ASIA PACIFIC JOURNAL OF MANAGEMENT, VOL. 17, 201-222 (2000)

Knowledge creation in strategic alliances: Another look at organizational learning

PHILLIP H. PHAN

The L&y School of Management 6 Technology, Renmlaer Polytechnzc Institute,

1109” St., Troy, NY 12180, USA, E-mail: ,b,fhan@rpi.edu

AND

THEODORE PERIDIS

Schulich School of Bwinm, York Uniwwity, 4700 Keele St., Toronto, Canada M3J IP3

E-mail: tperidis@sch~*licb.yorku.ca

This paper argues that a certain amount of partner conflict must exist for knowledge creation to occur in a strategic alliance. We argue that such tensions can generate opportunities for firms to challenge each other’s assumptions and paradigms, leading to novel perspectives and new solutions. This position is contrasted to existing theories that present conflict minimization as the route to alliance success. The paper exploits the generative or double-loop learning process (Liedtka et al. 1997; Argyris and Schon 1996) to build a model of inter- organizational knowledge creation and explicitly considers the implications for partner interactions. We suggest that knowledge creation often occurs in turbulent and discontinuous environments associated with the tension between alliance partners of different cultural origins. This paradox is critical to understanding the reasons why strategic alliances often fall short in their potential to create new knowledge.

1. INTRODUCTION

Organizational learning is a process by which a firm acquires information, knowledge,

understanding, know-how, techniques, and practices that lead to changes in its routines

(Argyris and Schon 1996). These changes may improve the organization’s performance of

its tasks or they may simply change the way those tasks are executed. Traditionally,

organizational learning is seen primarily as an internal activity, in the sense that it refers

to changes that are implemented on the organization’s routines, irrespective of the source

of the stimulus or the knowledge that engendered the process. Organizational knowledge

is the product of organizational learning and is represented by the codes and routines that

guide action in the firm (Nelson and Winter 1982). Thus, the creation of new knowledge

involves the creation and/or assimilation from the outside of new codes and routines that

replace or append existing ones.

We define strategic alliances as long-term, trust-based relations that entail highly

relationship-specific investments in ventures that cannot be fully specified in advance of

CCC 0217-45611001040201-22

0 2000 BY JOHN WILEY & SONS (ASIA) LTD

202 P. H. PHAN AND ‘I’. PERIDIS

their execution (Provan and Gassenheimer 1994; Ring and Van de Ven 1992). Within the

strategic alliance literature, learning is traditionally seen as the efficient assimilation of

knowledge, a process in which a firm imitates its partner’s skills and routines and/or

replicates its technology (Hamel 1994). Equally critical have been the attempts to understand

adaptation, the adjustments and the developments that take place within each organization

as a result of participating in an alliance (Khanna et al. 1998). For example, the NUMMI

alliance between GM and Toyota in the 1980s led to the creation of the Saturn Corporation

in the 199Os, as a way for GM to replicate the production technologies it assimilated from

Toyota. The fundamental premise of alliances is that they allow organizations to further

exploit resources and core competencies. The exploitation of these resources is accomplished

within an organizational context in which new ways of deploying resources and adapting

their use to the new situations are identified. While current routines may also be changed

in the light of newly found ways of using existing resources, it is important to understand

that these changes occur within a defined organizational culture and therefore cannot be

too radical. Both types of learning, assimilation and adaptation are equally important and

have been addressed to varying degrees in the literature.

Our interest in this paper, however, goes beyond the simple assimilation/adaptation

distinctions that have been used. Instead, we want to explore the processes that take place

in the partner interface that might lead to second-order learning or learning of the process

of learning, a process that leads to paradigm shifts. We make the argument that second

order learning is critical to the process of knowledge creation because it alters the value

system and thought processes by which organizations interpret data and draw conclusions

about their competitive and technological opportunities. Thus, second-order learning is

not necessarily the same as the knowledge creation process described by Khanna et a1.

(1998). Nor does it also necessarily include the knowledge that already exists in another’s

knowledge base. Participation in an alliance, we argue, can potentially trigger second

order learning processes that lead to genuinely novel knowledge. The objective of this

paper is to posit a knowledge-creation theoretical framework, based on the organizational

learning work of Argyris and Schon (1978; 1996), which describes second-order learning

processes in strategic alliances.

Here, we argue that organizational learning is affected by the existence of the

alliance partner, the challenges that it presents to the ways the organization acts, and, most

importantly, by the modes of interaction between the partners. Therefore, the paper

contributes and extends our understanding of organizational learning in three ways. First,

we argue that second-order learning is more germane to the creation of knowledge than

is first-order learning. Second, we extend relational contracting perspectives on strategic

alliances by suggesting that the cultural distances between partners, heretofore a negative

success factor in much of the literature (Lane and Lubatkin 1998), can have positive

economic value. In short, we argue that partner conflict is good for knowledge creation.

Finally, we provide a more complete theory of alliance effectiveness.

KNOWI.1;Il<;E CREATION IN STKATEGK ALIJANLES 203

This paper’s point of departure is a brief definition of knowledge, then a review of

the research on strategic alliances followed by the organizational learning literature. We

then amalgamate the two latter streams of literature in a theoretical model from which

we draw specific propositions on how the critical elements of strategic alliances (relational

contracting, cultural compatibility, skill complementarity, and reciprocal dependencies)

impact knowledge creation within an organization learning theoretical framework. Suggestions

for future research are then explored and the paper concludes with a summary of implications

for theory and practice.

2. LITERATURE REVIEW

A DEFINITION OF KNOWLEDGE

According to von Krogh (1998) the literature reports two views of knowledge. The

traditional view characterizes knowledge as informational representation of the world,

which consists of objects and events perceived cognitively and universally by the brain.

Thus, the representation of a ‘chair’ as object and the property of ‘chairness’ as a function

remain constant regardless of who perceives it. In this view of knowledge, learning is the

accumulation of increasingly complete representations of reality. Therefore, knowledge can

be encoded and therefore transmitted.

A more recent view of knowledge expands on the original view in that it suggests

that knowledge is socially constructed, highly personal, and thus difficult to encode and

share. Nonaka (1994), for example, states that while truthfulness or representation is an

essential attribute of knowledge, the more important attribute to emphasize is the ‘justification

of personal belief because while the former leads to static declarative definitions of knowledge,

the latter can lead to a dynamic process of knowledge creation, which is the point of our

paper here.

Of particular interest in this ‘constructionist perspective’ (von Grogh 19%) of

knowledge, is its tacit dimension (Nonaka 1994; Hayek 1945; Polanyi 1966). Tacit

knowledge has inherent value because it is inimitable, rare, unique, and path dependent

(Ghemawat 1991; Barney 1993). From an individual’s perspective, tacit knowledge is

acquired by experience through ‘learning by doing’ and ‘learning by using’ (Collis 1991;

Grant 1991). Thus, tacit knowledge includes the contextual dimensions of facts, events,

and ways of acting or doing; is rooted in history and past action, and involves perceptual,

cognitive and technical elements (Polanyi 1966; Nonaka 1994). Therefore, new knowledge,

which is the result of knowledge creation, is that which the individual previously has no

cognitive record.

Argyris and Schon (1996) define organizational knowledge as the codes (rules,

formal and informal procedures and policies, mental maps, and so on) and routines (strategies

for performing complex tasks) that guide organizational action. Knowledge has three

204 P. II. PHAN AND T . PERIDIS

components in this definition: strategies, values and assumptions. We define strategies

broadly to mean the patterns in action that organizations rely on to perform tasks and

fulfill objectives (Mintzberg 1978). Strategies may also be interpreted as the organizational

routines that characterize a developed bureaucracy. Following Sinkula et al. (1997), values

represent the systematic beliefs of the instrumentality of the strategies that are being

performed. In other words, values represent the organization’s internal sense of the legitimacy

of its goals, objectives, and methods of accomplishing them that are held in common by

organizational members. Finally, assumptions are those ‘constants’ that organizations hold

to be true of the environment in which they perfbrm the tasks. Assumptions represent the

naturally accepted constraints on the scope of routines performed and contemplated for the

future by rhe organization.

Sometimes, the values and assumptions of the organization are encoded in an

organization’s explicit knowledge base. Values may be expressed in the form of mission

statements, goals statements, ethical codes or employee conduct handbooks. Assumptions

are often embedded in the organization’s strategic plans and budgets, as well as its control

and reporting systems. At other times, the values and assumptions are tacitly embedded

in the patterns of behavior, norms, and cultural distinctiveness held in common by

members of the organization.

Regardless of how these are expressed, explicitly or tacitly, it is evident that the three

dimensions of organizational knowledge, strategies, values and assumptions, correspond to

the definition of organizational knowledge as routines and codes. Following the spirit of

the definition of individual knowledge, new organizational knowledge are those routines

and codes that previously did not collectively exist in the organization.

STRATEGIC ALLIANCES

The study of strategic alliances has emphasized the use of transactions cost economics and

resource dependence theories to explain the governance structure of alliances (Provan and

Gassenheimer 1994; Kogut 1988; Contractor and Lorange 1988). A transactions cost

explanation models the variations in degrees of asset specificity, uncertainty, and small

numbers bargaining (risk of holdup) as determinants of the governance structure of alli-

ances (Williamson 1985). Resource dependence theory explains governance structure choice

as a function of the need to secure resources, which organizations use to stabilize their

environments and minimize the need for adaptation (Pfeffer and Salancik 1978). In gen-

eral, transactions cost explanations regard uncertainty as a constraint that dictates the

outcome of governance arrangements. By contrast, resource dependence theory frames

uncertainty as a target variable to be managed through alliance governance choice. In the

same way that market access, technology, and capital are exchanged, both approaches treat

information as a resource to be exchange in a strategic alliance.

At this time, theoretical formulations from transactions cost economics and resource

dependence have not explicitly addressed the issue of new knowledge created in an alliance.

KNOW’UlX;E CREATION IN STRATBGIC ALLIANCES 205

Heretofore, these theories assume that successful strategic alliances tend toward stability,

driven by more complete information as partners learn about each other and therefore how

to behave towards one another. Such a view follows from regarding strategic alliances

merely as another form of organizing exchange (Parkhe 1993). Furthermore, strategic

alliances are assumed to exist in order to achieve some defined competitive or strategic

goal (Simonin 1997). From a normative standpoint, a well-specified goal is taken as a

necessary condition for alliance success (Geringer 1988; Harrigan and Newman 1990).

From the perspectives of transactions, cost economics and resource dependence strategic

alliances would not occur without specific strategic goals (Parkhe 1993). Without clearly

defined outcomes, the expected value of an alliance could not be specified, which would

make it impossible to set a value on the claims of a contingent contract and the accompanying

bureaucratic organization governing the alliance. Thus, under a transactions cost perspective,

an alliance could not form without objectives. Similarly, under the resource dependency

perspective, the lack of specific objectives and expected payoffs renders the power distribution

in an alliance indeterminate, making it difficult to specify the behavioral expectations of

the partners.

It is with this understanding and an acknowledgement of the fact that many alliances

still exist in spite of a lack of specific goals’ that leads us to conclude that we need a

different way of looking at strategic alliances. Indeed, some researchers have acknowledged

that organizational learning is a critical determinant of strategic alliance success (Hamel

1991; Inkpen 1996; Arino and de la Torre 1998; Parkhe 1991). The resource-based view

of the firm (Barney 1991) asserts that the most valuable resource is knowledge because

it is idiosyncratic and thus difficult to imitate (Gulati et al. 2000). Tacit knowledge is

particularly difficult to imitate because it is not encoded and therefore invisible to the

casual observer. The main difficulty in imitation stems largely from the fact that the

knowledge is contextual and organizationally embedded, which suggests that to acquire

it, a firm has to penetrate a competitor’s organizational boundaries (Crossnan et al. 1999).

There are a number of ways this can be achieved, which includes the formation of strategic

alliances.

The organizational learning perspective of strategic alliances focuses on how value

is created through the enhancement of partner skills (Khanna et al. 1998; Larsson et al.

1998; Gulati et al. 2000). It also attempts to understand how the partners contribute to

value creation through the division of partner roles and how this value is apportioned after

it is created (Doz 1996; Hamel 1991). There are two distinct views on alliance learning.

The first is what Hamel (199 1) terms ‘the race to learn,’ which views alliances as ‘mechanisms

for gaining access to partners’ knowledge and skills’ (Inkpen and Beamish 1997). The

’ For example, the kereitsu is a Japanese network organizational form that exists as a dynamic and

loosely knit multilateral alliance. Such alliances are remarkable for their stability and longevity. So

much so that in the automotive industry American manufacturers have copied the Japanese by

creating American kereitsz in Detroit (Ealey and Troyano-Bermudez 2000).

206 P. H. PHAN AND T . PEKIDIS

second addresses the opportunities for co-specialization and enhancement of capabilities

that derive from new business opportunities created by virtue of the combination of

partner capabilities. Kale et d/, (2000) demonstrate that the success of alliances depends

on the sophistication of the individual partner’s learning processes.

However, the literature views the first type of alliance based organizational learning

as unstable, which inevitably leads to the termination of the alliance because one partner

is likely to learn faster, dominate the relationship, and expropriate the value that belongs

to the other partner (Khanna et ul. 1998; Inkpen 1998; Snyder and Cummings 1998). The

latter views alliances as win-win situations with stable arrangements that enhance both

partners’ competitive positions. In the second type, the gains from learning are transferable

to the partners’ other lines of businesses, which increase the net present value of the

alliance and therefore increase the incentives to cooperate. This is akin to the distinction

between private and common benefits that was made by Khanna et al. (1998) and von

Krogh (1998). For example, in the automotive parts manufacturing industry, Lear Interiors

and Magna International have become market share leaders because of their cooperative

arrangements with the Big 3 American automotive companies. They have been able to

learn manufacturing and design technologies by working closely with General Motors,

Ford, and Chrysler. In addition, these alliances have enabled them to achieve scale economies

and develop core capabilities that have strengthened their competitive positions against

other parts manufacturers globally (Ealey and Troyano-Bermudez 2000).

Notice that in this paper, we treat knowledge creation and learning as related but

distinct processes, so before we can discuss knowledge creation in the strategic alliances,

we will first review the extant research on organizational learning, which has a longer and

richer theoretical tradition than knowledge creation.

ORGANIZATIONAL LEARNING

In the organization sociology literature, models of mutual organizational learning mention

the development and diffusion of organizational knowledge between individuals and the

organization (March 1991; Lane and Lubatkin 1998). A key tenet in these models is the

idea that individuals modify their behaviors continuously as a consequence of their socialization

into the organization’s cultural environment. The modifications of these behaviors give rise

to new routines and modes of action. According to Not&a and Konno (1998) and

Nonaka (1994), this process of knowledge creation can be described as a spiraling cycle

of interactions between explicit and tacit knowledge pools across people and organization

boundaries. West and Meyer (1997) suggest that these interactions are mediated by the

quality of communication protocols, technologies, and interpersonal skills, which deter-

mines the extent of learning.

Like individuals, firms are also continually engaged with their internal and external

environments, and constantly responding to changing patterns of competition, regulation,

and the socio-demographic characteristics of employees and consumers (Argyris and Schon

KNOWLEDGE CREATION IN STRATEGIC ALLIANCES 207

1978). First order or single loop learning occurs when error detection and correction leads

to changes in organizational strategies, and assumptions within a constant framework of

norms for performance (Bateson 1972; Argyris and Schon 1978). Sometimes, when

fundamental shifts in the firm’s competitive environment occurs, learning takes place to

correct not only the process by which decisions are made but also the standards to which

these decisions are measured against (Argyris and Schon 1978). This learning single loop

learning process is characterized by the standard cybernetic feedback cycle of error detection

and correction. When variances between outcomes and goals are detected, error correction

takes the form of altering the actions or the goals to reduce variance.

The efficacy of organizational learning is mediated by the organizational schemas

and information filters (we call these mental models) that allow individual organizations

to frame and interpret data (Padgett 1992; March and Olsen 1989; Huber 1991). These

mental models come from an organization’s historical and epistemological traditions and

evolve as the firm encounters effective or ineffective solutions to its formulation and

implementation problems. At this time, there is little systematic inquiry into what may

cause an organization’s mental models to change. The literature on organizational change

talks about crises and triggering events that can cascade into a paradigm shift. However,

these processes are usually modeled as random (Snyder and Cummings 1998), which is

not useful for our purposes. Instead, we posit that through strategic alliances firms can

initiate these triggering paradigm-shifting events.

In an organization, knowledge can come from hierarchy where the source is identified

as internal, and market and social exchange where the sources are external (Liebeskind

et al. 1996). All three sources of knowledge are contextually embedded and institutionally

constrained; that is, social and group norms dictate what and how knowledge is transferred.

Social exchange, which involves the interaction of ‘pools of knowledge,’ can lead to the

transfer of tacit knowledge without resorting to price mechanisms or legal contracting

(Powell 1998; Nonaka 1994). S ocia exe an 1 h g e may be informal, such as the water fountain

encounter or formalized such as the strategic alliance.

In double loop or generative learning, the value system that gives rise to the

assumptions about the environment in which the organization acts is called into question.

According to Liedtka et al. (1997) and Argyris and Schon (1978) the double loop process

likely occurs when the simple error detection and correction cybernetic mechanism no

longer produces the desired results (variance reduction) so that the assumptions underlying

the creation of the goals and action sets are re-examined. This may lead managers to

conclude that the assumptions are no longer valid, triggering a reassessment of the values

that led to those assumptions. For example, that a firm’s stock price is an accurate and

desirable measure of performance is an assumption based on a fundamental belief that

capital markets are efficient processors and users of corporate information. If that belief is

not held by management then the value of the stock price as an indicator of performance

and therefore a guide to managerial behavior is attenuated, as has been the case of the

Japanese firm (Yoshikawa and Phan 2000).

208 P. H. PHAN AND ‘I?. PEKIDIS

The upshot of the above discussion is that it takes the failure of a single loop process

to trigger the double loop one. We argue that second-order learning happens because a

first-order inquiry into the value system leads nowhere and thus, managers are forced to

rethink their assumptions and the way they are inquiring, giving rise to paradigm shifts.

For example, American automobile manufacturers in the 1980s had to rethink the way

they learned about the competition, new technology and markets when they saw that

traditional ways of learning (using traditional market research; employing large-scale

consumer testing; and having large, in-house research and development departments) did

not result in market share gains. This inquiry into the way they learned led American

automakers into new learning paradigms that included the use of strategic alliances,

outsourcing, and integrated supplier design and manufacturing (O’Reilly 1998; Ealey and

Troyano-Bermudez 2000). This does not mean that both single and double loop processes

cannot occur simultaneously in an organization. It does mean that for a double loop

process to occur, the failure of a single loop must happen. Thus, we can conceive of

organizations as collections of learning loops. In strategic alliances one or more of these

loops intersect each other across the two organizations. The intersections of these loops

often result in knowledge transfer.

Heretofore, it has been assumed that knowledge transfer takes place once the linkages

are formed between partners to a strategic alliance (Simonin 1999; 1997; Lei et al. 1997). In these models, managers are seen to continuously modify their beliefs about the environment

as they gain more private information from the alliance. As private knowledge is obtained,

the beliefs and actions they generate lead to improved organizational performance or

private gain. Such successful solutions then diffuse back to the partnership in the form of

formal and informal knowledge transfers and become part of the solution set that provides

the basis for future joint problem solving. This iterative process raises the sophistication

of the partners’ approaches to problem solving and eventually yields performance returns

(or synergy) that are shared by the alliance or for public gain. This learning process is

essentially single looped because the value systems of the alliance partners remain intact

and have not been challenged. Error detection and correction take place in the context of

the partners’ assumptions about the environment, basis for exchange, and each other’s

motivations.

The above literature review leads to three conclusions. First, the research on strategic

alliances has concentrated on forms of governance and incentives with relatively less

emphasis on its learning aspects.2 Second, the learning mechanisms hypothesized to occur

’ This does not mean that there 1s not a lot of work currently being done. They simply have yet co

show up in the published Ilterature. For example, at the time this paper was being revised, the

Str~~tegx Mmmpmnt Jourd published a special issue (Vol 2 1; special issue, 2000) on strategic alli-

ances, in which learning and knowledge transfer figured prominently. However, even in this most

recent publication, our notion of the value of conflict in enhancing learning was not addressed.

KNOWLEDGE CREATION IN STRATEGIC ALLIANCES 209

in strategic alliances are, for the most part, single looped processes. Finally, with the

exception of some research on learning between organizations (e.g. Arino and de la Torre

1998; Kale et al. ZOOO), most of the learning literature has confined itself to learning

within organizations. More importantly, there is less understanding on how organizational

interactions can trigger learning mechanisms.

Three gaps are identified in the literature, suggesting the need to examine how

learning takes place between alliance partners, how diversity between partners can trigger

learning, and how second-order learning is triggered when disparities due to partner

diversity lead to organizational dissonance. To do so, we will present a theoretical framework

of knowledge creation in strategic alliances utilizing an organization learning framework.

3. THE THEORETICAL MODEL

Following the logic set out in the literature review, knowledge creation is the coming into

existence of new knowledge. In an organizational setting, even though individuals may

create new knowledge (because they become cognitively aware), unless the organization as

a whole is cognizant, it cannot claim to have created new knowledge. The argument is

extended to knowledge creation between organizations. New knowledge created by a

strategic alliance is that which both partners did not previously have in common with each

other and that they individually did not previously possess in their own organizations.

Fig. 1 Knowledge creation in strategic alliances

210 P. H. PIIAN AND T . PERIDIS

In our theoretical model (Figure l), partners in an alliance act to fill their solution

inventories through joint goal setting, coordinated action and outcome sharing. In the

single loop process, the model shows that a partner’s store of explicit knowledge, accumulated

as a result of successful problem solving, is shared with its alliance partner in a series of

formal contractual and relational-based interactions. These interactions transfer knowledge

between both partners and reside individually in their organizational memories as ready-

made solutions to anticipated problems. These solutions come from two sources. Explicit

knowledge (data, proprietary technology, business processes, and marketing know-how)

contained in the alliance agreement, and an evolving knowledge set fueled by a continuous

social exchange between the partners in the form of informal communications (West and

Meyer 1997).

Following our earlier definition of new organizational knowledge as those routines

and codes, derived from Argyris and Schon (1996), that previously did not collectively

exist in the organization, we define new knowledge in a strategic alliance as routines and

codes that previously were not held jointly or individually among the partners. This

definition is more useful to our notion of knowledge creation, as distinct from organization

learning, which is a broader construct. We pay attention to this definition because learning

in strategic alliances also includes the transfer of knowledge and the combination of

existing pools of knowledge.

Indeed, alliance partners in a single loop process learn as a result of the successful

resolution of problems, and by transferring knowledge from the evolving solution set. The

model therefore specifies that within each organization, single loop learning will occur

continually in a standard cybernetic feedback mechanism. Between the organizations,

single loop learning also occurs as a feedback loop connecting joint outcomes to joint

action and joint goals (Figure 1). However, for new knowledge to be created between

alliance partners, a double loop learning process has to take place since it is this process

that calls into question the assumptions and paradigms that lead to new ways of looking

and thinking about fact, events, and contexts - the basic ingredients for new knowledge.

Single loop learning processes do not provide a basis for knowledge creation because the

partners’ mental models and paradigms bound the joint solution set. As long as partners

can draw from that set for viable solutions to their problems, there is no incentive for them

to fundamentally rethink the way they approach solving those problems. Following this

logic, we propose that:

Proposition 1 Double loop learning between alliance partners is a necessary, though not

sufficient, condition for knowledge creation.

An anonymous reviewer cites the example of biochip technology being created by strategic

alliances of semiconductor and biotechnology companies in Silicon Valley to make this

point. Chip manufacturers have had to incorporate a new knowledge base and with it new

ways of looking at processes as biological or analog. Biotech companies have had to learn

new ways of communicating biological constructs to partners more comfortable with

digital processes. The conjunction of these two knowledge bases represents a new way of

understanding familiar constructs for both partners, which requires the questioning of the

assumptions and paradigms underlying these constructs. The proposition that double loop

is not a sufficient condition for knowledge creation merely acknowledges the fact that

learning is an organizational process and therefore requires the appropriate organizational

environment to be successful.

While such double loop learning does not necessarily result in organizational upheaval,

particularly when it is confined to specific pools of knowledge, it can if these knowledge

pools are large enough to encompass entire organizations. The NUUMI alliance between

Toyota and GM resulted in a completely new organization form, The Saturn Company,

while Toyota had to completely reformulate what they understood about labor relations,

marketing and distribution in the global automobile industry (O’Reilly 1998). Such

international strategic alliances are probably more fertile grounds for new knowledge

creation to occur.

Parkhe (1991) and Kidd (1998) posited that diversity between partners in international

strategic alliances c&d lead to double loop learning. They suggested a multi-level approach

to viewing diversity and suggested that the negative impact of diversity on alliance

longevity can be attenuated by education and learning. In our model, we push this notion

of diversity further by arguing that partner diversity and conflict need not be a negative

influence on alliance success per se but can instead represent a key component in the

learning process. That is, we believe that attempts to reduce partner conflict, while

beneficial to alliance stability in the short run can block the second order learning process

triggered by such conflict. Furthermore, if we extend the theory on double loop organizational

learning to knowledge creation, partner diversity and thus tension becomes a necessary

condition for knowledge creation to occur.

Following Proposition 1, for double loop learning to occur, the single loop process

must literally be broken. In the strategic alliance, when a disparity occurs between the

mutual goals and a partner’s internal goals (Organization 1 in Figure l), a learning loop

is initiated in Organization 1. This disparity may arise because the values, defined as the

systematic beliefs of the instrumentality of the strategies (Sinkula et al. 1997), expressed

by Organization 2 conflicts with those of Organization 1. This variance will lead to a

compromise being contemplated. If the disparity cannot be resolved by adjusting Organization

l’s internal goals or actions, it then triggers a double loop in which its own value set and

strategic assumptions are called into question. Because our interest is focused on knowledge

creation at the nexus of an alliance, we do not address specifically in this paper what is

it about an organization that will cause it to engage in double loop learning. Argyris and

Schon (1996) make the argument that double loop learning does not happen very often

but when it does is usually related to enabling organizational cultures, structures and

processes that characterize open systems (Scott 1987).

One implication of the model is that it is possible for information to be transferred

across organizations, and still not have knowledge creation occur because an organization’s

212 P. H. PHAN AND T . PERIDlS

mental model has discarded or placed a low value on the information received

(March 1991). Furthermore, single loop learning does not guarantee double loop learning.

Indeed, we argue that single loop learning can cripple double loop learning, thus knowledge

creation, because organizations stop searching for better solutions when variance reduction

has taken place.

Strategic alliances can solve this problem by breaking the frames that organizations

use to filter information. When an organization comes into close contact with another in

a strategic alliance, its mental model may be challenged because it may encounter a

mental model that is different from its own. This triggers a double loop process that causes

the organization to re-evaluate its value system.

To further explicate the model, suppose that the gray area in Figure 1 represents the

set of values common to both organizations. By the above logic on single loop learning,

to create mutually shared goals, the partners have to first create mutually shared values.

This process may be formal, encoded in a contract and reinforced with penalties and

incentives and/or informal, created through interpersonal contacts between managers of

both firms. The white area in the strategic alliance represents the values tension, which

is the place in the alliance relationship space where the partners do not hold any values

in common and where the potential for conflict is highest. This tension can represent

either opportunities for knowledge creation, constraints to a relationship being taken to

a deeper level or threats where a relationship is in danger of breaking down.

The model thus states that the larger the gray area, the less conflict and tension, the

less necessity for alliance partners to adjust individual value systems, the more likely single

loop learning will occur but the less likely knowledge creation will occur. The larger the

white area, the greater the potential for conflict, the more likely that value systems will

be challenged, leading to a higher probability of double loop learning and thus, knowledge

creation. Thus, proposition 2 is stated as:

Proposition 2 The higher the values tension between strategic alliance partners, the

more likely new knowledge will be created.

Here, values are defined as the systematic beliefs of the instrumentality of the strategies

(Sinkula et al. 1997). This is distinct from cultural values construct, defined as the ‘mental

programming’ of individuals and groups by Hofstede (1983), later discussed in the model.

While culture as mental programming tends to be static and enduring, values as a system

of beliefs about the instrumentality of strategies are more dynamic and transitory.

The proposition naturally leads to the question, ‘Under what conditions does this

values tension lead to knowledge creation and under what conditions does it lead to

alliance failure?’ First, we assert that strategic alliances do not occur in a vacuum. They

take place within a social, economic and legal context. Therefore, understanding the

dimensions of this context is critical to our understanding of how the values tension can

lead to knowledge creation.

KNOWIXIXE <.REATI”N IN STRA’,‘E(;I~. ALI.IANLI:S 213

Following the literature on relational contracting and strategic alliances, Peridis,

Oliver and Phan (1997) argued for three contextual dimensions that affect the development

of common (or shared) values. These are organizational cultural congruence, reciprocal

dependencies and resource complementarity. Cultural congruence refers to the degree of

similarity of what Hofstede (1983) defines as the ‘mental programming’ of individuals and

groups. His work presents perhaps the most accepted definition of culture in the management

literature. He defines culture, of which there are four dimensions: individuality, power

distance, uncertainty avoidance and femininity, as a set of values and attitudes generally

shared across a collective that distinguish one human group from another. Organizations

faced with hypercompetitive environments may alter their values (e.g. the sudden about-

face of Bill Gates’ vision for Microsoft’s internet strategy in 1995 (Rebello 1996) or the

rapid restructuring of Jack Welch’s General Electric as an e-commerce company (Smart

1996)) but still operate within the same organizational cultural contexts. While Hofstede

(1983) centers much of his work on national culture, his constructs have been broadly

applied in the international business research literature to organizations as well. For

example, Adler and Graham (1989) and Harrigan (1988) argue that it may be difficult

for culturally disparate alliance partners to work together effectively because they are

unable to develop common values. This means, a priori, that successful alliances are those

in which cultural disparities are minimized. Here, the authors have borrowed the notion

of national culture to be applied to the organizational level of analysis.

Based on our arguments for the connection between double loop learning and

knowledge creation, we take a different view on this matter. Although organizational

cultural disparities may increase the difficulty of managing alliances, partnerships between

organizationally culturally similar firms do not offer opportunity for double loop learning.

Such similar organizations may increase the efficiency of single loop learning (e.g. in

technology transfers, and organizational processes), but their value systems, which are

driven by the underlying cultural environment, remain constant and therefore double loop

learning is never initiated within the alliance. The model thus states that while alliances

are more easily implemented the greater the common values between partners, the less

likely new knowledge will be created under such circumstances.

Nonetheless, there is a body of literature demonstrating that cultural disparity is

negatively related to alliance performance (e.g. von Grogh 1998). I f we assume that

knowledge creation eventually leads to effectiveness and therefore performance, this body

of literature is at odds with our idea that cultural congruence, which leads to lower values

tension, reduces new knowledge creation. Thus, while we hold to the idea that a values

tension, caused by organizational cultural disparity positively influences knowledge creation,

we have to admit that such an effect may be non-linear. At very high levels of inter-

organizational cultural disparity, the resulting values tension becomes dysfunctional, preventing

effective communication between partners searching for new solutions (West and Meyer

1997) and therefore the partnership breaks down without creating new knowledge. At

214 P. H. PHAN AND T . PERIDIS

very low levels of inter-organizational cultural disparity, there is not enough conflict to

trigger the double loop learning process and therefore the alliance partners rely only on

single loop solutions for their problems. Thus, we proposed that,

Proposition 3 The impact of organizational cultural disparity on knowledge creation is

non-linear, where the greatest benefit to knowledge creation occurs at moderate levels of

organizational cultural disparity.

The development of common values is also a function of reciprocal dependencies between

the two partners. Although we explored earlier, it bears reiteration. The motive to co-

operate and work toward mutually beneficial objectives is guided by partner expectations

of repeated transactions with net positive present value (Macneil 1980; Parkhe 1993). The

necessity of repeated transactions is a consequence of bilateral dependence between the two

parties, which tends to curb opportunistic behavior and promote convergent interests

(Provan and Gassenheimer 1994; Parkhe 1993; Kogut 1989). A ‘mutual hostage’ (Kogut

1988) or bilaterally dependent condition binds alliance partners to the relationship and

increases the likelihood of mutual effort to attain shared alliance goals. Such mutual effort

takes the form of actions that reduce the variances between partner expectations and

objectives.

For the purposes of knowledge creation, however, we believe that mutual hostage

situations are not conducive to double loop learning. Since internal processes and behaviors

are too costly to monitor, mutual hostage contracts focus on the commonality of outcomes

and threat of retaliation, also known as ‘tit-for-tat’ as a way of maintaining mutual control

over partner actions (Kreps 1991). In addition, for such contracts to be effective, the

allowed variance in performance has to be relatively small - again because there is no

monitoring provision for motives and values. Thus, mutual hostage contracts tend to ‘pull

the plug’ prematurely when there is non-performance in the contract, leaving little room

for the partners to mutually to explore the assumptions, organizational values and learning

process reasons for non-performance. For this reason, we proposed that alliances that do

not explicitly include tit-for-tat remedies are better at creating new knowledge, even

though a priori they may be unstable. Thus, following our argument for the relationship

between knowledge creation and double loop learning,

Proposition 4 Ceteris paribus, the higher the reciprocal dependency in a strategic

alliance, the less likely new knowledge will be created.

Resource complementarity is a structural source of shared values. Our earlier review of the

extant literature on strategic alliances lists the motivations to engage in alliances to be risk

reduction, anticipated scale economies, market entry, product portfolio diversification,

technology synergy, product or process innovation, joint R & D development, information

exchange, or risk-sharing in capital intensive ventures. In all such cases the resources or

skill portfolios of the firms must be complementary for the alliance to generate value for

KNOWLIXGE CKEATION IN STRATEGIC ALLIANCES 215

both partners. Resource complementarities are also more likely to produce economic rents

when they result in co-specialized assets, defined as when the economic value of an asset

or skill increases in magnitude with increases in the magnitude of another asset or skill

(Amit and Shoemaker 1993; Dierickx and Cool 1’$39), that are transaction specific,

imperfectly imitable and immobile (Teece 1986; Barney 1991).

The notion of co-specialized assets is particularly applicable to value creation in

strategic alliances where the resources or skills of two partners, used concurrently, generate

economic rents that are alliance specific and co-specialized. Here, the combined value of

the complementary skills will be higher than their cumulative value in isolation (Oliver

1997). Thus, strategic alliances can be viewed as vehicles for bringing together mutually

reinforcing skills and talents that cover different aspects of state-of-the-art knowledge

(Contractor and Lorange 1988). Resource complementarity attenuates the difficulties inherent

in managing a culturally disparate partnership because it reinforces the instrumentality,

defined as the explicit goals, of the alliance. By focusing on the instrumentality the

emotional dissonance generated by cultural and organizational conflict will be tempered

by the promise of benefits from partnering. In effect, organizations can decide to be

munificent in their assessment of partner non-performance and thus be prepared to engage

in the kind of values exploration that lead to knowledge creation. Thus, we postulate that:

Proposition 5a Ceteris paribus, the higher the level of resource complementarity in an

alliance, the more likely new knowledge will be created.

Taken together, proposition 5 and 3 appear to contradict each other. Here, we are suggesting

that even though resource complementarity can result in knowledge creation (PS), because

it also reduces the interorganizational conflict caused by cultural disparity, which we posit

to be better for double loop learning and thus knowledge creation (P3), the net

impact of resource complementarity seems indeterminate. However, following the logic

of proposition 3, we posit that the negative impact of resource complementarity on

knowledge creation will likely occur at moderate levels of cultural disparity. At very high

levels of cultural disparity, resource complementarity will more likely positively moderate

the relationship to knowledge creation. This is because by attenuating the conflict resulting

from cultural disparity, alliance partners are accorded the opportunity to communicating

and thus jointly seek for solutions to their mutual problem. Thus, we propose that:

Proposition 5b Resource complementarity will negatively moderate the relationship

between moderate levels of cultural disparity and knowledge creation.

Proposition 5c Resource complementarity will positively moderate the relationship

between high levels of cultural disparity and knowledge creation.

To summarize, environments characterized by values tension provide the best opportunities

for knowledge creation. Double loop learning will more likely occur when cultural disparity

216 P. H. I’HAN AND 1‘. PERIDIS

is moderate rather than too high or low, less likely to occur when reciprocal dependencies

are high, and more likely to occur when resource complementarities are high. We also

postulated a non-linear moderating effect of resource complementarity on cultural disparity.

Our theoretical model has led to some rather counter-intuitive results. In particular,

we suggest that for knowledge creation to occur there has to be a certain degree of

organizational cultural distance and independence between the alliance partners. This is

in contrast to Nonaka and Konno (1998), Nielsen (1988), Inkpen (1998), Jarillo (1988)

and others who espouse the traditional view that organizational cultural harmony and

interdependence are critical for alliance success. We feel that we are able to do this because

resource complementarity can instrumentalize an alliance and increase partner munificence

and decrease the negative impact of high levels of cultural disparity. We define partner

independence as a lack of dependence on the outcome of the alliance. If the economic value

of the alliance, relative to the value of the firm, is sufficiently small, a partner can take

a more munificent attitude towards alliance non-performance. It is this attitude that keeps

open the channels of communication and thus joint problem solving.

4. DISCUSSION AND FUTURE RESEARCH DIRECTIONS

We try to make the point in this theoretical model that the process of knowledge creation

in strategic alliances fundamentally depends on a learning process that takes as its necessary

conditions conflict and cognitive dissonance between the partners. We know from case

studies and empirical research that individual firms enter into an alliance with different

‘libraries’ of knowledge and that the combinations of these libraries are what create

immediate economic value. However, whether the partners go on to create new knowledge

and therefore a sustainable advantage over other competing alliances’ depends on how they

manage the values tension created by these different libraries of knowledge.

Finally, implicit in our model is the idea that double loop learning is desirable

because it leads to paradigm shifts, which are the bases for knowledge creation. However,

there is a price to pay in double loop learning. Organizational upheavals and personnel

displacement, inefficient resource usage when routines are disrupted, and the very real risk

of failure; wherein rather than recover and rebuild from the lessons learned, an organization

falls into a spiral of introspection and destructive internal politics.

Our propositions highlight a number of interesting future research directions. It

suggests a paradox between cultural disparity as a simultaneously positive force for learning

’ It now traditional to think of alliances as an organization form Uarillo 1988; Gulati et al. 2000) and

therefore we should consider the possibility of competition between alliances for market dominance.

For example, in the airlines industry - Star versus OneWorld versus NWA-KLM; and in the

telecommunications industry - MCIWorldcom versus Vodaphone-Mannesman versus BT-AT&T

global competition now exist at the level of the alliance.

KNOWLEDGE CREATION 1N STRATEGIC ALLIANCES 217

and a negative one for successful strategy implementation. Strategic alliances are in place

to combine and coordinate organizational routines, some of which eventually become

relevant to the internal operations of the individual partners. Combination and assimilation

is single loop learning process since the value systems and learning mechanisms of each

organization remain largely intact. It is only when these values are challenged and the

alliance partners are forced to jointly seek solutions outside of established knowledge bases

and routine that new knowledge is created. An alliance will add little to new knowledge

when there is little cultural difference between the partners. On the other hand, when

there is great cultural difference the potential for new knowledge is the greatest but so

is the potential for dysfunctional internal political processes.

The model leads to two research questions. The first is,

‘What prevents the values tension from degenerating into unproductive learning,

which is the premature breakup of an alliance because partners ‘learn’ that they cannot

work with each other (Argyris and Schon 1996; Snyder and Cummings 1998)?’

Research in international business, where much of the work on strategic alliances resides,

has concluded that organizational cultural disparity is an impediment to successful performance

in collaborative efforts between partners (e.g. see Adler 1983; Kidd 1998). For the reasons

we argued above, we think that organizationally culturally disparate alliances have a better

chance of knowledge creation and therefore appeal for a finer grained distinction between

levels and type of cultural disparity to better understand its impact on alliance performance.

Peridis et al. (1997) proposed that the negative impact of cultural disparity on operational

effectiveness could be mitigated by the degree to which partners are engaged in relational

contracting. Open communication, trust, the development of friendships, and norms of

fair play do not necessarily have to be incongruent with the existence of a values tension

in an alliance. Instead, these are likely to significantly reduce the negative effects of

cultural diversity on operational effectiveness or strategy implementation (Ring and Van

de Ven 1992).

The second research question derived from the model is this:

‘Is there an optimal level of values tension that will trigger double loop learning but

still allow trust to develop so that the alliance will continue to be stable?’

Previous research has indicated that concerns between partners over potential asymmetries

in information acquisition and learning may be exacerbated in organizationally culturally

disparate strategic alliances because the partners may face greater challenges in understanding

each others’ objectives, expectations, and communication modes (Parkhe 1993). Under

these circumstances, the transparency of the partnership, that is, the openness of the firm

to its partner (Hamel 1991) in terms of processes, production, and operations, can significantly

reduce the negative impact of partner differences rooted in cultural disparity. Such openness

not only leads to a greater sharing of information, they establish a de facto standard for

218 P. Ii. PIIAN AND T . PERIDIS

integrity and honesty in dealing. Thus, the values tension, per se, need not be a basis for

alliance failure. Anticipating the existence of a values tension and dealing with its emotional

content, rather than simply seeking to eliminate the causes of the tension altogether, will

allow firms to explore, understand, and manipulate the knowledge bases that underlie the

tensions. The double loop learning process of exploration, questioning and challenging

described by Argyris and Schon (1996) can eventually lead to new knowledge creation.

In terms of methodological approaches, we believe that the most fruitful is to

develop a series of clinical studies that follow the process of negotiation and organizational

adjustment before and during the strategic alliance. Since the model posits a continual

process, implementation issues have to be explored in tandem with formulation ones.

Values tension can arise from the day-to-day interactions between alliance partners as they

discover more about each other. In addition, large-scale sampling will be more efficient

if it can be directed at specific facets of the alliance. For example, it would be important

to define success in such a way as to capture the variation in definition that is inherent

in each alliance, before one can build useful hypotheses to verify the model. Such construct

operationalizations make more sense when they follow in-depth clinical studies. Finally,

we believe that in order to measure the values tension, the research has to be conducted

on companies involved in cross-border partnerships, where the potential for such tensions

is greatest. Even though we firmly believe that this model is broadly applicable to all

forms of strategic alliances because organizational cultures are unique, we suggest the

methodological convenience of creating maximum variance in the explanatory variables by

looking at cross-border alliances. Finally, we also suggest that future empirical studies

limit themselves to single industries (e.g. telecommunications, pharmaceuticals or automobiles)

to minimize the systematic variance explained by industry related factors.

This model is a first attempt at explicating inter-organizational learning at a higher

order, and thus, suffers from some weaknesses. First, it is still unclear what the inflexion

point is of the relationship between organizational cultural disparity and knowledge

creation. Second, we did not (and deliberately so) discuss specific organizational mechanisms

that would allow managers to detect the size of the values tension and manage it nor did

we address the mechanisms by which managers can take what they learned in the strategic

alliance into their own organizations. We suspect that bureaucracy would tend to militate

against this process, especially if the new knowledge created is contrary to the values

currently espoused by the parent organization. General Motors, for example, could not

take the manufacturing lessons it learned from the New United Motors Manufacturing,

Inc. (NUMMI) alliance with Toyota back into its own organization (O’Reilly 1998).

Instead, after many attempts it had to create an entirely new firm (The Saturn Corporation)

in order to exploit the new knowledge it obtained. Thus, we can only guess that the

process of incorporating new created knowledge into an organization is messy, iterative,

fraught with false starts, and perhaps even random.

KNOWLEDGE CREATION IN STRATEGIC AIUANCES 219

5. CONCLUSIONS

In this paper, we broadly reviewed two bodies of literature, one in strategic alliances and

the other in organizational learning, and have attempted to fuse them in order to present

a unique perspective on inter-organizational knowledge creation. We make two contributions

to the extant literature on learning in strategic alliances. First, we present a model that

distances itself from the commonly used imitation/assimilation notions of learning. Second,

we highlighted a paradox - that while strategic alliances are implemented more efficiently

when there is minimum tension between the partners, knowledge creation is maximized

when such tension is increased. Thus, in order to exploit the advantages of strategic

alliances, individual organizations have to be prepared to deal with cultural conflicts but

to do so in a manner that allows the double loop learning process to be triggered. Finally,

we believe that continual and open communications between partners helps to build trust,

which can attenuate the negative emotional fallout from a values tension.

ACKNOWLEDGMENTS

We would like to thank two anonymous reviewers and the participants at a seminar on

knowledge creation at the National University of Singapore for their comments and

contributions to this article.

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