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CUHK Business School Research Looks at the Risk of Establishing Strategic Corporate Alliances During Periods of Market Uncertainty

HONG KONG SAR – Media
OutReach – 8 April 2021 – Whenever
there is great uncertainty in the market, it is not uncommon for firms to seek
out a business partner to leverage on each other’s strengths to develop new
business opportunities as well as to help shoulder risks. A case in point is
the famous AOL
Time Warner alliance, which was billed as the ultimate combination of
an online service provider with a media conglomerate, amidst the massive
upheaval that occurred just as global use of the internet took off in the early
2000s’.


 


The deal, which was finally
unwound in 2018, is widely considered the worst merger of all time.


 


There have also been a few success stories. The Spotify-Uber alliance
gave users personalised music experience during their car rides has been said
to be a win-win for both companies, at a time when Spotify was facing criticism
that it failed to compensate its artists fairly. Another famous successful
alliance is the partnership between Starbucks
and Barnes & Noble, which allows customers to enjoy
the former company’s coffee when they visit the latter’s book stores, helping
the bricks-and-mortar book seller to fend off online rivals that have since
become dominant in the industry.


 


So why do some firms that try to be stronger and perform
better during difficult times by establishing alliances fail to achieve their
goals? A recent research study reveals that forming alliances may not make the
companies stronger together, especially when the market condition is volatile.


 


While prior research focused on how alliance strategies
improves company performance and innovation, Ribuga
Kang, Assistant Professor in the Department of Management at The
Chinese University of Hong Kong (CUHK) Business School and her co-author Prof.
JungYun Han at National Taiwan University looked at the impact of market
uncertainty on innovation of firms involved in alliances in their latest
research study Market
Uncertainty, Innovation of Firms in Alliance and Alliance Partner
Characteristics. In the study, Prof. Kang and Prof.
Han analysed 115 firms in alliances in the pharmaceutical and biotechnical
industries in the U.S. between 1990 and 2015.


 


According to Prof. Kang and her co-author, there are four
reasons for why market uncertainty hinders innovation of companies in
alliances.


 


First of all, partner firms may be reluctant to commit
effort or resources during turbulent times because they would be more
interested in protecting their own companies during these periods. Also,
companies may need to renegotiate agreements due to the changing environment,
which is likely to cause confrontation and conflict. Consequently, the trust
and willingness to share between companies would be significantly undermined.


 


Secondly, a hostile business environment may lead to
increased difficulty in communication between companies. As being innovative
relies on the integration of knowledge and resources from companies in an
alliance, the increased difficulty in communication would hinder efforts in
creating new ideas.


 


Thirdly, companies with alliance partners may tend to overly
depend on their partners instead of searching for new ideas elsewhere.


 


Lastly, when companies in an alliance share their concerns
about the uncertainties and challenges amid volatile market conditions, they
reinforce the pessimistic forecast about the market and hence would likely
develop passive and defensive business strategies that would ultimately lead to
low innovation.


 


“Just because two companies don’t seem to go together
at first, doesn’t mean they aren’t a great pair. For firms seeking alliances,
they should aim to form partnerships that can create synergy and be win-win to
both parties,” Prof. Kang says.


 


Mitigating
Risks


However, the study points out that there are two conditions
that would help companies in alliances to mitigate the negative effect of
market uncertainty on innovation. According to the study, when companies choose
to partner with other firms from a different industry and a different nation,
it would help them to develop diverse and useful new knowledge.


 


Prof. Kang explains that there are three advantages for
having a partner firm in a different industry. Firstly, the partner firm would
be able to supply brand new ideas and knowledge given their different industry
backgrounds. Secondly, if a company has a partner firm in a different industry,
the partner will provide fresh perspectives to the other firm and make it less
likely that a firm would follow tired old market practices. Thirdly, if the two
companies in an alliance are from different industries, they would not be in
direct competition. Therefore, they would be more willing to exchange
knowledge, which would result in increased innovation.


 


Having a partner company in another country, according to
Prof. Kang, also has three benefits. The first benefit is that the foreign
partner would be able to bring in non-localised knowledge and new ideas.
Secondly, such a cross-border alliance provides an opportunity to learn a new
mindset, different business practices and organisational cultures. Lastly,
companies would be able to rely on their foreign partners for their resources
and networks to broaden the business opportunities in other markets.


Innovation
Quantity Vs Quality


Interestingly, the researchers found that forming alliances
with companies in different industries and in different countries can influence
innovation in various ways. In particular, different types of alliances have
different effects on the quantity of innovation and whether the innovation
generated created value by uncovering an unmet customer need or offering a new
solution.


 


To measure the effect on innovation quantity, the research
team examined the number of patents filed by a company. For the effect of the
latter type of innovation, called exploratory innovation (as opposed to
exploitative innovation, which focuses on meeting an already exposed customer
need) the researchers looked at the number of new patents filed in different
categories. The two types of patents are counted in a four-year period after a
firm formed an alliance.


 


According to the results, forming an alliance with a partner
in a different country increases the number of patents, even when the market
condition is uncertain. On the other hand, having a partner firm in a different
industry can increase the firm’s exploratory innovation during volatile times.


 


“We think that new knowledge, such as different
organisational styles or cultural differences, brought by a foreign partner
firm can help a firm file more patents,” Prof. Kang explains. “However,
if a company wants to be really innovative, that means expanding its own
boundaries, then it must get a partner firm in a different industry to get new
ideas and expertise beyond its own existing knowledge stock.”


 


Managerial
Implications


Although forming alliances is an effective business strategy
for companies to pursue mutual benefits, Prof. Kang and her co-author urge
companies to pay attention to the risks and challenges that market uncertainty
may bring to business alliances because these risks can often outweigh the
benefits.


 


For managers, the researchers suggest them to have a deep
understanding of the impacts and risks that their firms face in a difficult
business environment. This is important because if managers fail to fully
understand the uncertainty they face (and considering that during poor economic
conditions, a partner firm would have heightened interest to protect their own
interests) an alliance would be unable to achieve meaningful innovative goals.


 


Based on their findings, Prof. Kang and her co-author advise
managers to choose carefully an alliance partner which will allow them to best
utilise each other’s expertise to develop innovative products. They also
encourage managers to leave their comfort zone in finding partner firms and
avoid forming alliances with firms that are close to home or with firms in the
same industry, especially in highly uncertain and competitive market
conditions.


Reference:


Han,
J. and Kang, R. (2020), “Market uncertainty, innovation of firms in
alliance and alliance partner characteristics”, European Journal of Innovation Management, Vol.
ahead-of-print No. ahead-of-print. https://doi.org/10.1108/EJIM-05-2020-0195


 


This
article was first published in the China Business Knowledge (CBK) website by
CUHK Business School: https://bit.ly/3cxxGBy.


 

CUHK Business School Research Looks at the Risk of Establishing Strategic Corporate Alliances During Periods of Market Uncertainty Source link CUHK Business School Research Looks at the Risk of Establishing Strategic Corporate Alliances During Periods of Market Uncertainty

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