The Role of Trust in Strategic Alliances - Literature review Example

Literature Review: the Role of Trust in Strategic Alliances Introduction Strategic Alliances have been influenced by economic and political changes taking place in the world in the middle of 1990s. The rapid growth of information technologies, cooperation and integration activities have caused changes in this sector with EU integration and Single Market policy. The present day models and theories of Strategic Alliances differ from those, which were in use three decades ago. The role of trust in Strategic Alliances is made all the more complex and thought provoking because of the competition of ideas between different academic and political standpoints. Added to this is the input from those who actually involved in this business, giving us a "real world" perspective. This essential input often gives us insider accounts of a contemporary world which we are not normally privileged to see. This paper is aimed to investigate the main driven theories, values and assumptions described in the literature that are shaping a notion of trust in Strategic Alliances. Notion of Strategic Alliance Before examining the role of trust in Strategic Alliances the notion of Strategic Alliance itself should be descried. In the literature there are different definitions proposed to describe the nature of Strategic Alliances. The first layer of literature (Austin 2000; Lewis 1999) used this term to describe joint ventures which do not involve equity investment by the partners and co-operative activities in areas other than manufacturing. In this case, Strategic Alliances are described as co-operative business activities between two or more firms, entered into for strategic reasons, involving the creation of a separate business entity under joint control and ownership. They can involve equal shareholdings. Strategic Alliances can "involve 'passive' partners who invest money in the operation without taking an active role in its management. Another layer of literature distinguish joint ventures and strategic alliances as different in their aims and structure. According to Doz and Hamel (1998) strategic alliances are "formed between firms with similar capabilities and capacities usually from industrialised countries; companies involved in strategic alliances are often direct competitors operating in the same product and geographic markets; they are usually entered into for reasons other than market access or the pooling of synergistic resources". While examining the role of trust in Strategic Alliances the research will be based on the second interpretation of the notion strategic alliance. The importance of trust In ordinary day-to-day practice most strategic alliances when making decisions tend to combine these different approaches, although frequently without being aware of the mental processes they are using. It is helpful to be aware of whether one is thinking in terms of 'acts' or 'ends', especially when analysing a dilemma. Theories proposed by Lewicki et al (1998) base a conception of right action on a conception of trust for duty's sake and mainly differ in so far as they specify two different sources of these duties. In order to make the correct moral choices, a strategic alliance simply has to understand what its trust concepts are and what correct rules exist which regulate the duties between the partners. When the parties of a strategic alliance follow their duty, it is behaving morally. When they fail to follow trust policy, it is immoral. It has also been acknowledged that strategic alliances have important obligations to a variety of stakeholders and not just the shareholders, and this should be reflected in their statements of trust (Bleeke, Ernst, 1995). To some extant trust within strategic alliances is based on the codes of ethics or a formal statement of what strategic alliances expects in the way of ethical behavior. It can serve as a guide for employee conduct to help employees determine what behaviors are acceptable. Since the purpose of trust is to let everyone know what is expected and what is considered right (Austin 2000). Trust and control By focusing on rates of return on investment, adjusted for inherent risks, strategic alliances may develop an economic overview of those options likely to produce the best returns for them. Risks are obviously greatest the more resources are committed to a venture, although also included in the consideration are such issues as political uncertainty, economic fluctuations and uncertainty over the performance potential of third parties. Arin et al (2005) points that trade off risk against greater control over operations and the potential for higher returns. For example, wholly-owned foreign direct investment options afford one of the partners total control over activities and potentially higher returns than other strategies but at the expense of greater risk. Lane and Bachmann (1998) discuss that as the control over activities is high the risk is minimized as well as of importance of trust. Lane and Bachmann (1998) underline the idea that trust should exist in this case, but it is role becomes less important because of control activities. Conversely, strategic alliances involving in indirect exporting options have minimal risk but offer little to no control over activities and potentially low returns. The researchers (Lane and Bachmann 1998) underline that in this case the importance of trust is crucial, because greater part of the activities depends upon trust and straight dealing of the parties. Like other forms of market servicing strategy, then, strategic alliances are part of a dynamic process. It is therefore unlikely that many strategic alliances initiated at the outset of the Single Market will be sustained in the future. Conflicts concerning trust arising out of poor communication and understanding (particularly of a cultural nature) will either result in the partners undertaking a complete review of strategic alliances or searching for alternative strategies to sustain business in the Member States of Europe. Johnston and Noftsinger (2004) write that success depends upon "frequent, open communication among members, and trust is a common feature of that communication" (Johnston and Noftsinger 2004, p. 19). Rickett in his work "Building Strategic Relationships: A Practical Guide to Partnering with Non-Western Missions" (2000) pays attention to the interdependance of the importance of trust in strategic alliences and market they operate with. Each mode of market servicing involves a very different cost structure and it is prudent for firms to understand the potential offered by each for both short- and long-term trust. Zaheer (1998) describes that in some cases, trust means more than simply passing moral judgment about what should and should not be done in a particular situation. It is part of the conscious decisions a strategic allience makes about the directions it wants a business to take. It is a link between morality, responsibility, and decision making within the organization. That is why it is very important to adopt "steady" trust relationships in order to minimize the risk for both parties. Levels of trust In the literature three levels of trust are singled out knowledge-based trust, deterrence-based and identification-based (Sheppard, Tuchinsky, 1996). They raise the question of how trust of strategic alliences affect the behaviour of individuals and the values of society, and concerns important ethical questions about the role of trust in the strategic management process. Another classification (Austin 2000) of trust levels includes the macro level (society), corporate level and individual level. The macro level involves the impact of trust in the national and international strategic alliances on society. These are largely concerned with assessing the relative virtues of different political/social systems, such as free enterprise, centrally planned economies, etc. There are also important issues of international relationships and the role of strategic alliances on an international scale. At the corporate level, if trust is supported and strictly enforced by a strategic alliance management team of both parties, it will become part of the company's culture and will improve trust behavior. If managers and employees see trust as a window-dressing facade, it will accomplish nothing. The adoption of trust relations is very important because it helps to maintain high standards in business (Austin 2000). At the corporate level the issue is often referred to as corporate social responsibility and is focused on trust issues facing individual corporate entities when formulating and implementing strategies. Much of the initial discussion on these issues centred on the trust responsibility of the parties of strategic alliences and was reflected in policies inclined towards corporate social responsibility. More recently, the debate has widened somewhat and is now more generally described as business ethics (Doz, Hamel 1998). On the individual level, a company's staff should believe that the prestige of the party in a strategic alliance and its strong corporate culture removed the need for trust. Ciborra (1991) underlines that trust is often considered as either too restrictive (internal administrative instructions) or too general and therefore useless or used as alibis. While the above provides some general observations regarding the impact of trust on strategic alliances it provides no clear framework for understanding how given the numerous strategies available, strategic alliances should decide upon the most suitable alternative for entering markets or developing pan-European activities with minimal risk. Ario et al (2005) describe that: " Initial expectations are shaped by the parties' reputation for fair dealing; their professional credentials, demonstrated competence or other relevant demographic characteristics; and the complementarities that may exist between their resources and strategic intent (Ario, et al 2005, p. 18) . Lewis (1999) in the book "Trusted Partners: How companies Build Trust and Win Together" arises the question that the most difficult trust problem for strategic alliances is the question of to whom they are responsible when developing trust strategies. The simplest answer in private-sector organisations is the shareholders, and in public-sector organisations the politicians as representatives of the people. However, in practical terms most managers know that it is rarely so simple. Perhaps the only useful guide to strategic alliances is to say that their analysis of their lines of responsibility needs to go beyond the legalistic answer. There is no question that, irrespective of the legal position, there is a clear responsibility to the other stakeholder groups. Langfield-Smith (2005) sees the problem and the roel of trust in anotehr dimension. The reseachers wriets that: "trust may develop over time through processes of learning and adaptation, which are essential to the strengthening of the relationship between partners, making the relationship more durable in the face of conflict and encouraging interactions between partners involving knowledge exchange and promotion of each other's interests " (Langfield-Smith 2005, p. 11) Strategic alliances are usually in a powerful position within market to influence the expectations of other stakeholders. They have access to information and channels of influence which are not available to many other stakeholders. With this power comes trust to behave with integrity (Zaheer 1998). Given that strategy development is an intensely political process, strategic alliances can often find real difficulties in establishing and maintaining this position of integrity. Trust and risk According to Todeva and Knoke (2001) "Firms may treat alliances as lowcost, low-risk mechanisms for exploring possible future purchases. Agreements gradually evolve into a direct sale as one company gains greater business experience relative to its collaborator" (Todeva, E., Knoke, D. 2001, p.29). Potential hazards or problems, both when used as intended and possible misuse or use in other applications, should be identified. Trust regulations not damage the people or the environment in the target market. In activities related to market entry and expansion, should be taken to ensure that methods used do not conflict with either local or home values, and will not be construed as including bribery. Establishing trust and minimizing risk is fundamental to the successful formation and growth of any strategic alliance (Rickett, 2000). Increasingly, researchers, Lewicki et al (1998), are recognizing the importance of assessing not only risk but also the relation between risk and trust in group dynamics, conflict resolution and group communications. The importance of risk assessment is also well documented by Arin et al 2004. In strategic alliances where many of the traditional ways in which humans establish bonds through physical contact and socializing are absent or at best limited, the importance of building trust assumes pivotal importance (Bleeke, Ernst 1995). Assessment of risk and trust interdependence is necessary because it helps act honestly avoiding misleading or confusing claims. The international strategic alliances should be aware of what approaches and subjects are considered as acceptable to target market, and conform to requirements. Duties and obligations help to control activities of both parties and their staff. All efforts should be made to prevent false claims and pressure tactics. Some researchers (Doz, Hamel 1998) asking whether seeing a strategic alliance begin to talk openly about trust might be the first indication of an enhanced level of intra-group trust. Did the open dialogue suggest awareness of and a level of comfort with the issue of trust within the team Was this the first step to building a deeper level of trust within a strategic alliance (Doz, Hamel 1998). They come to conclusion that unfaithful behavior of one party deprive the relationships and trust of other parties involved in the strategic alliance, and only a strict trust policy as a basic concept of business can help to avoid risk and claims. Establishing trust goals allows a firm to take corrective action by punishing employees who do not comply with company standards and rewarding those who do. Conclusion Two main themes in the research literature have been particularly prominent in recent years: "trust and control" and "trust and risk" as a source of successful collaboration. Also a big layer of literature concerns the debate over the different methods and models of building successful trust relationships. Up-to-date scholarship on both of these themes is reflected in recent researches of Todeva and Knoke (2001), Arin et al (2005), Globerman, Nielsen (2005). In their works these authors develop a new theoretical approach which can be applied into practice. Lane and Bachmann (1998) prove the fact that in the 21st century strategic alliances activities depends upon trust within the companies, the nature of community relations, the interdependence of trust and control and trust and risk. In their studies they collect many benefits for strategic alliances including: obtaining high standards of trust relations at all levels of work force, and reducing anxiety and confusion over what is acceptable employee conduct. Bear in mind the theories and ideas of recent studies it is possible to say that all of them suggest that strategic alliances should maintain high standards of trust relationships in order to minimize the risk, prevent unfair actions and suspicion. The researchers explain that strategic alliances need to be concerned with issues related to trust and responsibility, because a number of the issues are also the subject of legal requirements in many countries. The duties and obligations which are set forth become enshrined in custom and law, and people stop giving them or their consequences much thought - they are simply assumed to be correct. References 1. Arin A., Torre, J., Ring P. S. 2005. Relational quality and inter-personal trust in strategic alliances European Management Review. 2, 15-27 2. Austin, J. E. 2000 The Collaboration Challenge: How non-profits and businesses succeed through strategic alliances San Francisco , CA : Jossey Bass Pub. 3. Bleeke, J., Ernst, D. 1995, Is Your Strategic Alliance Really a Sale, Harvard Business Review, Jan-Feb. 4. Carson, J. 2000, The Art of Effective Alliances Available from: http://www.inc.com/articles/2000/08/20083.html [Accessed 20 Aug 2005] 5. Ciborra, C. U. 1991, Alliances as learning experiments: cooperation, competition and change in high-tech industries. In Strategic Partnerships: States, Firms and International Competition, edited by L. K. Mytelka, 51-77. London: Pinter Publishers. 6. Doz, Y., Hamel. G. 1998. Alliance Advantage: The Art of Creating Value Through Partnering. Boston: Harvard Business School Press. 7. Globerman, S. Nielsen, B. B. 2005. Trust and the Governance of International Strategic Alliances, Feb, Available from: www.cbe.wwu.edu/cib/1recentgloberman/ Liability%20of%20Forgive_Ebay%202004.pdf [Accessed 20 Aug 2005] 8. Johnston, S.W. Noftsinger, J.B. 2004. Getting a grip on strategic Alliances. Trusteeship, July/Aug. 15-19 9. Lane, C., and R. Bachmann. 1998. Trust Within and Between Organizations: Conceptual Issues and Empirical Applications. New York: Oxford University Press. 10. Langfield-Smith, K. 2005. Trust, Risk and Control in Strategic Alliances: A Case Study in the Construction Industry. Australia. February Available from: www.mbs.ac.uk/research/subject-areas/ accounting-finance/documents/KimLangfieldSmith_000.pdf [Accessed 20 Aug 2005] 11. Lewis, J.D. 1999 Trusted Partners.: How companies Build Trust and Win Together New York , NY : The Free Press. 12. Lewicki, R. J., McAllister, D.J., Bies R.J. 1998 Trust and distrust: New relationships and realities. Academy of Management Review 23, 438-458. 13. Rickett, D. 2000 Building Strategic Relationships: A Practical Guide to Partnering with Non-Western Missions. Pleasant Hill , CA : Klein Graphics 14. Sheppard, B. H., Tuchinsky, M. 1996 Micro-OB and the network organization In Trust in organizations: Frontiers of theory and research. Roderick M. Kramer and Tom R. Tyler (eds.), 140-165. Thousand Oaks, CA: Sage. 15. Todeva, E., Knoke, D. 2001. Starategic Allience and Corporate Social Capital. May. Available from: www.soc.umn.edu/knoke/pages/Todeva&Knoke.pdf [Accessed 20 Aug 2005] 16. Zaheer, A. 1998. "Does Trust Matter Exploring the Effects of Interorganizational and Interpersonal Trust on Performance." Organization Science 9 (2), 141-59. Read More