4. A Real Options-Based Conceptual Framework for Alliance-Making

We propose a conceptual framework for managing the benefits and risks of strategic alliances where they are viewed as embedding synergistic options available to management of the partner firms. Such a framework involves: (1) mapping the staged paths envisioned for the alliance in terms of strategic options exercisable over the lifetime of the cooperative venture; (2) assessing the incremental, synergistic value of those options; (3) anticipating the potential impact of risks on the success/failure of the venture and associated synergistic value erosion; (4) defining the optimal option map for implementing the strategic alliance via potential, successive adjustments to the initial strategy. All aspects of alliance-making (e.g., alliance strategy or management) are addressed through our real options approach. Our framework predicts that: (1) options to defer elements of the alliance strategy are more valuable when the partnership is established in an unknown economic environment where uncertainty is high (e.g., a new geographic market); (2) exercise of expansion options is worthwhile when the alliance produces asymmetrical effects on partners prompting one of them to a different valuation of intangible assets arising from the venture; (3) switching options are more valuable in automotive, consumer electronics or energy industries, where product differentiation is important and/or product demand is volatile; (4) alliances embedding learning options are mainly formed in the defense and aerospace sectors; (5) abandonment options are incorporated in alliances of shared-supply type formed in capital-intensive industries, financial services, or new product introductions (e.g., consumer electronics).