How to generate super-normal profits?

Effective inter-organisational resource allocation via strategic alliances creates positive synergistic effects. Moreover, Relation-specific assets, Governance model & Knowledge-sharing routines can further enhance the overall value of a strategic alliance. Collaborating with strategic partners can create a unique competitive advantage, which can become a source of so-called relational rents.

.credits: Dyer, J.H. & Singh, H.

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Strategic alliances are a well-known and broadly utilized business approach, however despite numerous advantages they often fail to deliver the expected results. According to several studies, approximately 50-60% of M&A’s and strategic alliances are characterized as under performing. (Dyer et al., 2001; Kale and Singh, 2009)

So, what are the key principles of successful SA? How can firms capture value from strategic alliances?

First of all, its crucial to partner up with a company that provides complementary assets & capabilities. Therefore, it is important to critically analyse your firm’s skills and capabilities and define what is the firm’s strategy, in order to evaluate what type of resources & capabilities would be beneficial for the firm. Firms should spend substantial time & effort during this initial step, since it may significantly influence the outcome of strategic alliance.

When an alliance is formed, there are several mechanisms which can effectively support the partnership:

Relation-specific assets

investments into assets that are unique and developed specifically for synergistic opportunities associated with your partner. This can include for example factories located next to each other, specific tools, tailored manufacturing processes or Human Resources with specific inter-organisational know-how.

Duration, safeguards and total volume of such assets is crucial in order to develop long-lasting economies of scale or scope.

Knowledge-sharing routines

• regular patterns of inter-organisational interactions that enable transfer, recombination and creation of knowledge.

• “Absorptive capacity” is a key capability to enhance knowledge-sharing.

• Facilitating social connections and also a transparent and standardized communication matrix/rules are important aspects as well.

• Finally, a proper mechanism which creates incentives for knowledge sharing (partner alignment, transparency) and reduced costs or “free riding” mitigation are essential for relational rent generation.

Effective governance

alliance specific system (including rules, processes, responsibilities, etc.) which guide organisations in partnership management. Companies can choose between formal and informal governance models.

• Formal governance relies on legal contracts (which are costly and incomplete, but can be enforced by 3rd parties) and/or financial investments, equity exchange etc.
  

• Informal governance can be developed in the form of goodwill or trust. It takes a long time and it’s difficult to develop, however it’s often recognized as the most effective and least costly method.

Both approaches have its drawbacks such as writing contracts for tacit knowledge or opportunities for misappropriation, nevertheless a governance model has to be established.

Relational rents

By effective and dynamic utilization of those mechanisms, firms can achieve so-called Relational rents, which cannot be created by either firm in isolation. Such rents also cannot be achieved via simple arm's-length market exchanges, since those are not rare and can be easily imitated.

On the other hand, the uniqueness of strategic partnership (enhanced by relation-specific assets, knowledge sharing routines and governance model) can become a source of competitive advantage, which can provide firms with super-normal profits.

Conclusion

Firm’s ability to identify and evaluate partners based on complementarity of resources depends on the quality of information and its network position. Furthermore, partnership knowledge and portfolio management practices are crucial for effective utilization of introduced mechanisms. There are also additional factors which can influence the outcome of collaborative business models. Managing such complexity can be difficult especially for organisations which lack previous experiences. Nevertheless, strategic alliances can create a unique source of competitive advantage which can be further transformed into super-normal profits. Don't worry, StraxQ will help you!

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References:

• Simple Rules for Making Alliances Work by Jonathan Hughes and Jeff Weiss @HBR / https://store.hbr.org/product/simple-rules-for-making-alliances-work/R0711H

• Kale, P., Singh, H. (2009). Managing strategic alliances: What do we know now, and where do we go from here. Academy of management perspectives, 23(3), 45-62.

• Dyer, J. H., Kale, P., and Singh, H. (2001). Strategy how to make strategic alliances work developing a dedicated alliance function is key to building the expertise needed for competitive advantage. Sloan Management Review, 42, 37–43.

• Dyer, J.H.; Singh, H. (1998). The relational view: Cooperative strategy and sources of interorganizational competitive advantage. Academy of Management Review 23(4): 660-679.

• Dyer, J. H., Singh, H., and Hesterly, W. S. (2018). The relational view revisited: A dynamic perspective on value creation and value capture. Strategic Management Journal, 39(12), 3140-3162.