THE ROLE OF INCENTIVES AND COMMUNICATION IN STRATEGIC ALLIANCES: AN EXPERIMENTAL INVESTIGATION

RAJSHREE AGARWALRAJSHREE AGARWALRACHEL CROSONRACHEL CROSONJOSEPH T. MAHONEYJOSEPH T. MAHONEY

Strategic Management Journal,2010Strategic Management Journal,2010

ABOUT THE AUTHORSRAJSHREE AGARWALProfessor of Entrepreneurship and Strategy at U of Maryland Ph. D. in Economics, 1995, SUNY-Buffalo

RACHEL CROSONProfessor of Economics and Organizations, Strategy, and International Management at U of Texas at DallasPhD, Economics, 1994, Harvard University

Joseph T. MahoneyProfessor of Strategy and Entrepreneurship at UIUCPh.D in Business Economics, 1989, Wharton School (Penn)

Assurance/Coordination Game

3

A. Invisible hand game

P2

Co-op Do not

P1Co-op (170, 170) (130, 140)

Do not (140, 130) (120, 120)

B. Prisoner’s dilemma gameP2

Co-op Do not

P1Co-op (170, 170) (110, 190)

Do not (190, 110) (120, 120)

C. Assurance game

P2

Co-op Do not

P1Co-op (170, 170) (100, 120)

Do not (120, 100) (110, 110)

D. Assurance game w/ heterogeneous payoffs

P2

Co-op Do not

P1Co-op (270, 80) (140, 75)

Do not (160, 65) (150, 70)

: Payoff dominant strategy

: Risk dominant strategy

PAPER OVERVIEWMOTIVATIONAlignment of economic incentives is a necessary, but not a sufficient, condition for achieving successful alliance outcomes.

RESEARCH QUESTIONHow important are incentive alignment and communication to achieve success in cooperative alliance? What conditions may impact their efficacy in achieving success? Are there synergies between the two underlying mechanisms, or do there mechanisms substitute for each other?

STUDYA cross-sectional laboratory experiment with 405 participants

STRATEGIC ALLIANCES

WHAT IS SA?An interorganizational form where multiple exchange partners agree to invest resources, share knowledge, and engage in economic value-creating activities that build on synergies between the resources and capabilities that each of the exchange partner firms bring to the alliance.

PROBLEM OF SAFrom the property rights theory with game theoretical insights , strategic alliances result in opportunistic behavior and free-riding.

ECONOMIC INCENTIVESPROPERTY RIGHT THEORY“Getting the economic incentives right” (Kim & Mahoney, 2005; 233)

HYPOTHESESHypothesis 1: Alliances wherein decision makers have a higher ratio of common to private benefits are more likely to achieve success than alliances wherein decision makers have a lower ratio of common to private benefits.

Hypothesis 2: Alliances in which there is heterogeneity in strategic alliance partners’ ratio of common to private benefits will have a lower likelihood of success than alliances where exchange partners are relatively homogeneous in their ratio of common to private benefits.

COMMUNICATIONCLASSICAL ORGANIZATIOAL THEORY OR SOCIAL PSYCHOLOGY LENSESEmphasis on the nonmaterial, informal, interpersonal, and moral basis of behavior. Strategic alliances may also benefit from incorporation of motivation/design solutions, especially “communication”.Communication can reduce coordination cost and address management issues. Also, it can engender cooperation through moral suasion, development of group identity, and trust.

HYPOTHESISHypothesis 3: The effect of incentive alignment on the probability of success in alliances is higher in the presence of communication than in its absence.

EXPERIMENTDESIGNThe authors developed five treatments : low common benefit, high common benefit, high common benefit with communication, mixed common benefit, and mixed common benefit with communication

PROCEDURE405 participants from one MBA program made decisions in strategic alliances.

IMPLEMENTATIONDifferences in the ratio of common to private benefit treatments were implemented by differences in bonus structure across the alliance simulations.

EXPERIMENTINDEPENDENT VARIABLESThe indicator variables for each of the five treatments (e.g., high common benefit = one if the observation was drawn from that treatment, and zero otherwise) The period in which the decision made.

CONTROL VARIABLESGroup fixed effects; the data is hierarchical (alliance members are grouped together).

ANALYSISLogistic regression analysis for the first dependent variable, and multivariate regression analysis for the other dependent variables.

RESULTS

H1 supporte

d

H1 supporte

d

H2 supporte

d

H2 supporte

d

H3 supporte

d

H3 supporte

d

Results

• Common benefits (no communication)

11

High Mixed Low

Alliance Success 27.27% 10.11% 0.00%

•With communication

High Common Benefits Mixed Common Benefits

With comm. No comm. With comm. No comm.

Alliance Success 58.52% 27.27% 21.93% 10.11%

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Results

12

Approximately double

DISCUSSION AND CONCLUSIONS

CONCLUSIONSConsistent with property rights, alignment economic incentives is necessary for success, but is not sufficient; the ability to communicate increase the probability of success.

LIMITATIONSExperimental methods; exogenous uncertainty, endogenous uncertainty, students sample

CONTRIBUTIONSIntegrate key insights (economic game theoretical lens and social psychology lens), provide powerful experimental methods, emphasize a cooperative system, contribute to strategic alliance theory.