Understanding Alliance Evolution and Termination: Adjustment Costs and the Economics of Resource Value

Strategic Organization, 2015, 13, 2, 91-116.

50 Pages Posted: 29 Aug 2015 Last revised: 5 Jan 2016

See all articles by Anoop Madhok

Anoop Madhok

York University - Schulich School of Business

Mohammad Keyhani

University of Calgary - Haskayne School of Business

Bart A.G. Bossink

Vrije Universiteit Amsterdam, School of Business and Economics

Date Written: May 1, 2015

Abstract

Alliances have been studied extensively in the past and various arguments 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 remaining 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.

Keywords: adjustment costs, strategic alliances, governance form, resource based view

JEL Classification: L20, L24, L29, M10

Suggested Citation

Madhok, Anoop and Keyhani, Mohammad and Bossink, Bart A.G., Understanding Alliance Evolution and Termination: Adjustment Costs and the Economics of Resource Value (May 1, 2015). Strategic Organization, 2015, 13, 2, 91-116., Available at SSRN: https://ssrn.com/abstract=2652318

Anoop Madhok (Contact Author)

York University - Schulich School of Business ( email )

470 Keele Street
Toronto, ON M3J 1P3
Canada
416-736-2100 x20578 (Phone)

HOME PAGE: http://research.schulich.yorku.ca/faculty-profile-details.jsp?id=87&tab=0

Mohammad Keyhani

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

Bart A.G. Bossink

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

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