The Strength of Churning Ties:

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The Strength of Churning Ties:

A Dynamic Theory of Interorganizational Relationships*



S
ERGIO
G.

L
AZZARINI

John M. Olin School of Business


Washington University

1 Brookings Drive, Campus Box 1133

St. Louis, MO 63130
-
4899

Phone: 314
-
935
-
4538; Fax: 935
-
6359

E
-
Mail:
LAZZARINIS@olin.wustl.edu


T
ODD
R.

Z
ENGER

John M. Olin School of Business


Washington University

1 Brookings Drive, Campus Box 1133

St. Louis, MO 63130
-
4899

Phone: 314
-
935
-
6399; Fax: 935
-
6359

E
-
Mail:
zenger@olin.wust.edu






June 2002





* We thank the insightful comments by Lyda Bigelow, Chih
-
Mao Hsieh, Gary Miller, and
especially Jackson Nickerson, who provided critical suggestions to improve our a
rgument. We
also benefited from comments by anonymous referees of the Business Policy and Strategy
Division of the 2002 Academy of Management Conference. Remaining errors and omissions are
our own.





The Strength of Churning Ties:

A Dynamic Theory of

Interorganizational Relationships


Abstract

In many circumstances, firms seek to combine or balance the cooperation
-
based advantages of
strong ties (partnerships) with the autonomy
-
based advantages of weak ties (arm’s
-
length
exchanges) into a single rela
tionship. However, we contend that such a combination is unstable,
because tie strength is influenced by informal processes

socialization and learning

that are
constantly shifting. Thus, managers cannot directly control the functionality of ties, but the
y can
alter the trajectory of those informal processes through changes in formal mechanisms that
periodically alter tie strength. Managers initiate weak ties and then strengthen them through
formal mechanisms that promote cooperation, such as long
-
term co
ntracts and joint ownership.
Whenever ties become excessively strong and autonomy has been undermined, they are formally
restructured or terminated. This generates ties that are neither permanently weak nor strong, but
churning. We identify conditions t
hat make churning ties an appropriate strategy to manage
interorganizational relations, and also the costs and competencies of alternative formal
mechanisms that managers can employ to reinforce and weaken ties.


Keywords

Interorganizational collaboration,

strategic alliances, networks, cooperative strategy.


1

The close buyer
-
supplier relations of Japan are often viewed as a benchmark in structuring
interfirm alliances. Many argue that such partnerships promote mutual trust, knowledge sharing,
and relations
hip
-
specific assets that enhance performance
(e.g. Asanuma, 1989; Dyer &
Nobeoka, 2000; Holmstrom & Roberts, 1998; Nishiguchi, 1994)
. Such partnerships, however,
are far from a panacea. In 2001, Toyota, long viewed as possessing model ty
pes of supplier
relationships, discovered it was paying significantly higher prices for parts inside its close
network of suppliers than were available outside this network. Predictably, they encouraged
their managers to “seek business ties outside the gr
oup”
(Dawson, 2001: 43)
. Chrysler, which
actively sought to replicate “Japanese
-
style” partnerships in the U.S.
(Dyer, 1996)
, faced a
similar problem in 2001, with supplier relationships “so cozy” that competitors were ex
tracting
better prices for similar parts
(Ball, 2001: A8)
. Moreover, efforts by automakers to push
component purchasing into electronically
-
managed markets suggests movement away from close
ties, toward more arm’s
-
length supply relationsh
ips
(Lucking
-
Reiley & Spulber, 2001)
.

The above events reflect a fundamental tradeoff that managers face in crafting their
interorganizational relations. While a long
-
term exchange promotes cooperation, which is often
referred to in the l
iterature as a “strong” tie, an arm’s
-
length exchange or “ weak” tie is easily
severed and thus enables access to new relationships that may yield cost reduction or innovation.
If we view tie strength as a choice, how then do firms select an appropriate t
ie strength for their
interorganizational relations? Most authors adopt a simple
contingency
argument:

the choice of
tie strength depends on the attributes of the exchange or the industry in which it occurs. Thus,
while exchanges involving relationship
-
specific assets require the support of strong ties, simple
exchanges that do not require specialized assets can be managed through a series of weak ties,
i.e., arm’s
-
length relations with multiple firms
(e.g. Dyer, Cho, & Wujin, 1998; Willi
amson,
1985)
.

However, very often managers seek
both

cooperation and autonomy in crafting a particular
exchange relation. For instance, an exchange involving relationship
-
specific investments within
an industry with high technological uncertainty may be
nefit not only from a strong tie, but also

2

from a series of weak ties
(e.g. Harrigan, 1988a; Rowley, Behrens, & Krackhardt, 2000)
. Weak
ties provide incentives for exchange partners to remain on the cutting edge in terms of cost and
innov
ation and provide the flexibility to easily sever ties when opportunities emerge. Strong
ties, however, foster investments in relationship
-
specific assets, but in the process managers may
socially obligate themselves to partners whose capabilities become

obsolete as potential new
partners with lower costs or better technologies emerge
(Afuah, 2000)
. On the other hand, while
weak ties maintain the managers’ flexibility to pursue new opportunities and acquire new
knowledge, they discourage

relationship
-
specific investments and other forms of cooperation.
In many circumstances, managers seek to both promote cooperation in the form of relationship
-
specific investments and at the same time maintain autonomy to access alternative partners. I
n
other words, managers would like to maintain an intermediate level of tie strength that balances
cooperation and autonomy.

We posit, however, that managers cannot craft interorganizational ties that combine the
autonomy of weak ties with the cooperation

of strong ties in any stable manner. The basic
problem is that
informal
processes influence tie strength and these informal processes are neither
static, nor directly controllable by the managers, except indirectly by the rather blunt instruments
associa
ted with formal changes in the nature of the exchange. Thus, the degree of tie strength
that develops over time has an uncertain component that can lead to greater or lesser tie strength
than originally desired by managers. For instance, an exchange rela
tionship, which begins as an
arm’s
-
length tie, may evolve through repeated interaction into a strong tie. Over time
idiosyncratic routines and social attachments will tend to emerge and eventually constrain
flexibility to access new knowledge and new exch
ange partners. The tie then becomes excessive
in strength, showing high cooperation, but low autonomy. An opposite path of change is also
possible: a firm with a strong tie supporting a particular exchange may initiate a new tie with
another exchange par
tner and in the process unravel its existing strong tie. This existing tie then
becomes weak, showing high autonomy, but low cooperation.


3

We contend that a static theory of tie strength is misguided, because managers have no
capacity to statically ch
oose the informal processes that influence the performance of
interorganizational relations. Rather, building upon Nickerson and Zenger
(forthcoming)
, we
argue that managers can only dynamically approach the desired tie strength by essent
ially
vacillating between formal mechanisms that alter expectations of relationship continuity, thereby
providing incentives to shape the direction by which tie strength increases or decreases. Namely,
managers monitor the evolution of informal processes
that alter tie strength and implement,
ex
post
, formal changes to adjust strength to the desired level. Thus, when repeated interaction in a
strong tie damages autonomy, managers terminate this long
-
term relationship or alter its formal
structure in ways
that reverse the trajectory of tie strengthening. If managers sever the tie, they
simply build new relationships. While initially weak, the newly formed tie is strengthened over
time with the aid of formal governance structures such as long
-
term contract
s and joint
ownership. However, such changes are costly: managers will resist adopting formal changes until
the benefit of adjusting tie strength exceeds the costs of doing so. Since informal processes that
influence tie strength are not directly controll
able, it is likely that at some point in time the
degree of misalignment between desired and actual strength will be sufficiently severe to afford
the cost of changing formal governance. Thus, the achievement of superior interorganizational
performance ma
y require ties that are neither permanently strong nor weak, but
churning
:
managers may need to promote periodic changes in formal mechanisms that constantly alter the
path of informal processes influencing tie strength.

We submit that such patterns of

escalating and weakening ties, considered by some as
dysfunctional
(Dyer, Cho et al., 1998: 73)
, may actually be the only way in which managers can
approach an “ideal” tie when the achievement of superior performance requires both coopera
tion
and autonomy. We identify conditions that make churning ties an appropriate strategy to
manage interorganizational relations, and also the costs and competencies of alternative formal
mechanisms that managers can employ to reinforce and weaken ties.

By providing a dynamic
theory of how firms adjust the governance of ties as a response to changes in interorganizational

4

performance, we contribute to the growing body of research examining the performance
implications of external relationships
(e.g. Dyer & Singh, 1998; Gulati, Nohria, & Zaheer, 2000)
.

The paper is structured as follows. In the next section, we review the literature relating tie
strength to performance, and then discuss in detail the difficulty in managing ties when indus
try
or exchange contingencies demand at the same time cooperation and autonomy. We next present
the logic of churning ties and the formal instruments available to firms to weaken or reinforce
ties. Since our main focus is on dyadic transactions, we then
briefly discuss how a similar logic
applies to multiple transactions in networks. Concluding remarks follow.


TIE STRENGTH AND PER
FORMANCE

Granovetter
(1973: 1361)

originally defined tie strength as a “combination of the amount of
time, t
he emotional intensity, the intimacy (mutual confiding), and the reciprocal services which
characterize the tie.” This collection of complex social elements that characterize close
relationships tends to be associated with patterns of interaction that del
iver a long time horizon
of expected exchange which, as the relationship unfolds, creates a long history of past exchange
(e.g. Gulati, 1995a; Ring & Van de Ven, 1994; Zajac & Olsen, 1993)
. Thus, to facilitate
exposition, we simplify the
original definition of tie strength by considering a variable that
mediates most processes supporting close relationships: the “commitment” of partners, i.e., the
degree to which they expect to continue their relationship despite the existence of alternati
ve
partners
(Blau, 1964; Cook & Emerson, 1978; Kollock, 1994; Seabright, Levinthal, & Fichman,
1992)
. We therefore define tie strength as
the degree of commitment that supports an exchange
relationship for the transfer of goods, services,

or information
.
1

We view tie strength as a
governance device, though we recognize that a strong tie may emerge for reasons other than the
functional support of an exchange. Notice therefore that our unit of analysis is a dyadic



1

This definition also a
llows a direct application of the concept to interorganizational ties, since some elements
present in Granovetter’s
(1973)

original definition, such as emotional intensity and intimacy, are more applicable to
interpersonal relations.


5

exchange that is potentia
lly (although not necessarily) recurring.
2

Based on this definition, we
next discuss the performance consequences of tie strength.

Benefits of Strong Ties

The primary benefit of a strong tie is that it provides the necessary commitment to promote
coope
ration

in an exchange. On the one hand, commitment provides a “shadow of the future” to
discourage opportunism, meaning that the long
-
term payoff from cooperation surpasses the
short
-
term payoff from defection
(Anderson & Weitz, 1992; Axel
rod, 1984; Heide & Miner,
1992; Parkhe, 1993)
. Within this perspective, many authors note that one of the main advantages
of commitment is that it encourages
ex ante

investments in relationship
-
specific assets
(Dyer &
Singh, 1998; Helper,

1991; Hennart, 1988; Madhok & Tallman, 1998; Williamson, 1985)
.
Parties engaged in arm’s
-
length exchanges are less willing to invest in such assets since there is a
risk,
ex post,
that a party will leave the relationship or attempt to renegotiate contra
ctual terms in
such a way that the other party will be disfavored. Relationship
-
specific assets include not only
physical investments but, perhaps more importantly, human
-
specific assets or co
-
specialized
knowledge generated from joint learning
(Bureth, Wolff, & Zanfei, 1997; Foss, 1996;
Holmstrom et al., 1998; Poppo & Zenger, 1998; Williamson, 1985)
.

On the other hand, repeated interaction and familiarity also create a “shadow of the past”
which promotes the emergence of relational
governance based on social attachments, trust, and
norms
(Gulati, 1995a; Larson, 1992; Luhmann, 1979; Macneil, 1980; Ring et al., 1994; Zajac et
al., 1993)
.
3

This further reinforces the cooperation
-
based benefits of strong ties. Thus, st
rong
social attachments reduce conflicts and promote cohesion
(Krackhardt, 1992; Nelson, 1989)
.



2

Thi
s rules out one
-
shot transactions such as when a firm acquires standard machinery
(Williamson, 1985: 72
-
73)
.
In such cases, exchange is occasional and thus the likelihood that parties will be able to meet in the future is
negligible. At
first glance, project collaborations with finite duration may appear to fall into this category.
However, most exchanges of this sort actually involve a
series

of project collaborations. Consider the movie
industry: although the production of a movie has

a finite horizon, parties oftentimes continue their relationship in
subsequent projects
(e.g. Faulkner, 1983)
.

3

To be sure, social attachments are, in their essence, between people rather than firms
(Seabright et al., 199
2)
.
However, informal relationships between firms can arise due to “closely interwoven personal relations”
(Inkpen &
Currall, 1997: 312)

between individuals representing each firm. Outcomes of repeated interaction between these
individu
als are likely to disseminate to other members of the partnering firms and generate collective expectations
and norms
(Zaheer, McEvily, & Perrone, 1998)
.


6

Relational norms such as reciprocity also curb firms’ willingness to defect and thus support
mutual trust
(Berg, Dickhaut, & M
cCabe, 1995; Bradach & Eccles, 1989; Dore, 1983)
.
Empirical research has found, for instance, that personal interaction and norms enhance joint
learning and knowledge sharing between firms
(Dutton & Starbuck, 1979; Dyer et al., 2000;
Kale
, Singh, & Perlmutter, 2000; Liebeskind, Oliver, Zucker, & Brewer, 1996; Rulke, Zaheer, &
Anderson, 2000)
. In addition, since repeated interaction implies increasing amounts of time and
effort devoted to the relationship
(Madhok et al., 1
998)
, psychological commitments towards
particular partners will tend to escalate, thus increasing firms’ willingness to continue their
cooperative exchange
(Ring et al., 1994; Seabright et al., 1992)
.

Benefits of Weak Ties

Weak ties are

advantageous because they provide
autonomy.

Managers can flexibly shift to
access new knowledge and valuable exchange opportunities with alternative firms
(Granovetter,
1973)
. Indeed, the absence of a strong tie is what frees the manag
er to access knowledge, goods,
or services through a wide range of weaker ties. The firm can flexibly exchange with a variety
of firms which possess specialized knowledge and capabilities
(Granovetter, 1982; Schilling &
Steensma, 2001)
.
Interfirm specialization creates diversity of knowledge and competencies in a
network
(Kogut, 2000; Liebeskind et al., 1996; Richardson, 1972)

and enhances opportunities for
innovation through knowledge spillovers among firms
(Feldman & Audretsch, 1999)
. Since
agents connected through weak ties are not committed, they can adjust or sever their existing ties
to benefit from new external opportunities.

Weak ties also circumvent the dysfunctional outcomes unleashed by the esc
alating
commitment of strong ties. Continuous interaction with the same partners restricts firms’
exposure to new ideas and information
(Adler & Kwon, 2002; Greif, 1997; Uzzi, 1996)

and
undermines the diversity of knowledge available in t
he alliance, thus diminishing its value
(Dussauge, Garrette, & Mitchell, 2000; Hamel, 1991; Nakamura, Shaver, & Yeung, 1996)
. The
same mechanisms that promote commitment also restrict firms’ capacity to access new
knowledge. Thus, joint
learning and knowledge sharing that occurs between two firms can lock

7

them into one particular field of knowledge and lock them out of external opportunities
(Cohen
& Levinthal, 1990; Leonard
-
Barton, 1995; Poppo et al., 1998; Young
-
Ybarra &

Wiersema,
1999)
. Routines emerging from repeated interaction tend to create idiosyncratic language and
procedures, which limit firms’ ability to interpret external sources of information and recognize
the importance of those sources
(Kat
z, 1982; Tushman & Katz, 1980; Zenger & Lawrence,
1989)
. Thus, even if strong ties promote knowledge sharing and co
-
specialization
(Dyer et al.,
2000; Kale et al., 2000)
, this becomes a liability if partners are trapped into the “wrong”
knowledge
(Afuah, 2000; Grabher, 1993; Kern, 1998)
.

The strong social attachment that accompanies repeated interaction aggravates the problem
of gaining access to new knowledge. Excessive socialization may undermine partners’ ability to

find discrepant information and innovative solutions
(Gruenfeld, Mannix, Williams, & Neale,
1996; Kern, 1998; Levinthal & March, 1993)
. Additionally, firms connected through strong ties
may be unwilling to pursue better opportunities, if

pursuing these opportunities threatens existing
ties or violates existing social obligations
(Gargiulo & Benassi, 2000; Halpern, 1994; Jeffries &
Reed, 2000)
. Constrained by such obligations, partners will tend to favor the stability of
their
relationship over efficiency
(Dore, 1983; Seabright et al., 1992; Yamagishi, Cook, & Watabe,
1998)
. For instance, Humphrey and Ashforth
(2000: 719)

document that U.S. automakers
expressed “concerns that interpersona
l relationships could lead buyers to award contracts to
suppliers who had higher unit costs, lower quality and slower delivery times.”

Contingency Arguments

The simple recognition that strong ties support cooperation, while weak ties provide
autonomy sug
gests a simple contingency argument in which tie strength is matched to
exchange

conditions. Thus, transaction cost economics posits that relationship
-
specific assets at a
minimum require the support of long
-
term arrangements to reduce the hazards of oppo
rtunistic
behavior. Absent the need for relationship
-
specific assets, the weaker ties of market
-
like
exchanges may provide sufficient governance
(Williamson, 1985)
. Social exchange theorists
(Cook et al., 1978; Kollock, 1
994; Yamagishi et al., 1998)

and organizational economists

8

(Barzel, 1982; Holmstrom & Milgrom, 1994)

highlight additionally the role of measurement
difficulty in the choice of governance. More difficult measurement of exchange performanc
e
requires longer
-
term relations to discourage opportunism. Other scholars view the transfer of
tacit, complex knowledge as an exchange requiring strong social ties and the transfer of codified
knowledge as well suited to weak ties
(Hansen
, 1999; Hennart, 1988; Kogut, 1988; von Hippel,
1994)
.

Still other theories propose a fit between tie strength and
industry
conditions. Drawing from
the concepts of
exploration
, the search for new resources, and
exploitation
, the use of existing
resour
ces
(Koza & Lewin, 1998; Levinthal et al., 1993; March, 1991)
, Rowley et al.
(2000)

propose a fit between tie strength and industry characteristics. They argue that the autonomy
-
based benefits of weak ties are crucial to
enhance a firm’s innovativeness in industries with high
technological uncertainty, which demand exploration
-
oriented tasks, whereas the cooperation
-
enhancing properties of strong ties deliver superior performance in stable industries, which call
for exploi
tation
(see also Harrigan, 1988a; Schilling et al., 2001)
. Some authors also emphasize
the role of market
-
level uncertainty, such as volatile demand, favoring transactions with many
firms to absorb temporary supply or demand shocks
(Eccles, 1981; Jones, Hesterly, & Borgatti,
1997; Kranton & Minehart, 2000)
.

Table 1 summarizes the fit or alignment between exchange/industry conditions and tie
strength, according to the contingency arguments discussed above.

<
Table 1 aroun
d here
>


WHAT IF FIRMS WANT T
O COMBINE THE ADVANT
AGES OF BOTH WEAK AN
D
STRONG TIES?

While these contingency arguments adequately describe the relationship between tie strength
and various exchange or industry conditions, two factors plague managers’ choice

of tie strength.
First, managers commonly face a set of conditions that mandate a conflicting pattern of tie

9

strength. Second, managers cannot directly choose or control informal processes that influence
tie strength. We consider these issues next.

C
onflicting Contingencies

In many settings, managers want the benefits of
both
weak and strong ties. Consider the case
of crafting R&D alliances in uncertain, high technology environments. In such settings, firms
require continuous access to novel knowled
ge
(Hagedoorn & Schakenraad, 1994; Powell, Koput,
& Smith
-
Doerr, 1996)
. Such continuous exploration calls for the autonomy of weak ties. At the
same time, creating effective R&D alliances often requires significant investments in
relatio
nship
-
specific human assets
(Oxley, 1997; Pisano, 1989)

and transfer of tacit knowledge
(Hennart, 1988; Kogut, 1988)
. Such conditions require the support of strong ties (Table 1).
Thus, in this context, firms will want b
oth cooperation and autonomy in a single relationship;
they will want a tie to be strong enough to create commitment while
at the same time

weak
enough to enable access to a range of alternative firms.

Recognition of this tension between weak and strong
ties pervades the literature. Blau
(1964)

points out that while social attachments increase cooperation, they restrict individuals’
mobility to pursue opportunities with alternative partners. Resource
-
dependence theory posits
that organi
zations desire autonomy to allocate their resources, even though they are commonly
faced with commitments to existing relationships
(Galaskiewicz, 1985; Oliver, 1991; Pfeffer &
Salancik, 1978)
. This dilemma is also present in the literatu
re on partnerships and strategic
alliances. While scholars generally view alliance longevity as a proxy for performance
(e.g.
Geringer & Hebert, 1991; Park & Russo, 1996)
, they also recognize that such longevity reduces
partners’ flexibil
ity

to learn and benefit from other firms
(Afuah, 2000; Hamel, 1991; Lambe,
Spekman, & Hunt, 2000; Parkhe, 1991; Singh & Mitchell, 1996; Young
-
Ybarra et al., 1999)
.
Eccles and Crane
(1988: 55)

in their study of investment

banking find that banks and their
customers often “want the advantages of [long
-
term] relationships
and
the advantages of a more
transactional [arm’s
-
length] orientation” (emphasis in the original)
.
Finally, Doz and Hamel

10

(1998: 21)

conc
lude that while committed relationships facilitate cooperation, “companies must
be free to pursue better opportunities when they appear.”


The tension between weak and strong ties exists whenever an exchange is subject to
conflicting contingencies.
Consid
er, for instance, a buyer
-
supplier relationship that involves high
asset specificity, but is also subject to disruptive technological change that may cause the
competencies of incumbent suppliers to become obsolete.
4

Or, consider a service relationship
th
at requires both a high degree of customization and enough flexibility to explore opportunities
brought by alternative service providers.
5

In the presence of such conflicting contingencies,
managers will seek an intermediate level of tie strength that bal
ances the cooperation
-
based
advantages of strong ties with the autonomy
-
based advantages of weak ties. We argue below,
however, that such a combination is unstable: it is not possible to structure relationships that
permanently
combine cooperation and aut
onomy. Unfortunately, firms have no capacity to
structure a permanent relationship that is at once flexible, thereby easy to exit and providing easy
access to new information, and also sufficiently committed, thereby supporting cooperation.

The Dy
namics of Tie Strength

The fundamental difficulty facing the firm is that tie strength is largely influenced by
informal processes

processes that managers can only indirectly control. Indeed, tie strength is
constantly changing as personnel within the two

firms both
jointly

learn

and
socialize
. Through
repeated interaction personnel within the firms develop idiosyncratic routines and co
-
specialized
knowledge, as well as relational governance due to emerging social norms and attachments.



4

Analyzing the microprocessor industry, Afuah
(2000: 389)

asserts
that in the advent of technological change
“staying with the old supplier means that the manufacturer can build on existing close relationships but must grapple
with the problems that the supplier faces in making the transition to the new technology. If t
he change is radical
enough to suppliers, they many not be able to supply components with the type of quality that the firm needs to be
competitive with the new technology… [However] switching suppliers means having to build new relationships and,
in doing

this, a firm may be handicapped by the organizational procedures and routines that it developed in its old
relationships.”

5

In their study of investment banking, Eccles and Crane
(1988)

find that both customers and investment banks
would

like to develop strong ties to support cooperation. While corporate customers would like banks to offer
services tailored to their needs, investment banks would like to increase the amount of information sharing in their
relationship. However, by establ
ishing a strong tie, banks and their customers necessarily reduce their autonomy to
make better deals with other firms. Financial transactions require continuous exploration of arbitrage opportunities,
which is properly carried out through weak ties
(Zaheer & Zaheer, 1997)
.


11

These informal pr
ocesses cannot be directly controlled or contracted for
ex ante

for two main
reasons. First, they involve complex, intertwined social cognitive mechanisms: not only is
learning a process resulting from collective efforts, but also the accompanying social
connections
influence individuals’ choice and solution of problems
(Argote, 1999; Arrow, 1974; Levinthal et
al., 1993)
. Second, the outcome of such processes is affected by stochastic factors that
boundedly rational managers cannot perfec
tly foresee before firms interact in a given period.
For instance, joint learning and socialization will be reinforced over time if for some reason
individuals within the firms become motivated to proceed with an ongoing project, but they will
be undermin
ed if changes in industry conditions or firm
-
level strategies shift individuals’
attention to activities other than those involved in the alliance. Therefore, complexity and
unforeseen changes will make it difficult for managers to make,
ex ante
, appropri
ate choices to
avoid events that may alter the path of joint learning and socialization. Due to the difficulty in
adjusting informal processes that influence tie strength, ties that initially exhibit intermediate
levels of strength tend to be altered in a

self
-
reinforcing manner. Over time, ties tend to become
either very strong

with high cooperation but low autonomy

or very weak

with high
autonomy but low cooperation.

Consider the first possibility: ties becoming increasingly strong. Suppose that indi
viduals
within partnering firms jointly learn, at the outset, how to develop certain processes or
technologies that are judged to be promising. Since joint learning requires social interaction, it
delivers not only co
-
specialized knowledge, but also share
d norms, values, and procedures
(Kogut & Zander, 1996; Leonard
-
Barton, 1995)
. Thus, when knowledge is jointly generated, it
tends to be socially embedded and supported by idiosyncratic routines
(Argote, 1999; Wegner,
Erber
, & Raymond, 1991)
. As Brown and Duguid
(1998: 100)

remark, it is “socially embedded
knowledge that ‘sticks,’ because it is deeply rooted in practice.” This makes it difficult for
outsiders to interpret that collective knowledge, as we
ll as for insiders to interpret external
knowledge embedded in other social contexts
(Afuah, 2000; Cohen et al., 1990; Levine &
Moreland, 1991; Tushman et al., 1980; Zenger et al., 1989)
. In addition, individuals within firms

12

may become l
ess receptive to new perspectives and more willing to deal only with people
showing similar interests and views
(Gargiulo et al., 2000; Hansen, 1999; Katz, 1982; Nelson,
1989)
. Consequently, individuals will tend to downplay opportunities

with new firms and favor
firms with which they have developed relationships. The resulting increase in commitment will
tend to further solidify social attachments and deepen co
-
specialization
(Bureth et al., 1997)
.
The relationship may
therefore reach a status of excessive tie strength associated with a pattern
of functionality involving high cooperation, but low autonomy.
6


An opposite path of change is also possible: ties can weaken over time. The processes
generating such chang
e are in theory symmetrical to the processes described above, though in
practice tie strength may be more quickly unraveled than enhanced. If firms are to some extent
autonomous, they will be able to use alternative firms for a particular exchange or purs
ue new
types of activities that may emerge as a result of external events such as changing industry
conditions. Individuals within the firms may therefore devote diverging effort towards new
projects instead of projects where firms’ interests align. The
resulting decrease in interfirm
interaction reduces co
-
specialization and social attachments which, in turn, implies that it will be
increasingly less costly to exit the relationship. But then firms will become increasingly
reluctant to continue sharing k
nowledge and co
-
specializing assets, as they perceive an increased
risk that their partners will pursue opportunities with alternative firms. Consequently, the tie will
tend to become weak, showing high autonomy but low cooperation.
7





6

This process of tie strengthening is consistent with what Williamson
(1985)

calls the “fundamental
transformation.” According to Williamson
(1985: 62)

the initiation of a relat
ionship triggers a process where
“additional transaction
-
specific savings can accrue at the interface between supplier and buyer as contracts are
successively adapted to unfolding events and as periodic contract renewal agreements are reached. Familiarity

here
permits communication economies to be realized: Specialized language develops as experience accumulates and
nuances are signaled and received in a sensitive way. Both institutional and personal trust relations evolve. Thus
the individuals who are r
esponsible for adapting the interfaces have a personal as well as an organizational stake in
what transpires.” Notice that Williamson
(1985: 62)

does not restrict the occurrence of this phenomenon to
exchanges requiring specific investmen
ts at the outset. He also considers exchanges where asset specificity deepens
as a
by
-
product

of repeated interaction, due to socialization and joint learning.

7

Eccles and Crane
(1988)

find this process of tie weakening in their study of

investment banking. They note that
“… when the customer can choose from among a group of investment banks, a profound change takes place in the
expectations each has about the future… Because a relationship is based on both transactions and the
expectati
on
of
future transactions, uncertainty about the future diminishes the quality of the relationship… The customer’s
unwillingness to share information with the investment bank beyond what is necessary to do a particular deal further

13

Figure 1 illustrate
s the changes described above. In the presence of conflicting
contingencies, firms’ preferences increase Northeast: they would like to reach a position with
high levels of cooperation and autonomy, such as point
X
. The permanent use of either a strong
ti
e or a series of weak ties (i.e., points
S

or
W
) is sub
-
optimal for firms that would like to procure,
for instance, customized products in industries with uncertain technological paths. However, due
to the forces described above, any tie close to point
X
will gradually become either strong,
showing high cooperation but low autonomy (point
S
), or weak, showing high autonomy but low
cooperation

i.e., the relationship will move towards either point
S

or
W
. Which outcome will
be eventually “selected” is uncer
tain at the outset, since there will be forces pulling the
relationship towards either extreme.
8

Thus, the process of tie change will be path dependent
(Arthur, 1989)
: a host of stochastic factors outside our model will eventually decide
to which
particular point the relationship will tend to converge. In sum, while managers can in theory
identify an ideal tie strength for a given exchange relationship, such tie strength cannot be
maintained in the presence of conflicting contingencies.
The fundamental question is therefore
how to increase relationship performance under those conditions, since partners will wish an
intermediate level of tie strength that balances cooperation and autonomy and such combination
is unstable.

<
Figure 1 around
here
>

The arguments above suggest that firms cannot cope with the weak vs. strong tie dilemma
statically. Rather than pursuing stable but sub
-
optimal outcomes

i.e., either a strong or a weak
tie permanently

we contend that firms can do better in the prese
nce of conflicting
contingencies by promoting dynamic adjustments in tie strength in order to reap
temporarily

the
benefits from autonomy and cooperation.







diminishes the quality o
f the relationship. When interaction between deals decreases, the relative significance of
transactions decreases, further reinforcing the perception of an increased transactional [arms’s
-
length] orientation on
the part of the customer”
(E
ccles et al., 1988: 58, emphasis in the original)
.

8

For instance, Doz
(1996)

discusses the role of stochastic “initial conditions” that influence future alliance
outcomes.


14

CHURNING TIES: DYNAM
ICALLY ADJUSTING TIE

STRENGTH

The preceding discussion provides us with two a
ssumptions about the nature of
interorganizational relationships. First, there is a wide range of circumstances under which both
cooperation and autonomy in an exchange relationship are desired. Second, intermediate levels
of tie strength that balance co
operation and autonomy are difficult to sustain, because informal
processes that influence tie strength are dynamically changing. But although it is not possible to
directly control such informal processes directly, managers can indirectly influence their

trajectory through periodic, marked changes in
formal
governance mechanisms. Changes in
formal governance essentially alter expectations of relationship continuity, thereby providing
incentives to change the direction by which tie strength increases or d
ecreases. For instance,
when an exchange relationship is weak, managers can lengthen the terms of a contract or develop
a joint equity relationship, which heighten expectations of relationship continuity and hence
increase commitment. The repeated intera
ction that is thereby encouraged tends to promote
socialization and joint learning. However, given that informal processes are to a large extent
uncontrollable, changes elicited by formal governance will at best set the trajectory by which
such informal p
rocesses are
likely

to evolve. Thus, the role of managers is to constantly monitor
the performance of an exchange and intervene, through formal changes, whenever tie strength
migrates in either direction significantly beyond the desired level.
9


Building
upon Nickerson and Zenger
(forthcoming)
, the above assumptions of (1) conflicting
contingencies, (2) dynamically changing tie strength due to informal processes that are not
directly controllable, and (3) the capacity to alter these dynami
cs through formal mechanisms
lead to the conclusion that exchange performance is optimized not by static matching of tie
strength to exchange or industry conditions, but rather by dynamic management of tie strength.
Firms initiate weak ties and then stren
gthen them through formal mechanisms that promote



9

By “managers,” we mean individuals who constantly monitor and

attempt to increase the performance of an
exchange. To be sure, if managers are deeply involved in the informal processes of socialization and co
-
specialization, they will not be willing to promote any kind of change anyhow. We provide more comments on
this
issue in the conclusion section.


15

commitment and hence create incentives for socialization and joint learning, such as long
-
term
contracts and joint ownership. Whenever ties become strong and autonomy has been
undermined, they are formal
ly restructured or terminated.

Then, whenever ties become weak,
managers adopt again formal changes to increase commitment. Through this pattern of
churning

ties the firm dynamically achieves levels of tie strength more closely aligned with the desired
l
evel than could be achieved by simply allowing a tie to continuously strengthen or weaken over
time.

The Logic of Churning Ties

Churning ties involve periodic changes in formal governance that alter the path of informal
processes influencing tie stre
ngth. Please refer to Figure 2. When the relationship is extremely
weak (i.e., close to point
W
) and a stronger tie is desired, managers can pursue formal changes
that promote commitment. For instance, managers can extend the duration of a contract or
c
ontractually specify shared asset investments. Such changes, which enhance expectations of
relationship continuity, encourage repeated interaction, which in turn favors knowledge sharing
and the formation of shared norms, values, and routines. If formal
changes are successful, then
the relationship will reach a point like
X

, where it attains maximum performance. Cooperation in
the form of knowledge sharing will coexist with the ability of firms to learn from one another, as
well as from other firms, sinc
e they will tend to carry distinct experiences and knowledge sets.

Unfortunately, informal processes that influence tie strength will continuously shift. As a
result of increased commitment, co
-
specialization and social attachments will likely escalate.

The relationship will thus tend to move towards point
S
, where cooperation will increase at the
expense of reduced autonomy. Limited ability to interpret and acquire new knowledge, added to
the dysfunctional effects of socialization

e.g., friendship ties

inducing favoritism

will cause a
sharp reduction in performance. To avoid having the relationship reach point
S
, managers can do
the reverse: they can formally reorganize the terms of their exchange. For instance, they can
shorten the contractual durati
on. More drastically, they can sever the tie. If either firm severs
the tie, both parties must craft new relationships. However, the lack of experience and

16

familiarity with their new partners will be an impediment to promoting investments in
relationshi
p
-
specific assets and knowledge sharing. Thus, the new or existing tie will be close to
point
W
, exhibiting high autonomy but low cooperation. To restore cooperation, managers must
again employ formal changes to increase commitment.

<
Figure 2 around here
>

However, formal changes designed to adjust tie strength are costly. For instance, costs to
strengthen ties may encompass expenses to craft devices such as long
-
term contracts, whereas
costs to weaken ties may encompass the costs of severing relationship
s, including the associated
legal costs to alter clauses or settle disputes. Therefore, decisions to shift tie strength closer to
the desired level must be balanced against the costs of change. Due to these costs, managers will
need to wait until the ben
efits of adjusting tie strength exceed the costs of the necessary formal
changes. Were change costless, managers would simply churn the ties at small deviations from
the desired level of autonomy or cooperation.

Thus, while intermediate tie strength canno
t be achieved statically, it can be achieved
dynamically by using formal mechanisms to periodically increase and decrease tie strength.
Although this pattern of strengthening and weakening ties cannot achieve the “ideal” point
X
, it
can at least temporari
ly achieve balanced levels of cooperation and autonomy that accompany
intermediate levels of tie strength, such as point
X

. In other words, churning ties by continually
stimulating, then diminishing tie strength may deliver higher performance than can be

achieved
by either a string of short
-
term exchanges or by one extended strong tie.
10


The formal mechanisms available for the implementation of churning ties differ in two ways.
First, they have differential ability to promote either strengthening or weak
ening

i.e., formal



10

Rigorously speaking, this occurs if increases in cooperation or autonomy have decreasing marginal effects on
performance. Thus, when a tie is strong (high cooperation, low autonomy), further increases in cooperati
on have
little impact on performance compared to even small increases in autonomy. By contrast, when a tie is weak (low
cooperation, high autonomy), small increases in cooperation contribute much more to performance than further
increases in autonomy. Th
us, when the relationship is, say, at point
W
, movement towards point
S

will bring
cooperation gains that will tend to outweigh initial losses in autonomy. We note that the trajectory depicted in
Figure 2 is only illustrative: other paths may be described

and may also enhance performance, as long as they are not
strongly “convex” (e.g., when, by strengthening a tie, a firm decreases autonomy at a much higher rate than it
promotes cooperation).


17

mechanisms vary in terms of the likelihood that they will alter the trajectory of informal
processes influencing tie strength, and the resulting pace of change. For instance, formal
changes that more likely promote commitment at the out
set tend to accelerate the process of
socialization and joint learning. Second, such formal mechanisms are associated with distinct
levels of implementation and downstream costs, which must be factored in the decision to
implement churning ties. We next
discuss in detail the formal instruments that can be used to
reinforce and weaken ties, emphasizing their relative costs and competencies.

Strengthening Weak Ties

When ties are weak, lack of commitment inhibits cooperation, and lack of past cooperation
i
nduces low willingness to commit. To disrupt this self
-
reinforcing process, managers must
create expectations that the relationship will endure. Basically, managers must adopt formal
mechanisms that credibly commit firms to a repeated interaction and, co
nsequently, create
incentives for the development of social attachments, co
-
specialization and routines
(Zenger,
Lazzarini, & Poppo, 2002)
. In addition, since crafting contracts and other formal devices
requires parties to jointly determi
ne procedures to deal with unexpected changes, the process of
contracting itself creates opportunities for social interaction
(Poppo & Zenger, forthcoming)
.
11

We discuss below three possible changes in formal governance, arranged increasin
gly in their
ability to create expectations of relationship continuity, and also in their associated costs: loose
contractual arrangements, long
-
term contracts, and joint ownership.

Loose contractual arrangements
serve to signal intentions for future coll
aborative ventures.
Renewable short
-
term contracts and narrow agreements based on particular projects to test the
competencies of possible partners are examples. Even though such loose agreements are not too
costly to implement and their termination is r
elatively easy, they do not create enough
commitment to strengthen ties. Firms are not likely to develop shared routines and co
-



11

There is a debate on whether formal mechanisms promote
(Baker, Gibbons, & Murphy, 1994; Poppo et al.,
forthcoming)

or undermine
(Fehr & Gächter, 2000; Macaulay, 1963: 64; Sitkin & Roth, 1993)

relational
governance. This discussion, however, is centered on the effects of cont
ractual incentives or punishments. Our
argument that long
-
term contracts promote tie strengthening is actually simpler: such instruments guarantee that
parties will be, to some extent, engaged in a recurring exchange.


18

specialized knowledge merely with a short
-
term contract. Thus, although loose contractual
agreements are not costly, they are
not very effective at altering the trajectory of the relationship
towards strengthening.

Long
-
term contracts

take a step further by formally bonding parties in a recurring
relationship or restricting exchange with alternative firms, such as in the ca
se of exclusivity
agreements. The degree of commitment enabled by long
-
term contracts is stronger than in the
case of loose contractual agreements since the former explicitly defines the extent of repeated
interaction. However, implementation and downstr
eam costs increase. The anticipation of
future events and the establishment of procedures to respond to such events engender major
challenges for the implementation of long
-
term contractual relations
(Crocker & Masten, 1991;
Joskow, 1988)
. Furthermore, long
-
term contracts induce downstream costs to alter or terminate
them when necessary. To exit from a contractual obligation, it is necessary to incur substantial
legal expenses and, in some cases, accomplish side monetary transfers to com
pensate for losses
faced by the other party
(Argyres & Liebeskind, 1998)
. Thus, although long
-
term contracts are
better able to strengthen the tie than loose agreements, they are more costly as well.

Finally, managers can strongly comm
it by making use of
joint ownership
, such as mutual
investments in idiosyncratic assets and joint equity stakes in common organizations (e.g., joint
ventures). Joint ownership involves not only high implementation costs related to up front
investments, bu
t also high downstream costs since part of such investments may be sunk in the
form of dedicated assets and organizational structures
(Doz et al., 1998; Harrigan, 1988a)
.
Nonetheless, it is precisely these high downstream costs that make
exit costly and thus strongly
promote commitment
(Anderson et al., 1992; Weiss & Kurland, 1997; Williamson, 1985;
Young
-
Ybarra et al., 1999)
.

Notice that changes in formal governance that are more likely to strengthen the tie are a
double
-
edged sword. While such formal changes more likely achieve high cooperation levels,
they have two side effects. First, they tend to have high implementation costs and high
downstream costs to restore autonomy whenever necessary. Second, they also tend t
o increase

19

the
pace
of tie strengthening, meaning that the relationship will likely display intermediate levels
of tie strength for too little time (using Figure 2, the relationship moves away from point
X


too
quickly). Thus, formal changes that more lik
ely promote cooperation at the outset also increase
the likelihood that the relationship will quickly achieve excessive commitment levels associated
with low autonomy.

Weakening Strong Ties

Ties can also be excessive in their strength leading to a self
-
reinforcing process where high
commitment reduces firms’ autonomy, which in turn further escalates commitment. To avoid
this outcome, managers can pursue tie weakening through a host of changes in formal
governance aimed at restoring autonomy by altering

the trajectory of socialization and co
-
specialization. We discuss the following formal changes, arranged in an increasing order in
terms of their ability to promote tie weakening and also their costs: reorganization of formal
governance, bilaterally nego
tiated termination, and unilateral termination of the partnership.
12


The least aggressive mechanism for weakening ties involves
reorganization of the formal
governance
, by which we mean formal changes in the structure of interaction between firms.
Manag
ers can renegotiate the terms of the exchange through the reallocation of ownership stakes
(Blodgett, 1992)
. They can also adjust contractual clauses and modify monitoring procedures
(Reuer, Zollo, & Singh, 2002)
. To red
uce the problem of socialization, managers can
additionally introduce rules to constantly change the personnel at their interface. For instance,
buyer representatives can be “rotated” within a firm in order to avoid dysfunctional friendship
ties with sell
er representatives inducing favoritism and biased pricing
(Jeffries et al., 2000)
.
Such rotation practices have been evidenced in the U.S. auto industry
(Humphrey et al., 2000:
719)
. Although these changes are not too co
stly, they have limited effectiveness to ameliorate
the problems caused by excessive tie strength. Thus, when managers reallocate assets without



12

By “termination” we mean the
diss
olution

of the long
-
term relationship, where parties will become more
autonomous than before. Notice that alliances can terminate by merger or acquisition
(e.g. Dussauge et al., 2000;
Kogut, 1989; Reuer, 2001)
, which should be interpreted

as an
increase
, rather than a decrease, in tie strength. We
do not discuss this possibility here since, for simplicity, we are focusing on interorganizational governance.


20

substantial changes in the extent of co
-
specialization or socialization, they may be mostly
redistributing, ra
ther than creating, value. In addition, changes in contract terms may not reduce
interfirm commitment if social attachments largely contribute to the governance of the exchange.
For instance, reducing the duration of its contracts may not grant a firm re
al autonomy if
friendship ties still influence the choice of possible partners at the moment of contract renewal.
Finally, since attitudes towards particular partnering firms tend to be collective rather than
simply individually defined
(I
nkpen et al., 1997; Zaheer et al., 1998)
, rotation of buyer and seller
representatives may not change socially shared norms inducing the same dysfunctional
consequences emanating from personal ties.
13


Alternatively, managers can
bilaterally negot
iate the termination of the partnership
. This
occurs when partners recognize that the opportunities for rent generation with the alliance are
limited and jointly decide to pursue other opportunities
(Doz et al., 1998)
. To be implemented,

bilateral termination is likely to involve non
-
negligible negotiation costs to determine the
conditions to dissolve the tie and monetary transfers to liquidate joint ownership of assets. Since
parties may not agree with those terms and conditions, bilate
ral termination can be in some cases
unfeasible
(Inkpen & Ross, 2001: 143)
. Bilateral termination also entails the downstream costs
of building new relationships, i.e., the costs of strengthening newly formed ties. Although
costly, bilat
eral termination

if feasible

alleviates the problems caused by tie strength since it
effectively severs existing social ties and provides firms with autonomy to pursue more valuable
opportunities and knowledge.

A more radical option is to
unilaterally t
erminate the partnership
, by which managers
deliberately dissolve a long
-
term tie or open the relationship to alternative firms. For instance,
buyers can demand that supply relations be put out for competitive bid to “test the market”
(Ecc
les, 1981: 353)
. Mandating that procurement transactions will be managed through an



13

For instance, a new buyer representative may have an
indirect

tie with a seller r
epresentative through direct
friendship ties with former buyer representatives within his or her firm. In this case, it is possible that the new buyer
representative will adopt similar policies used by the former representative when dealing with the suppl
ier.


21

Internet “business
-
to
-
business” auction may have this precise effect
(Lucking
-
Reiley et al., 2001;
Wise & Morrison, 2000)
. Competitive bidding may not o
nly be used to find new suppliers, but
also to create incentives for incumbent suppliers to increase the efficiency of their production
processes and pursue price reductions
(Eccles, 1981)
.
14


The costs to implement unilateral termination
tend to be substantial, since the lack of mutual
consent implies that parties may engage in costly litigation. In addition, there are high
downstream costs associated with unilateral termination. It can damage existing ties since
opening up the exchange
to alternative firms conveys “the risk of offending an important current
partner that might compete with a business that is being courted for a future relationship”
(Singh
et al., 1996: 112)
. Perhaps more importantly, unilateral terminati
on can also damage a firm’s
reputation
(Podolny & Page, 1998)
, as current and future partners will be unwilling to cooperate
if they learn that the firm tends to destroy ties at its discretion. Thus, although unilateral
termination will q
uickly alleviate the restrictions imposed by strong ties

e.g., firms will be able
to procure products at lower prices or benefit from new technology

it will also increase the
difficulty to strengthen remaining or newly formed ties. For instance, Helper
(1991: 820)

documents that U.S. automakers have faced “a legacy of mistrust, resulting from their years of
‘cutting the legs out from under … our suppliers,’ as one Ford executive put it.” To restore
cooperation, managers had to adopt new p
ractices in the industry such as increasing the length of
contracts
(Helper, 1991)
. But even with these changes, U.S. automakers have had difficulty
triggering informal processes that strengthen ties, given their reputation of switching a
t will
(Mudambi & Helper, 1998)
.

In sum, similarly to the process of strengthening ties, formal changes that most effectively
weaken ties are most likely to increase the costs to subsequently strengthen existing or newly
formed ties. Th
ere also appears to be an asymmetry in this process: relationships can be more



14

This tends to occur when a buyer faces switching costs to transact with new suppliers due to idiosyncratic routines
and relationship
-
specific assets. Under these conditions, incumbent suppliers will have an advantage in competitive
bidding
(Laffont & Tirole, 1988; Williamson, 1976)

unless, of course, a new supplier with superior technology or
radical innovation emerges.


22

easily unraveled than developed, though changes that more quickly weaken ties are more costly
as well (e.g., litigation expenses and downstream reputation losses). Thus, the ch
allenge in the
management of churning ties is twofold. First, managers need to employ formal changes that
create as much commitment as possible whenever a certain tie becomes weak and that,
downstream, guarantee as much flexibility as possible to weaken t
hat tie whenever it becomes
strong. Second, when weakening a tie, managers must employ changes that restore as much
autonomy as possible but that do not severely undermine an existing tie or make it difficult to
build new relationships in the future.


Moderating Effects

The
institutional environment

in which exchange relations arise will alter the probability of
observing churning ties. The institutional environment

of a society is the set of formal and
informal “rules of the game” that constraint th
e behavior of individuals and firms
(North, 1990)
.
Consider formal institutions. Regulatory controls on the formation and dissolution of
interorganizational relations will inhibit the emergence of churning ties by creating an “artificial

inertia” in existing ties. For instance, the Japanese government has had an important role in
promoting strong ties between buyers and suppliers through its active programs to “organize the
subcontractors into
keiretsu
(channeled groups) [where they] ser
ved the same contractor(s)”
(Nishiguchi, 1994: 39)
. There are, however, formal institutions that can actually encourage
churning ties. When third
-
party law enforcement is effective and not costly, firms can have
higher confidence that de
alings will be honored, thus increasing their willingness to pursue new
ties with strangers
(Johnson, McMillan, & Woodruff, 2002)
. As a result, large trade networks
where individuals transact less frequently with the same firms will tend
to emerge
(Greif, 1997;
North, 1990)
. On the other hand, when third
-
party enforcement is costly and ineffective, firms
must necessarily resort to strong ties to promote cooperation
(Kali, 1999)
.

Informal institutions at a

societal level will also influence the emergence of churning ties.
Certain societies rely on committed exchanges because collectivist cultural patterns
(Dore, 1983;
Greif, 1997; Hill, 1995)

and absence of trust in strangers
(Yamagishi & Yamagishi, 1994)

inhibit

23

the formation of new relationships outside restricted circles. Although cooperation easily
unfolds in those societies through committed relations
(Dyer & Singh, 1998)
, the resulting strong
ties ar
e extremely difficult to disrupt. Parties will be reluctant to violate social norms and
transact with firms or individuals with whom they are not familiar. As a result, churning ties are
not likely to be observed when such informal institutions are prese
nt. By contrast, societies
exhibiting individualistic cultural patterns and high levels of trust in strangers facilitate the
establishment of churning ties since parties will tend to avidly pursue valuable opportunities
even with unfamiliar firms.

Anoth
er moderating variable in our model relates to a firm’s competence to form, maintain,
and benefit from external relationships, which affects the cost of employing churning ties.
Following previous research
(Lambe et al., 2000)
, we use the

term
relational competence
to
describe a firm’s ability in selecting valuable and trustworthy partners, managing its alliances,
and curbing its own incentives to defect so that its partners will perceive the firm as trustworthy.
Firms showing relational
competence “will (1) more likely choose partners who will abide by
relational norms and (2) understand themselves the value following relational norms”

(Lambe et
al., 2000: 221)
. Thus, if firms exhibit relational competence then cooperati
on will not need to be
sustained through repeated interaction, as they will follow general norms such as reciprocity or
integrity. This implies that firms exhibiting relational competence will not need to use costly
formal mechanisms, such as joint owners
hip, to strongly commit
(Barney & Hansen, 1994)
. In
addition, firms with high relational competencies are more likely to bilaterally negotiate, rather
than unilaterally impose the termination of their alliances, since they will have ease
in partnering
with new firms. Overall, relational competencies will reduce the need for costly formal
mechanisms to form and dissolve relationships; thus, the likelihood that firms will engage in new
relationships and then switch to other partners will in
crease.
15





15

It is likely that relational competencies are formed through cumulative experience with past alliances, as fi
rms
learn how to select valuable partners, and also how to manage their interorganizational relationships
(Anand &
Khanna, 2000; Gulati, 1999)
. Relational competencies may also be associated with the existence of dedicated
organizational
structures to identify partners and manage a firm’s ongoing alliances
(Dyer, Kale, & Singh, 2001)
.


24

Summary of Propositions

We summarize below the propositions of our model, schematically represented in Figure 3:

P1. In the presence of conflicting contingencies, (a) churning ties

a pattern of periodically
reinforcing and weakening interorgani
zational relationships

will emerge, and (b)
exchanges governed by churning ties will outperform exchanges governed by either weak or
strong ties permanently.

P2. The following formal mechanisms can be used to strengthen ties, arranged in an
increasing ord
er in terms of their ability to promote strengthening and the extent to which
they will make it more difficult to weaken the resulting ties in the future: loose contractual
agreements, long
-
term contracts, and joint ownership.

P3. The following formal mec
hanisms can be used to weaken ties, arranged in an increasing
order in terms of their ability to promote weakening and the extent to which they will make it
more difficult to strengthen the resulting ties in the future: reorganization, bilateral
terminatio
n, and unilateral termination of the partnership.

P4. Formal and informal institutions will moderate the effect predicted by P1, by either
favoring or inhibiting the emergence of churning ties. (See our previous discussion for
specific predictions.)

P5.

If firms have high relational competencies, they will be (a) less likely to use costly
mechanisms to reinforce ties, such as joint ownership, (b) more likely to bilaterally negotiate,
rather than unilaterally impose the termination of their alliance, and
therefore (c) the
frequency in which relationships are formed and dissolved in the context of churning ties will
increase.

<
Figure 3 around here
>


CHURNING NETWORKS

Our level of analysis is purely dyadic: we evaluate the dynamics of change in the strength

of
a single tie. Therefore, a limitation of our model is that it disregards possible managerial actions
that can address the tension between weak and strong ties by “optimizing” the network within
which the firm is embedded instead of adjusting ties in i
solation. Thus, some authors propose
that firms can form a
portfolio
of weak and strong ties, which supposedly combines the
advantages of partnerships and arm’s
-
length exchanges
(e.g. Faulkner, 1983; Uzzi, 1996)
.
Indeed, casual evidence
shows that firms often develop committed relationships with some
partners, and engage in arm’s
-
length exchanges with a large number of other firms. Other
authors still propose that the relevant issue in the management of networks is whether a tie is

25

redun
dant
or not, rather than the extent of its strength
(Burt, 1992)
. Namely, a firm should avoid
forming a tie to an actor that is connected to another actor to which the firm is already tied, since
this redundant contact is not likely to pr
ovide new information or opportunities.
16

A strong tie
can still be useful if it is nonredundant
(Burt, 1992)
. Thus, Rangan
(2000: 826)

posits, “a large
network of strong ties to nonredundant actors is the best sort to ha
ve.”

We contend that both arguments are unsatisfactory responses to the tension between weak
and strong ties. For the portfolio of tie argument, we first note that although most firms do have
a portfolio of weak and strong ties, this does not necessarily
mean that it is a response to
conflicting contingencies. Firms may simply be using strong ties for contingencies that call for
cooperation (e.g., specific assets), and weak ties for contingencies that call for autonomy (e.g.,
generic assets). Thus, the p
ortfolio of weak and strong ties should be applied to the
same

exchange that requires both cooperation and autonomy. But indivisibilities and scale economies
will make it costly to maintain more than one or a few partners simultaneously for a single
excha
nge. Furthermore, the portfolio of tie argument neglects the dynamic forces discussed
before, which alter the nature of ties over time. Thus, continuous interaction with particular
partners will tend to create idiosyncratic routines and co
-
specialization
, which will make it
increasingly difficult to transact with other firms. Even if a firm tries to acquire new knowledge
through weak ties, those ties will not be useful from a practical standpoint because the firm may
fail to interpret external knowledge
and even convince the other parties to share it. Conversely,
holding weak ties with alternative firms may damage a particular strong tie since the partner may
interpret those weak ties as explicit exit options and, consequently, may become reluctant to
co
operate
(Jones, Hesterly, Fladmoe
-
Lindquist, & Borgatti, 1998)
. Therefore, the mix of weak
and strong ties applied to a particular exchange is likely to change towards few strong ties with
low autonomy, or many weak ties with low cooperat
ion.




16

For evidence supporting this argument, see McEvily and Zaheer
(1999)

and Gargiulo and Benassi
(2000)
;
for
evidence contrary to the argument, see Zaheer and Zaheer
(1997)

and Ahuja
(2000)
.


26

The redundancy argument also suffers from a similar shortcoming: it neglects endogenous
changes in networks. Suppose that a firm
A
, which has a strong tie to another firm
B
, decides to
form a nonredundant tie to firm
C
. Initially, the tie to firm
C

will provide firm
A

with novel
information and opportunities. However, by transacting with firm
C
, firm
A

creates an indirect
tie between
B
and
C
. Since the
B
and
C

share a common partner, they will have improved
information about each other in terms of

their capabilities and trustworthiness; for this reason, it
is likely that firms
B

and
C

will decide to form a relationship. Empirical research shows that the
formation of these “cliques” does tend to occur
(Gulati, 1995b)
. The conseque
nce is that the tie
A
-
C

will become redundant, thus reducing its benefits as conduit of new information and
opportunities. Thus, the mere fact that a firm exploits a nonredundant tie is likely to precipitate
an endogenous change

the formation of redundant

ties

that undermines over time the benefits
that the firm can attain from that action.

Despite its beneficial effects, nonredundancy tends to
be unstable
(Aldrich & Whetten, 1981: 391)
.


This discussion shows that the search for an opti
mal network configuration, as a static
exercise, says little about how firms should dynamically adjust their positions in a context of
changing networks. We contend, in particular, that network optimization requires dynamic
strategies that are similar in
nature to churning ties at a dyadic level. Namely, firms may need to
continuously weaken the strong ties and strengthen the weak ties in their portfolio to maintain an
appropriate balance of each type of tie.
17

Similarly, firms may need to continuously se
ver
redundant ties or build non
-
redundant ones to increase the value that they can attain from
external relations. However, a more careful examination of these dynamic strategies at the
network level is beyond the scope of this paper.





17

For instance, in their analysis of corporate customer
-
bank relationships, Eccles and Crane
(1988: 89)

show how
certai
n customers “downgrade” certain banks formerly connected through a strong tie to “upgrade” other banks
formerly connected through a weak tie.


27

CONCLUSIONS

Gi
ven the increasing interest in models that describe how interorganizational ties contribute
to firm performance
(e.g. Dyer & Singh, 1998; Gulati et al., 2000)
, a careful analysis of the
tradeoffs involved in the choice of alternative inter
firm governance mechanisms is warranted.
Our paper, in particular, discusses a rather pervasive dilemma: in many circumstances, firms
want to combine the cooperation
-
based advantages of strong ties with the autonomy
-
based
advantages of weak ties; they wan
t at the same time commitment and flexibility. We offer a
dynamic theory that explains how firms faced with this tradeoff can adjust their ties over time to
increase alliance performance. Since firms cannot control informal processes that change the
func
tionality of their relationships over time

i.e., the mix of autonomy and cooperation

they
must use a limited set of formal instruments to alter the trajectory of tie strengthening or
weakening. Thus, firms can dynamically combine cooperation and autonomy
by periodically
employing formal mechanisms that weaken ties when excessive commitment damages autonomy
and formal mechanisms that reinforce ties when lack of commitment hinders cooperation.

Within this perspective, our theory clearly runs against the vi
ew that relationship instability is
dysfunctional. For instance, Dyer, Cho, and Wujin
(1998: 73)

assert that “vacillating between
arm’s
-
length relationships and partnerships is unlikely to be a successful strategy given the long
-
term comm
itment and relation
-
specific investments required for strategic partnerships to be
successful.” In the presence of conflicting contingencies, vacillation can be indeed a successful
strategy: churning ties can deliver superior alliance performance by captu
ring temporarily the
benefits of both weak and strong ties.

Contributions to the Literature on Interorganizational Collaboration

Our paper brings two main contributions to the literature. First, it adopts a completely
different perspective from conting
ency arguments, which propose a static fit between tie strength
and particular exchange or industry conditions. Our theory points out the imperative of dynamic
models to predict patterns of interorganizational relations when conflicting contingencies and
endogenous changes in the nature of ties render that static match impossible. In addition, by

28

highlighting the role of conflicting contingencies, our theory is consistent with dialectical models
of interorganizational relations, which assert that contradi
ctory forces are crucial to explain
change
(e.g. Das & Teng, 2000; Zeitz, 1980)
. We contribute to this literature by describing both
the key sources of conflict and the resulting dynamics of change involving interorganizational
ties.

Seco
nd, our model potentially integrates two streams of research that have evolved rather
independently: the analysis of tie
dissolution
(e.g. Dussauge et al., 2000; Kogut, 1989; Levinthal
& Fichman, 1988; Park et al., 1996)

and the analysis o
f tie
formation

(e.g. Gulati, 1995b; Kogut,
Shan, & Walker, 1992; Powell et al., 1996; Stuart, 1998)
. Our theory clearly shows that both
analyses cannot be divorced, since the decision to reorganize or terminate a tie has consequences
for

the formation of subsequent ties, and vice versa
(Podolny et al., 1998: 70)
. For instance, as
we discussed before, a firm that prematurely severs a tie will have difficulty in building new
relationships if its reputation is damaged. Als
o, the decision to form relationships may actually
be associated with the restructuring or termination of existing ties

as Richardson
(1972: 896)

puts it, “firms form partners for the dance but, when the music stops, they can change them.”

Thus, the focus on isolated events of tie formation or dissolution provides only a partial picture
of the dynamics and the management of interorganizational relations. Our model fills this void
by discussing how different types of formal changes to rest
ructure or sever existing ties influence
the formation of new ones, and how the mechanisms employed to build new relationships affect
firms’ ability to change them when necessary.

Limitations and Possible Extensions

An important limitation of our study i
s that we assume the existence of managers who
monitor the performance of exchanges and adopt formal changes to restore either cooperation or
autonomy. Although this allows us to focus on the main rationale of churning strategies, it
ignores a real possib
ility: that managers themselves may be part of the processes of socialization
and learning which alter the nature of ties over time, and thus may avoid any form of change.
For instance, the termination of a relationship may be resisted by managers who “of
ten staked

29

their careers on the success of the alliance project,” even when the relationship proves to be
unprofitable
(Inkpen et al., 2001: 144)
. How then to justify the impetus to churn ties? The
simplest way, commonplace in economics,

is to assume that firms and their managers (through
reputation concerns or incentives) face market pressures to make efficient decisions. A more
refined justification comes from Beckert’s
(1999)

model of institutional change. Namely, as

a tie
approaches stable, yet inferior patterns of functionality

i.e., polar levels of tie strength in the
presence of conflicting contingencies

it becomes increasingly salient that change could deliver
performance gains. This triggers the emergence of in
dividuals willing to “destroy established
taken
-
for
-
granted rules if they perceive such action to be profitable”
(Beckert, 1999: 786)
. Such
individuals correspond to the managers in our theory. We admit, however, that intervention
mechan
isms are a black box in our model, and thus deserve further development in subsequent
work.

Another limitation is that our model suggests that churning ties derive from firms’
willingness to increase the overall

value of their relationships. However, firm
s may be tempted
to alter the governance of their exchange to appropriate, rather than create value. For instance,
Helper
(1991)

suggests that buyers may pursue practices associated with weak ties, such as
competitive bidding, simply to i
ncrease their monopsony power and hence redistribute rents
from suppliers. Thus, firms’ relative bargaining power may also influence the emergence and
management of churning ties.

Apart from the consideration of relational competencies, we also ignore th
e role of firm
-
specific attributes affecting the emergence of churning ties. Our model does not consider, for
instance, the value that firms can attain by partnering with firms holding beneficial positions in a
given network. Thus, a tie with a prestigio
us firm
(Podolny, 1993; Stuart, 1998)

may generate
reputation
-
based benefits to other transactions even if that tie yields no direct value. Our model
also ignores the role of partner asymmetries

(Harrigan, 1988b)

in the a
doption of mechanisms to
strengthen or weaken ties. For instance, firms with a large set of alternative partners will be
more able to build new relationship after the termination of an exchange than firms with few

30

potential partners. Such firm
-
specific v
ariables can be incorporated in our model as factors that
moderate the adoption of churning ties and the use of alternative formal mechanisms of change.
For instance, managers may be more willing to unilaterally sever a tie if they have a large set of
alt
ernative partners, and less willing to do so if particular attributes of their partners, such as
prestige, yield positive spillovers to other transactions.

Finally, our unit of analysis is a dyadic exchange and thus fails to assess interdependencies in
the

governance of ties among several firms. Although in the previous section we discuss how
our arguments can be scaled up to a network level, other issues remain unexplored. For instance,
the benefits to adopt a weak or strong tie are likely to be influenc
ed by the extent to which other
firms in the network employ weak or strong ties. Thus, when some firms adopt weak ties, the set
of external opportunities available to other firms in the network increases, possibly reinforcing
the trend toward weak ties
(Kranton, 1996)
. The adoption of standardized mechanisms such as
Internet procurement can be self
-
reinforcing for this reason: the benefits to use those
mechanisms increase as the number of firms adopting the same standard increases
(Lucking
-
Reiley et al., 2001)
. Likewise, the adoption of either strong or weak ties can follow
institutionalization processes
(DiMaggio & Powell, 1983)
, because firms may follow practices
considered as legitimate by shareholders
, investors, and other agents. In the presence of those
externalities, we may see industry
-
wide cycles of tie change induced by emergent interactions
between multiple agents. Although our model focuses on dyads, it can provide the initial
underpinning of

a theory explaining the dynamics of networks if one considers that “change
always emerges at the level of dyads, where it is potentially generated, received and transmitted
to other business relationships”
(Halinsen, Salmi, & Havila, 1999:

784)
. Integrating endogenous,
micro
-
level change occurring at dyads with emergent, macro
-
level change at networks will
provide a major leap towards the understanding of how interorganizational relations evolve and
influence firm performance.


31

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39



TABLE 1

Fit (Alignment) Between Contingenc
ies and Tie Strength



Contingency

Weak tie

(autonomy)

Strong tie

(cooperation)

Exchange attributes




Asset specificity

Low

High


Difficulty to measure performance

Low

High


Type of knowledge

Codified

Tacit




Industry characteristics




T
echnological innovation

High

Low


Market volatility

High

Low


Generic task objective

Exploration

Exploitation



40


FIGURE 1

The Dynamics of Tie Change

















Autonomy


Cooperation

S

X

W


41






FIGURE 2

Churning Ties

























Managerial intervention to (
a
) weaken or (
b
) strengthen the tie








Self
-
reinforcing processes causing further weakening or strengthening





X


(
a
)

(
b
)

Autonomy


Cooperation

S

X

W


42


FIGURE 3

The Theory of Churning Ties









Conflicting

contingencies

Churning

ties

Strengthening of ties
when they become
weak

Weakening of ties
when they become
strong

Loose contractual
agreements


Long
-
term
contracts


Joint ownership

Institutional
environment

P
1


P3


P2

Unilateral

termination


Bilateral
termination


Reorganization

Relational
competence of
partners

P4

P5

Increasing ability to strengthen or
weaken the tie