A behavioral theory of alliance portfolio reconfiguration: Evidence from pharmaceutical biotechnology

• Date: 01 October 2019
• DOI: http://doi.org/10.1002/smj.3041
• Author: Hans T. W. Frankort,Korcan Kavusan
• Published date: 01 October 2019

RESEARCH ARTICLE

A behavioral theory of alliance portfolio

reconfiguration: Evidence from pharmaceutical

biotechnology

Korcan Kavusan

1

| Hans T. W. Frankort

2

1

Department of Strategy and

Entrepreneurship, Rotterdam School of

Management, Erasmus University

Rotterdam, Rotterdam, The Netherlands

2

Cass Business School, City, University of

London, London, UK

Correspondence

Korcan Kavusan, Department of Strategy

and Entrepreneurship, Rotterdam School of

Management, Erasmus University

Rotterdam, Burg. Oudlaan 50, Room

T07-22, 3062 PA Rotterdam, The

Netherlands.

Email: kavusan@rsm.nl

Abstract

Research Summary:Extant research suggests that firms

rationally evaluate external and/or internal contingencies

when deciding how to reconfigure their alliance portfolios.

We advance a behavioral perspective which assumes that

managers are boundedly rational and thus rely on behav-

ioral heuristics when making alliance portfolio

reconfiguration decisions. In panel data on U.S.-listed bio-

technology firms, we find that below-aspiration perfor-

mance motivates a firm to form alliances with novel

partners within the resource scope of its existing alliance

portfolio. This effect is weakened by equity ties with exis-

ting partners and strengthened by firm-specific uncer-

tainty. Conversely, above-aspiration performance leads to

new alliances with existing partners but outside the

resource scope of the firm's existing alliance portfolio.

Finally, as organizational slack increases, a firm forms

alliances with novel partners focusing on new-to-the-

portfolio resources.

Managerial Summary:We study why and how firms

change the configuration of their alliance portfolios over

time. We find that actual performance relative to perfor-

mance objectives, and firms' excess resources, are important

drivers of such change. The more firms fail to meet their

performance objectives, the more likely they are to form

alliances with novel partners focusing on areas in which

Received: 10 October 2017 Revised: 7 February 2019 Accepted: 11 April 2019 Published on: 29 May 2019

DOI: 10.1002/smj.3041

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits use and

distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations

are made.

© 2019 The Authors. Strategic Management Journal published by John Wiley & Sons, Ltd.

1668 Strat Mgmt J. 2019;40:1668–1702.wileyonlinelibrary.com/journal/smj

they already have one or more alliances with other partners.

The more firms exceed their performance objectives, the

greater their inclination to form alliances with their existing

partners in areas in which they do not yet have alliances.

The greater the stock of excess resources, the greater firms'

propensities to form alliances with novel partners focusing

on areas in which they do not yet have alliances.

KEYWORDS

alliance portfolios, innovation performance, organizational slack,

performance aspirations, pharmaceutical biotechnology

1|INTRODUCTION

The portfolio perspective on interfirm alliances suggests that the benefits firms derive from their alli-

ance portfolios can exceed the sum of the benefits obtained from each individual alliance (Hoehn-

Weiss, Karim, & Lee, 2017; Wassmer, 2010). Building on this insight, numerous studies have sought

to identify alliance portfolio configurations that enhance firm performance (e.g., Bos, Faems, &

Noseleit, 2017; Hoehn-Weiss et al., 2017; Jiang, Tao, & Santoro, 2010; Lavie, 2007; Ozcan &

Eisenhardt, 2009; Wassmer & Dussauge, 2012; Wassmer, Li, & Madhok, 2017) and related out-

comes such as liquidity events (Hoehn-Weiss & Karim, 2014), knowledge acquisition (Frankort,

Hagedoorn, & Letterie, 2012), and product innovation (Wuyts & Dutta, 2014). While these studies

contribute to understanding the consequences of portfolio configurations, little research has examined

why firms decide to change the configuration of, or “reconfigure,”their alliance portfolios over time,

and how they implement such decisions.

Besides conceptual suggestions (e.g., Kim, Oh, & Swaminathan, 2006; Koka, Madhavan, & Pres-

cott, 2006), empirical studies show that alliance portfolio reconfiguration may be driven by firm-

specific uncertainty (Beckman, Haunschild, & Phillips, 2004), gradual shifts in a firm's strategy in

response to external technological changes (Lavie & Singh, 2012), combinations of strategic uncer-

tainty and firm competencies (Hoffmann, 2007), and external contingencies such as technological

discontinuities (Asgari, Singh, & Mitchell, 2017) or market competition and uncertainty (Beckman

et al., 2004; Ozcan, 2018). While providing valuable insights into the antecedents of alliance portfo-

lio reconfigurations, these studies conceptualize managers as value-maximizing decision makers who

make portfolio reconfiguration decisions based on a rational evaluation of external and/or internal

contingencies. Yet, managers are more accurately viewed as boundedly rational (Simon, 1955) and

so they may rely on behavioral heuristics when making decisions regarding alliance portfolio

reconfiguration. Despite broader evidence that behavioral drivers such as performance feedback and

a stock of slack resources (Cyert & March, 1963) influence firms' collaborative activities (Baum,

Rowley, Shipilov, & Chuang, 2005; Ener & Hoang, 2016; Lungeanu, Stern, & Zajac, 2016;

Makarevich, 2018; Tyler & Caner, 2016), we know little about how such factors may affect firms'

alliance portfolio reconfigurations.

In this study, we develop a comprehensive model of alliance portfolio reconfiguration based on

the behavioral theory of the firm (Cyert & March, 1963), a theory of decision making rooted in the

KAVUSAN AND FRANKORT 1669

notion that managers are boundedly rational. Our central line of argument consists of four parts:

(a) Performance feedback and slack resources influence firms' preferences regarding value creation

and appropriation from their alliance portfolios (Lavie, 2007); (b) portfolio-level value creation and

appropriation derive from synergies and conflicts in the alliance portfolio (Hoehn-Weiss et al.,

2017); (c) these synergies and conflicts are determined by portfolios' partner and resource character-

istics (Gulati, Lavie, & Madhavan, 2011); and thus (d) firms accommodate their evolving value

creation and appropriation preferences by reconfiguring their portfolios through simultaneous

partner-choice and resource-focus decisions in newly formed alliances.

We propose that below-aspiration performance will motivate a firm to seek greater value appro-

priation from its alliance portfolio to address performance problems (Cyert & March, 1963). To this

end, the firm will reconfigure its portfolio by forming alliances with novel partners, yet focusing on

resources already accessible through its alliance portfolio, which may induce competition between

new and existing partners, increasing the firm's bargaining power (Lavie, 2007). In contrast, above-

aspiration performance and slack resources motivate a firm to seek greater value creation from its

alliance portfolio (Chen & Miller, 2007). Therefore, the firm will reconfigure the portfolio by for-

ming alliances focusing on new resources, thus expanding the scope for synergistic resource combi-

nations (Gulati et al., 2011; Wassmer & Dussauge, 2012). While above-aspiration performance

motivates firms to form such alliances with existing partners due to the implied satisfaction with

these partners (Levinthal & March, 1993), slack motivates and enables simultaneous experimentation

with new resources and novel partners (Greve, 2003a). We also uncover some boundary conditions

by examining how firms' equity ties to existing partners and firm-specific uncertainty alter the role of

performance feedback and slack resources in motivating specific types of alliance portfolio

reconfiguration. Empirical analyses of U.S.-listed biotechnology firms from 1981 to 2000 generally

support our predictions.

Our first and primary contribution lies in developing and testing a behavioral theory of alliance

portfolio reconfiguration. By conceptualizing managers as boundedly rational decision makers, we

show evidence that they are guided by behavioral heuristics, thus providing novel insights into the

antecedents of observed alliance portfolio configurations. Second, while the behavioral theory has

long argued that firms may respond differently to below-aspiration performance, above-aspiration

performance, or organizational slack, empirical evidence of such differences is sparse (Posen, Keil,

Kim, & Meissner, 2018). By uncovering how the nature of firms' responses to these distinct behav-

ioral drivers differs, we extend the behavioral literature with more fine-grained and discerning evi-

dence of behaviorally motivated organizational decisions. Finally, behavioral research has

traditionally focused on the relationships between behavioral drivers and organizational decisions,

with limited attention to the boundary conditions of such relationships (Greve & Gaba, 2017; Shin-

kle, 2012). In the context of alliance portfolio reconfiguration, we extend this nascent understanding

of boundary conditions by elucidating how a firm's equity ties and firm-specific uncertainty interact

with behavioral mechanisms.

2|THEORETICAL BACKGROUND

The core premise of the portfolio perspective on alliances is that, in addition to value obtained from

individual alliances, firms can also derive value from their alliance portfolios by combining resources

accessed through multiple simultaneous alliances (Hoehn-Weiss et al., 2017; Lavie, 2007;

Wassmer & Dussauge, 2012). A critical determinant of such additional value is the prevalence of

portfolio interdependencies, that is, the synergies and conflicts in the portfolio which result from “the

1670 KAVUSAN AND FRANKORT