The Role of Personal Relationships in Inter-firm Alliances

Abstract

Strategic alliances have become an important means for developing and improving a firm's level of competitiveness. Although attractive, alliances are risky and difficult to manage. One crucial mechanism in managing and reducing alliance risk is reliance on personal relationships between managers in partnering firms. Personal ties are beneficial in that they can form the basis for developing trust between partners, and aid joint decision-making and information sharing, thereby reducing some of the risks inherent in alliances. Despite their usefulness, however, personal relationships may have drawbacks. For example, strong interpersonal ties in alliances can sometimes prevent dissolution of faltering arrangements, as feelings may prevent the making of difficult, yet prudent, termination decisions. In order to combat this possibility, firms can reduce the downside of personal relationships by carefully managing the role of performance managers across the life of the relationship.

Full text

The role of personal relationships in inter-firm
alliances: Benefits, dysfunctions, and
some suggestions
Henry Adobor
Department of Management, School of Business, Quinnipiac University,
275 Mt. Carmel Avenue, Hamden, CT 06518, USA
Abstract Strategic alliances have become an important means for developing and
improving a firm’s level of competitiveness. Although attractive, alliances are risky
and difficult to manage. One crucial mechanism in managing and reducing alliance
risk is reliance on personal relationships between managers in partnering firms.
Personal ties are beneficial in that they can form the basis for developing trust
between partners, and aid joint decision-making and information sharing, thereby
reducing some of the risks inherent in alliances. Despite their usefulness, however,
personal relationships may have drawbacks. For example, strong interpersonal ties
in alliances can sometimes prevent dissolution of faltering arrangements, as feelings
may prevent the making of difficult, yet prudent, termination decisions. In order to
combat this possibility, firms can reduce the downside of personal relationships by
carefully managing the role of performance managers across the life of the
relationship.
D2006 Kelley School of Business, Indiana University. All rights reserved.
1. The importance and challenges of
managing strategic alliances
In today’s ultra-competitive business environ-
ment, various forms of inter-organizational link-
ages, often broadly described as strategic
alliances, continue to redefine corporate relation-
ships. Firms, even one-time rivals, are collaborating
with each other in hopes of gaining competitive
advantage.
Alliances, defined as cooperative arrangements
between two or more firms to improve their
competitive position and performance, can assume
a number of forms, ranging from the simple (e.g.,
arm-length buying and selling) to the more complex
(e.g., fully integrated joint ventures, whereby
partners set up a third, independent organization
in which they have shared equity). Although most
alliances occur between two firms, they can also
0007-6813/$ - see front matter D2006 Kelley School of Business, Indiana University. All rights reserved.
doi:10.1016/j.bushor.2006.03.003
E-mail address: Henry.Adobor@quinnipiac.edu
KEYWORDS
Social relations;
Personal ties;
Inter-firm alliances
Business Horizons (2006) 49, 473 —486
www.elsevier.com/locate/bushor

involve a network of several firms that pool
resources; for example, the Texas-based semicon-
ductor initiative SEMATECH is a consortium of
several firms. Often formed for a specific purpose,
alliances are frequently dissolved after their stated
objectives are accomplished.
Historically, firms have used alliances to gain
access to needed resources, as an opportunity to
learn new skills, and to capture economies of scale.
Alliances that succeed can be very beneficial to
partnering firms; for example, partnering with
General Motors helped Isuzu, Suzuki, and Daewoo
to sell more cars in the U.S. through GM dealer
networks. As well, both Toyota and GM benefited
from the New United Motors Manufacturing
(NUMMI) joint venture. According to Fortune mag-
azine, within a few years of its formation, the
KLM—Northwest alliance was contributing over $1
billion to each of the respective partners (Tully,
1996). Lotus Development Corporation, Oracle
Corporation, USAA (a Fortune 200 financial services
company), and Starbucks Corporation have been
mentioned as best practice cases of firms that
routinely benefit from alliances (Segil, 1998).
While alliances are attractive, they are hardly
the lodestar that firms navigate to sure success.
To the contrary, available evidence suggests al-
most half of all alliances fail (Dyer, Kale, & Singh,
2001). One possible cause for this high rate of
failure is the substantially risky nature of alliances
themselves. Deceitful behavior is one important
source of risk in alliances. Deceit occurs when a
partner acts in its own interest to the detriment
of the alliance; deceitful behavior may include
failure to fulfill partnership promises or obliga-
tions, withholding useful information from part-
ners or distorting it, misrepresenting intentions
and abilities, and engaging in outright theft of
counterparts’ proprietary information.
Das and Teng (1999) identified two broad types
of risk in alliances: performance and relational.
The authors define performance risk as the
probability of not attaining the performance goals
of the alliance, even when partners cooperate
fully with each other. The second, and more
important, form of risk is relational risk, which
can be defined as the probability that the partner
will not cooperate fully. Das (2005) suggests that
partners can use contracts, ownership structure,
monitoring, and participatory decision making,
among other things, to reduce relational risk in
alliances.
Another important means of managing alliances,
including reducing risks, is relying on strong inter-
personal relationships between individuals in part-
nering firms (Jap & Anderson, 2003). It would be
difficult for two firms to work well together if
managers and key people at the boundaries of the
firms did not get along; therefore, it is not
surprising that firms entering into partnerships
are often advised to encourage the development
of strong friendships and trust between people in
their partner’s firm (Spekman, Isabella, MacAvoy, &
Forbes, 1996).
2. Paradox: Interpersonal relations and
inter-firm relationships
Although alliances involve economic exchange
between firms, rather than individuals, we know
that individuals play important roles in these
relationships. According to John Browne, CEO of
British Petroleum, bYou never build a relationship
between your organization and a company....You
build it between individualsQ(Prokesch, 1997,
p. 155). At the same time, however, there is
awareness that firms need to be cautious about
relying too heavily on strong interpersonal relation-
ships in inter-organizational relationships. For ex-
ample, Anderson and Jap (2005) found that an
alliance between an automobile manufacturer and
a supplier was adversely affected because of close
personal relations between managers in both firms.
The authors observed that strong interpersonal
relationships can sometimes make partnerships
vulnerable to failure.
The recognition that there are both benefits and
limits to relying on strong interpersonal relation-
ships in alliances requires a clear understanding of
the role of personal relationships in inter-firm
alliances. Unfortunately, our knowledge of this
critical issue remains fairly rudimentary, despite a
recent explosion in studies on strategic alliances.
For example, we know little about how and when
relying on strong interpersonal relationships
becomes dysfunctional and, more importantly,
what steps to take to mitigate any adverse
consequences of relying on individual relations in
alliances. Therefore, a critical focus on how
personal relationships affect inter-firm relations,
including the negative consequences and how to
reduce them, will be of practical use to firms.
The purpose of this article is to explore both
the benefits and the costs of relying on personal
relationships between individuals in an inter-firm
relationship. Significantly, suggestions are offered
for managing personal relationships during the
course of a partnership, aimed at mitigating the
dysfunctional consequences associated with reli-
ance on personal relationships. First, the positive
aspects of personal relationships in inter-firm
H. Adobor474

alliances are discussed. Next, by focusing on the
implicit costs and dangers of tying the fate of
inter-organizational relationships to personal ties,
the limits of depending on individual relationships
are outlined. Finally, some suggestions are of-
fered for mitigating the costs associated with
relying on key individuals in inter-firm alliances.
It is proposed that there is much to be gained
from knowing when to de-emphasize the role of
personal relationships in alliances.
3. The importance of personal
relationships in strategic alliances
In this context, personal relationships refer to
interpersonal ties between individual managers in
partnering firms. Our understanding of the benefits
and limits of relying on personal relations may be
clearer when we think in terms of the life cycle
model of a partnership. Alliances often go through
early, growth, and maturity phases. The general
recommendation is that, to get the maximum
benefit, personal relationships should be most
important in the early phase and reduce over time
as the alliance matures.
Fig. 1 illustrates this point: it shows the impor-
tance of personal ties as highest in the earlier
phase of the relationship and reducing as the
alliance matures. The key presumption is that most
of the hypothesized benefits of personal relation-
ships in alliances are likely to be realized in the
early phases of an alliance. At the same time, most
of the dysfunctions of personal ties (discussed later
in this article) are more likely to occur in the later
stages of the alliance. As such, there may be a
greater need for personal relations in the earlier
parts of the relationship than in the later stages.
This position is consistent with the finding of
Seabright, Levinthal, and Fichman (1992) that
individual attachments are important early in a
relationship, but diminish in significance over time.
Indeed, the recommendation is that individuals and
personal relationships take a back seat as an
alliance matures. Personal ties between managers
in a partnership can confer the following advan-
tages on the strategic alliance:
!Speed up the alliance formation process;
!Reduce relational risk;
!Build and strengthen trust; and
!Help reduce uncertainty in the alliance.
3.1. Personal relationships and alliance
initiation
Economic sociologists have long noted the role of
social relations in economic action. For example,
Granovetter (1973, p. 1378) emphasized the fact
that social connections are important in economic
life, and argued that even links between people
who interact infrequently and are not close friends
(what he calls bweak tiesQ) may still benefit from
such social relationships. According to the author,
weak ties between individuals with little in com-
mon can provide an important means for diffusing
information across different groups that do not
interact; for example, a firm may be able to gain
information on a prospective partner from another
firm with which it has weak ties. Recent research
on inter-firm cooperation in China has also shown
that personal relations are a critical element in the
number and pattern of strategic alliances that
emerge. According to Xin and Pearce (1996),
guanxi, or personal connections, have come to
signify the importance of interpersonal relation-
ships in inter-organizational relationships in China.
Weak ties may provide useful benefits in economic
relations, but stronger ties may be even better
when it comes to managing inter-firm relation-
ships, for a number of reasons.
First, personal relationships may provide the
impetus for alliance formation. Social connections
are especially useful in making the personal
connections that often form the basis for strategic
alliance formation between firms. Firms can
gather information about the abilities and inter-
ests of a prospective partner through personal
friendships between executives. Personal relation-
ships also provide a conduit through which firms
can gain access to reliable and fine-grained
information on a prospective partner; for exam-
ple, via their study of collaboration among a group
of seven organizations engaged in the healthcare,
research, and education sectors in London,
Ontario, Canada, Volkoff, Chan, and Newson
(1999) reported that close personal ties between
individuals were helpful when it came to initiating
Figure 1 Relationship between the importance of
personal ties and phase of alliance.
The role of personal relationships in inter-firm alliances: Benefits, dysfunctions, and some suggestions 475

discussions between the partnering firms. Another
study, this one on the garment industry in New
York City, found that personal friendships were
important in the building of alliances between
garment manufacturers. According to the study’s
author, Brian Uzzi (1996), the initiation of alli-
ances in the garment industry benefited substan-
tially from existing personal ties between
individuals.
Second, while it may be easy for a firm to
determine a prospective partner’s capability to
deliver on the goals of the alliance, it may not be so
easy to determine whether they are trustworthy.
The former relates to performance risk, the latter
to relational risk. Interpersonal relationships often
provide the basis for strong initial trust (Zaheer,
McEvily, & Perrone, 1998). Personal trust increases
the relationship assets of the alliance and helps
reduce the relational risk associated with the
alliance. Olk and Elvira (2001) found that personal
ties can be very important in negotiating alliances,
and pointed out that alliances that benefit from
personal ties have less to worry about when the
relationships are structured.
Personal relationships may also be of great
consequence as the alliance unfolds. During the
early stages of an alliance, partners are most likely
still feeling each other out; major commitments
have not yet been made, and the partners may be
looking for any signals to either make commitments
or take a step backward. This is the time when
personal relationships could matter most, as they
can provide the measure of comfort necessary to
prompt partners into taking a leap of faith,
something that is required for the growth of the
alliance. Rosabeth Kanter (1994, p. 106) noted
that interpersonal connections provide an impor-
tant infrastructure for collaboration, observing
that bmany strong interpersonal relationships help
resolve small conflicts before they escalateQ.
Further, the author quoted a European manager,
who had experience with several cross-border
alliances, as saying: bThere really is no good
system for working out problems except through
personal relationshipsQ.
Finally, personal relationships may contribute
to the success of an alliance because such ties
often promote greater information sharing be-
tween managers and encourage higher levels of
reliable behavior. Uzzi (1996) suggests that inter-
organizational relationships may benefit from
personal relations in three key areas: joint
problem-solving, trust, and information transfer.
Joint problem-solving benefits emerge when indi-
vidual managers from partnering firms use their
relationships to solve problems that face the
alliance. Information that managers share with
each other is likely to be of value. The joint
decision making and problem solving that personal
relationships enable is particularly helpful to
alliance performance because, as Saxton (1997)
observes, shared decision making signifies a
commitment to the relationship. It also decreases
the probability of opportunistic behavior on the
part of partners and, more importantly, increases
the likelihood that opportunistic behavior will be
recognized if and when it does occur. Spekman et
al.(1996,p.352)also report that personal
relationships bact as the safety net which protects
the alliance from self-destructing when the busi-
ness is under performing or when expectations are
not being realized.Q
3.2. Personal relations can mitigate
relational risk
Partners have several option choices for controlling
risk in an alliance. According to Das (2005), these
include the use of contracts, the way the alliance is
structured, cross-investment in each other’s firm,
monitoring, and participatory decision making to
reduce relational risk (specifically, deceitful be-
havior). Each of these mechanisms has their
strengths and limitations.
Perhaps the most popular mechanism, contracts
are an attractive means for reducing risk. They
specify the rights and responsibilities of the part-
ners, and reduce the risk of deceitful behavior and
opportunism because they can be legally enforced.
Contracts, however, do have limitations. The most
significant shortcoming is that it is impossible to
draw up a contract that covers all exigencies,
especially long-term ones, because it may be
impossible to determine what all the future con-
tingencies would be. The result, as Das (2005)
observes, is that contracts may prevent short-term,
but not long-term, relational risk. Worse yet,
contracts cannot compel a party to perform a
particular act. At the very best, the courts can
only offer damages to an aggrieved party.
The limitations of contracts may actually be
greater in cross-border alliances. A contract can
only serve as an effective means of governance
under well-developed property rights regimes (i.e.,
well-developed courts and an effective legal sys-
tem). Unfortunately, not all countries offer these
conditions; for example, the difficulties of enforc-
ing contracts in Russia have been reported. Accord-
ing to Arino, Vila, Abramov, Skorobogatykh, and
Rykounina (1997), Western European managers who
negotiated alliances in Russia unanimously reported
that legal contracts were of little consequence in
H. Adobor476

that environment. In other cases, attitudes towards
contracts may be less strict in some parts of the
world than in Western societies. For example, the
perception exists in China that contracts are
organic documents subject to modification, a
perception diametrical to Western views of con-
tracts as sacrosanct. Child (2005) observes that, in
China, institutional supports for guaranteeing busi-
ness agreements are limited, and the lack of a well-
developed legal system may be the reason why
successful business collaboration depends on trust
between people.
Firms can use other formal control systems to
reduce risk; for example, to lessen deceitful
behavior, they can structure an alliance relation-
ship in terms of ownership rights. They may also
make transaction-specific investments in each
others’ firms (often described by the metaphor of
dmutual hostageT) or closely monitor their counter-
part firm. All three mechanisms provide some form
of formal control to the partners. Not all sorts of
relational risks, however, can be controlled using a
formal system. For example, mutual hostages,
specialized information, and capital equipment
may lose their importance over time.
Personal relations may be an additional, and
important, mechanism for not only strengthening
an alliance, but for overcoming some of the
limitations of the formal control mechanisms. For
example, personal ties naturally encourage shared
problem solving and trust. They may reduce the
need for excessive monitoring, and encourage the
sharing of helpful information that allows the
partners to know each others’ intentions and
interests, and promote cooperative behavior. In
fact, Kanter (1994, p. 106) declared that
balliances cannot be dcontrolledTby formal sys-
tems, but require a dense web of interpersonal
connections.Q
3.3. Personal relationships and trust building
Trust, defined as the belief that partners will act in
good faith and not do anything harmful to their
counterpart, has been described as a lubricant that
smoothes an exchange relationship. It is very
important in inter-firm alliances, as alliances entail
substantial risk. The presence of trust reduces a
certain amount of risk and lowers the costs
associated with the whole exchange process. This
is possible because trust facilitates investment in
long-term relationships between the partners;
further, it assures relationship quality by allowing
for a free exchange of useful information.
Organizations cannot trust directly; thus, key
individuals, acting as representatives, often ex-
press the collective trust on behalf of their firms.
As a behavioral concept, trust can only reside at
the interpersonal level, and this is where the
important role of personal relationships comes
into play. Unfortunately, we know that trust is
fragile and difficult to rebuild once broken. The
personal bonds of friendship that interpersonal
relationships make possible are an important
component of inter-organizational trust. This
may be especially crucial in the early stages of
the relationship, when partners may not yet have
had the opportunities required to build attach-
ment and commitment to the relationship. Child
(2005, p. 348) notes that any trust that exists
between organizations comes down to the quality
of mutual trust that exists between individuals,
what he calls btrust guardiansQ. The author cites
the example of Hewlett-Packard, which explicitly
designates championing roles called brelationship
managersQ. According to Child, the contribution
trust guardians make to cooperation in alliances
will depend on: (1) the mutual impersonal trust
they have developed with their counterpart man-
ager, (2) the influence they enjoy within their
respective organizations, and (3) how many trust
guardians there are.
Personal friendships often serve as the glue that
underlies trust, especially at times when the
temptation to engage in opportunistic behavior is
greatest. Personal ties create a moral obligation
that is necessary for trust to endure. More impor-
tantly, personal ties and trust between individuals
put pressure on the partnering firms to cooperate.
As Macaulay (1963, p. 63) stated, bclose personal
ties between individuals in firms contracting with
each other could exert pressure for conformity to
expectations.Q
3.4. Personal relations and volunteer
champions
Alliances require committed leaders, especially in
the early phases of the relationship. Key individuals
who provide critical support for new ideas and
innovation have been called bchampionsQ. Such
individuals are often willing to go beyond their
normal responsibilities to support a project. As
Kumar and Van Dissel (1996, p. 296) note:
bCompanies seeking to build and sustain inter-
organizational alliances need to recognize and
implement the roles of corporate dstatesmen,T
ddiplomats,Tand dpeace observers,Twho not only
seek out and build peace treaties and alliances, but
also, on an ongoing basis, guard against misunder-
standing, misinterpretations, and perceived or real
The role of personal relationships in inter-firm alliances: Benefits, dysfunctions, and some suggestions 477

betrayals that may lead to the disintegration of the
relationship.Q
Managers with personal ties would be the best
candidates for that custodial role.
Although firms can appoint individuals to
championing positions, research has shown that
bvolunteer championsQare most effective.
According to Peters (1982), a study commissioned
by Texas Instruments found that of seventy new
product innovations, those that succeeded were
generally led by a volunteer champion. Managers
with personal ties may be in the best position to
parlay their personal relationships into role-based
relations, becoming champions for the alliance.
As previously discussed, personal relations often
create obligations and trust. Championing is
important for two critical reasons: (1) there may
be resistance to the partnerships from a range of
stakeholders, and (2) like most new projects,
resource commitments may initially be slow to
secure.
Rather than being universally accepted and
supported, the decision to enter an alliance is often
resisted by employees and other stakeholders.
First, the rank-and-file may object to the alliance,
due to a belief that it is not in the best interest of
the firm. Second, the decision to enter an alliance
may be determined by different pressures, and the
objectives of individual departments or divisions
within a firm may not always be congruent. Both
conditions increase the prospect for political be-
havior, which occurs when individuals or groups act
to protect their self-interests. Political behavior
may crop up because units or departments involved
with alliances often assume greater visibility and
power than those not connected with the alliance;
in some cases, the latter may express outright
hostility toward the former. In fact, internal support
for any inter-firm relationship is not automatic.
Dyer et al. (2001, p. 40) quote an alliance execu-
tive: bWe have a difficult time supporting our
alliance...You have to go begging to each unit and
hope that they will support you. But that’s time
consuming and we don’t always get the support we
should.QIn another case of stakeholder resistance,
Lewis (1990) reported the near collapse of the
collaboration between French aviation company
SNECMA and General Electric, due to objection by
rank-and-file employees of GE. Inter-unit resistance
can derail an inter-firm relationship because such
disagreements often generate political or self-
interested behavior, and political behavior and
inter-unit competition increase high status polari-
zation and conflict. Research suggests that these
conditions hinder inter-firm collaboration. Kanter
(1994) reported that the alliance between Volvo of
Sweden and Renault of France collapsed, in part,
because the stockholders of Volvo Sweden objected
to the continued support of Renault by the French
government.
Like most organizational innovations, alliances
may be resource-starved, especially in the early
stages of the life cycle; therefore, active leader-
ship is important in the securing of resources. An
individual who believes in the merits and potential
of the alliance, a champion, may be critical to its
success, especially in the formative stages. The
leadership role of individual supporters may be
required to mobilize support and resources in the
furtherance of the goals of the alliance. A good
example of this type of leadership is the late Bob
Noyce, former CEO of the Texas-based semicon-
ductor initiative, SEMATECH. Mr. Noyce played a
championing role in three critical areas of the
multi-party alliance. First, he was instrumental in
defining what the achievable goals of the consortia
should be. This is important, given that clear goals
in alliances are required to give direction and a
sense of common purpose. Second, Mr. Noyce
provided vital cultural leadership. Finally, he
actively promoted a policy of inclusion and a sense
of cooperation among the firms in the consortia.
These values were to prove very important in the
later years of the alliance, and some even endured
after the death of Mr. Noyce in 1990.
Direct personal leadership of champions may be
needed to articulate the joint vision of the alliance,
especially during early stages of the relationship;
for example, it may be necessary to convey the
alliance vision to organizational members. Organi-
zational leaders cannot mandate required collabo-
rative behaviors; instead, they need to sell the
strategic value of an alliance to organizational
members. In their study of European alliances,
Spekman et al. (1996) found that key individuals
played an important role in shaping the collective
vision of the alliances in which they were involved.
Further, Volkoff et al. (1999) found that one key
individual, Bjerring, played an important role in
articulating the potential benefits for other firms in
the collaboration they studied in Ontario, Canada.
3.5. Personal relationships and uncertainty
When people cannot assign reasonable probabilities
to outcomes, uncertainty exists. By this definition,
firms engaged in economic exchange face uncer-
tainties. Uncertainty in strategic alliances may
arise for a number of reasons. Often, it occurs
because partners are unable to predict when and to
what extent their counterparts will reciprocate
H. Adobor478

behavior. There is, for instance, the risk that a
partner will exploit a counterpart or engage in
opportunism of some sort.
Uncertainty in alliances may also arise because
partners are unable to predict the payoff from the
relationship. Sociologists have studied the effect of
what they call bsocial uncertaintyQand how this can
be reduced in interaction. We can borrow from their
understanding to explore how interpersonal rela-
tionships help reduce uncertainty in economic
exchange. Yamagishi, Cook, and Watabe (1998,
p. 170) define social uncertainty as bthe risk of
being exploited in social interactions.QThe authors
note that social uncertainty arises because the
interaction partner has the ability to impose harm,
and an actor cannot predict if the partner will, in
fact, act in that way. This same situation arises in
strategic alliances because partners can do harm to
each other.
Sociologists suggest that trust in people
bemancipatesQor reduces social uncertainty. Per-
sonal relationships are built on commitment and
trust for an individual; as such, interpersonal ties
can become a critical element for reducing uncer-
tainty in alliances. In some sense, personal relation-
ships substitute legal contracts for social contracts
because personal ties are based on informal under-
standing and some implicit amount of social con-
tract. The presumption here is that firms will avoid
acting opportunistically if their representatives
have an implicit social contract with each other.
The information sharing and cooperation individuals
extend benefit the alliance directly by reducing
some key sources of uncertainty.
4. The downside of personal
relationships
While relying on personal ties in inter-firm relation-
ships can be very useful, the tactic is not without
drawbacks. These include:
!Conflict of interest;
!Pursuit of self-interest and escalating commit-
ment to a course of action;
!The fate of the alliance gets tied to personal
relationships; and
!A possibility that agency and transaction costs of
the relationship will increase.
4.1. Conflict of interests
One important limit to relying on personal relation-
ships is that there are no guarantees that individ-
uals will always act in the interest of the firm. One
expects that individuals whose connections support
their firm’s inter-organizational relationships will
act in the interest of their parent firms. In some
sense, such individuals become agents for their
firms; however, whether they act in the complete
interest of their firms is open to debate. Although
organizational roles can restrain how employees
behave, for a number or reasons, their behavior
may not always be consistent with their role
expectations.
First, personal loyalty may deviate from organi-
zational interests, leading to such malfeasance as
corruption and embezzlement (Anderson & Jap,
2005). Second, managers’ egos may lead them to
engage in behaviors that are contrary to their role
expectations; for example, individuals may conceal
negative information to preserve their own repu-
tation. Finally, personal interest may stand in the
way of role performance. For example, Shaugh-
nessy (1995) reported that a key firm representa-
tive in an alliance was very uncooperative because
he felt the assignment was detrimental to his
career prospects. The author also cited a case in
which key representatives in a joint venture felt
their career interests were best served by fighting
for the short-term advantage of their own compa-
nies, to the detriment of the long-term health of
the alliance.
4.2. Personal relations and escalation of
commitment
A related dysfunction is that individuals may
escalate commitment and steer the relationship
in ways that are unanticipated by their parent firm,
or are even detrimental to the strategic interest of
their firm. Staw (1976) suggests escalation of
commitment occurs when a decision maker persists
in investing in a course of action, despite informa-
tion that indicates the outcome may be unfavor-
able. Escalation of commitment in an alliance
relationship happens when actors stick to a course
of action (e.g., continuing to invest in an alliance or
refusing to exit it) when available information
suggests the relationship ought, in the interest of
the partners, to be terminated.
Ross and Staw (1993) observed that escalation
may be determined by the economic merits of the
project, psychological determinants such as an
individual’s need to justify a decision, social
determinants such as a person’s need to demon-
strate strong leadership, and organizational deter-
minants such as the level of support within the
organization for the idea. Individual managers may
escalate commitment to an alliance for a number
of reasons, the first of which is self-justification.
The role of personal relationships in inter-firm alliances: Benefits, dysfunctions, and some suggestions 479

Staw (1976) found that personal responsibility is
the key driver of escalation behavior. Individuals
who play an important role in initiating an alliance
may have a stake in the success of the relationship,
and may be under self-imposed pressure to ensure
that the relationship succeeds. At some point, it
might become obvious that the relationship is not
in the best interest of the firm, or that the alliance
is not fulfilling its primary objectives. Neverthe-
less, an existing personal investment may compel
an individual to continue their commitment to the
relationship, rather than give up on it.
Second, if an individual senses that people in
their organization closely identify them with the
alliance, they may escalate their commitment to
the relationship in order to preserve their own
reputation. In such cases, these individuals desire
continued commitment, even if it becomes appar-
ent that the alliance is a losing course of action.
Escalation of commitment may also occur when
people perceive that the failure of a relationship
may cost them their job or position, and when
performance improvement is optimistically (and
often not realistically) hoped for. Cultural values
may be a determinant, as well. Child (2005)
observes that business people in Oriental countries
are reluctant to terminate business relations, even
when an alliance no longer meets their strategic
objectives, because interpersonal trust is such an
important part of business dealings; for example,
the author reports that Honda managers were said
to have felt a sense of betrayal when Rover backed
away from their automotive alliance after Rover was
purchased by BMW. Finally, the nature of the
alliance or the project itself can be a reason why
managers escalate behavior. Objective aspects of
the relationship, such as costs associated with
exiting the alliance, may keep managers hanging on.
There are at least two ways by which firms can
reduce escalation due to individual leadership.
First, since feelings of personal responsibility for
decisions prompt individuals to escalate commit-
ment, one way of reducing escalation is to mini-
mize reliance on personal relations and encourage
all members of the organization to assume owner-
ship of the alliance. For example, firms can use
project teams and encourage employees to build
multiple ties with individuals in the partner’s firm.
Multiple ties will attenuate the level of responsi-
bility that an individual would otherwise have felt if
they remained the primary custodian of the alli-
ance. The lower the feeling of responsibility for
results, the less incentive there is to justify the
correctness of earlier decisions. Of course, man-
agement must ultimately bear responsibility for the
success or failure of any strategic initiative,
including partnerships. Second, firms can monitor
the role performance of those managers with ties in
partnering firms. When performed correctly and
periodically, monitoring may reduce escalation by
uncovering escalation tendencies before they
materialize.
A case regarding the failed alliance between
Volvo of Sweden and Renault of France (Bruner &
Spekman, 1998) reveals instances of behavior that
may be consistent with escalation of commitment.
Based on archival data and interviews with the
principals, the study paints an interesting picture
of how key individuals may have escalated com-
mitment to an obviously failing relationship. Initi-
ated by Pehr Gyllenhammar, CEO of AB Volvo, and
Raymond Levy, CEO of Renault, the alliance lasted
four years, during which time there arose several
indications that the relationship was doomed to
fail. Primarily, it was obvious that the alliance was
not supported by Volvo’s stakeholders; further, it
was also apparent that the alliance was not
meeting its strategic objectives. For example, one
of the key parts of the alliance, a project to
develop high-end executive cars (the P4 project),
faltered in part because the coordinating teams
from both firms could not agree on important
decisions. Even worse, there were near revolts by
Volvo’s Swedish stockholders because of the deal,
and the company’s American car dealers (an
important market) were opposed to the alliance.
Instead of taking a step backward or slowing down,
Gyllenhammar proposed an outright merger with
Renault.
Even when things were obviously not working,
Gyllenhammar put a positive spin on the relation-
ship. Consistently, the CEO insisted the alliance was
operating satisfactorily, although the evidence
indicated otherwise, and discounted the severity
of problems as they arose. When the alliance finally
collapsed four years later, Gyllenhammar not only
resigned from Volvo, but also sold his family’s stake
in the company.
Although it is impossible to know for sure why
Pehr Gyllenhammar took the actions he did, one
can speculate regarding possible reasons. First, it
appears that he may have escalated commitment
because of his belief in the commercial potential of
the alliance, a very plausible explanation. Second,
he may have been persistent in his beliefs because
he had invested much time and energy in develop-
ing a working relationship with Mr. Levy, the CEO of
Renault. Both managers may have felt the need to
demonstrate strong leadership by not quitting,
especially since they were both closely identified
with the project. Finally, based on his final reaction
to the collapse of the deal, Gyllenhammar’s
H. Adobor480

reputation may have been on the line. To save face,
the leaders may have persisted in escalating
commitment to the alliance, even when it was
clear the relationship was failing.
4.3. Individual personalities may adversely
affect the alliance
Another important dysfunction associated with
relying on personal relationships is that the fate
of the alliance may be tied to the fate of
individuals. This can happen when personal friend-
ships break down, turnover occurs, or both.
Personal relationships rest on friendship ties.
When friendship ends, the relationship may be
adversely affected, especially if such personal
relationships played a crucial role in the alliance.
Under these circumstances, personal conflict gets
externalized to the alliance. Turnover can also
adversely affect an alliance. Individuals may resign
posts, be fired, or, in rare cases, even die (e.g.,
Robert Noyce, the charismatic alliance champion of
SEMATECH). According to Spekman et al. (1996), the
joint resignation of the CEOs of both Volvo and
Renault dealt a severe blow to the alliance, sending
the relationship to its eventual demise. Although
individuals can always be replaced, time is needed
for new relationships to be forged. Additionally,
replacements for key individuals often may not share
the enthusiasm or chemistry of their predecessors.
This dysfunction can be particularly heightened
when personal ties become indispensable to the
success of the relationship. When no one else can
perform an individual’s role, that person becomes
indispensable, and indispensable people often hold
significant power. Individuals can become indis-
pensable because they have access to or control of
important information; individuals as gatekeepers
can use their access to information from a coun-
terpart to their advantage. Research has shown
that gatekeepers are able to influence the views of
others by carefully controlling information. The
more the firm depends on personal ties to accom-
plish alliance goals, the more difficult it becomes
to replace them.
Spekman et al. (1996) observed that the collapse
of friendship between managers is one of the most
serious blows that can befall an alliance. In a study
of 200 alliances, Segil (1998) reports that some
firms are keenly aware individual personalities may
adversely affect alliance relationships. According to
the author, Starbucks management acknowledges
that ego clashes are a major obstacle to creating
effective partnerships; thus, the company ensures
that individual personalities take a back seat to the
overall well-being of an alliance. By insisting that its
partners work with teams rather than individuals,
Lotus Inc., too, structures its alliances to limit
dependence on individual relationships.
4.4. Personal relationships may increase
agency and transaction costs
When individuals engage in self-interested behavior
or fail to perform their assigned organizational
roles, this may increase the transaction and agency
costs associated with the alliance. Transaction
costs include all the expenses associated with
exchange; in the case of an alliance, these include
the costs of finding a partner, developing trust,
investments in specific resources, executive time
related to the relationship, and other incremental
expenditures. Oliver Williamson (1975), a pioneer
in the field of transaction cost theory, argues that it
is more efficient for firms to choose organizational
arrangements that keep the cost of economic
exchange at a minimum.
Agency costs arise when agents acting on behalf
of a principal violate their charges. Any individual
who acts on behalf of their firm may be likened to
an agent working for his or her principal. Agency
theory focuses on explaining the principal—agent
relationship (Eisenhardt, 1989). Although tradition-
ally applied to relationships between shareholders
and corporate officers, it is possible, within limits,
to borrow from agency theory to understand the
behavior of individual leadership in alliances. In
some sense, any key individual whose relationship
the firm relies upon to manage an alliance serves in
a sort of principal—agent relationship.
Any sort of personal conflict of interest that
arises when individuals act on behalf of their firm
can adversely affect the organization and lead to
agency costs. Behaviors that are in conflict with the
role an individual is supposed to perform can cause
harm to the alliance. In other cases, individuals can
engage in activities or behaviors that promote their
own interest to the detriment of the alliance. To
summarize, despite the generally positive benefits
of personal ties, there are limits to their use.
Considering the central role personal ties play, the
issue is not so much whether firms should rely on
them as how they can balance their dependence so
that negative consequences can be mitigated.
5. Reducing the dysfunctional effects of
personal relationships
Considering the importance of alliances and the key
role individuals and personal relationships play in
The role of personal relationships in inter-firm alliances: Benefits, dysfunctions, and some suggestions 481

them, it is vital that firms have strategies in place
to use personal ties effectively. Carefully managing
personal relationships by determining where in the
relationship they can be most useful offers an
important means for mitigating the adverse con-
sequences of personal ties. Using the framework of
the life cycle presented in Fig. 1, it is suggested
that the importance of personal relations in an
alliance is greater during the early stages, and may
become less critical as the alliance matures.
Therefore, carefully managing personal relations
over the course of the alliance may be one way of
reducing the dysfunctional effects of personal
relations in alliances.
Table 1 summarizes the main arguments made in
this section. The first column presents the stages of
life cycle of a typical alliance, the second column
identifies the main focus associated with each
Table 1 Linking alliance phase, performance requirements, and personal ties
Stage in life cycle Main focus Key leadership/Performance
requirements
Role of personal
relationships
Early phase
In this phase, partners are still
bsizingQeach other up. It is
also a period when firms
mobilize internal support for
the alliance. Suspicion and
doubt are paramount at this
stage, as partners are still
engaged in making sense of
the relationship.
4Articulate and build
collective vision
4Individual leadership 4Rely on personal relations
and use individual leadership
4Build legitimacy 4Championing 4Individual leadership most
important for articulating
vision, as well as
championing
4Achieve tactical and
strategic interaction
4Build initial trust
Growth phase
Transition to this stage occurs
when firms have
demonstrated credible
commitment, such as
investment in dedicated
assets.
4Build attachment 4Promote multiple links
among individuals in
partnering firms
4Leadership capabilities
required may be different
at this stage
4Formalize rules of
interaction
4Multiple people assume
ownership for the relationship
(directly related to preceding
requirement)
4Use personal ties to
support multiple ties
4Build trust based on a
demonstration of
competence
4Formalization permits role
assignments
4Achieve interpersonal
and operational integration
4Demonstrating operational
competence requires that
all units cooperate with
those in counterpart firm
4Multiple leaders are
needed at this stage, and
begin to reduce reliance on
personal ties
Maturity phase
Firms may be renegotiating
original agreements, and
the payoff from the
relationship is matured
at this stage. Partners are
in a position to know
whether the relationship
is beneficial or not. The
decision to dissolve the
alliance or continue may
be easier to make at
this stage.
4Demonstrate operational
competence
4Need to develop a network
of ties
4Need for collective
ownership highest
4Build cultural integration 4Firm-level mobilization of
resources and people needed
for successful relationship
building
4Personal ties should be
less important so that the
relationship can survive
the departure of individuals
4Probability of dysfunctional
effects of relying on personal
relations may be highest
now because familiarity may
breed contempt
4Continued reliance on
personal ties also means
that personal investment
in the relationship is so
strong that the possibility
of escalating commitment
is greater
H. Adobor482

stage, the third column identifies key leadership
and performance requirements, and the last col-
umn illustrates how reliance on personal relations
ought to be balanced over the life of the alliance.
5.1. Strategic use of personal relationships
Firms can reduce the dysfunctional consequences
of relying on personal ties in an alliance by knowing
when to emphasize individual relationships and
when to reduce reliance on such ties. In some
sense, firms may need to consider their use of
personal relationships as a matter of strategic
thinking.
One helpful approach is to think of the relation-
ship in terms of a life cycle made up of early,
growth, and mature phases. It may also be advan-
tageous to integrate Kanter’s (1994) ideas on how
firms build productive partnerships by focusing on
five levels of integration or levels of interaction
between them across the life cycle and teasing out
when personal relations, as opposed to multiple or
structural ties, would be most helpful to achieving
the goals of the alliance.
According to Kanter, partners should achieve five
levels of integration, each of which provides
different opportunities for interaction. The first
level of integration is strategic interaction, which
involves contact among top management in both
organizations for the purpose of discussing broad
goals. Tactical integration brings middle managers
together to plan specific joint activities and
identify ways to improve the transfer of informa-
tion between their firms. Operational integration
provides the right resources and information to
people so that they can effectively carry out their
daily tasks. Interpersonal integration creates a
network of personal relationships between mem-
bers of the two organizations, and cultural inte-
gration provides people in both firms with the skills
and understanding necessary to bridge their cul-
tural differences. We can identify some of the key
behaviors associated with each stage of an inter-
organizational relationship, and then determine
the points at which personal ties can be most
useful and when dependence on them may become
dysfunctional.
5.1.1. Early phase
The early phase of the relationship is unique for a
number of reasons. It is often a period of contra-
dictions: a time during which partners enjoy the
goodwill of each other, yet opportunism is likely to
be acted upon. Partners may go through a
bhoneymoon periodQcharacterized by a reservoir
of comfort, goodwill, and hope; however, at the
same time, unfamiliarity and mutual apprehension
of the unknown may increase the chances for
opportunism and malfeasance.
This is also the time for building and forging a
common vision of what the relationship is supposed
to accomplish. Although the alliance lacks a formal
structure, strategies and choices of the parties
begin to form during the early stages. According to
Browning, Beyer, and Shelter (1995), partners’
roles are typically ambiguous at this juncture.
Finally, this is the stage in which the parties
establish the configuration of behaviors and
arrangements that will keep the relationship ori-
ented toward its goals. This may be the time to
achieve strategic and tactical integration by relying
on personal leadership to develop a broad mission
for the alliance. Direct personal leadership and
personal relationships between managers can be
very important at this stage for at least two
reasons.
Because this is the stage during which internal
resistance is most likely to occur, the championing
role of key individuals will prove especially helpful.
Personal relationships can serve to cushion the
initial doubt partners will have about each other
and the potential of the relationship. For example,
during the crucial sense-making phase of the
alliance between NASA and 3M, company represen-
tatives Mike Smith and Chris Podsiadly undertook a
fact-finding mission by visiting a variety of NASA
facilities together. The men developed a strong
friendship, 3M representative Podsiadly concluded
that he could trust Smith to get the job done within
NASA, and the resulting mutual confidence led to a
10-year joint endeavor agreement (Ring, 1997).
During the crucial initial phase of an alliance, it
benefits the firm to put a face on the relationship.
As such, personal ties may be most valuable at this
stage.
Direct leadership and personal ties may also be
important during the early phase because the
alliance typically lacks a formal structure during
this period, and an associated degree of ambiguity
regarding the roles of the partners may exist.
Under the circumstances, direct communication is
the most appropriate form of coordination; if this is
carried out, personal relationships will be impor-
tant. The existence of personal trust between
managers will also tend to cushion the initial,
fragile trust that marks the early phases of inter-
firm relationships.
5.1.2. Growth phase
As the alliance progresses, firms need to institu-
tionalize the relationship so it can withstand the
absence of personal ties, as well as the collapse of
The role of personal relationships in inter-firm alliances: Benefits, dysfunctions, and some suggestions 483

personal relationships. The second, or growth,
stage is a period marked by some form of structural
attachment between the partners. Seabright et al.
(1992) define attachment as an inertial or binding
force between exchange partners that promotes
commitment to the relationship. Structural attach-
ment between partners means that they cannot
easily abandon the relationship without important
consequences. During the growth phase, formal-
ized procedures should begin to replace personal
contacts.
Alliances that survive the first few years of
familiarization must progress to a stage in which
partners bridge the gap between expectations and
reality. At this juncture, the bhoneymoonQis quickly
winding down, and unless the parties can give
expression to the alliance vision and meet the
expectations of their counterparts, good friends
may become enemies. In many ways, this appears
to be the most critical phase of any alliance
relationship. A look at the key demands and
leadership requirements of this phase illustrates
that this is the time when firms must begin to
reduce the central role of key individuals and
personal relationships, expand ownership of the
alliance, and modify the role of expectations of key
individuals. A number of central issues, including a
different set of leadership requirements, become
important at this stage.
First, this is the period in which the partners must
demonstrate operational capacity. At this stage,
partners should have achieved interpersonal and
operational integration by bringing several managers
together, including close cooperation at the commit-
tee level to work toward the goals of the alliance. The
focus of the relationship then shifts gradually from
familiarization and vision building to giving realiza-
tion to the vision. During this period, substantial
investments are made in physical, material, and
intellectual capital. Operational competence
requires that the parties meet expected deadlines
and perform to the satisfaction of each other. The
ability to demonstrate operational competence
depends more on the participation of a broad section
of people from both firms and on structural integra-
tion than on personal relationships. Key units and
divisions responsible for projects must collectively
assume ownership of the relationship at this stage.
While personal relationships still contribute during
the growth phase of the alliance, they should retreat
from center stage, take a back seat, and play a
supporting rather than central role.
Second, this is the stage when formalization
begins and coherent and identifiable alliance
structure (e.g., division of tasks, authority rela-
tions, communication patters between the part-
ners) starts to evolve. At this juncture, several
people should be interacting closely and a pattern
of communication should have begun to surface in
the relationship. The emergence of formalization
enables individuals not privy to initial arrange-
ments to perform in designated roles; indeed,
formalization requires the active participation of
the rank-and-file membership of an organization.
Although the role of key people can still help the
relationship, whether the alliance succeeds or fails
at this point may depend more on the ability of a
large number of people than on how well personal
relationships support the alliance. For example,
departments or committees charged with deliver-
ing on the alliance must be able to fulfill their
assignments in a timely and competent manner.
This means that interpersonal relations must be
established between several people in the parent
firms so that the collapse of personal relationships
between key people does not derail the alliance.
According to Kanter (1994, p. 105):
bActive collaboration takes place when compa-
nies develop mechanisms—structures, processes,
and skills—for bridging organizational and interper-
sonal differences and achieving real value from the
partnership. Multiple ties at multiple levels ensure
communication, coordination, and control. Deploy-
ing more, rather than fewer, people to relationship
activities helps ensure that both partners’ resour-
ces are tapped and that both companies’ own
needs and goals are represented.Q
Finally, the nature of trust that emerges as an
alliance matures depends more on the competence
of the firm than on affect between individuals.
According to Sako (1992),thissortoftrustis
competence-based. Competence-based trust
occurs when partners demonstrate that they are
capable of meeting the operational expectations of
the relationship.
5.1.3. Mature phase
The third and final stage of an alliance is the
mature phase. During this period, the relationship
either endures to its intended end point or fails
prematurely. Notably, it is marked by cultural
integration; cultural differences between partners
should be bridged and structural attachment and
organizational bonding between the parties should
have taken place at this point.
The main focus of this phase of the relationship
is how the partners deal with both internal and
external pressures. Internally, this is a time to
review the payoff, or economic rent, accrued to
the firm from the relationship. Determining this
H. Adobor484

sort of benefit is an organization-wide effort; the
broader organizational community, through their
intimate knowledge of the relationship, can deter-
mine whether or not the alliance is in the best
interest of the firm. Externally, this is the time for
partners to review the contract or agreements that
guide the alliance to determine whether any
renegotiations are warranted. During the mature
phase, primary leadership responsibility lies in
managing changing expectations of the partners.
While personal ties may still be useful, they should
take a back seat at this stage, for at least two
reasons.
First, friendships can break down after long
periods of time, when parties may begin to take
each other for granted; bfamiliarity breeds con-
temptQis an adage that applies in this situation. Of
course, the opposite can also occur: friendships,
rather than disintegrating, may solidify. As previ-
ously mentioned, this can adversely affect the
partners when loyalty to individuals replaces
commercial and firm-level loyalty and interests,
or strong ties become a reason for escalating
commitment.
Second, the longer people remain in their roles,
the greater the probability that individuals may
escalate commitment. The less sweeping the
mandate of key individuals at this stage, the less
likely they will escalate commitment in the face of
failure.
6. Final observations
Knowing how to effectively manage an alliance can
be a source of competitive advantage. Since
personal relationships play a vital role in inter-firm
relationships, knowing when to maximize reliance
on them should become an important alliance
management skill. Structuring alliances to com-
pletely eliminate individual roles may have as
many costs as placing too much faith in them.
Available evidence suggests that some firms are
aware of the adverse consequences of relying on
personal relationships in alliances; for example,
Lotus Inc. and Oracle Corporation structure their
alliances to reduce dependence on personal rela-
tionships by insisting that their partners work with
teams created around specific functions rather
than with individuals, believing team structure will
promote relationships that can stand the departure
of individuals (Segil, 1998). While this may be
prudent, completely eliminating personal relation-
ships as a matter of policy can be counterproduc-
tive. The key, it appears, is to strike a balance
between the need to use social ties as an asset in
economic exchange, and recognition of the limits
of such ties. This article has proposed that firms
can benefit from personal relationships in alli-
ances. Although there is a downside to utilizing
personal ties in alliances, it is possible to reduce
the negative effects associated with overdepen-
dence on personal relationships by carefully man-
aging the process.
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