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Interfirm Diversity in Global Alliances. (Executive Briefing).

Global strategic alliances join in a common cause companies headquartered in two or more countries. Andersen Consulting reports that the average corporation now manages more than 30 alliances, while many hold portfolios that contain hundreds. Alliances already account for between 6 to 15 percent of the market value of the typical company. Within five years, they are expected to account for 16 to 25 percent of median company value and, astonishingly, more than 40 percent of market value for almost one-quarter of the world's businesses.

In current dollars, this means that for advanced economies as a whole, alliances will represent somewhere between $25 trillion and $40 trillion in value within five years. Plainly, alliances as competitive weapons continue to gain in importance in raw numbers, dollar value, and strategic significance.

Yet, amazingly, 61 percent of global alliances have been outright failures, or are limping along in some state of poor performance. This is often triggered by the inability of many partners--relative newcomers to voluntary cooperative relationships with foreign firms--to surmount their differences.

So this year's Executive Briefing focuses attention on the multiple factors that may lead to friction and premature, unintended termination of global alliances. What has been the progress, in research and practice, in handling these alliances over the past 10 years? And what are the implications of interfirm diversity for alliance managers?

It is important at the outset to define terminology. "Interfirm diversity" encompasses the comparative differences between companies in certain attributes or dimensions that continually shape the pattern of interaction between them. Researchers in sociology, marketing, and other fields have long noted that dissimilarities between social actors can render paired interactions difficult or less effective, whereas similarities promote relatively harmonious, effective interactions. Of course, in global alliances, significant diversity is to be expected. It is found along multiple dimensions: societal culture, national context, corporate culture, strategic direction, and management practices/organizational structure.

* Major Dimensions of Interfirm Diversity

Societal Culture. A society's culture shapes the way its members behave, believe, perceive, think, and reason. These powerful influences reach into all aspects of human life, including the practices (standard operating procedures) and priorities (reflecting culture-based values) of executives in each country. Thus, it is hardly surprising that the cross-cultural interactions found in global alliances can lead to mild embarrassment at best, and to destructive conflict at worst.

This applies even to partnerships between companies from countries sharing a common language, with supposedly similar cultures. One American firm ran into major problems when it tried to work out a joint venture in the U.K. Just before appearing at a British governmental hearing, the U.S. firm asked the British company to "table" a few key points not yet worked out. To the Americans' surprise, these points were the first ones the British executives brought up at the public hearing, and the proposed JV collapsed. "To table" something in England means to bring it up at the table, not put it under the table as the Americans had wanted. Between British English and American English, there are some 4,000 common words with different meanings or usage--potential minefields in initial negotiations or ongoing communication.

Problems are compounded when the cultural orientations or language bases of the interacting managers are sharply different, as is often the case. In the mid-1990s, three competing companies from three continents--Siemens AG of Germany, Toshiba of Japan, and IBM of the U.S.--worked together to develop a revolutionary computer memory chip. But the impact of culture was immediately evident. Siemens scientists were shocked to find Toshiba colleagues closing their eyes and appearing to sleep during meetings, a common practice for overworked Japanese managers when talk does not concern them. The Japanese, who normally work in large groups, found it painful to sit in small, individual offices and speak English; some withdrew whenever possible into all-Japanese groups. As for the Americans, IBMers complained that the Germans planned too much and that the Japanese--who like to review ideas constantly--would not make clear decisions.

National Context. A company's national context primarily includes surrounding industry structure and institutions as well as government laws and regulations. Effective collaborations can be hampered by the tremendous diversity that exists in the national contexts of global firms. Communist China continues to disappoint and frustrate Western multinationals, in part because the American sense of business ethics and business law does not exist there. And as recently highlighted by GE's failed attempt to acquire Honeywell, vast differences in regulations can surface even among Western countries.

Corporate Culture. An alliance between Britain's GEC (General Electric Company) and Germany's Siemens AG flopped because, as one participant put it, "Siemens is basically an engineer's company, whereas GEC is a financier's outfit." Corporate culture includes those ideologies and values that characterize particular organizations; when the ideologies and values differ or diverge, serious challenges result. AT&T and British Telecommunications PLC's alliance drew skepticism from telecom analysts, who noted, "Other global ventures have struggled to mesh disparate corporate cultures, phone networks, and computer systems."

Strategic Directions. Another crucial dimension along which destabilizing divergence may develop between alliance partners is the strategic direction pursued by each firm. Partner screening at the alliance planning stage can test for strategic compatibility by analyzing a potential partner's motivation and ability to live up to its commitments, and by assessing whether probable areas of conflict may exist due to overlapping interests in present markets or future geographic and product market expansion plans. A revised analysis may become necessary as the partners' evolving internal capabilities, strategic choices, and market developments pull them in separate directions, diminishing the strategic fit of a once-perfect match. Dow-Badische, a long-standing alliance between Dow Chemical and Germany's BASF, built up sales of chemicals and fibers to $300 million. But Dow dissolved the 20-year-old alliance on the grounds that the venture was drifting too far apart from Dow's mainstream chemical business.

Management Practices/Organizational Structure. The wide diversity in management styles, organizational structure, and other operational-level variables that exists among firms from different parts of the world can largely be traced to diversity along the first four dimensions discussed above. In turn, these differences can heighten operating difficulties and trigger premature dissolution of a global alliance. Thus, major differences include the style of management (participatory or authoritarian), delegation of responsibility (high or low), decision-making (centralized or decentralized), and reliance on formal planning and control systems (high or low).

When GM invited Toyota to join its huge new online marketplace for suppliers' goods and services, Toyota had strong reservations. Tadaaki Jagawa, the senior Toyota executive in charge of procurement, said, "Even within the U.S., our manufacturing systems are so different I am not sure if we could really pull this one off."

Clearly, the full list of characteristics along which global alliance partners may differ is extensive, and such interfirm diversity can have a big impact on the entire spectrum of alliance activities. There is no evading the challenges that arise from this diversity; left unattended they can lead to costly failures. So what opportunities are available to managers to actively improve the prospects for more robust, successful global alliances?

* Learning to Cope

After learning to appreciate interfirm diversity in all its dimensions, the second critical step to coping effectively with these differences begins with an assessment of their type and degree. If the relatively stable dimensions of societal culture, national context, and corporate culture constitute salient differences among firms, then organizational learning becomes a threshold condition for alliance success, and management attention must be targeted at the relevant dimensions during the earliest phases of alliance development (partner screening, pre-contractual negotiations). In cases where significant diversity arises from the relatively more volatile dimensions of strategic direction and management practices, later adaptive learning under new partner circumstances is a necessary precondition for alliance success and longevity.

Because societal culture makes up our mental map for understanding and reacting to the world around us, handling differences in societal cultures must begin with developing an understanding of each other's mode of thinking and behaving. What makes my partner tick? What are its behavioral norms, deeply held cultural beliefs, and so on? Many potential problems can be nipped in the bud through such understanding, which may be developed through sophisticated programs to promote intercultural awareness, or by encouraging informal contact among employees.

Fortunately, with growing globalization, U.S. multinationals' use of crosscultural training programs may be on the rise, which means that fewer American executives now believe that a good manager in Boston or New York will necessarily be effective in Bombay or Beijing, or that a candidate's domestic track record can serve as the primary criterion for overseas assignment selection. Ethnocentric arrogance (or cultural naivete) and global alliances simply do not mix well.

Although differences in national contexts can be significant, important common patterns may be emerging internationally in response to powerful imperatives facing global firms, such as the gradual dissolution of old industry structures and institutions in Europe, Japan, and the U.S., the tendency toward forming strategic alliances, and growing permissiveness on the part of governments toward these alliance formations. Thus, firms weaned on particular home government policies and national industry structures and institutions can cope effectively by emphasizing "rational" (technological and economic) factors that may progressively overwhelm the national differences.

To mesh diverse corporate cultures effectively, each alliance partner must make the effort to be receptive to and learn the ideologies and values of its counterpart. Among some U.S. firms, this might mean less emphasis on equity control and an acceptance of slower payback periods on alliance investments in the interest of future benefits over longer time horizons. Among Japanese firms, this might mean a keener recognition of the demands on U.S. managers to show quicker results, with possible modifications in the goals of the alliance and the means used to achieve those goals. Research has shown some support for the emergence of "intermediate" corporate cultures--those characterized by priorities and values between the sponsoring firms--as alliance partners make mutual adjustments.

One key to managing diverging strategic directions and partner interests is to build flexibility into the partnership structure, allowing firms to adjust to dynamic changes in their internal and external environments. Flexible structures may be attained, for example, by initiating an alliance on a small scale with specific, short-term agreements (cross-licensing, second-sourcing) instead of huge deals that can pose "lockin" problems with shifting strategic priorities. In a gradually built relationship, areas of cooperation can be expanded to a broader base to the extent that continuing strategic fit exists. Or flexibility can be attained by entering into a general (or blanket) cooperative agreement activated on an as-needed basis.

Finally, diverse management practices and organizational structures can create ambiguous lines of authority, poor communication, and slow decision making. Effectively combining diverse systems of alliance partners may require setting up unitary management processes and structures, where one decision point has the authority and independence to commit both partners. After a U.S.-based marketing JV between TRW and Fujitsu collapsed under the weight of a double management system ("too many cooks"), Fujitsu reorganized the unit as a wholly owned subsidiary.

* Looking Ahead

With the continuing strong growth of global alliances, the problems associated with interfirm diversity need urgent attention. Such problems also provide rich opportunities for creative solutions. Perhaps the most promising of these is to use the accumulated knowledge in organizational learning theory to deliberately and systematically accelerate the institutionalization of global alliance formation, structuring, and management.

The ideas of Frederick Winslow Taylor, who published the Principles of Scientific Management in 1911, were based on breaking down work to the simplest tasks, separating planning from executing tasks, and introducing time-and-motion studies. Similarly, discussing Cisco's heavy reliance on acquisitions to fill in its product line and fuel growth, CEO John Chambers says, "We have it down to a science. We could do ten a month if we needed to." To what extent can we perform such scientific analyses on the various repeatable tasks involved in global alliance management?

A critical part of managing interfirm diversity is building trust. But the propensity for trust, or even what it means, is apt to vary greatly among alliance partners of different nationalities, and managers must try to understand these differences. Exciting recent advances in fuzzy logic, artificial intelligence, and intuition also suggest important prospects for continuing research in trust. Finally, an empirical study currently under way aims to test in the real world of global alliances the predictive power of the theoretical propositions I first put forward in 1991.

In the rapidly consolidating global auto industry, Nissan CEO Carlos Ghosn believes that managing cross-border alliances is a skill that will be essential for executives of the emerging "auto supergroups." As he says, "This crossing of cultures, of companies, and of functions is at the heart of success. The company that is able to do this in the most effective way, in my opinion, will be the winner."

Ghosn is right. Success in the coming years will go to those companies that are able to break out of their own cultural, national, and corporate straitjackets and embrace cross-cultural, cross-national, cross-organizational mindsets that promote effective handling of diversity as an integral, inescapable part of global alliances.

References and Selected Bibliography

Andersen Consulting, Dispelling the Myths of Alliances (Chicago: 1999).

E.S. Browning, "Side by Side," Wall Street Journal, May 3,1994, p. Al.

L. Chang and I. Johnson, "Foreign Investment in China Falls as Beijing Meddles with Market," Wall Street Journal, August 20, 1999, p. A9.

J.R. Harbison and P. Pekar, Institutionalizing Alliance Skills: Secrets of Repeatable Success (Los Angeles: Booz-Allen & Hamilton, 1997),

G. Lorenzoni and A. Lipparini, "The Leveraging of Interfirm Relationships as a Distinctive Organizational Capability," Strategic Management Journal April 1999, pp. 317-338.

S.N. Mehta and G. Naik, "AT&T-BT Global Venture Stirs Doubts," Wall Street Journal October 8, 1999, p. B7.

M. Murray, "Oceans Apart," Wall Street Journal, June 15, 2001, p. A1.

E. Nee, "Cisco: How It Aims to Keep Right on Growing," Fortune, February 5, 2001, pp. 91-96.

A. Parkhe, "Interfirm Diversity, Organizational Learning, and Longevity in Global Strategic Alliances," Journal of International Business Studies. Fourth Quarter 1991, pp. 579-601.

A. Parkhe, "Understanding Trust in International Alliances," Journal of World Business; Fall 1998, pp. 219-240.

A. Parkhe and J. Kim, "Interfirm Similarity and Outcomes in Global Strategic Alliances: An Empirical Investigation," working paper, Indiana University, 2001.

D.A. Ricks, "International Business Blunders," Business and Economic Review, January-March 1988, pp. 11-14.

N. Shirouzu and R.L. Simison, "Toyota Weighs Joining GM in Web Supply System," Wall Street Journal January 6, 2000, p. B4.

A. Taylor "Bumpy Roads for Global Automakers," Fortune, December 18, 2000, pp. 278-292.

RELATED ARTICLE: This past summer, the author was honored to receive the 2001 JIBS Decade Award from the Journal of International Business Studies, a leading scholarly journal in the field. This Executive Briefing is based on the 1991 article for which he won the award. It reviews the core points and assesses the progress that has been made over the ensuing decade.
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Title Annotation:management
Author:Parkhe, Arvind
Publication:Business Horizons
Geographic Code:1USA
Date:Nov 1, 2001
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