The relational view: Mechanisms that preserve relational rents

An explanation of how firms generate relational rents necessarily requires an explanation of why competing firms do not simply imitate the partnering behavior, thereby eliminating any competitive advantages that might be gained through collaboration. There are a variety of isolating mechanisms that preserve the rents generated by alliance partners. First, it is important to recognize that some of the mecha- nisms already described in the literature on the sustainability of rents within the RBV of the firm apply at the dyadic level. These include causal ambiguity and time compression diseconomies (see Barney, 1991; Dierickx & Cool, 1989; Lipp- man & Rumelt, 1982; Reed & DeFillippi, 1990). For example, the development of goodwill trust is subject to considerable causal ambiguity because it is a highly complex and situation- specific process (Butler, 1991; Larzelere & Huston, 1980). Moreover, the development of trust or partner- specific absorptive capacity is subject to time compression diseconomies because it cannot be developed quickly, nor can it be bought or sold in the marketplace (Arrow, 1974; Sako, 1991).

However, in addition to these mechanisms, relational rents may be preserved through in teror- ganizational asset interconnectedness; partner scarcity (rareness); resource indivisibility (coevolution of capabilities); or a socially complex, and therefore difficult to imitate, institutional environment (e.g., country specific). We do not discuss causal ambiguity and time compression diseconomies, since these rent-preservation mechanisms have been discussed in detail else- where.

1. Interorganizational Asset Interconnectedness

Our concept of relational advantage takes the idea of asset interconnectedness across organi- zational boundaries. We submit that interorgan- izational asset interconnectedness will occur in cumulative increments on an existing stock of assets held by a firm or its alliance partner. To illustrate, a Nissan seat supplier built its plant on the property adjacent to a Nissan assembly plant. The supplier was willing to make this site-specific investment because Nissan had a minority equity position in the supplier and because the two parties had developed a high level of trust. Once this site-specific investment was made, the two parties discovered that rather than transport the seats by truck (a general-purpose asset), it would be more economical to build a conveyor belt (a highly specialized asset). Consequently, they jointly invested in building the conveyor belt.

This example demonstrates how initial relation- specific investments (i.e., a site-specific plant) create conditions that make subsequent specialized investments (i.e., customized equip- ment) economically viable. Thus, there is a cu- mulative (snowball) effect that is due to the in- terconnectedness of current relation-specific investments with previous relation-specific in- vestments. In contrast, GM’s suppliers have not made the initial site-specific investment; there- fore, it is not economically feasible for them to make other subsequent specialized investments. The key strategic implication of this isolating mechanism is that alliance partners may need to make “bundles” of related relation- specific investments in order to realize the full potential of those investments in an alliance relationship.

2. Partner Scarcity

The creation of relational rents is often con- tingent on a firm’s ability to find a partner with (1) complementary strategic resources and (2) a relational capability (i.e., a firm’s willingness and ability to partner). In some cases a latecomer to the partner scene may find that all potential partners with the necessary complementary strategic resources have already entered into alliances with other This is a particular problem for late movers into foreign markets, where there may be few local firms with the local market knowledge, contacts, and distribution network needed to facilitate market entry. In other instances potential partners may simply lack the relational capability or the relation-building skills and process skills necessary to employ effective governance mechanisms, make relation- specific investments, or develop knowledge- sharing routines (Eisenhardt & Schoonhoven, 1996; Larson, 1992). Firms with collaboration experience have been found to be more desirable as partners and more likely to generate value through partnerships (Gulati, 1995a; Mitchell & Singh, 1996).

To illustrate the importance of relational ca- pability, Koichiro Noguchi, Toyota’s International Purchasing Chief, told the first author that one of the difficulties Toyota faced in entering the U.S. market was finding U.S. suppliers who were willing to work in partnership fashion. Stated Noguchi:

Many U.S. suppliers do not understand our way of doing business. They do not want us to visit their plants and they are unwilling to share the infor- mation we require. This makes it very difficult for us to work with them effectively; we also can’t help them to improve (author interview, July 22, 1992).

Thus, even though Toyota had developed a re- lational capability and was effective at partnering, it found that it was unable to effectively generate relational rents with U.S. suppliers who had not developed a relational capability. Thus, relational rents may be difficult to imitate because potential alliance partners with the necessary complementary resources and relational capability are rare. The key strategic implication of this isolating mechanism is that there are strong first mover advantages for those firms that develop a capability of quickly identifying and allying with partners possessing complementary strategic resources and/or a relational capability.

3. Resource Indivisibility

Partners may combine resources or jointly de- velop capabilities in such a way that the resulting resources are both idiosyncratic and indivisible. The VISA organization is an example of alliance partners (23,000 banks) jointly creating indivisible assets that help generate returns for the alliance partners. In particular, the VISA brand name and distribution network are idiosyncratic and indivisible assets that are collectively owned by the participating banks in a large multifirm alliance. Individual banks can only access the brand name and distribution network through the alliance.

In other settings, such as with Fuji and Xerox, alliance partners combine resources and capa- bilities, which then coevolve over time. Under these conditions the mutual coevolution of ca- pabilities of the partner firms can serve as a preserver of rents from the partnership. As the partners engage in a long-term relationship, they develop dedicated linkages that enhance the benefits from engaging in the joint relationship. Over time, these coevolved capabilities are increasingly difficult to imitate, owing to path dependence and resource indivisibility.

A key strategic implication is that the partners’ resources and capabilities may coevolve and change over time, thereby restricting each firm’s ability to control and redeploy the resources. Although value may be generated through the partnership, there is the potential for a loss of flexibility, which should be considered at the outset.

4. Institutional Environment

An institutional environment that encourages or fosters trust among trading partners (i.e., has effective institutional ”rules” or social controls for enforcing agreements) may facilitate the creation of relational rents (North, 1990). Indeed, at a broader level, arguments regarding relational advantage can be extended to consider the issue of national or country advantage (Casson, 1991; Fukuyama, 1995; Hill, 1995). For example, numerous scholars suggest that Japanese trans-actors incur lower transaction costs than U.S. transactors, thereby generating relational rents (Dore, 1983; Dyer, 1996b; Hill, 1995; Sako, 1991; Smitka, 1991). Japanese firms appear to have been successful at generating relational rents in part because of a country-specific institutional environment that fosters goodwill trust and co- operation (Dore, 1983; Hill, 1995; Sako, 1991;Smitka, 1991).

Borys and Jemison (1989) refer to these types of environmentally embedded mechanisms that control opportunism as ”extrahybrid institutions.” Collaborating firms in other countries (e.g., the United States and Russia) may not be able to replicate the low transaction costs of Japanese alliance partners because of an inability to replicate the socially complex extrahybrid institutions embedded in the Japanese in- stitutional environment. Thus, following North (1990), one can argue that the institutional envi- ronment can either raise or lower the transaction costs that must be borne to achieve a given level of specialization and cooperation. The strategic implication of this isolating mechanism is that firms may need to locate operations in particular institutional environments in order to realize the benefits associated with extrahybrid institutions.

In summary, the relational rents generated by alliance partners are preserved because competing firms

  1. cannot ascertain what generates the returns because of causal ambiguity;
  2. can figure out what generates the returns but cannot quickly replicate the resources because of time compression diseconomies;
  3. cannot imitate practices or investments be- cause of asset stock interconnectedness (they have not made the previous invest- ments that make subsequent investments economically viable) and because the costs associated with making the previous in- vestments are prohibitive;
  1. cannot find a partner with the requisite complementary strategic resources or rela- tional capability;
  2. cannot access the capabilities of a potential partner because these capabilities are indi- visible, perhaps having coevolved with an- other firm; and
  3. cannot replicate a distinctive, socially com- plex institutional environment that has the necessary formal rules (legal controls) or informal rules (social controls) controlling opportunism/encourage cooperative behav-ior.

Source: Dyer Jeffrey H., Singh Harbir (1998), “The Relational View: Cooperative Strategy and Sources of Interorganizational Competitive Advantage”, The Academy of Management Review, Vol. 23, No. 4 (Oct.,1998), pp. 660-679.

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