The Competitive Advantage of Interconnected Firms

Introduction

At the turn of the 21st century, the competitive environment has changed dramatically. As the reliance on interfirm alliances (henceforth termed alliances) has gained popularity, firms can no longer be considered simply as independent entities competing for favorable market positions and protecting their core assets from imitation and appropriation. Instead, firms have become interconnected in the sense that they engage in multiple simultaneous alliances. Alliances can be defined as collaborative arrangements among independent firms, involving exchange, sharing, and codevelopment activities designed to achieve the strategic goals of these firms. Alliances take different forms, including joint ventures, joint marketing initiatives, and affiliation in research consortia.

Although alliances have been extensively studied in the fields of economics, sociology, organization theory, international business, and strategic management, traditional theories of the firm offer limited explanations of the interconnected firm phenomenon because of their emphasis of competitive dynamics. On the one hand, such traditional theories undervalue the important contribution of alliances to firm behavior and performance. On the other hand, the proliferating alliance literature offers mainly analysis of dyadic relationships or network structures rather than a firm-centric perspective. Hence, a need arises for a theory that explains how interconnected firms evolve and how their alliance networks affect their performance.

Theories of the firm address three questions concerning the nature of the firm: (a) Why do firms emerge; (b) why do firms differ in their scale, scope, and organization of activities; and (c) what accounts for heterogeneity in their performance? While the strategic management literature is [Page I-325]mostly concerned with the latter question, understanding of firm nature is necessary for the development of a theory of the firm. The validity of different theories of the firm has been a subject for a fertile debate in the strategic management literature. Although some of these theories can be broadly used, their assumptions require scrutiny when Applied to the study of the interconnected firm. For example, with his microanalytic approach, Williamson (1975) adopted the transaction as the unit of analysis, arguing that the firm emerges in order to economize on transaction costs accrued due to bounded rationality and opportunistic behavior. Transaction-cost economics offers an explanation of firm existence but falls short of providing a comprehensive theory of the interconnected firm because it tends to consider markets and hierarchies as two discrete governance modes and its atomistic unit of analysis cannot capture the idiosyncrasies of interconnected firms that typically integrate internalized and market transactions. In addition, it disregards interdependence in partners' exchange decisions and, as Zajac and Olsen (1993) noted, overemphasizes contractual aspects of transactions at the expense of process issues.

...