Vikas Aggarwal, INSEAD; Nicolaj Siggelkow, Management, The Wharton School; and Harbir Singh, Management, The Wharton School
Abstract: We examine the performance implications of selecting alternate modes of governance in interorganizational alliance relationships. While managers can choose from a range of modes to govern alliances, prior empirical evidence offers limited guidance on the performance impact of this choice. We use an agent-based simulation of interfirm decision making to complement empirical studies in this area. Our results point to a complex interplay between interdependencies, governance structures, and firms’ search capabilities. Different patterns of interdependence create varying needs with respect to coordination and exploration, while at the same time different governance modes, coupled with organizational search capabilities, supply varying degrees of these factors. Firm performance in an alliance relationship improves when the needs and supplies of coordination and exploration are matched. We find situations in which stronger organizational search capabilities can backfire, leading to lower exploration within the alliance relationship, and hence to lower firm performance. Moreover, we show that for higher levels of interdependence, coordination can become more critical for firm performance than exploration: unless it is tied to coordination, exploration can be ineffective in alliance settings.