A Theory of Global Strategic Alliances: The Case of the Global Auto Industry

Author(s): Willem P. Burgers, Charles W. L. Hill, W. Chan Kim

Source: Strategic Management Journal, Vol. 14, No. 6 (Sep., 1993), pp. 419-432
Published by: John Wiley & Sons
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 Strategic Management Journal, Vol. 14, 419-432 (1993)

A THEORYOF GLOBALSTRATEGICALLIANCES:
THE CASE OF THE GLOBALAUTO INDUSTRY
WILLEMP. BURGERS
College of Business Administration, University of New Orleans, New Orleans,
Louisiana, U.S.A.
CHARLESW. L. HILL
School of Business Administration, University of Washington, Seattle, Washington,
U.S.A.
W. CHAN KIM
INSEAD,Fontainebleau, France

The theory articulated in this paper suggests that the desire to reduce demand and competitive
uncertainty are two separate, important motives for alliance formation. Taking this as a
starting point, we predict the configuration of horizontal alliances that we might expect to
observe within an industry when firms experience these uncertainties to different degrees.
An empirical test of this theory using data from the global auto industry yields results
consistent with the view (1) that alliances are a device for reducing both the uncertainties
that arise from unpredictable demand conditions and those that arise from competitive
interdependence, and (2) that variation of demand uncertainty and competitive uncertainty
across firms explains differentials in both the intensity and structure of their horizontal
alliance activity.

INTRODUCTION Thus, this study looks at alliance activity within

a single industry. Although the issue of alliances
One of the most notable trends in recent years among competitors has received increasing atten-
has been the growth in the popularity of alliances tion in the literature (Harrigan, 1985, 1986, 1988;
between competitors (Harrigan, 1985, 1986, 1988; Kogut, 1988; Nielsen, 1988) there has been a
Hergert and Morris, 1987). This development lack of theory development regarding the overall
raises two questions; (1) what motivates firms to configuration of alliance activity within an industry
enter into alliances with their competitors, and (Porter and Fuller, 1986; Walker, 1988; Nohria
(2) given motivations, which other firms in an and Garcia-Pont, 1991). Indeed, one of the basic
industry will a firm ally itself with? In the sections stumbling blocks challenging researchers when
that follow we draw on established theory to analyzing interorganizational relations within an
outline a set of hypotheses regarding both of industry has been to find a way to explain the
these questions. Data from the global auto configuration of relations among incumbent firms
industry is then used to test these hypotheses. (Van de Ven, Walker, and Liston, 1979). In
addition, much of the empirical research on
alliances has looked at alliance formation across
Key words: Strategicalliances,networks,auto indus- industries (e.g., Pfeffer and Nowak, 1976). There
try has been very little empirical research focusing

0143-2095/93/070419-14$12.00 Received9 May 1990

(? 1993 by John Wiley & Sons, Ltd. Final revisionreceived14 January1993
420 W. P. Burgers, C. W. L. Hill and W. Chan Kim
upon the configuration of alliance activity among
competitors within an industry (exceptions being
Nohria and Garcia-Pont, 1991; Walker, 1988).
MOTIVES FOR ENTERING INTO
HORIZONTAL ALLIANCES
Our focus is on alliances between competitors
within an industry. Alliances between competitors
are referred to as horizontal alliances. They can
be distinguished from vertical alliances between
firms operating in adjacent stages of a value
chain (Harrigan, 1988). We take the term
horizontal alliance to mean a long term (three
years or more) explicit contractual agreement
pertaining to an exchange and/or combination of
some, but not all, of a firm's resources with a
competitor. This definition includes, but is not
limited to, joint ventures.
Our arguments are drawn from two main
theoretical perspectives. One perspective, based
in transaction cost economics, emphasizes the
use of alliances as an efficient way to expand
strategic capabilities. The other perspective,
based in classic industrial organization, empha-
sizes the use of alliances as a means for
reducing competition (through market power and
collusion). These perspectives are not mutually
exclusive, and indeed, both have received empiri-
cal support (Kogut, 1988). Drawing on these
perspectives, we argue that environmental uncer-
tainty is a catalyst that drives competitors into
strategic alliances with each other (Pfeffer and
Salancik, 1978; Provan, 1982; Whetten and
Leung, 1979). Two sources of environmental
uncertainty can be identified: (1) demand uncer-
tainty, and (2) competitive uncertainty (Harrigan,
1988). Below we argue that demand uncertainty
motivates competitors to enter into alliances with
each other in order to gain access to the
capabilities required to cope with such uncertainty
(the efficiency motive), while competitive uncer-
tainty motivates firms to enter into alliances with
each other in order to reduce that uncertainty by
reducing competition (the market power motive).
DEMAND UNCERTAINTY
Demand uncertainty is the uncertainty that
arises from unpredictable changes in consumer
purchasing patterns. Predictability will be lower,
and demand uncertainty will be greater, whenever
an industry is being subjected to an event
that threatens to change established purchasing
patterns (e.g., an innovation or new entry). To
survive in an uncertain environment firms must
be able to adapt quickly to changing demand
conditions. However, organizational inertia and
the constraints of administrative heritage may
make it difficult for firms to internally develop
or purchase the strategic capabilities required to
deal with rapidly changing demand conditions
(Bartlett and Ghoshal, 1989; Hannah and Free-
man, 1989). In this context, it has been argued
that firms can gain access to the requisite strategic
capabilities by entering into alliances with firms
that already possess those capabilities (Nohria and
Garcia-Pont, 1991; Kogut, 1988; Porter and Fuller,
1986). Thus, by enabling the firm to quickly gain
access to key strategiccapabilities, strategic alliances
help firms to cope with unpredictable changes in
consumer purchasing patterns.
However, alliances are not without problems.
They are prone to failure (Harrigan, 1988),
difficult to manage (Killing, 1983), demand
considerable attention from top management
(Berg and Friedman, 1980; Koot, 1988), and
decrease organizational autonomy (Aldrich, 1979;
Provan, 1982). Such problems suggest that firms
will hesitate to enter into alliances unless they
have a clear incentive to do so. Within the
context of a single industry, it is possible that
the incentive to enter into an alliance is a
function of firm performance. Insofar as firm
performance is an indicator of firm efficiency,
poorly performing (inefficient) enterprises are
probably less able to deal with the adverse
consequences of demand uncertainty than their
more efficient competitors. As such, their incen-
tive for entering into alliances is likely to be
greater than the incentive that high performing
firms have. Thus:
Hypothesis 1: The number of long-term hori-
zontal alliance agreements a firm enters into will
be negatively related to the firm's performance.
COMPETITIVE UNCERTAINTY
Competitive uncertainty is the uncertainty that
arises from competitive interdependence. Com-

petitive interdependence exists whenever the
competitive actions of a firm have a direct effect
upon the market position of its rivals, thereby
risking a response in kind (Hay and Morris,
1979). The extent of competitive interdependence
that a firm faces is a function of industry
structure (Hay and Morris, 1979). Competitive
interdependence is low in fragmented industries
and in monopolies. It is highest in oligopolies
where a limited number of evenly balanced
competitors confront each other.
Competitive interdependence produces com-
petitive uncertainty because a firm never knows
in advance whether its actions will invite retali-
ation, or whether its rivals will initiate competitive
moves that directly impact upon its market share
and require a response in kind. For this reason
it has been argued that the desire to co-opt
one's competitors, thereby reducing competitive
uncertainty, represents an important motive for
entering into horizontal strategic alliances (Pfeffer
and Nowak, 1976; Pfeffer and Salancik, 1978;
Pennings, 1981; Kogut, 1988; Contractor and
Lorange, 1988).
Within the context of a single industry,
our basic proposition is that the competitive
uncertainty facing a firm varies with its position
within the industry's size distribution. Accord-
ingly, so does the firm's incentive for entering
into an alliance to reduce competitive uncertainty.
More specifically, we shall argue that the incentive
to enter into an alliance to reduce competitive
uncertainty is greatest for intermediate sized
firms, and least for the smallest and largest firms
in an industry.
Consider the smallest firms in an industry.
Their low market share implies that their actions
will impact less on other players in the industry.
Consequently the competitive moves of small
players will be less likely to invite a response in
kind. Moreover, their small market share implies
that they are limited in their ability to use
horizontal alliances to reduce competitive uncer-
tainty. Since small firms are not the cause of
competitive interdependence, they can't really
reduce it by entering into an alliance. They do
not have much in the way of market share to
bring to the table.
Next consider the largest firms in an industry.
On first examination it might appear that the
largest firms have a much greater incentive
to enter into alliances to reduce competitive
Global Strategic Alliances 421
uncertainty. The degree of uncertainty they face
is high since their competitive moves might upset
any equilibrium in the industry, as might the
moves of their largest rivals. On the other hand,
a number of factors work to reduce the incentive
that large firms have to engage in horizontal
alliances in order to reduce competitive uncer-
tainty. Alliances between large firms are likely
to come under close antitrust scrutiny in both
the U.S. and the E.C. The incidence of alliance
activity among large firms will be moderated by
this factor. A further consideration is that large
firms are more likely than intermediate or small
firms to have the cost structure and financial
resources required to survive a sustained competi-
tive battle. This moderates the incentive that
large firms have to enter into a horizontal
alliance for the purposes of reducing competitive
uncertainty. These factors suggest that among
large firms within an industry, the need and
inclination to enter into horizontal alliances for
the purpose of managing competitive uncertainty
is moderated.
Now consider intermediate firms; when com-
pared to the smallest firms the larger effects of
competitive actions by intermediate firms are
more likely to elicit a response in kind on the
part of their rivals. When compared to the largest
firms, the intermediate firms' lesser size and
more limited resources make it less likely they
can successfully fight a sustained competitive
battle-they are less insulated from the adverse
consequences of competitive interdependence.
Thus, on average, the intermediate firm faces a
higher degree of competitive uncertainty. The
intermediate firm is too large to go unnoticed, but
not sufficiently large enough to deter retaliation or
survive a competitive battle undamaged. As a
consequence, intermediate firms are likely to
have a greater incentive to enter into horizontal
alliances to reduce competitive uncertainty. Thus:
Hypothesis 2: The number of competitors
linked to afirm will be highest at an intermediate
level of firm size. Put differently, the number
of competitors linked to afirm will be negatively
related to the deviation of firm size from the
intermediate value of firm size in the industry.
Note that Hypothesis 2 is framed in terms of
the number of competitors linked to the firm
through alliances, rather than the number of
422 W. P. Burgers, C. W. L. Hill and W. Chan Kim
alliances (as was Hypothesis 1). This is because
only one alliance with a given competitor
is required to reduce competitive uncertainty,
whereas several alliances with a single competitor
may be called for when the aim is to get access
to strategic capabilities.
ADDITIONAL CONSIDERATIONS
In addition to the above hypotheses, we should
also consider whether firm performance would
affect the number of competitors linked to the
firm, or if firm size also would affect the number
of alliance agreements entered into by the
firm. In any event these possibilities should be
controlled for in order to avoid specification
error or spurious results when testing Hypotheses
1 and 2. However, it is possible to go beyond
this methodological consideration and extend the
above theoretical arguments, albeit tentatively,
to justify formal hypotheses concerning these
potential relationships.
All else being equal, better performance by
the firm may signal to potential adversaries that
the firm can fight successfully when challenged.
This would reduce the likelihood that the
competitive actions of firms with successful
performance will be challenged aggressively,
alleviating competitive uncertainty and the com-
mensurate need for negotiated linkage with
competitors. Hence:
Hypothesis 3: The number of competitors
linked to the firm will be negatively related to
the level of firm performance.
As for the relationship between firm size and
the number of alliance agreements, it is possible
to argue that intermediate firms are the most
threatened by demand uncertainty and, therefore,
have a greater incentive to enter into alliances
than either large or small firms. Large firms,
because of their greater resources, are more
likely to be able to internally develop the
strategic capabilities required to deal with demand
uncertainty than intermediate firms. Therefore,
large firms have less need to enter into alliances
in order to access such capabilities. As for small
firms, often such organizations are specialized
niche companies. Given this, the kind of strategic
capabilities that they can get from other organiza-
tions may be inappropriate. Intermediate firms,
are unlikely to be specialized niche companies.
Moreover, compared to large firms they may
lack the resources required to develop strategic
capabilities internally. Thus:
Hypothesis 4: The number of horizontal
alliance agreements the firm enters into will be
highest at an intermediate level of firm size.
Put differently, the number of horizontal
alliance agreements a firm enters into will be
negatively related to the deviation of firm size
from the intermediate value of firm size for the
industry.
THE MODEL
Figure 1 summarizes Hypotheses 1 through 4 in
a single model. This model is used as the basis
for subsequent empirical work. As shown in
Figure 1, we also intend to control for a potential
association between firm performance and the
deviation of firm size from the intermediate
value of firm size in the industry. This is necessary
since the idea that firms of intermediate size are
'stuck in the middle' has gained considerable
currency (Porter, 1980). In addition, we control
for the possibility that the number of alliance
agreements a firm enters into is related to the
number of competitors to which it is linked.
CHOOSING FIRMS TO ALLY WITH
It is now time to turn our attention to the second
question raised in the introduction, that is: given
motivations, which otherfirms in an industry will
Number of
Firm
Performance H1() Alliance
Agreements
/ _
H3(-)
H4(-)
Firm Size Number of
Deviation from H2(-) Competitors
Intermediate Linked to the
Firm Size Firm
Figure 1. Motivesfor allianceformation-hypotheses

a firm ally itself with? Our argument here is that
the other firms that a firm chooses to (and is
able to) ally itself with will be a function of the
performance and relative size of that firm. As a
lead into this argument, note first of all that
over time the operation within an industry of
the forces described in the previous section will
result in the emergence of a network of alliance
agreements between industry participants. Such
networks can be viewed as interorganizational
organizations. A firm's position will be more
central the greater the number of direct and
indirect linkages that it maintains with other
organizations in the network (Freeman, 1979).
Other things being equal, there are two reasons
why a firm will prefer to take a central position
in a network of alliances. First, firms that take
a central position in a network are able to
exercise greater control or influence over the
actions of less central firms in the network (Boje
and Whetten, 1981). For example, a central firm
may be able to persuade a less central firm from
initiating damaging price cuts by threatening to
direct the network as a whole to respond in kind
if it does so. In other words, a central firm may
be able to use its position to establish some kind
of discipline over the network as a whole, thereby
reducing competitive uncertainty. Consistent with
this view, Laumann and Pappi (1976) and
Galaskiewicz (1979) have reported evidence
which suggests that organizations attempt to
enhance their influence over other organizations
by adopting a central position in interorgani-
zational networks.
Second, the more central a firm's position in
a network, the greater its ability to hedge its
bets concerning the best way to satisfy consumers
in a highly uncertain environment where demand
conditions are unpredictable (Harrigan, 1985,
1988). Harrigan argues that given demand uncer-
tainty there are clear advantages to be gained
(in terms of hedging bets) by positioning the
firm at the hub of a 'spiders web' of parallel
joint ventures, all of which serve the same
strategic purpose (i.e., access to the capabilities
of other firms).
The above suggests that firms need to seek
multiple partners and establish a central position
in a network in order to (1) maximize their
influence within the network (thereby reducing
competitive uncertainty), and (2) hedge their
bets by maximizing access to strategic capabilities
Global Strategic Alliances 423
(thereby reducing demand uncertainty). How-
ever, there is a downside to seeking a central
position in a network of alliances. The central
firm may find itself locked into a number of
long-term relationships from which it has difficulty
exiting should they prove to be less viable than
originally thought. The financial, physical, and
human resources committed to an alliance consti-
tute an exit barrier that may significantly decrease
the firm's strategic flexibility and autonomy,
thereby limiting its ability to adapt to changing
circumstances (Harrigan, 1980, 1985, 1988). Thus,
the firm faces a dilemma. On the one hand,
having multiple alliance agreements with multiple
partners increases the firm's ability to reduce
demand and competitive uncertainty. On the
other hand, it decreases the firm's long-term
strategic flexibility.
Aldrich and Whetten (1981) have pointed to
a way in which this dilemma can be attenuated.
They have argued that interorganizational net-
works are often made up of several subnetworks.
A subnetwork is a group of organizations which
are more densely linked with one other than
with other organizations in the industry wide
interorganizational network. Each subnetwork
may be structured in a hierarchical fashion, with
more powerful members influencing the actions
taken by less powerful members. Thus, an
industry wide network of competitors may be
divided into a number of subnetworks. Joining
a subnetwork enables firms to reap some of the
benefits that flow from being part of a network,
with suffering an extreme loss of strategic
flexibility that would occur from being commit-
teed to too many partners.
This observation has implications for the trade-
off between uncertainty reduction and strategic
flexibility. Poor performing firms that find their
strategic capabilities lacking may have a need
for a greater number of alliance agreements. All
else being equal, we would also expect these
same firms to be less attractive as potential
partners. They may be hard put to find a
hospitable subnetwork willing to adopt and
support them while respecting their interests. In
contrast, firms that perform well will have a
greater ability to concentrate and focus their
agreements on competitors of their choice within
a subnetwork. The division of an industry
wide network of competitors into a number of
subnetworks of competitors may thus leave
424 W. P. Burgers, C. W. L. Hill and W. Chan Kim
weaker performers adrift in the industry as they
may find it difficult to position themselves
unambiguously within the confines of one subnet-
work. Thus:
Hypothesis 5: While firms with high perform-
ance will tend to concentrate their alliances
with competitors within the boundaries of a
subnetwork, firms with low performance will
not. That is for each firm the proportion of
partners found within the boundaries of a
subnetwork will be positively related to firm
performance.
The division of an industry into densely linked
subnetworks may also have different implications
for firms of different size. Large firms may to a
degree limit the trade-off between benefits of
cooperation and reduced long-term strategic
flexibility by concentrating their linkages within
the boundaries of a richly joined subnetwork
within which they have a dominant position.
Such a strategy will maintain their autonomy and
strategic flexibility vis-a-vis the total industry-
wide network, yet also give them a central
position within a subnetwork and, therefore,
power over their partners in the subnetwork. It
is also possible that smaller organizations will be
led by their larger partners to concentrate their
alliance relationships within the boundaries of
subnetworks. As Harrigan points out (1985,
1988), larger organizations may seek to augment
their power over smaller partners by isolating
their smaller partners within the confines of
a subnetwork which the larger organization
dominates.
In contrast, intermediate organizations are
expected to disperse their linkages across
several subnetworks. On the one hand, they
are less likely to be strong enough to individually
control and dominate a network of their own.
On the other hand, they are less likely to be
weak enough to submit to the dominance of a
large organization. An alternative solution
would be for intermediate players to band
together and jointly form a subnetwork. The
disadvantage with this arrangement is that a
subnetwork containing evenly matched organi-
zations will lack a hierarchical structure. As a
consequence, its effectiveness as an instrument
for coordination may be impaired (Phillips,
1960; Whetten, 1987). Specifically, the absence
of hierarchical authority suggests that it would
be difficult to maintain the cohesion of such a
subnetwork. Thus:
Hypothesis 6: While large and small firms
will tend to concentrate their alliances within
the boundaries of a subnetwork, intermediate
firms will not. That is, for each firm the
proportion of partners found within the bound-
aries of a richly joined subnetwork will be
positively related to the deviation of firm size
from the intermediate value of firm size in the
industry.
The arguments underlying Hypothesis 6 put
an additional twist on the role of competitive
uncertainty in the industry. In effect, it may be
said that large firms and the small firms under
their guidance, seek to control rather than reduce
competitive uncertainty. Their hypothesized
alliance within hierarchical densely linked subnet-
works would reduce the competition among
them, but may well serve to increase competitive
pressure on outsiders. Implicitly, the arguments
underlying Hypothesis 6 therefore suggest that
large firms seek to augment their power in the
industry by building interorganizational organiza-
tions under their control. These ideas suggest
that large firms are unlikely to favor alliances
with other large or intermediate firms, since
these may strengthen the competitors most likely
to challenge their market position and control
(Contractor and Lorange, 1987; Reich and
Mankin, 1986).
For their part, smaller firms are also likely to see
advantages in linking up with large enterprises.
Access to the resources of larger firms increases
the probability that small firms will survive.
Large firnms may provide the cash resources
necessary to ride out demand downturns and
underwrite new investments, and the access to
distribution channels necessary to maximize sales.
While intermediate firms can provide these things
too, large firms can provide more of them by
virtue of their superior market position. Thus,
large firms make better alliance partners for
small firms. In sum, this suggests the following
hypothesis:
Hypothesis 7: The larger the size of the firm,
the smaller on average will be the size of its
partners.
 Global Strategic Alliances 425

EMPIRICAL RESEARCH and has broken down previously well established

rules of the game, thereby raising competitive
The above hypotheses were tested on data taken uncertainty. Third, the specter of excess pro-
from the global auto industry. The incidence of ductive capacity in both North America and
alliances in the global auto industry increased Western Europe (due to Japanese inward
throughout the 1980s. As a result, by 1990 most investment) has further increased competitive
of the world's car makers were linked by a web uncertainty. By the late 1980s it was apparent
of cross-shareholdings, joint ventures, and joint that planned increases in Japanese capacity in
manufacturing and sales arrangements. (The both the U.S. and Western Europe would result
Economist, 1990a). The increase in alliance in substantial excess capacity in those markets,
activity in the auto industry does seem to be a thereby increasing the probability of a dangerous
response to increased demand and competitive price war occurring.
uncertainty. The entry of new competitors into
formally protected national markets has increased
the level of demand uncertainty in the industry. DATA AND MEASURES
The entry of Japanese, Korean, and European
(mainly German) producers into the North Our sample is made up of the 23 largest global
American market during the 1970s and 1980s competitors in the free world car market in 1987,
resulted in a significant increase in both the based on World Motor Vehicle Data (see Table
number of competitors and the range of product 1). These companies account for all significant
offerings in that region. Outside entry, though global competitors. We excluded companies
less dramatic, was also significant in Europe operating only in local or protected markets
during this time period. The threat of increased (generally third world countries or countries of
competition following the creation of a single the former communist bloc) since these companies
market in the E.C. after 1992 has increased neither influence nor are influenced by global
further the level of demand uncertainty facing competition. Also excluded were a number of
European producers. As a result of actual and very small 'craft based' sports car manufacturers
threatened new entry, demand conditions in both (e.g., Aston Martin, Ferrari, Lotus). Most of
North America and Europe therefore became these companies produce less than 100 cars per
much less predictable than they had been in the year. Due to their extreme small size and
past. specialized clientele, these companies also neither
In addition, the level of competitive uncertainty influence nor are influenced by global compe-
can be judged to be high in this industry for tition.
three reasons. First, the industry is concentrated Data on competitive alliances established by
enough for competitive interdependence to come 1983 in the global auto industry were available
into play. As of 1989 the top eight firms in the from the United Nations Industrial Development
market accounted for 70.1 percent of global Organization (UNIDO). Additional data were
market share (Business Week, 1990). The level obtained from the Funk and Scott index, the
of concentration in each of the three major Wall Street Journal index, and various editions
regional markets was even higher. The largest of Mergers and Acquisitions. Based on these
six firms accounted for 90.9 percent of car and data, the empirical analysis takes into account
light truck sales in the U.S., 75.5 percent of car 214 observations of individual firm participation
sales in Western Europe, and 84.2 percent of in horizontal alliance agreements that had been
the car sales in Japan (The Economist, 1990). established by 1988. Note that some agreements
Second, the increasing globalization of the involved more than two competitors. These
industry is destabilizing the competitive environ- agreements resulted in 58 pairwise linkages
ment in many once protected national markets. among the 23 firms studied.
Historically the 'rules of the game' were well Production data for each firm were obtained
established in most national markets, the majority from World Motor Vehicle Data. Average annual
of which were tightly knit oligopolies or duopolies. unit production by the firm {AAPf} was used to
New entry into many formerly protected national assess firm size. The distribution of firm size was
markets has increased the intensity of competition skewed by a proportionally larger number of
426 W. P. Burgers, C. W. L. Hill and W. Chan Kim

Table 1. Car manufacturers: average (MS, = oL + f3 + c,) and MS is the arithmetic

annual worldwide production mean of the MS time-series. This growth statistic
(thousands of units) in 1988
correlates highly with the generally accepted log-
General Motors (GM) 7,743 linear model, but is not affected by negative or
Ford Motor (FO) 6,226 zero values in the MS time-series which have to
Toyota (TO) 4,084 be further transformed in the log-linear model
Volkswagen (VW) 2,875 (Hunter and Coggin, 1983). In addition, the
Nissan (NI) 2,699 measure is easily interpreted providing an esti-
Peugeot-Citroen (PE) 2,465
Chrysler (CH) 2,337 mate of the average percent growth or decline
Renault (RE) 2,101 in market share per unit of time.
Fiat (FI) 2,049 Mean firm size {ln(AAPf) = _ ln(AAPf)/
Honda (HO) 1,709 23} served as the benchmark for intermediate
Mazda (MA) 1,383 firm size. Firm size deviation was calculated as
Mitsubishi (MI) 1,261
Suzuki (SU) 845 the absolute deviation of actual firm size from
Daimler-Benz (DB) 801 mean firm size {Iln(AAPf) - ln(AAPf)I}.
Hyundai (HY) 647 To measure intensity of cooperation we counted
Daihatsu (DA) 643 the number of alliance agreements that a firm
Fuji-Subaru (FU) 595 had with its competitors. While this approach is
Isuzu (IS) 575
Rover Group (RO) 548 objective it can only give an indication of intensity
Volvo (VO) 481 of cooperation. The degree of cooperation that
BMW (BM) 463 is established in different alliances will certainly
Daewoo (DA) 162 vary a great deal. However, more accurate data
Saab-Scania (SA) 158 on the hidden subtleties of the different alliances
among competitors worldwide are simply not
Source: World Motor Vehicle Data, 1989
editions,publishedby MotorVehicle Manu- available.
facturersAssociation.

TESTING HYPOTHESES 1-4

smaller firms. Therefore, we used the natural
log of size {ln(AAPf)} to compress the large
firm tail of the size distribution.
Firm performance was assessed on the basis
of market share performance (change in market
share). There are a number of reasons for
operationalizing performance by using market
share as opposed to profit data. In the global
setting market share data for different firms
are more nearly equivalent than are firms'
reports of profit performance since the latter:
(1) are subject to national differences in
accounting methods, (2) are of uncertain com-
parability due to persistent differences in firms'
cost of capital, and (3) will vary greatly with
currency fluctuations. Further, it is likely that
profit performance in the capital intensive auto
industry in any case is related strongly to
market share performance.
Market share performance (MSP) was meas-
ured by the Hunter and Coggin (1983) growth
statistic as follows: MSP = 13/MS(x 100), where
13is the raw score regression coefficient from the
simple linear MS (market share) trend regression
Hypotheses 1 through 4 are tested using a path-
analytic structural equation model (the LISREL
VI program-see Joreskog and Sorbom, 1984).
This approach allows us to simultaneously investi-
gate the hypothesized relationships among the
variables of interest while controlling for possible
interrelationships that may exist between the
independent variables or between the dependent
variables.
Market share performance and deviation of
firm size from intermediate firm size were
measured across the period 1978-87. Then we
counted the number of alliance agreements firms
entered into and the number of competitors that
they were linked to through alliances during the
same period. Hence, the analysis provides a
broad cross-sectional assessment of Hypotheses
1-4. The 1978-87 period approximates to the
time period during which cooperation among
competitors in the global auto industry became
endemic.
The results of the path analysis are reported
in Figure 2 and Table 2. Hypothesis 1, which
 Global Strategic Alliances 427

Firm | Number of
Performance - _6* Alliance
(MSP) Agreements
(NoA)
_ ~~~~-128\/_
-.022
Firm Size Number of
Deviation from Competitors
Intermediate -.470*
Linked to the
Firm Size Firm (NoP)
lSIZEDEVI
Figure2. Results for Hypotheses 1 to 4
posited that higher levels of performance are
negatively related to the number of alliance
agreements that firms enter into, was supported
(p < 0.043). Hypothesis 2, which posited that
deviation from intermediate firm size will reduce
the number of competitors linked to the firm,
was also supported (p < 0.046). Hypotheses 3
and 4 were not supported.
While the results summarized in Figure 2 give
us an overall picture of the relationships of
interest during the 1973-87 period, they do not
indicate causation per se. This does not present
a problem for interpretation of the result linking
the deviation from intermediate firm size to the
number of competitors linked to the firm. It is
highly unlikely that firm size was determined by
the number of competitors that a firm was
linked to through alliance agreements. The only
reasonable causal interpretation here is that the
deviation from intermediate firm size caused the
variation in the number of competitors linked to
the firm.
However, it is possible that alliance agreements
led to poor performance, rather than poor
performance leading to alliance agreements. To
ensure that this was not the case we calculated
for each year a firm's market share performance
during the previous 5 years (using the Hunter
and Coggin statistic described earlier). Then we
established for each year the alliance agreements
implemented by the firms in our sample. Based
on these data we used simple regression analysis
to examine the relationship between previous
performance and subsequent entry into alliance
agreements. The standardized regression coef-
ficient of - 0.446 with p < 0.001 obtained from
the simple regression analysis linking alliance
activity with previous market share performance
strongly suggested that poor performances did
indeed cause firms to seek additional cooperation
with competitors.
TESTING HYPOTHESES 5 AND 6
Hypotheses 5 and 6 state that high performance
and deviation from intermediate firm size,
respectively, will lead firms to concentrate their
linkages with competitors within a single subnet-
work. To test Hypotheses 5 and 6 it was necessary
to identify subnetworks within the industry
network. To do this, for each company we
determined its distance to all other companies in

Table 2. Path analysis testing the relationships between the firm's market share performance
{MSP}, absolute deviation of size from intermediate firm size {SIZEDEV}, number of alliance
agreements {NoA}, and number of partners {NoP}, 1978-87

Independent Hypothesis Dependent Path

variables and sign variable coefficient t-Statistic Probability

MSP H1(-) NoA -0.496 -2.123 0.043

MSP H3(-) NoP -0.128 -0.570 0.570
SIZEDEV H2(-) NoP -0.470 -2.088 0.046
SIZEDEV H4(-) NoA -0.022 -0.096 0.924

Notes
(1) MSP = 1/MS(x 100); where: MS is the firm's average market share during the 1978-87 period, and b is
the raw-scoreregressioncoefficientof the MS trend regression(i.e., MS, = (x + P +et),
(2)SIZEDEV= lln(AAPf)- ln(AAPf)I,where: AAPf is firm f's average annual productionduring 1978-87,
and ln(AAPf = 131ln(AAPf)/23.
(3) NoA = the numberof allianceagreementsthe firm entered into duringthe 1978-87 period.
(4) NoP = the number of competitorswith whom the firm entered into one or more alliance agreements
duringthe 1978-87 period.
428 W. P. Burgers, C. W. L. Hill and W. Chan Kim
the network. We started with a determination of
the number of links contained in the geodesic
between each pair of companies. A geodesic is
a measure of distance in the interorganizational
setting. It is defined as the shortest path by
which a pair of organizations may be linked, either
directly or via one or more other organizations
(Freeman, 1979). A geodesic contains one link
if the two companies are related directly, two
links if two companies are related indirectly via
one other company to which both are linked,
three links if the companies are each linked to
two other companies who in turn are linked
directly to one another, and so forth. Indirect
linkages between companies matter since two
firms, even when not linked directly, nonetheless
may belong to the same subnetwork by virtue of
their common relationship with other members
of the subnetwork and their common lack of
relationship with members of other subnetworks.
To detect such commonalities between compa-
nies, in reference to their relationships with other
companies, we used the Proximities program in
SPSS-X to compute the Euclidean distance
between each pair of companies based on the
similarity of their geodesic distance to their
competitors. The resultant Euclidean distances
took into account all direct and indirect linkages
between the pairs of companies. Next, following
Green and Carmone (1972), we applied multidi-
mensional scaling (MDS) to the output of
the Proximities program in order to identify
subnetworks. More precisely, we employed the
ALSCAL procedure in SPSS-X, which uses the
alternating least-squares approach developed by
Takane, Young, and DeLeeuw (1977), to produce
the two-dimensional nonmetric multidimensional
scaling solution shown in Figure 3.
Interpretation approaches in MDS may focus
on the dimensions and/or the regions of the
spatial solution (Kruskal and White, 1991).
A dimensional interpretation seeks to reduce
similarity along multiple dimensions to a similarity
along fewer dimensions. A regional or 'neighbor-
hood' interpretation seeks to identify regions in
the spatial solution that have meaning in reference
to the similarity along multiple dimensions. Here
we are interested in neighborhood interpretation
since we seek to identify subnetworks within the
overall network of car companies. One way to
locate the boundaries of relevant regions of space
in a neighborhood interpretation of an MDS
spatial solution, aside from simple visual inspec-
tion, involves cluster analysis (Green and Car-
mone, 1972; Kruskal and White, 1991).
Accordingly, we applied the between group
average-linkages clustering program in SPSS-X to
the output of the Proximities program. The
average-linkage approach joins a case to a cluster
provided that the case is more similar, on average,
to all other cases in the cluster than it is to all
other cases, on average, in an alternative cluster.
As is well known, no statistical grounds exist
for determination of an 'appropriate' number of
clusters within a population of cases. An objective
cutoff was arrived at by specifying as subnetworks
only those clusters where a majority of companies
in the cluster maintained a majority of their
linkages within the cluster. Within the constraints
of that specification, we identified the maximum
possible number of subnetworks. A four cluster
solution yielded three clusters that satisfied the
subnetwork specification, and one cluster made
up of BMW only. Additional clustering did not
generate any further combinations of firms that
were linked more closely to one another than
with competitors outside the combination.
As can be seen from Figure 3, the reduced
space solution separates rather compact groupings
of firms. The boundaries drawn in Figure 3
represent the four cluster solution. All firms with
the exception of BMW are included in a
subnetwork. Accordingly, BMW was dropped
from the subsequent analysis. We can distinguish
two American-Japanese subnetworks, and a
European third subnetwork joined by Nissan.
While several firms, e.g., Volkswagen, Rover,
and Nissan, in the European subnetwork have
relationships with firms in both of the
American-Japanese subnetworks, the latter sub-
networks are only connected through GM's
cooperation with Mazda.
To test Hypotheses 5 and 6, for each firm we
determined the degree to which it constrained
its linkages within the boundaries of a single
subnetwork. To achieve this we first of all
identified the number of a firm's partners found
within the subnetwork in which most of its
partners were based {NOPm}. For example, four
of Suzuki's total of five partners in Figure 1 are
found in the 'GM-Toyota' subnetwork, one in the
'Volkswagen' subnetwork, and none in the 'Ford'
subnetwork. Hence NOPm for Suzuki equals 4,
while its total number of partners {NoP} equals
 Global Strategic Alliances 429
BMW

HY GM

7
F
ml\
MA u

Is
/I
H
FU

r.

.VW
NI

c-
DS - k -- = vo

Fl

Figure 3. Reduced spaced solution

5. Each firm's highest proportion of linkages within
a single subnetwork {HPLWSS-N} was then
calculated by dividing each firm's NOPm by its
total number of partners {NoP}. For example,
Suzuki's highest proportion of linkages focused on
a single network equals 4/5 = 0.8.
The HPLWSS-N variable was then regressed
against the variables measuring each firm's market
share performance {MSP} and absolute deviation
from the mean size value in the industry
{SIZEDEV} during the 1978-87 period. The
results are reported in Table 3. Hypothesis 5 was
rejected (p < 0.393) indicating that performance
differences did not affect the degree to which
firms concentrated cooperation within a single
subnetwork. Hypothesis 6 was accepted
(p < 0.046), indicating that large and small firms
tend to concentrate their alliances within the
boundaries of a subnetwork, whereas intermediate
firms do not.
TESTING HYPOTHESIS 7 Consistent with Hypothesis 7, the statistically
Hypothesis 7 states that the larger the size of
the firm, the smaller on average will be the size
of its partners. To test this we first computed
the average size of each firm's potential partners,
during the 1978-87 period, based on the size
distribution of the other firms in the industry:
22
{ln(AAPp) = E ln(AAPp)/22}
p=1
We then computed the average size of its actual
partners:
NoP
{ln(AAPa) E ln(AAPa)/NoP}
a=1
The difference between average actual and
average potential partner size {DPAPS =
ln(AAPa) - ln(AAPp)} indicates a firm's prefer-
ence for larger or smaller partners relative to
what would be expected if choices were made at
random among potential partners. This difference
was then regressed against firm size. Construction
of the DPAPS variable and the results of its
regression against size are shown in Table 4.
significant negative regression coefficient
(p < 0.037) suggests that the larger the firm, the
smaller the size of its actual partners relative to
the size of its potential partners. Put another
way, larger firms have a preference for entering
430 W. P. Burgers, C. W. L. Hill and W. Chan Kim
Table 3. Regression of firms' highest proportion of Table 4. Regression of the difference between aver-
linkages within a single subnetwork {HPLWSS-N} on age actual and average potential partner size {DPAPS}
firm performance {MSP} and on absolute deviation on firm size {ln(AAPf)}
of firm size from mean firm size {SIZEDEV}
Independent Regression
Independent Regression variables coefficient Probability
variables coefficient Probability
ln(AAPf) -0.3567 0.037
MSP 0.0024 0.393 (2.21)
(0.875) Constant 8.924 0.000
SIZEDEV 0.0880 0.046 (8.00)
(2.130)
R-Squared 0.189
Constant 0.6337 0.000
(12.88) Notes
(1) t-statisticin parentheses
R-Squared 0.294 (2) DPAPS = ln(AAPa) - ln(AAP,) where:
N 22 ln(AAP,I) = N,P
ln(AAPa)/NoP with
AAPa = actual partner a's 1978-87 average annual
production
Notes ln(AAPp) = X.= 1ln(AAPP)/22with
(1) t-statistic in parentheses
(2) HPLWSS-N = NoPm/NoP, where: NOPm is the number
AAPP = potential partner p's 1978-87 average annual
production
of a firm's partners found in that subnetwork in which most (3) AAPf = firm f's 1978-87 averageannualproduction.
of the firm's partners are found, and NoP is the total number
of partners for the firm.

into alliances with small organizations (and vice
versa).
CONCLUSION
The theory articulated in this paper suggests that
the desire to reduce demand and competitive
uncertainty constitute two important motives for
alliance formation. Taking this as a starting point,
we generated a number of hypotheses that predicted
the configuration of cooperative alliances that we
might expect to observe within an industry when
the pressures of these uncertainties vary across
firms. These hypotheses were tested on data from
the global auto industry. The results provide
support for the view that cooperative alliances are
a device both for reducing demand uncertainty
and for reducing competitive uncertainty. Poor
performance led firms to negotiate a greater
number of alliance agreements, but without seeking
out a greater number of partners. A position 'in
the middle' led firms to focus on negotiated linkage
with a greater number of partners, but without
entering into a greater number of alliance agree-
ments.
The observed network configuration of
alliances within the industry further provided
some evidence that was consistent with the notion
that firms trade-off the benefits that arise
from uncertainty reduction against the costs of
decreased strategic flexibility when deciding
whether to enter into an alliance. Large and
small firms solved this dilemma by focusing their
alliances within a single subnetwork. Intermediate
firms, however, considered unable to control
their own subnetwork and unwilling to be
controlled within a subnetwork not of their own,
were more inclined to develop linkages across
subnetwork boundaries.
Differences in performance, however, were
not associated significantly with firms' focus,
or lack thereof, on linkages within a single
subnetwork. While we theorized that weak firms
should not seek and would not find 'sanctuary'
within a single subnetwork, our results proved
differently. Time will reveal if indeed a choice
of sanctuary within a single subnetwork can
remedy poor performance, or whether a balancing
strategy of alliances across subnetwork bound-
aries will prove more beneficial.
Beyond the immediate and traditional concep-
tions of horizontal cooperation as a means of
efficient access to expanded capabilities, or
alternatively as a means to reduce competition,
our results hint also at a new dynamic of
horizontal cooperation that over time may come
to supersede considerations of competitors' orig-
inal motives for cooperation with one another.
Specifically, the arguments advanced in reference

to large firms' preference for smaller partners,
in combination with the results showing large
and small firms' focus on single subnetworks,
suggest that large firms and the small firms under
their guidance may arrive or may have arrived
at a point where the subnetwork becomes a tool
for controlling the process of competition. Rather
than merely a tool for efficiency, or for reduced
competition, cooperation then becomes a means
to create a new competitive agent, an interorgani-
zational organization with its own competitive
dynamic and purposes.
Nonetheless, we have focused on just one
industry. Therefore, we must be cautious about
making any broad generalizations based on this
study. Although we believe that the arguments
contained herein will ultimately be shown to help
explain alliance formation in a wide variety of
industries, additional studies of alliance formation
in other settings are required to confirm this.
Our paper is intended only as a first cut at what
is undoubtedly a large and complex topic. There
is a need to explore the performance implications
of alternative cooperative strategies. A series of
questions might be raised about how firm
performance and alliance performance might be
affected by the degree to which a firm adheres
or deviates from the cooperative strategy that is
theoretically appropriate given its competitive
standing. Another fruitful avenue for investi-
gation might be to explore the relationship
between the structuring of alliances and alliance
success. For example, will the failure rate of
alliances within subnetwork boundaries differ
from the failure rate of alliances across subnet-
work boundaries? And will the alliance failure
rate for the promiscuous firm differ from the
alliance failure rate for the firm that concentrates
its alliance agreements in linkages with just a
few competitors?
Empirical research is also needed on the
competitive behavior of firms belonging to
different subnetworks. For example, does the
subnetwork structure induce a greater degree of
conscious parallelism among member firms? Will
member firms come to direct their competitive
energies away from one another, but intensify
joint competitive pressure on firms outside the
subnetwork? Will such effects ultimately come
to haunt firms which lack a single subnetwork
focus?
The time period we studied in this paper was
Global Strategic Alliances 431
one of transition, approximating the period of
time during which alliance formations redefined
the nature of competition in the industry.
Insufficient time has passed to assess the ultimate
effects on firms' survival and prosperity taken as
a function of their cooperative strategies.
Not only is additional empirical research, as
well as the passage of time, needed. Given the
pervasiveness of alliance formation in nearly
every important industry today, our present
understanding of the firm as an independent
agent may lose much of its current meaning.
New theoretical approaches may be needed
to explain the behavior and performance of
organizations operating as parts of larger inter-
organizational networks. Furthermore, new theo-
retical approaches may be needed to study the
interorganizational organization as a new form
of competitive agent. Possibly, such approaches
may be developed from sociological theories of
group behavior.
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