Understanding alliance evolution and termination: Adjustment costs and the economics of resource value. (May 2015)

• Record Type: Journal Article
• Authors: Madhok, Anoop; Keyhani, Mohammad; Bossink, Bart
• Is Part Of: Strategic organization. Volume 13:Number 2(2015:May)
• Page Start: 91
• Page End: 116
• Publication Date: 2015-05
• Subjects: Adjustment costs -- alliance evolution -- alliances -- alliance termination -- firm boundaries -- interorganizational relationships -- relational rents -- resource-based rents -- resource transformation; Management -- Periodicals; Organization -- Periodicals; Business planning -- Periodicals; Strategic planning -- Periodicals; Gestion stratégique; Planification stratégique; Théorie des organisations; Périodique électronique (Descripteur de forme); Ressource Internet (Descripteur de forme); 658.4012
• DOI: 10.1177/1476127015580309
• Languages: English
• ISSNs: 1476-1270

Abstract

Alliances have been studied extensively in the past and various arguments have been suggested to explain their evolution and eventual termination. We argue that one important explanation of alliance termination has remained overlooked, one where the mechanism revolves around resource value and is independent of any mismanagement, opportunism, lack of trust, interpretive misunderstanding, or perceptions of inequity. In this explanation, we recognize explicitly that resources undergo transformation through an alliance, and this transformation reveals new previously imperfectly predicted costs to remain in the alliance as well as new opportunities outside the alliance. We apply the concepts of direct and indirect adjustment costs and inter-temporal economies of scope to explain these phenomena and demonstrate that, depending on the particular structure of incentive asymmetry between the two firms after alliance formation, the new circumstances may motivate a revised cost/profit sharing arrangement, a change in ownership of alliance resources, or a complete dissolution of the alliance. Some determinants of adjustment costs are explored in detail, covering resource characteristics, resource combination characteristics, and environment characteristics. Based on the economics of resource value, our argument has implications not just for alliance evolution and termination but also provides a distinct lens to explain the evolution of firm boundaries and the manner of transition of alliances into acquisitions.