Alliance-Based New Product Development Success: The Role of Formalization in Exploration and Exploitation Contexts

Abstract

Purpose: Although alliances offer tremendous strategic potential, firms still struggle to successfully manage new product development alliances (NPD alliances). A prominent explanation for this is the institutional economics' view (see Williamson 1985) that, in general, a key disadvantage of alliances versus vertical integration is that administrative control mechanisms are weaker. Here, a key control mechanism is formalization (the use of explicit rules to govern business activities). However, regarding formalization's influence on both NPD and alliance performance, conceptual views and empirical findings are mixed, which suggest that unexamined variables moderate formalization's influence on NPD performance. Therefore, it is surprising that there is no research on whether formalization's influence differs in alliances pursuing an NPD exploration strategy versus an NPD exploitation strategy because both (1) require varying levels of freedom of action and adherence to procedural rules to achieve success, and (2) are extensively employed in NPD. Further, there is also surprisingly little intrafirm NPD and non-NPD alliance research on formalization in exploration and exploitation contexts because here as well formalization's influence on performance (1) is central, and (2) differs based on the project's innovative and learning intent. The purpose of this research is to begin to close important literature and industry practice knowledge gaps about formalization's influence on NPD alliance performance in exploitation versus exploration strategic contexts. Originality, value, and contribution: This research is the first examination ever of two key NPD strategies—exploration and exploitation—in an NPD alliance context. The research sheds light on conflicting views about formalization's NPD performance-enhancing and inhibiting aspects, and offers implications for industry best practices. Methodology/approach: Empirical examination of survey data from 151 NPD alliances via hierarchical regression and tests of group moderation. Findings: Results shed light on when and why formalization moderates the influence of key fundamental alliance success mechanisms on NPD alliance performance based on strategic context.