When Does Trust Matter to Alliance Performance?

“In strategic alliances, trust can be a double-edged sword,” says SFU Business assistant professor Rekha Krishnan. “It can have both performance-enhancing potential and performance-hampering potential.”

In a recent study of 126 alliances between Indian firms and their foreign partners, Krishnan and colleagues from Tilburg University in the Netherlands examined two types of uncertainty that firms often face in a strategic alliance: behavioural uncertainty where the firms face difficulty in anticipating and understanding each other’s actions; and environmental uncertainty from changes outside the firms’ control, such as changes in technology trends or changes in industry direction.

Knowing when to trust in these instances can be the key to success, says Krishnan. While trust-building is costly, she notes, firms in an alliance need to consciously invest in cultivating this relational asset. “It’s important to invest in trust up front when forming an alliance,” she says, “because the performance-enhancing potential of trust becomes active under behavioural uncertainty.”

But, she says, you can take trust too far. In times of environmental uncertainty, many firms tend to feel they should rely on each others’ capabilities, resulting in a situation where a firm accepts information from a partner without verifying its veracity and completeness. Instead, she says, each firm should perform its own due diligence since the uncertainty is related to external, rather than internal, changes. In fact, she says, trusting alliance partners may even experience strategic blindness—outright insensitivity to environmental changes.

“Firms become complacent when they trust too much,” she says. “They develop inertia because they don’t want to upset the relationship.”

Krishnan’s research, When Does Trust Matter to Alliance Performance? appeared in the October 2006 issue of the Academy of Management Journal.

For more information about Dr. Krishnan’s research, please follow this link.