1. The role of incentives and communication in strategic alliances: An experimental investigation Rajshree Agarwal, Rachel Croson, and Joseph T. Mahoney Strategic Management Journal (2010) Presented by: Danielle Jones 1

2. Authors 2 Rudolph P. Lamone Chair and Professor in Entrepreneurship University of Maryland Dean, College of Business University of Texas - Arlington Caterpillar Chair and Professor of Business Administration (Strategy & Entrepreneurship) University of Illinois at Urbana-Champaign

3. Strategic Alliance “…an interorganizational form where multiple exchange partners agree to invest resources, share knowledge, and engage in economic value-creating activities that build on synergies between the resources and capabilities that each of the exchange partner firms bring to the alliance” (pg. 414). 3

4. Motivation/Research Problem Half of all strategic alliances fail Large gap between potential and realized economic value creation Strategic alliances have an inherent tension between cooperation and competition –Partners invest resources and build synergies through cooperation, but there is also the potential for “free-riding” –Potential property rights (competing for largest share of economic benefits) and opportunism (using holdup to pursue own interests) issues 4

5. Mechanisms for Strategic Alliance Success Economics/Property Rights Theory (Khanna et al., 1998) : Structural Solutions Use game theory to propose that aligning partners’ economic incentives will lead to a successful strategic alliance Assume perfect rationality Social Psychology/Organizational Theory (Zeng & Chen, 2003) : Motivational Solutions Increased communication amongst partners may increase cooperation and decrease competition Assume bounded rationality 5

6. Research Questions & Methodology Research Questions: How important are incentive alignment and communication to achieving success in cooperative alliances? What conditions may impact their efficacy in achieving success? Are there synergies between the two underlying mechanisms, or do these mechanisms substitute for each other? Research Design: Model a multiparty strategic alliance as an assurance game Test the model in a laboratory experiment setting 6

7. Assurance Game 7 Payoff dominant strategy and risk dominant strategy Optimal decision for each partner is dependent on their alliance partner's decisions Successful strategic alliances rely on partners choosing the payoff dominant strategy rather than the risk dominant strategy

8. Hypothesis 1: Economic Incentives 8

9. Hypothesis 2: Economic Incentives 9

10. Hypothesis 3: Moderating effect of Communication 10

11. Experimental Design Treatments (interacting economic incentives and communication): (1) Low common benefit; (2) High common benefit; (3) Mixed common benefit; (4) High common benefit with communication; (5) Mixed common benefit with communication Procedures: 405 participants (executive MBA, MBA, and senior-level undergraduate students) Participants randomly assigned to a treatment and their role in regards to decision making within the strategic alliance Participants made decisions and communicated using a computer-based application Implementation: Differences in the ratio of common to private benefit treatments were represented by differences in bonus structure across the alliance simulations Participants communicated through a free-form chat box 11

12. Logit & Multivariate Regression Specifications 12

13. Discussion Main conclusions : Aligning economic incentives is necessary for strategic alliance success, but it is not sufficient – there is a need to reduce bounded rationality and coordination problems due to heterogeneity through communication Communication approximately doubles the rate of strategic alliance success Contributions: Integrates economic property rights, social psychology, and organization theory perspectives in the context of strategic alliance success Utilizes a laboratory experiment to isolate the underlying causal mechanisms Limitations: Use of controlled laboratory setting Use of students as participants 13