highlights the control (Gulati, 1995a, 1995b), and those among corpo-
benefits actors can receive and has been rate contributions officers (Galaskiewicz, 1985b).
developed furthest in the work of Burt (1992). Only recently have scholars begun to explore
An actor in a social network can derive control the implications of the social structure resulting
advantages by being the tertius gaudens, or one from intercorporate networks on strategic
who is situated between two other actors. This alliances. Strategic alliances are distinctive in that
can occur either when two or more actors are entering one constitutes a strategic action, and
after the same relationship with a focal actor, as their cumulation can also become a social net-
is the case when multiple firms want to enter an work. Thus, alliances are unique in that they can
alliance with a given firm, or can occur when an be studied as both endogenous and exogenous
actor is the tertius in separate relationships with factors. The former can be examined by looking
two actors with conflicting demands, as may at the influence of social networks on the forma-
occur for a firm that has separate alliances with tion of alliances, while the latter can be assessed
two independent firms that may create conflicting by considering the effects of the social network
demands. In both such instances, firms in the of cumulated alliances. Both can be examined
tertius role can create advantages for themselves simultaneously by assessing the influence of the
by playing one off against the other and brokering social network of prior alliances on its future
tension between the other players. These advan- alliances in a longitudinal setting. Studying the
tages can translate into concrete benefits in the development of an alliance network over time
form of favorable terms in their exchange can provide unique insights into the evolution of
relationships with partners. networks, where strategic action and social struc-
While the original focus of network research ture are closely intertwined. It also allows us to
was on understanding how the embeddedness of examine the extent to which alliances formed by
individuals influences their behavior, a similar firms may lock them into path-dependent courses
argument has been extended to organizations of action in the future. The normative side of
(e.g., Burt, 1982; Walker, 1988; Mizruchi, 1992; this, of course, is that once firms understand the
Gulati, 1995b). Firms can be interconnected with dynamics of alliance networks, they may choose
other firms through a wide array of social and path-creation strategies rather than becoming
economic relationships, each of which can consti- path-dependent (Garud and Rappa, 1994). As a
tute a social network. These include supplier result, they can visualize the desired network
relationships, resource flows, trade association structure of alliances in the future and work
memberships, interlocking directorates, relation- backwards to define their current alliance strategy.
ships among individual employees, and prior stra- The same dual orientation is feasible for study-
tegic alliances. While firms may be connected ing the performance consequences of alliances
through a multitude of connections, each of which including the performance of alliances themselves
could be a social network, some may be more and how alliances may influence the performance
or less significant than others and researchers of partnering firms. One way to understand the
have rarely focused on more than one network performance consequences of social networks for
at a time (for a review of research on interorgani- alliances and for the firms entering them is to
zational relationships, see Galaskiewicz, 1985a). think of social networks as bestowing firms with
To recognize the true importance of a social social capital which can become an important
network, it is important to understand the nature basis for competitive advantage (Burt, 1997).
and purpose of the network as well as the con- While the notion that actors possess social capital
tents of information flowing through it has been most developed for individuals and their
(Stinchcombe, 1990). While much of the research interpersonal networks, the idea can easily be
on interorganizational relationships has focused extended to organizations and their interorgani-
298 R. Gulati
zational networks (Gulati, 1997). The benefits of KEY ISSUES IN ALLIANCES

social capital accrue to firms from the access to
information it provides and the potential for con- The section is organized around the five key
trol benefits. This information can be a powerful questions that I outlined to be critical issues for
catalyst, providing firms with new productive studying strategic alliances. For each question, I
opportunities to utilize the financial and human first discuss some of the current research and
capital with which they are endowed. For debates at the firm and dyadic levels, followed
instance, the informational advantages to firms by an examination of how introducing a social
from a social network can enable the creation of network perspective opens up an additional set
new alliances by three distinct means: access, of issues that can be considered.
timing, and referrals (Burt, 1992). Access refers
to information about current or potential partners
The formation of alliances
as to their capabilities and trustworthinessan
existing network can influence a firms choice of In a review of some of the theoretical expla-
feasible partners and its attractiveness to other nations for the formation of joint ventures, Kogut
firms as a partner. The availability of current (1988a) highlighted three main motivations which
information about alliance partners can also affect are broadly applicable to other types of alliances
the partnering firms choice of structure to for- as well: transaction costs resulting from small
malize the alliance, as well as key processes numbers bargaining, strategic behavior that leads
underlying the dynamic evolution of the alliance. firms to try to enhance their competitive posi-
Timing entails having informational benefits tioning or market power, and a quest for organi-
about potential partners at the right time, which zational knowledge or learning that results when
can be important when a firm seeking attractive one or both partners want to acquire some critical
partners must approach them at the right time knowledge from the other or one partner wants
and preempt their seeking alliances elsewhere. It to maintain its capability while seeking another
can also alter the evolutionary path of the alliance firms knowledge.
by providing partners with information at critical Some of the early empirical studies on alliances
junctures in the alliance, which can affect the focused on the formation of joint ventures in
performance of the alliance and the benefits the particular, which entail the creation of a new
firm receives from the alliance. Referrals can be entity with shared equity between partners. They
particularly important in alliance formation, as a examined some of the strategic imperatives for
firms existing partners may refer other firms to joint ventures, which included the enhancement
it for alliances or to enter three-way partnerships. of market power and increased efficiency. Several
In the case of alliances, firms with more social studies focused on the incidence of such alliances
capital will not only have access to information across industries and the size of firms entering
about a larger number of alliances, but they may them. The concentration of such alliances within
also be able to attract better partners who want particular industries in the manufacturing sector
to ally with them. Furthermore, they may be able and the heightened proclivity of larger firms to
to extract superior terms of trade because of enter them led scholars to conclude that the quest
possible control benefits that may ensue from for market power may be an important motive
their social capital. The informational benefits for such ties (e.g., Pate, 1969; Berg and Fried-
from social networks can have ramifications for man, 1978). These arguments were further refined
the development and ultimate success of the to incorporate transaction costs as an inducement
alliance itself. Ties that are structurally embedded for certain types of alliances (Stuckey, 1983) and
can have fundamentally different characteristics knowledge acquisition as a salient motive for
and life course than those that are not (Powell, many alliances (Berg and Friedman, 1981).
1990). Embedded ties promote greater frequency Current studies on alliance formation have fol-
of information exchange between partners, which lowed tradition and examined industry- and firm-
can affect the success of the alliance as well as level factors that could explain the frequency
the performance of firms entering them. with which alliances occur. More detailed meas-
ures have been developed, and the domain of
inquiry has expanded from joint ventures to other
types of alliances. Some of the industry-level stream that has paid attention to alliance forma-
factors linked with alliance formation include the tion at this level has been resource dependence
extent of competition, the stage of development theory. A rich literature on the formation of
of the market, and demand and competitive uncer- relations among social service agencies flourished
tainty (Harrigan, 1988; Shan, 1990; Burgers, Hill, in the 1960s and 1970s (for reviews, see Galas-
and Kim, 1993; Eisenhardt and Schoonhoven, kiewicz, 1985a; Oliver, 1990). This research built
1996). The focus has remained on strategic fac- on the original open systems model of resource
tors, since empirical investigations of transaction procurement but added an exchange perspective
cost and knowledge-based imperatives for alliance that suggested that organizations enter partner-
formation have been less tractable. ships when they perceive critical strategic inter-
The study of firm-specific imperatives has dependence with other organizations in their
focused on identifying some of the inducements environment (e.g., Levine and White, 1961;
likely to lead firms to enter alliances (for a Aiken and Hage, 1968), in which one organi-
review, see Harrigan and Newman, 1990). This zation has resources or capabilities beneficial to
has led to a rich research stream that has exam- but not possessed by the other. Applied to the
ined which types of firms in which industries dyadic context, these arguments suggest that firms
enter what types of alliances for what reasons sought out ties with partners who could help
(Mariti and Smiley, 1983; Ghemawat, Porter, and them manage such strategic interdependencies.
Rawlinson, 1986; Porter and Fuller, 1986). This Richardson (1972), in a theoretical economic
has been refined within a costbenefit framework account, also proposed that the necessity for com-
in which the costs and benefits from alliances are plementary resources is a key driver of inter-
primarily strategic and technological and alliances organizational cooperation.
materialize when the benefits exceed the costs In recent years, the focus of scholars studying
(Harrigan, 1985; Contractor and Lorange, 1988). interorganizational relations has shifted from
At the firm level, scholars have sought to show social service agencies to business organizations.
the role of resource contingencies such as stra- A strategic interdependence perspective on
tegic vulnerability and incumbency on the pro- alliance formation suggests that firms ally with
clivity of firms to enter alliances (Eisenhardt and those with whom they share the greatest inter-
Schoonhoven, 1996; Mitchell and Singh, 1992). dependence. To assess the significance of resource
Other scholars have looked at firms attributes, dependence at the dyadic level, researchers have
such as size, age, competitive position, product linked the formation of alliances to the distri-
diversity, and financial resources, as important bution of various kinds of capabilities within the
predictors of their propensity to enter strategic industry, such as production, marketing, distri-
alliances with each other (Shan, 1990; Barley, bution, regulatory approval, and access to new
Freeman, and Hybels, 1992; Powell and Brantley, technologies. At the interindustry level, resource
1992; Burgers et al., 1993; Shan, Walker, and dependence theorists have empirically tested the
Kogut, 1994). The importance of resource con- role of strategic interdependence by predicting the
siderations has been further refined by Kogut number of joint ventures formed across industries
(1991), who suggested that many joint ventures (Pfeffer and Nowak, 1976a, 1976b; Berg and
occur as options to expand in the future and are Friedman, 1980; Duncan, 1982). Recent efforts
interim mechanisms by which firms both buffer have focused more closely on the industry level
and explore uncertainty. and explored the role of resource configurations
A second question associated with alliance within an industry in predicting alliance forma-
behavior of firms has to do with the question of tion. They have not only revealed distinct pat-
with whom firms partner. Just as a persons terns, such as densely linked cliques, but have
decision to get married is tied to the choice and also tried to explain the observed patterns on the
availability of a specific partner, a firms decision basis of strategic interdependence resulting from
to enter into an alliance is closely linked with its country-specific resource advantages (Shan and
choice of an appropriate partner and may even Hamilton, 1991), the distribution of strategic
be determined by that partners availability. capabilities (Nohria and Garcia-Pont, 1991), and
Hence, the dyad can be a valuable unit of analysis the relative size and performance of firms
to study the alliance behavior of firms. A research (Burgers, Hill, and Kim, 1993). This research
300 R. Gulati
suggests that industry patterns in the formation actors adopt a more social orientation and resort
of alliances indicate that firms are driven to enter to existing networks to discover information that
alliances with each other by critical strategic lowers search costs and alleviates the risk of
interdependence. opportunism. Granovetter (1985: 490) noted that
Although interdependence may explain tie for- the widespread preference for transacting with
mation between some firms, it may not adequately individuals of known reputation implies that few
account for alliance formation. This inadequacy are actually content to rely on either generalized
is clear from the fact that not all possible oppor- morality or institutional arrangements to guard
tunities for sharing interdependence across firms against trouble. A person resorts to trusted
actually materialize as alliances. An account of informants who have dealt with the potential
alliance formation that focuses only on interpartner and found him or her trustworthy, or,
dependence ignores how firms learn about new even better, to information from ones own past
alliance opportunities and overcome the fears dealings with that person (Granovetter, 1985:
associated with such partnerships. Implicit in such 490).
accounts is the assumption that firms exist in an The embeddedness of firms in social networks
atomistic system in which information is freely can both restrict and enable the alliances a firm
available and equally accessible to all and oppor- enters. By influencing the extent to which firms
tunities for alliances are exogenously presented have access to information about potential part-
(Granovetter, 1985). ners, social networks can alter the opportunity
To understand why social networks and the set firms perceive for viable alliances. Similarly,
information they channel are important for firms networks constrain the extent to which potential
and their alliances, we need to consider the cir- partners are aware of a focal firm and thus may
cumstances usually associated with such ties. constrain its set of choices for alliances. This is
Firms entering alliances face considerable moral vividly illustrated by the influence of one such
hazard concerns because of the unpredictability social network, the cumulation of prior alliances,
of the behavior of partners and the likely costs on the subsequent alliances by firms. As the
to a firm from opportunistic behavior by a partner, typical comments by a manager I interviewed
if it occurs. Despite the rapid growth of both indicate, firm managers embed their new ties by
domestic and international alliances in many relying extensively on their partners from past
industrial sectors, such partnerships are still con- alliances for information:
sidered risky (Business Week, 1986; Kogut, 1989;
Hamel, Doz and Prahalad, 1989). A partner may They are familiar with many of our projects from
either free-ride by limiting its contributions to an their very inception and if there is potential for
an alliance we discuss it. Likewise, we learn
alliance or simply behave opportunistically. Such about many of their product goals very early on
concerns are further compounded by the unpre- and we actively explore alliance opportunities
dictable character of such relationships. Rapid with them. (Gulati, 1993: 84)
changes in the environment may lead organi-
zations to alter their needs and orientation, thus Such comments suggest that firms are influenced
affecting their ongoing partnerships. For organi- in their ability to enter new partnerships by the
zations to build ties that effectively address their social network of their past alliances.
needs while minimizing the risks posed by such Several recent studies have explored the impor-
concerns, they must be aware of the existence of tance of social embeddedness on the formation
their potential partners and have an idea of their of alliances by firms. The first question examined
needs and requirements. Organizations also need has been at the firm levelwhich firms enter into
information about the reliability of those partners, alliances? Evidence suggests that the proclivity of
especially when success depends heavily upon firms to enter alliances is influenced not only by
the partners behavior (Bleeke and Ernst, 1991). their financial and technological attributes (treated
Sociologists have suggested that economic as proxies for strategic imperatives), but also by
actors address concerns of opportunism in eco- how they are embedded in social networks
nomic transactions by embedding transactions in between firms. For instance, several studies have
the social context in which those transactions used the social network of prior alliances between
occur. Faced with uncertainty about a partner, firms to show that firms that had more prior
alliances, were more centrally situated in the The status of an organization in the network
alliance network, or had more focused networks, affects its reputation and visibility in the system.
were more likely to enter into new alliances and The greater this reputation, the wider the organi-
did so with greater frequency (Kogut, Shan, and zations access to a variety of sources of
Walker, 1992; Gulati, 1993, 1997). Similiar find- knowledge, and the richer the collaborative
ings have been reported for the influence of experience, which makes it an attractive partner.
firm centrality in various other networks on their The signaling properties of status are particularly
likelihood of entering new alliances. These net- important in uncertain environments, where the
works include alliance networks among biotech- attractiveness of a potential partner can be gauged
nology firms (Powell, Koput, and Smith-Doerr, from its status, which in turn depends on the
1996), semiconductor firms and their patent organizations (or type of organizations) already
citation networks (Podolny and Stuart, 1995), and tied to this partner (Podolny, 1994). This
those of top management teams of semiconductor phenomenon has important behavioral conse-
firms (Eisenhardt and Schoonhoven, 1996). Each quences. If the status of whom they partner with
network highlights a different underlying social enhances their own attractiveness, organizations
process that enables central firms to enter will have a tendency to seek high-status partners.
alliances more frequently. Nonetheless, these Although special reasons, such as the control
studies strongly suggest that the embeddedness of a new technology, may prompt a high-status
of firms is an important influence on their organization to cooperate with a low-status player,
alliance behavior. the homophily principle in terms of status that
The influence of social embeddedness on the operates under conditions of uncertainty makes
formation of new alliances has also been observed this an unlikely occurrence (Gulati and Gargi-
at the dyad level, with a focus on who partners ulo, 1997).
with whom. In a study of alliance formation over The formation of dyadic ties between particular
a 20-year period, Gulati (1995b) examined the firms has also been studied in vertical alliances
factors explaining which of all possible dyads between buyers and suppliers. For instance, schol-
entered alliances during the observed time period. ars have examined the extent to which Japanese
The social context examined was the cumulation automotive assemblers recreate their relationships
of prior alliances between firms. The observed in Japan in their North American operations
social structural effects resulted from both the (Martin, Mitchell, and Swaminathan, 1995). The
direct and indirect ties of firms with each other. evidence suggests that in addition to an array of
Previously allied firms were likely to engage in strategic factors associated with the characteristics
further alliances. This was confirmed in comments of the buyer and supplier, an important consider-
by alliance executives such as: We have close ation in the recreation of ties was the history
working relationships with most of our alliance of prior engagements in which these firms are
partners. As a result, we are familiar with many embedded. The longer the prior history between
of their own goals and capabilities. Since they two firms, the more likely they were to recreate
also know about our specific skills and needs, these ties in North America. This suggests that
many new deals are created interactively with the social embeddedness of firms influences the
them. The results also provided evidence of the creation of vertical alliances between firms.
informational benefits of indirect ties between The social explanation offered by the reported
firms, both one-level-removed indirect ties and studies that highlight the role of embeddedness
more distant ties. Previously unconnected firms does not contradict the economic motivations for
were more likely to enter an alliance if they had alliances. Firms dont form alliances as symbolic
common partners or were less distant from each social affirmations of their social networks but,
other in the alliance network. rather, base alliances on concrete strategic com-
Structural embeddedness can also influence the plementarities that they have to offer each other.
choice of partner in alliances. The cues provided It does suggest that the conditions of mutual
by the position of organizations enlarge the realm economic advantage are necessary but not suf-
of potential partners about which an organization ficient conditions for the formation of an alliance
can have a priori information beyond the circle between two firms. While considerations of indi-
of organizations directly or indirectly tied to it. vidual quest for resources and complementarity
302 R. Gulati
are relevant, it is a firms social connections that Organizational scholars have long studied the
help it identify new alliance opportunities and diversity of structures within organizations and
choose specific partners that possess such comple- viewed structure as a mechanism to manage
mentary assets. uncertainty. Prior research on contract choices in
As highlighted earlier, firms are embedded in alliances and the extent of hierarchical controls
multiple social networks and the implications of they embody has been influenced primarily by
these manifold ties on alliance formation remain transaction cost economists, who have focused on
an open question. The evidence that exists thus the appropriation concerns in alliances, which
far highlights the significance of one social net- originate from contracting hazards and behavioral
work at a time on new alliances. The possible uncertainty at the time of their formation (e.g.,
implications of the simultaneous and possibly Pisano, Russo, and Teece, 1988; Pisano, 1989;
conflicting influence of multiple social networks Balakrishnan and Koza, 1993; Oxley, 1997). Fol-
on alliance formation have yet to be systemati- lowing this perspective, scholars have suggested
cally examined. For instance, one of the most that hierarchical controls are an effective response
widely studied interorganizational networks has to such concerns as they are anticipated at the
been board interlocks, and yet the implications time the alliance is formed. The logic for hier-
of such ties and other interfirm networks on archical controls as a response to appropriation
alliances has largely been overlooked until concerns is based on the ability of such controls
recently (Gulati and Westphal, 1997). Further- to assert control by fiat, enable monitoring, and
more, the broader institutional context in which align incentives. The operation of such a logic
such networks are placed can also be influential was originally examined in the classic make-or-
(Dacin, Hitt, and Levitas, 1997). buy decisions (e.g., Walker and Weber, 1984;
Masten, Meehan, and Snyder, 1991). The same
logic by which firms choose between the extremes
Governance structure of alliances
of making or buying a component is also
A notable characteristic of the dramatic growth expected to operate once firms have decided to
of strategic alliances in the last two decades has form an alliance in their choice of governance
been the increasing diversity of such alliances. structure. The greater the appropriation concerns,
The nationalities of partners, their motives and the more hierarchical the governance structures
goals in entering alliances, and the formal con- for organizing the alliance are likely to be.
tractual structures used to organize the partner- An important shortcoming with such prior
ships, called the governance structure, have all approaches has been their implicit treatment of
become increasingly varied. While alliances may each transaction as a discrete independent event
be considered a distinct form of governance that (Doz and Prahalad, 1991). This leads to temporal
is different from markets or hierarchies, there is reductionism since it treats alliances as occurring
also considerable variation in the formal structure in an ahistorical context. Firms may very well
of alliances themselves (Powell, 1990). The var- have a longer history with each other through
iety of organizing structures implies that firms their entering multiple strategic alliances over
face an array of choices in structuring their several years. One of the executives who special-
alliances. Prior research has distinguished among ized in alliances for his firm that I interviewed
alliance structures in terms of the degree of hier- highlighted this point:
archical elements they embody and the extent to
which they replicate the control and coordination We originally initiated technology partnerships
features associated with organizations, which are with a number of key industry players in the
mid-1980s. These in turn have led to numerous
considered to be at the hierarchical end of the repeated alliances with the same set of firms.
spectrum (e.g., Harrigan 1987; Hennart, 1988; With each partner maintaining on-site staff at our
Osborn and Baughn, 1990; Teece, 1992). At one facilities that was only to be expected. (Gulati,
end are joint ventures, which involve partners 1993: 84)
creating a new entity in which they share equity
and which most closely replicate the hierarchical Empirical studies on the governance of
control features of organizations. At the other end alliances have unfortunately continued in the
are alliances with no sharing of equity that have transaction cost economics tradition, treating each
few hierarchical controls built into them. alliance as independent and considering the activi-
ties it includes at the time of its formation as across organizations in determining the govern-
singularly reflecting the transaction costs ance structure used to organize their transactions.
associated with it. The approach taken is thus Second, social networks can serve as an important
static: it specifies the unit of analysis to be each basis for enforceable or deterrence-based trust
transaction and not the economic relationship and (Kreps, 1990; Raub and Weesie, 1990; Shapiro
thus ignores the possibility of a social structure et al., 1992; Burt and Knez, 1995). The antici-
resulting from repeated alliances and the emergent pated utility from a tie with a given partner
processes resulting from prior interactions and those with shared partners motivates good
between partners that may alter their calculus behavior. Each partners awareness that the other
when they are choosing contracts in alliances has much to lose from behaving opportunistically
(Ring and Van de Ven, 1992; Gulati, 1995a; enhances its confidence in the other. Potential
Dyer and Singh, 1997; Nickerson and Silverman, sanctions include loss of repeat business with the
1997). Furthermore, it would be useful to con- same partner, loss of other points of interaction
sider the implications of structural embeddedness between the two firms, and loss of reputation.
which would suggest the importance of the over- How is trust between two firms likely to alter
all network in which individual transactions and their choice of contracts in subsequent alliances?
also economic relationships are situated. An important concern of firms entering alliances
An important implication of the embeddedness has to do with appropriation and relates to the
of firms in social networks is the enhanced trust predictability of their partners behavior. A
between firms. Trust between firms refers to the detailed contract is one mechanism for making
confidence that a partner will not exploit the behavior predictable, and another is trust. Both
vulnerabilities of the other (Barney and Hansen, knowledge-based trust resulting from mutual
1994). A social network of prior ties can promote awareness and equity norms and deterrence-based
trust through two possible means. First, by serv- trust arising from reputational concerns creates
ing as effective referral networks, the prior social self-enforcing safeguards in an exchange
structure makes firms aware of each others exist- relationship and can substitute for contractual
ence. Take, for instance, the comments of one of safeguards (Bradach and Eccles, 1989; Powell,
the executives responsible for alliance decisions 1990). As a result, where there is trust, appropri-
that I interviewed: ation concerns are likely to be mitigated, and
organizations may not choose to rely on detailed
In some cases we realize that perhaps our skills
dont really match for a project, and our partner
contracts to ensure predictability. In a study of
may refer us to another firm about whom we the choice of governance structures in strategic
were unaware %. An important aspect of this alliances, I found that firms select contractual
referral business is of course about vouching for forms for their alliances not only on the basis
the reliability of that firm. Thus, if one of our of the activities they include and the related
long-standing partners suggests one of their own
partners as a good fit for our needs, we usually
appropriation concerns they anticipate at the out-
consider it very seriously. (Gulati, 1993: 84) set, but also the existence of the social network
of prior alliances in which the partners may be
Through these ongoing interactions, firms not embedded (Gulati, 1995a). What emerges from
only learn about each other but may also develop this account is an image of alliance formation in
trust around norms of equity, or knowledge- which cautious contracting gives way to looser
based trust (Shapiro, Sheppard, and Cheraskin, practices as partners become increasingly embed-
1992). There are strong cognitive and emotional ded in a social network of prior ties. Familiarity
bases for such trust, which are perhaps most between organizations through prior alliances
visible among individual organization members. does indeed breed trust which enables firms to
Macaulay (1963: 63) observed how close per- progressively use less hierarchical structures in
sonal ties emerged between individuals in organi- organizing new alliances.
zations that contracted with each other; these Several provocative articles have questioned
personal relationships in turn exert pressures for the role of transaction costs and appropriation
conformity to expectations. Similarly, Ring and concerns in alliances. Powell (1990) suggested
Van de Ven (1989, 1994) pointed to the that alliances and other such exchange relation-
important role of informal, personal connections ships dont necessarily fall on the market-
304 R. Gulati
hierarchy continuum put forth by transaction cost anticipated ongoing coordination of tasks across
economics but, rather, constitute a distinct form partners (Gulati and Singh, 1997). This study
of governance that he calls the network form. He also suggests that social structure of trusting
used the term network to classify such dyadic relationships are distinctive in addressing both
ties because many such ties are deeply embedded coordination costs and appropriation concerns,
in a multiplicity of relationships. This study poses and this is reflected in the nature of contracts
some important questions for future research on used when firms are embedded in social networks.
the governance structure of alliances. In parti- The presence of interfirm trust is an extraordinary
cular, if we are to go beyond the confines of lubricant for alliances that involve considerable
market and hierarchy as the dual anchors around interdependence and task coordination between
which we study the governance structure of partners, since firms with prior network connec-
alliances, it becomes imperative to begin con- tions are likely to have a greater awareness of
sidering some of the alternative dimensions along the rules, routines, and procedures each follows.
which we can examine such structure (see also Such a social structure can thus enable them to
Stinchcombe, 1986). work together closely, if necessary, all without
In another important critique of transaction cost the need for formal hierarchical controls.
economics applications to alliances, Zajac and Prior research on the governance structure of
Olsen (1993) pointed to two additional short- alliances has primarily focused on the impli-
comings. First, transaction cost accounts in gen- cations of embeddedness in one type of social
eral focus on single-party cost minimization while network, the network of prior alliances, yet the
alliances are inherently dyadic exchanges, which role of the multiplicity of social and economic
raises the question of whose costs are minimized. contexts in which firms are embedded on their
Relatedly, alliances are not only about cost choice of alliances remains underexplored. There
minimization but also about joint value maxi- may also be implications from the embeddedness
mization, an issue neglected previously. Second, of firms in other types of social networks such
the structural emphasis of transaction cost eco- as board interlocks, that could influence the
nomics leads it to neglect important processual design of alliances, but this has yet to be exam-
issues resulting from their ongoing nature. ined. Firms are also embedded in a social struc-
Alliances are usually not one-off transactions but, ture of dependence that can alter the likely power
rather, entail continuing exchange and adjust- dynamics in a potential alliance. Firms are likely
ments, as a result of which process issues become to anticipate such conditions and modify the
salient (Khanna, 1997). structure of their relationship accordingly (Baker,
Another concern with the transaction cost 1990). The economic context can influence the
approach stems from the fact that it has focused structure as well. For instance, the extent of
entirely on appropriation concerns that originate market overlap between the partners and within
from the presence of contracting hazards and the alliance, also known as relative scope, can
behavioral uncertainty. While appropriation can influence the likelihood of competitive dynamics
clearly be an important concern, there is also between the partners (Harrigan, 1987; Khanna,
another set of concerns for firms entering Gulati, and Nohria, 1998). Firms may anticipate
alliances resulting from coordination costs. Such the likelihood of such dynamics in an alliance
anticipated costs arise from the likely inter- and alter the structure to address those concerns
dependence of tasks across organizational bound- if they arise.
aries and the complexity of coordinating activities
to be completed jointly or individually. Coordi-
Dynamic evolution of alliances and networks
nation considerations are extensive in alliances.
In an empirical study of over 1500 alliances, There has been considerable interest in un-
my colleague and I found that the deliberations covering some of the dynamic processes that
underlying the choice of alliance structure at the underlie the development of individual alliances.
time an alliance is formed are not dominated by Such dyadic exchanges can be transformed sig-
concerns of appropriation, as previously sug- nificantly beyond their original design and man-
gested, but by considerations associated with date once they are under way. The varying evolu-
managing coordination costs resulting from the tionary paths alliances follow can have significant
consequences for their performance (Harrigan, be discrete stages that occur due to discontinuous
1985, 1986). Thus, understanding the evolution changes in the environment (Gray and Yan,
of alliances can provide critical insights into how 1997).
such ties can be better managed. Using detailed The rich insights from these detailed clinical
clinical studies of individual alliances, scholars and theoretical accounts have advanced our
have sought to uncover some of the formal and understanding of the dynamics within alliances
informal processes and key stages that unfold in enormously. The focus of these efforts has
alliances (Hamel, 1991; Larson, 1992; Ring and remained at the dyadic level of exchange, how-
Van de Ven, 1994; Doz, 1996). Considerable ever, with their primary emphasis on uncovering
efforts have been devoted to understanding some some of the important interpartner dynamics.
of the factors that influence this development and Similar behavioral processes can span dyads and
possible stages through which alliances may pro- occur within networks as well but remain to be
ceed. explored. For instance, individual contacts
In recent years, scholars have studied the role between firms through social networks can affect
of the initial conditions under which alliances the decision processes that may occur inside those
are formed in their subsequent development. For firms (Gulati, 1993). Boundary-spanning individ-
instance, Gulati et al. (1994) have introduced the uals can have crucial influence on the decision
idea that each partners comprehension of an making not only within their own organizations
alliances pay-offs is crucial for understanding but also in partner organizations. When alliances
the incentives to cooperate and for realizing the entail the creation of new entities, such as joint
possible ways each can unilaterally influence the ventures, they can lead to conflicting identities for
alliances outcome (see also, Parkhe, 1993). The individuals involved, who may be torn between
possible consequences of changing pay-offs once loyalties to the venture itself and to the parent
the alliance is under way were also discussed. In organization from which they originally came.
a related study, Khanna et al. (1998) introduced Furthermore, when network-level decisions must
the concept of a firms relative scope, which be made among clusters of firms, specific multi-
captures the initial conditions likely to influence lateral negotiations and dynamics may be poorly
the competitive and cooperative dynamics and for understood. Firms may also use their network
each firm is the ratio of the scope of the alliance contacts to create control benefits proactively by
to the total set of markets in which the firm is utilizing their advantageous position in social net-
active. This measure was used to establish test- works to play one partner off against the other.
able propositions that suggest that the opportunity They may also seek to manage their network to
set of each firm outside the particular alliance sustain such advantages (Lorenzoni and Baden-
crucially affects its behavior within the alliance. Fuller, 1995). Such dynamic processes related to
Thus, the extent of market overlap in activities potential control benefits have yet to be examined.
between the partners and with the alliance can The dynamics of behavior over time can be
be an important determinant of the likely behavior observed at the level of networks as well. Several
of partners. This coincides with prior efforts that scholars have suggested that clusters of firms with
linked initial asymmetries between partners with dense ties with each other may pursue collective
the ultimate success of the alliance (Harrigan, strategies in conjunction with the competitive
1986). Scholars have also begun to look at the strategies of their individual members (Astley and
combined impact of initial imprinting conditions Fombrun, 1983; Bresser, 1988). This has led to
and adaptive processes on the ultimate behavior new forms of competition in which networks of
and performance in an alliance (Hamel et al., firms compete with each other (Gomes-Casseres,
1989; Doz, 1996). Evidence seems to suggest 1994). Such networks of firms could include both
that while initial conditions such as the objectives horizontally and vertically connected firms. In an
of partners, their adeptness at learning, and the illuminating study, Nohria and Garcia-Pont
nature of the environment and interorganizational (1991) demonstrated the importance of horizontal
context do assert an influence over the develop- alliances in shaping the global automotive indus-
ment of an alliance (Hamel, 1991), the evolution try into distinct strategic blocks, which either
of some alliances may in fact be akin to a bring together firms with complementary differ-
punctuated equilibrium model in which there may ences or pool together firms with supplementary
306 R. Gulati
similarities, and can become a basis for compe- flowing through those networks changes. After
tition within the industry. Similarly, scholars all, networks have influence primarily through
focusing on the supply chain of large manufac- their channeling of information. Thus, if one is
turers, particularly in the automotive industry, to observe dynamics at the network level, it is
have examined how vertical networks and indi- also valuable to assess how the content of infor-
vidual ties within them have become structured mation flowing through those networks may
over time (Dyer, 1996; Helper, 1991; Lawrence change over time. In a study of the influence of
and Gulati, 1997). hospital networks on the extent and form of
While prior studies have provided new insights adoption of total quality management programs
into the structure of both horizontal and vertical by hospitals, my colleagues and I observed that
networks, important questions still remain about the nature of information transmitted about total
the growth and development of interorganizational quality management through the network varied
alliance networks (for a review, see Grandori and depending on the stage of institutionalization of
Soda, 1995). The shaping of such a dynamic the innovation (Westphal et al., 1997). In the
interorganizational network can be influenced in early periods, when total quality management was
important ways by exogenous factors, such as the less institutionalized, the information flowing
nature of competition and critical industry events through networks was about the technological
(Madhavan, Koka, and Prescott, 1998). In a attributes of total quality management, while later
recent study, my colleague and I suggested that on, when total quality management became more
the production of interorganizational alliance net- institutionalized, the information transmitted had
works is driven by a dynamic process involving stronger institutional elements in it. This changing
both exogenous resource dependencies, which nature of information in turn affected the influ-
prompt organizations to seek cooperation, and an ence of social networks on the type of total
endogenous embeddedness dynamic, in which quality management programs hospitals adopted.
the emerging network progressively orients the As a result, the effect of social networks on
choice of partners (Gulati and Gargiulo, 1997). the adoption of administrative innovations was
Alliance networks are not static social structures contingent on the stage of its institutionalization
in which organizations embed new alliances: they as an innovation. Studying changes in information
are also evolutionary products of these ties. As flows in the networks that influence alliances may
a result, new ties are influenced by the social provide valuable insights (Stinchcombe, 1990).
network of prior ties in which they are embedded.
Yet, when observed over time, the formation of
Performance of alliances
new ties in each period alters the very same
network that influenced their creation. This results The performance of alliances has received less
in an endogenous network dynamic between attention than other areas because of some oner-
embedded organizational action and the network ous research obstacles, which include measuring
structure that guides but is also transformed by alliance performance and the logistical challenges
that action. As the social network grows, the of collecting the rich data necessary to assess
new ties contribute to the differentiation among these issues in greater detail. As a result, it
organizations by their specific direct and indirect remains one of the most exciting and under-
relations and by the structural positions organi- explored areas. Numerous studies have reported
zations occupy in the emerging network. This dramatically high failure rates of alliances, and
structural differentiation enables organizations several practitioners have sought to identify the
to discriminate among partners in terms of their magical formula for alliance success (e.g., Kanter,
particular relational and structural profiles. As the 1989; Bleeke and Ernst, 1991). This wish list
available information grows, organizations seek- includes: flexibility in management of the
ing to build partnerships can become less reliant alliance, building trust with partners, regular
on exogenous factors and instead are more information exchange with the partners, construc-
influenced by the network in which they are tive management of conflict, continuity of bound-
embedded. ary personnel responsible for the interface
The influence of networks on firms may also between the firm and the alliance, managing part-
change over time if the content of information ner expectations, and so on. The focus of the
research generating such lists has primarily been tives of many alliances, performance can be dif-
at the alliance level, with efforts targeted at iden- ficult to measure with financial outcomes. Fur-
tifying antecedent conditions and emergent proc- thermore, in most cases, such measures simply
esses that can influence performance. dont exist. A further complication results from
The primary approach to empirical studies of the dyadic nature of alliances. Sometimes per-
the performance of alliances has been to examine formance is asymmetric: one firm achieves its
the termination of an alliance. Several careful objectives while the other fails to do so. For
empirical inquiries have yielded important instance, several cases have been reported of
insights into some of the key factors that may alliances in which one partner had raced to learn
be associated with the termination of alliances, the others skills while the other did not have
including industry and dyadic conditions such as any such intentions (Hamel et al., 1989; Hamel,
concentration and growth rates, country of origin 1991; Khanna et al., 1998). Despite these
of partners as developed or developing, the pres- measurement obstacles, researchers have gone
ence of concurrent ties, partner asymmetry, age beyond the initial efforts that equated alliance
dependence or the duration of the alliance, the termination with failure, to try to uncover some
competitive overlap between the partners, and of the factors associated with the success of
characteristics of the venture itself such as auton- alliances. These require detailed surveys or care-
omy and flexibility (Beamish, 1985; Harrigan, ful fieldwork on alliances that uncovers the multi-
1986; Levinthal and Fichman, 1988; Kogut, ple facets of alliance performance and considers
1989). While these studies have provided valuable the perspectives of all the partners in the alliance.
insights into the termination of alliances, their In a set of pioneering studies, Harrigan (1985,
importance for understanding the performance of 1986) used both archival and survey data to
an alliance per se is limited by two factors. First, assess factors that might influence the perform-
studying failure by looking at terminations fails to ance of alliances, with performance measured
distinguish between natural and untimely deaths. both by the survival of the alliance and by parti-
Many successful alliances terminate because they cipants assessment of success. More recently,
are predestined to do so by the parent firms at marketing and strategy scholars have turned to
the very outset. In other instances, an alliance even more extensive surveys, which have been
may simply be a transitional arrangement that the administered to the individual managers respon-
parents plan to terminate when their objectives sible for the alliance from each partner (Heide
are met or when they have valuable new infor- and Minor, 1992; Parkhe, 1993). Such approaches
mation that makes viable an acquisition or divesti- enable the collection of a host of measures, sub-
ture of that business (Kogut, 1991; Bleeke and jective and objective, on which performance can
Ernst, 1991; Balakrishnan and Koza, 1993). In be assessed, as well as an examination of dyadic
some instances, the transformation of a venture asymmetries in perceptions.
may actually indicate successful adaptation to While there have been advances in assessing
environmental shifts (Gomes-Casseres, 1987). the performance of alliances, few of these efforts
Also, not all ongoing alliances are necessarily have considered the impact of social networks in
successful, and some may be continuing more which firms are placed on the relative perform-
out of inertia or the high exit costs associated ance of their alliances. Once we acknowledge the
with dismantling it than because of the inherent importance of the multiplicity of social networks
success of the partnership. Second, studies of in which firms are placed, we can overcome
alliance terminations and alliance failure such dyadic reductionism and examine whether
implicitly consider performance as an eitheror alliances that are embedded to a greater or lesser
condition. This is clearly not the case, and a more degree in various networks perform better or
accurate assessment would focus on gradations of worse than others and why. While there have
performance in alliances. been several efforts to explore differences in
One of the vexatious obstacles to studying embedded ties between firms and those that are
performance, and also one of the problems with less proximate they tend to infer and dont
the many studies that have reported high failure directly assess whether embedded ties themselves
rates for alliances, is measuring performance itself perform any better than other ties. The inference
(Anderson, 1990). Given the multifaceted objec- is based on an aggregate assessment of the sur-
308 R. Gulati
vival properties of firms and its association with be more willing to make nonrecoverable invest-
the extent of embedded ties those firms have ments, which can enhance the performance of the
entered and not on a direct assessment of the alliance. Survey-based evidence further confirms
relative success of individual alliances. Further- that both interpersonal and interorganizational-
more, such approaches generally treat embed- level trust can be influential in the performance
dedness as an eitheror proposition and have of exchange relationships (Zaheer, McEvily, and
focused primarily on relational embeddedness Perrone, 1997).
resulting from proximate ties, while paying less More recently, in a study of supplier relation-
attention to the importance of structural embed- ships in the automotive industry, a colleague and
dedness. I directly examined the performance differences
While such studies have advanced our under- across various types of exchange relationships
standing of the nature and importance of embed- (Gulati and Lawrence, 1997). This study was
ded ties, an important extension would be to distinctive in that it used a detailed survey to
focus directly on the performance of alliances explicitly measure the performance of each
and whether the extent of embeddedness in social relationship with both subjective and objective
networks is an important factor. The extent to measures and examine its connection with precise
which an alliance is embedded is likely to influ- measures of the extent of embeddedness. We
ence its performance for several reasons. By found that, on average, more embedded tie
being proximately situated in an alliance, the relationships performed better than alternative
partnering firms are likely to have greater confi- sourcing arrangements but were particularly effec-
dence and trust in each other, both because they tive in situations of high uncertainty. Furthermore,
have greater information and because the network there were performance differences across embed-
creates a natural deterrent for bad behavior that ded ties as well, which resulted from how they
will damage reputation. Trust not only enables were organized.
greater exchange of information, it also promotes As firms have entered alliances with growing
ease of interaction and a flexible orientation on frequency, many prominent firms, such as General
the part of each partner. All of these can create Electric, Corning, Motorola, IBM, and Hewlett-
enabling conditions under which the success of Packard, have found themselves in hundreds of
an alliance is much more likely. alliances. While issues concerning the man-
There is some evidence that alliances with agement of individual alliances are still important
embedded ties may perform better or last longer and merit further consideration, new issues
than others. One of the first set of studies on the resulting from managing a portfolio of alliances
factors associated with alliance terminations found have arisen. This opens up numerous questions
that alliances between firms with a prior history about the cooperative capabilities of firms. Evi-
of ties were less likely to terminate (Kogut, dence suggests that there may be systematic dif-
1989). In another important set of studies, Levin- ferences in the cooperative capabilities that firms
thal and Fichman (1988) and Seabright, Levin- build up as they have more experience with
thal, and Fichman (1992) found that the duration alliances and that the extent of this learning may
of exchange relationships is not only influenced affect the relative success of those firms with
by changes that may occur in task conditions that alliances (Lyles, 1988). This poses questions
alter the extent of resource interdependence, but about what such capabilities are and what might
there may be dyadic attachments between firms be some systematic tactics firms use to internalize
that lead to the persistence of such ties. Such such capabilities. At least some of these capabili-
attachments are conditioned by the social struc- ties include: identifying valuable alliance oppor-
ture in which firms are embedded and include tunities and good partners, using appropriate
individual attachments resulting from the conti- governance mechanisms, developing interfirm
nuity of boundary spanners in the partnering knowledge-sharing routines, making requisite
organizations and structural attachments arising relationship-specific asset investments, and initiat-
from the history of interaction between the ing necessary changes to the partnership as it
organizations. Such social structures can limit evolves while also managing partner expectations
organizational perceptions of likely opportunistic (Doz, 1996; Dyer and Singh, 1997). The fact
behavior by partners and, as a result, firms may that a firm may have entered a wide array of
alliances also suggests that it has to si- Anand and Khanna, 1997). Inasmuch as the stock
multaneously manage this portfolio and address market reactions portend the likely future out-
conflicting demands from different alliance part- come from alliances, these results provide mixed
ners. Furthermore, if the firm is at the center of evidence of the beneficial consequences of
a network, it must pay particular attention to alliances for firms entering them.
a series of strategic and organizational issues Researchers have also looked at the perform-
(Lorenzoni and Baden-Fuller, 1995). Developing ance consequences for firms from their social
such a portfolio perspective on alliances merits network of cumulative alliances. One approach
further consideration, especially since many firms has been to try to explain the performance of
are now situated in an array of alliances. firms by the extent of their alliance activity, after
The performance of alliances remains one of controlling for other possible factors that may
the most interesting and also one of the most influence firm performance. In an early study,
vexing questions. We now know that embedded Berg, Duncan, and Friedman (1982) found a
ties differ in fundamental ways from other ties negative relationship between joint venture inci-
and that there may even be an association dence and firms rates of return in the chemical
between the extent of embedded ties a firm enters industry but could not definitively establish the
and its survival, but we have less understanding causal relationship between the twodid joint
of the extent to which alliances with embedded ventures lead to poor performance or vice versa?
ties actually perform better or worse than other More recently, some researchers have also nar-
alliances and why. Furthermore, the focus has rowed the domain of performance explained by
primarily been on the effects of relational embed- alliances and focused on the consequences from
dedness and we know little about the conse- technology alliances for the patenting activities
quences of structural embeddedness on the per- of firms and for their performance (Hagedoorn
formance of alliances. This and the question of and Schakenraad, 1994; Mowery, Oxley, and Sil-
the capabilities firms may need to manage a verman, 1996). This has been extended by linking
multiplicity of alliances are important items for firm performance not only to the frequency of
a future research agenda. past alliances but also to the firms position in
interorganizational networks (Zaheer and Zaheer,
1997; Ahuja, 1996).
Alliances and performance consequences for
Yet another approach to assess the aggregate
firms
influence of alliances on firm performance has
Do firms benefit from entering strategic alliances? been to examine the relationship between the
This question is distinct from the previous one extent to which firms are embedded in alliances
which looked at the performance of alliances and the likelihood of their survival. Thus, survival
themselves, and instead, it focuses on the per- of firms is considered as a proxy for performance
formance consequences of alliances for the firms (e.g., Baum and Oliver, 1991, 1992; Uzzi, 1996).
entering them. Since many other activities besides The alliances studied on which firm survival may
alliances can also influence the performance of depend have been those with vertical suppliers
firms, it can be difficult to empirically link the and with key institutions in the environment. The
alliance activity of firms with their performance. results of these studies suggest that such ties are
As a result, scholars have looked for a variety of generally beneficial in enhancing survival
direct and indirect means to test this relationship. chances. This may not always be the case and
To estimate the effect of individual alliances numerous contingencies that may alter this
on firm performance, several researchers have relationship have been also proposed (Singh and
conducted event study analyses on the stock mar- Mitchell, 1996). The challenge has been to sepa-
ket effects of alliance announcements (e.g., Koh rate out factors beyond embeddedness that may
and Venkatraman, 1991). This connection has also have an influence on survival and look at
been further refined as scholars have examined this in a longitudinal setting.
the differential benefits firms receive from differ- There have been several studies that have docu-
ent types of alliances and how this is influenced mented the varying performance benefits that
by the conditions under which they have been Japanese firms, as well as those of other national
formed (e.g., Balakrishnan and Koza, 1993; origins, have received from their vertical alliances
310 R. Gulati
in particular (Helper, 1990; Cusumano and Takei- tify the specific characteristics of the network that
shi, 1991; Dyer, 1996). Several of these studies may enable the network to provide positive bene-
have not only directly examined the relative per- fits to its members. For instance, in a study of
formance of individual alliances, but have tried hospitals and health care networks, my colleagues
to ascertain their effects on the performance of and I suggest that not all networks provide equal
firms entering them. These studies suggest that benefits to their members, and some networks are
close vertical ties that are characterized by rich better than others (Gulati, Shortell, and Westphal,
information exchange and long-term commitments 1997). We further identified several key network
can lead to greater cooperation and joint activities factors that may mediate the effect of network
between the partners and higher levels of asset- membership on firm performance and explain
specific investments, all of which translate into why some networks provide greater benefits to
concrete performance benefits for the firms form- their members than others. Two natural extension
ing such ties (Helper, 1991; Heide and Miner, of these studies would look not only at the
1992). Extensive empirical evidence in the auto- network characteristics but also the position of
motive industry suggests there are significant dif- individual organizations within the network in
ferentials in cost, quality, and new product devel- which they are placed. This could alert us both
opment across automotive manufacturers that are to possible informational benefits and to control
driven primarily by the extent to which they benefits that may result from particular locations
outsource and the nature of those relationships. in specific networks. Furthermore, it would be
The approaches to studying alliances and firm fruitful to assess the performance effects across
performance discussed thus far have paid scant the multiplicity of networks in which firms are
attention to the overarching networks in which embedded. Other possible concerns include who
firms may be embedded. Even studies connecting controls the network and why and possible limits
the cumulative number of prior alliances with the and constraints to the growth of networks.
survival of firms have only considered relational
embeddedness, or the proximate ties in which
firms are placed, and not the overall network and CONCLUSION
the position of firms in that network. This is not
only a question of whether the sum is more than The primary focus of research on alliances has
its parts, for by examining the entire social net- been to ask the why question, which focuses
work one can also examine the possible deleteri- on understanding some of the reasons firms enter
ous consequences of competitive networks formed alliances, structure them in certain ways, manage
by rival firms. Such extensions can easily be and change them, and the performance benefits
made. For instance, rather than focusing only on sought from them. One of the problems with an
the proximate ties a firm has entered, it is also orientation toward why questions is that they are
possible to isolate the network to which the firm syntactically inclined to teleological or functional
primarily belongs and examine whether member- answers (Granovetter, 1994). More important, this
ship in certain networks is more beneficial than leads to an avoidance of the how question,
others. This shifts the analytical focus away from which focuses on some of the conditions under
simply the number of prior ties to membership which certain behavior and performance outcomes
in particular networks. are likely (Oliver, 1990). This paper poses the
Gomes-Casseres (1994) has looked at several how question for alliances and highlights an
industries in which networks, rather than firms, important set of conditions deriving from the
have become the organizing level at which firms social networks in which firms come to be placed
compete with each other. As a result, the perform- that influences their behavior and performance
ance of a firm is influenced by the networks to related to alliances. It demonstrates how social
which it belongs. This has been enlarged to con- networks can be influential in the creation and
sider the relative success of competing networks success of alliances and shows how a perspective
of firms in particular geographic regions informed by the structural embeddedness of firms
(Saxenian, 1990; Gerlach, 1992). Such appro- can provide important new insights into some of
aches which highlight the relative success of the key current issues on strategic alliances.
particular networks can be further refined to iden- This paper suggests that social networks are
valuable conduits of information that provide both works can result in an important cross-level per-
opportunities and constraints for firms and have spective of interorganizational relationships
important behavioral and performance impli- (Galaskiewicz, 1985b; Zaheer et al., 1997; Gulati
cations for their alliances. By channeling infor- and Westphal, 1997).
mation, social networks enable firms to discover The theoretical orientation guiding this paper
new alliance opportunities and can thus influence has been the embeddedness perspective, which
how often and with whom those firms enter into highlights the significance of the social relation-
alliances. Once two firms decide to enter an ships in which actors are situated for their future
alliance, their relative proximity in the network behavior and performance. I would like to empha-
may influence the specific governance structure size that introducing such a perspective does not
used to formalize the alliance. The extent to preclude the possibility of traditionally examining
which two partners are socially embedded can strategic imperatives or diminish their importance.
also influence their subsequent behavior and These are indeed complementary elements and in
affect the likely future success of the alliance. A fact blend together if we consider the creation
firms portfolio of alliances and its network posi- and manipulation of networks to be part and
tion in an industry can have a profound influence parcel of strategic behavior (Burt, 1992). Further-
on its overall performance. I highlight several more, the embeddedness of firms can be more
recent studies, including some of my own, that broadly defined than its social relationships or
have developed a socially informed account of structural embeddedness to include institutional,
the alliance behavior by firms and examined some cultural, and political elements (Zukin and
of these issues. Table 1 summarizes the compari- DiMaggio, 1990). Each of these other facets can
son I draw between dyadic and network perspec- have consequences for the study of strategic
tives for each of the key questions on alliances. alliances, both independently and together, and
This table highlights each of the five key issues remain to be thoroughly examined. Ultimately, it
on alliances identified in this paper and the related is important to develop a more complete, socially
empirical questions. It illustrates how the con- informed account of each of the key issues out-
sideration of the role of social embeddedness of lined here that relate to strategic alliances.
firms enlarges the realm of inquiry away from A social network perspective on alliances can
dyads towards broader units which include eco- have both descriptive and normative outcomes
nomic relationships and the overall networks in that provide valuable insights for theories of stra-
which firms are placed. tegic management, organizational theory, and
Introducing social networks to the study of sociology. Incorporating social network factors
strategic alliances can provide valuable insights into our account of the alliance behavior of firms
into strategic alliances but can also make an not only provides us with a more accurate rep-
important contribution to the study of social net- resentation of the key influences on the strategic
works. The creation of an alliance is an important actions of firms, but has important implications
strategic action, yet the cumulation of such for managerial practice as well, many of which
alliances also constitutes a social network. Given have yet to be explored. For instance, an under-
our limited understanding of the dynamics of standing of the network dynamics that influence
networks, alliances provide a unique arena in the formation of new alliances can provide
which action and structure are closely inter- insights for managers on the path-dependent proc-
connected and the dynamic coevolution of networks esses that may lock them into certain courses of
can be examined (e.g., Gulati and Gargiulo, action as a result of constraints from their current
1997). Furthermore, the study of interorgani- ties. They may choose to anticipate such concerns
zational networks is now a burgeoning field of and proactively initiate selective network contacts
inquiry in and of itself, and strategic alliances that enhance their informational capabilities.
have become an important set of ties in which Thus, by examining the specific way in which
firms have become engaged and that thus merits social networks may constrain firms future
further examination (for a collection of articles actions and channel opportunities, firms them-
on interorganizational relationships, see Mizruchi selves can begin to take a more forward-looking
and Schwartz, 1987). Combining insights on stance in the new ties they enter. They can be
alliance networks with those on interpersonal net- proactive in designing their networks and con-
312 R. Gulati
Table 1. Dyadic and network perspectives on key issues for strategic alliances
Research issue Empirical questions Dyadic perspective Network perspective
1. The formation of Which firms enter Financial and technological Social network factors that
alliances alliances? imperatives that lead firms may constrain and also
Whom do firms choose to enter alliances create opportunities for
as alliance partners? Complementarities that firms to discover alliance
lead them to choose prospects and choose
specific partners (e.g., specific partners (e.g.,
Pfeffer and Nowak, 1976a; Kogut et al., 1992; Gulati,
Mariti and Smiley, 1983) 1995b; Gulati and
Westphal, 1997)
2. The governance of Which ex ante factors Transaction costs, Social networks that may
alliances influence the choice of interdependence, and mitigate ex ante
governance structure? power asymmetries (e.g., appropriation concerns and
Pisano et al., 1988; coordination costs that can
Harrigan, 1987) affect the choice of
governance structure (e.g.,
Zajac and Olsen, 1993;
Gulati, 1995a; Gulati and
Singh, 1997)
3. The evolution of Which ex ante factors Social and behavioral Social, behavioral and
alliances and and evolutionary dynamics between partners competitive dynamics that
networks processes influence the in alliances (e.g., Ring and occur across organizational
development of Van De Ven, 1994; Doz boundaries among groups
individual alliances and 1996) of firms in alliances
networks? (Nohria and Garcia-Pont,
1991; Gomes-Casseres,
1994)
The emergence and
development of a social
network (e.g., Gulati and
Gargiulo, 1997)
4. The performance of How should the Examination of Firm capabilities that
alliances performance of terminations as alliance enhance the success of
alliances be measured? failure (e.g., Kogut, alliances (Doz, 1996; Dyer
Which factors influence 1988b) and Singh, 1997)
the performance of Partner characteristics and Influence of comembership
alliances? evolutionary dynamics that of partners in social
affect the success of networks on the success of
alliances (e.g., Harrigan, their joint alliances (e.g.,
1986) Levinthal and Fichman,
1988; Kogut, 1989; Zaheer
et al., 1997; Gulati and
Lawrence, 1997)
5. Performance Do firms receive social Event studies of stock Influence of membership
advantages for firms and economic benefits market reactions to in social networks and
entering alliances from their alliances? alliance announcements relative position in the
(e.g., Anand and Khanna, network on the
1996) performance and survival
Survival of firms entering of firms (e.g., Dyer, 1996;
alliances (e.g., Baum and Gulati et al., 1997)
Oliver, 1991, 1992)
sidering the ramifications on their future choices tation. In P. Shrivastava, A. S. Huff and J. E.
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Strategic Management Journal, Vol.

19, 293317 (1998)

ALLIANCES AND NETWORKS

INTRODUCTION formance of firms. I define strategic alliances as

CCC 01432095/98/04029325 $17.50

zational networks (Gulati, 1997). The benefits of KEY ISSUES IN ALLIANCES

Research issue Empirical questions Dyadic perspective Network perspective

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