From Make-or-Buy to Coordinating Collaboration: Management Control in Strategic Alliances

Coase (1937) first explained firm boundaries as a solution to minimizing the costs of accessing markets — what Williamson (1975) termed “transaction costs”. Over time, innovations in management control and changes to legal structures have reduced the costs of monitoring, raised the costs of behaving opportunistically and created ways for partners to credibly commit to future actions. At the same time, the development of valuable and inimitable resources by entrepreneurial firms are a basis for collaboration between partners with complementary resource endowments (Penrose, 1959). Together these forces have transformed the dichotomous choice of “make” versus “buy” into a selection among a variety of hybrid modes of organization; for example, strategic alliances, joint ventures and supply chain partnerships. Hybrid structures blend characteristics of arms-length market transactions with modes of governance and control that are more common to large decentralized firms. The thesis of this chapter is that innovation in management controls has been central to the emergence, diversity and stability of hybrid organizational forms.