New publication in the Strategic Management Journal
In a new study published in the renowned Strategic Management Journal (VHB Rating A+), researchers from TU Dortmund University, the University of Groningen, the University of Passau and Seoul National University investigated the circumstances under which companies in strategic alliances intentionally conclude incomplete contracts.
In business, the rule is usually to conclude contracts that are as complete as possible and cover all possible eventualities. Such contracts are complex and expensive, but offer security in the event of a dispute. Companies that conclude incomplete contracts risk surprising court rulings, such as the US company SIGA Technologies, which had to file for bankruptcy in 2015 after losing a court case against its former alliance partner PharmAthene.
The authors of the study suspected that companies are more inclined to leave an alliance agreement intentionally incomplete if they believe that both partners have similar cognitive structures. "This basically means that they see the world through similar eyes," explains Professor Lorenz Graf-Vlachy from TU Dortmund University, one of the authors. In such cases, companies often unconsciously trust that they will be able to reach a constructive agreement in the event of conflict.
The similarity of the cognitive structures of the alliance partners was measured by comparing the companies' mission statements. The deliberate incompleteness of contracts was determined by the frequency of so-called "good faith" provisions - clauses that are particularly open to interpretation and can be interpreted very differently in court.
Analyses of 1,225 alliances in the biotech and pharmaceutical industries confirmed the authors' assumption: there is a positive correlation between the cognitive similarity of the alliance partners and the incompleteness of their contracts. This effect is particularly strong when it comes to a technology with a high degree of uncertainty (because it is then always more difficult to specify complete contracts), and weaker when the alliance partners have a lot of experience with alliances (because they therefore generally have to be guided less by "soft" factors when drafting contracts, for example because they already have many model contracts at their disposal).
"Companies that 'tick' in a similar way actually systematically conclude different contracts with each other than companies with different world views," summarizes Graf-Vlachy. "This also shows that mission statements are more than just empty words. Their content actually influences how companies approach strategic alliances, i.e. how they make far-reaching decisions."
Graf-Vlachy adds: "The study improves our understanding of when and why companies intentionally take certain legal risks." The findings raise awareness of the fact that characteristics of companies can - possibly completely unconsciously - have a decisive influence on contract negotiations.
Hanisch, M., Graf-Vlachy, L., Häussler, C., König, A., & Cho, T. Kindred Spirits: The Influence of Organizational Cognitive Frame Similarity on Contingency Planning in Strategic Alliances, Strategic Management Journal, online first.
The full text of the study can be found here.