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Despite the large literature on alliance contract design, we know little about how transacting parties change and amend their underlying contracts during the execution of strategic alliances. Drawing on existing research in the alliance contracting literature, we develop the empirical question of how contract detail and prior ties influence the amount, direction, and type of change in such agreements during the collaboration. We generated a sample of 115 joint ventures (JVs) by distributing a survey to JV board members or top managers and found that the amount of contract change is negatively associated with the level of detail in the initial contract but is positively associated with the number of prior ties between alliance partners. In relation to the direction of contract change, we find that the level of detail of the initial agreements negatively correlates with the likelihood of removing or weakening existing provisions and that prior collaborative experience positively correlates with the likelihood of strengthening of existing provisions or adding of new ones. We also find that prior ties affect the type of change in that JV parents prefer to change enforcement provisions more so than the coordination provisions in the contract. Our paper generates new insights on the complementarities between relational governance and transaction cost economics perspectives on alliance contracting.

Firms constantly seek to update their resources and capabilities to effectively compete with a variety of competitors. The process by which firms seek to develop new capabilities requires bridging the gap between the resources and capabilities that firms currently possess and those that firms need in order to compete in the future. Bridging a capability gap begins with the process of sensing and seizing a new opportunity. We propose that between sensing and seizing a new opportunity, firms must also undergo a critical process that involves identifying what capabilities they have and what they need; and bridging, which involves acquiring what is needed to fill the identified capability gaps. We discuss common challenges that firms may face as they identify and bridge capability gaps, as well as a strategy for identifying and bridging capability gaps as firms sense and seize new opportunities.

How a firm is perceived has implications for strategy formulation, strategy implementation, and firm outcomes. However, strategic management researchers have traditionally devoted less attention to theories that address these perceptual implications. This special topic forum (STF) includes six articles that use a sociocognitive lens to help expand our theoretical understanding of strategy and strategic management. A sociocognitive perspective encompasses how observers perceive, interpret, and make sense of an organization's strategic processes, actions, and related outcomes. The goal of this STF is therefore to advance theory in an integral domain of management scholarship while also augmenting well-known frameworks for teaching and practice. Specifically, the articles not only reflect the work that has taken place over the past three decades but also generate important theoretical and practical advances. We introduce each article, explain the key strategic questions it addresses, and offer suggestions for future research.

Regional differences among industry clusters have long been a puzzle, especially when performance differences are significant. This chapter examines the case of venture capital investing, in which Silicon Valley differs from the rest of the world despite attempts to imitate its model. The point of entry in this chapter is the contract between venture capitalist and entrepreneur. Although such contracts have been analyzed in other research, this chapter argues that the psychological effects of different contract styles are of primary importance to innovative outcomes of entrepreneurial ventures. Thus, it argues that regulatory focus theory, which considers the psychological effects of contracting, is essential to understanding differences in practice and outcomes in venture capital clusters.

The advantages of interorganizational relationships have received ample attention, but prior research has paid much less attention to the challenges in managing these relationships and how managers...

Research summary: We examine the relationship between the geographic concentration of a firm's sales and the firm's vulnerability to expropriation hazards. Although expanding outside the home location can initially increase a firm's exposure to government expropriation, we find that this effect reverses when a firm's sales outside its home location have reached a point at which it has sufficient resources to better influence government actions and to pose a credible threat to exit the market in which it is being targeted. We supplement this main result by identifying two moderating factors: the firm's level of political capital and the effectiveness of institutional constraints on government behavior. We find support for these hypotheses from survey data on privately owned enterprises in China. Managerial summary: This research advises firm managers that certain market activities might knock their firms' economic interests out of alignment with the government's political interests, and thus, influence the political hazards they face, particularly in emerging markets such as China, which has attracted strong interest of many firms with respect to entering the market. Here, all else being equal, the firms' geographic concentration exposes them to different levels of state expropriation—but not in a simple linear fashion as suggested by the conventional wisdom of local protectionism or that of the bargaining advantage generated by the threat of relocation: Those who are “stuck in the middle” ended up paying twice or even three times as much unauthorized levies as the purely local or the most expansive firms. Copyright © 2015 John Wiley & Sons, Ltd.

We augment transaction cost economics with a cognitive perspective to expand the conceptualization of uncertainty, an important but underexplored concept, to include interpretive uncertainty, which arises from conflicting cognitive frames. Interpretive uncertainty generates different views of the exchange and can lead to unexpected conflict, additional transaction costs, and potential early termination of the transaction. In contrast to traditional transaction cost economics hazards, which are derived from transaction characteristics, interpretive uncertainty is driven by relational characteristics (the attributes of the parties in relation to each other). Additionally, interpretive uncertainty is mitigated by aligning the frames of the exchange partners rather than by traditional safeguards, such as penalty clauses. As a result, effective governance must support the development of a common dominant frame that facilitates the completion of the transaction. In this article we develop propositions exploring...

How firms govern their economic activities, including external transactions and internal allocation of resources, is key to firm performance and lies at the very foundation of market exchanges. The...

Transaction cost economics assumes that firms choose between using various types of contracts in markets or hierarchy to govern a transaction. Yet, there is growing evidence that firms rely on form...

Contract violations are ubiquitous. There has been little attention, however, dedicated to understanding the mechanisms involved in making sense of and addressing such occurrences. Two experimental studies investigated how people interpret contract violations and how these interpretations affect trust and the management of relationships. By drawing on the distinction between violations of the letter versus spirit of the law, we show that letter violations are more difficult to overcome than spirit violations, due to higher perceived intentionality. These effects generalized across different populations, levels of contracting experience, types of contracting contexts, levels of ambiguity within the contract, and degrees of contract complexity. The results yield important implications for understanding contract violations, trust, and organizational responses as a relationship management capability.

Taking a temporal view of learning in partnerships, we argue that learning to contract from prior relationships can be manifested not only in an increase in the level of contractual detail but also in a decrease in negotiation time for a given level of contractual detail. We analyse the influence that the length of prior relationships and the detail of termination provisions have on negotiation time, or the time period that it takes for partners to reach a mutually acceptable agreement. We find that: (1) the length of prior relationships has a curvilinear, U-shaped effect on negotiation time, suggesting the possibility of diverse learning mechanisms as the relationship unfolds; (2) the impact of the detail of termination provisions on negotiation time varies across different types of termination provisions; and (3) it takes a shorter time to negotiate certain types of termination provisions when partners have longer prior relationships. Beyond suggesting the need to investigate the consequences of contractual provisions for collaborators, our study proposes negotiation time as an additional indicator of a learning-to-contract effect that complements existing ones.

In this article the authors discuss the integration of theories in " Academy of Management Journal" articles. They note the importance that theories play in management research, adding that as management scholars themselves, they engage in research to better understand the different aspects of management. They argue that a single theory is not sufficient for answering management research questions and discuss four approaches for integrating theory including the incorporation of two theoretical perspectives to address a single phenomena, the incorporation of one phenomenon with two seemingly disparate theoretical perspectives, and the application of one theory to the domain of another theory.

We examine how a firm’s market-oriented capabilities (in areas such as R&D or marketing) and consumer focus (business-to-business or business-to-consumer) foster its effectiveness in pursuing corporate political activities. We then explore the sustainability of any advantage that firms may gain from their political activities. We develop a conceptual framework to propose that a firm’s political capabilities to implement different political tactics, such as information provision and constituency building, are a product of how related these tactics are to different market-oriented capabilities and to the skills needed to serve different types of customers. Finally, we propose that the integration of market strategies and political strategies provides new insight into the sustainability of the advantages that a firm might gain through political activities.

We augment transaction cost economics with social cognitive psychology to show that contract framing is an important element in minimizing issues in focal exchanges and managing buyer-supplier rela...

How a contract influences the exchange and ongoing relationship between parties is an unresolved issue. While some suggest contracts negatively or positively influence the exchange and relationship, we argue that the contract frame determines its impact. Using regulatory focus and expectancy violation theories, we argue that promotion- and prevention-framed contracts induce different emotions, behaviors, and expectations, leading to different exchange outcomes and relationships, depending on the context. By considering contract framing, we provide new research opportunities in areas that use contracts to achieve desired outcomes.

The purpose of this panel symposium is to explore the implications of machine learning and algorithmic organization on management theory. We have gathered together a diverse collection of scholars ...

While strategic alliances have received a great deal of attention from academic researchers and practitioners, we still know relatively little about the contracts that govern these alliance relationships and their difference from more complex buyer–supplier contracts. Through an exploration of 15 alliance contracts to develop jet engines between a major aerospace manufacturer and eleven different alliance partners, we seek to understand the structure and purpose of these alliance contracts and their differences from standard buyer–supplier contracts. The alliance contracts we study are designed to share risk, facilitate learning and the exchange of knowledge, specify roles and responsibilities, and provide administrative mechanisms for adapting and resolving disputes. What emerges from this study is a better understanding of how alliances differ from other types of interfirm relationships and how these differences are reflected in the alliance contract.

This paper examines whether the prior relationship between two firms produces an inertial drag that influences contracts used for subsequent exchanges. Using data from the information technology services industry, we examine whether inertia develops during the relationship between firms in how they plan for contingencies. While attributes of the current exchange do play a role, we find that the prior relationship between the firms has a constricting effect on future contracts. Prior relationships can create what we call interorganizational inertia, which leads firms to use the same level of contingency planning in current exchanges that they used in prior contracts. Copyright © 2008 John Wiley & Sons, Ltd.

Our aim is to unpack contract design capabilities for detailed commercial contracts, to draw out implications for the locus of such capabilities within the firm, and to examine implications for exploiting those capabilities as a potential source of competitive advantage. We argue that developing contract design capabilities involves learning how much and what kinds of detail to include in a contract. We further argue that knowledge about the management of these trade-offs resides differentially in managers, engineers, and lawyers regarding different types of contractual provisions.

We address independent and joint effects of contractual hazards and technological capabilities on governance, arguing that strong technological capabilities improve a firm's ability to govern trans...

Investigating spillovers (potential costs and benefits to a firm that extend beyond an individual transaction), I integrate transaction cost theory and the knowledge-based view of the firm in an effort to better understand the efficient governance of knowledge. Contracts with detailed task descriptions were associated with transactions with the potential to generate new and reusable knowledge. The risk of a firm’s technology spilling over to others and the risk of reputation-impairing spillovers were associated with suppliers using their own employees rather than subcontractors. Thus, results suggest that the creation and protection of knowledge are key factors in understanding governance decisions.

Selecting the type of contract is an important aspect of governing interfirm transactions. The purpose of this article is to examine the use of fixed-fee and time-and-materials (T&M, or cost-plus) contracts and a hybrid contract that consists of a T&M contract with a cap. In addition to uncertainty and measurement factors, we also address a relatively unexplored aspect of contracting--how the prior relationship between the firms influences the type of contract the firms select. Using data on 394 contracts from the information technology (IT) services industry, we show that T&M contracts are preferred when the cost of measuring quality ex post is high and when it is difficult to estimate costs ex ante. We also find site-specific measures of relationship lead to a preference for low-powered T&M contracts. Copyright 2004, Oxford University Press.

This article discusses a study which analyzed a sample of 405 contracts written by a large supplier in the information technology (IT) services industry with the aim of confirming the existence of spillovers and when they occur, examines how transactions involving spillovers are managed. The IT contracts document projects in which the supplier is contracted to perform some type of service involving equipment in the customer's data center or some other aspect of the customer's IT networking infrastructure. Each contract represents a separate project for which the supplier supplied a distinct service for the customer. The study contributes to the literature on strategic management in three ways. First, it goes beyond confirming the existence of spillovers and when they occur, and examines how transactions involving spillovers are managed. While spillover effects have been confirmed from many sources, little attention has been paid to how spillovers influence a firm's governance choices. Second, the study sh...

Recent academic work has investigated the performance implications of chain affiliation of retail and service outlets. We argue that affiliation acts as a substitute or complement of other owner at...

We augment work on Transaction Cost Economics (TCE) and contract violations with a psychological perspective to examine causes and consequences of contract violations in interfirm relationships. We...

Most mainstream strategy research does not define the concept of bounded rationality as Herbert Simon originally intended. Instead, the major theories in strategy research rely on the simplified operationalization of bounded rationality as the inability to know every possible contingency or outcome. However, Simon’s conceptualization of bounded rationality was much more complex, incorporating all potential cognitive deficits that limit rational behavior, including framing effects, heuristics, influence of prior expectations, and emotions. In this paper, we suggest that the field of strategy could greatly benefit by expanding its definition of bounded rationality to incorporate all of the elements originally specified by Simon. With a more complex definition of bounded rationality, strategy researchers can ask new questions in areas that have already been well explored, thus enhancing our understanding of these topics even further. Additionally, firms that understand how certain elements of bounded rationality predictably impact decisions can build a capability based in decision-making that can positively impact firm performance, as well as intra-firm and inter-firm relationships.

The goal of interfirm contract research is to examine how formal contracts impact transaction success, firm relationships, and ultimately individual and collaborative firm performance when two or more firms interact. Most contract literature uses an economic lens to examine contracts: the property rights perspective, agency theory, and TCE. Property rights-based contract research (Coase, 1960; Demsetz, 1967; Alchian & Demsetz, 1973; Cheung, 1969) examines how efficient property rights assignment mitigates ex ante hazards. Similarly, agency theory-based contract research (e.g., Ross, 1973; Jensen & Meckling, 1976; Harris & Raviv, 1979) investigates how incentive alignment between the principal and agent leads to the mitigation of ex ante hazards. In contrast, TCE-based research (Williamson, 1975, 1985) examines contractual safeguards to mitigate both ex ante and ex post hazards (e.g., Joskow, 1985, 1987, 1990; Crocker & Reynolds, 1993). Because the three economic perspectives dominate, most research addresses how contracts are used to mitigate ex ante or ex post hazards. Therefore, many topics still need to be investigated to enhance our understanding of interfirm contracting.

Transaction cost economics (TCE) has received extensive attention from a variety of disciplines, but it holds a particularly central place in strategic management. The focal issues examined by TCE, vertical integration and interfirm governance (including contract design), are important determinants of firm performance – the central issue in the field of strategy. While several extensive reviews of empirical work in TCE have been undertaken, one key issue has received relatively little attention – construct validity in TCE empirical research. The purpose of this chapter is to highlight some of the challenges of operationalizing key transaction cost predictions and provide some ideas for better measuring core constructs such as asset specificity, uncertainty, and frequency.

In this paper, we combine insights from economics and psychology to understand how managers can use contract framing to shape interfirm relationships. Although the two differentially framed contracts may be economically similar, this framing can have very different psychological effects on how the parties view the relationship. To understand these effects, we draw on Regulatory Focus theory and Expectancy Violation theory to understand how choosing to confirm or violate the expectations set by the contract framing can shape the relationship, leading to the development of a contracting capability.

While much is known about how firms design their contracts, we know less about how they change and amend those contracts during execution of the transaction. This is important since a decision to m...

The purpose of this panel symposium is to show why and how context matters, and to draw attention to the benefits of integrating causal mechanisms and context to explain complex organizational phenomena. Our goal is to initiate a new dialogue among various constituents of the Academy of Management by bringing forward new questions and perspectives that highlight the salience of “contexts”. We believe this panel will generate fresh new debates particularly among Business Policy and Strategy (BPS), International Management (IM), and Organization and Management Theory (OMT) division members; and also will be of interest to members of the Entrepreneurship, Organization Behavior and Research Methods Divisions.

As acquiring and retaining talented human resources becomes increasingly challenging in the search for competitive advantage in many dynamic markets, firms are increasingly engaging in acquisitions...