Member of the Department of Management & Organizations faculty until 2015
James F. Bere Professor of Management & Organizations
Some of the most important strategic decisions an organization can make, says Ithai Stern, involve choosing the right alliances and partners. Yet while researchers have offered technical explanations for these decisions, few have looked at the social–psychological factors that come into play.
So Stern, an assistant professor of management and organizations at the Kellogg School, along with colleagues Edward Zajac, a professor of management and organizations also at the Kellogg School, and Janet Dukerich of the University of Texas, set out to figure out just how executives choose business partners. In a recent study, the researchers examined partnerships between large, established pharmaceutical companies and start-up biotech firms.
Big Pharma, Tiny Start-ups
The biotech revolution changed the face of drug development, leaving Big Pharma increasingly reliant on the knowledge base of fledgling biotech companies founded by PhDs—who in turn depended on the large corporations for funding and other resources. Soon, the whole strategy of the drug companies had shifted from emphasizing only internal R&D to developing new strategic alliances.
For these tiny biotech firms, forming partnerships is everything. Their success depends heavily on their ability to build relationships with established companies—and in many cases, the earlier, the better. So what makes a biotech firm more attractive? When it comes to small start-ups, says Stern, “the reputation and status of a newly created company is almost one and the same as its founder.” Just how potential partners perceive those characteristics is crucial.
“We’re all trying to economize on the psychological processes through which we form perceptions.”
Stern and his colleague suggest that the two concepts of reputation and status are quite distinct, even though they are often conflated. Reputation,” they write in the paper, “is determined by the value or quality of one’s previous actions, while status is determined according to a socially constructed ordering or ranking.” So the researchers looked at 325 partnerships created between 1990 and 2003, hoping to tease apart the respective roles of status and reputation. For their study, the researchers equated status with the academic ranking of the university from which a firm’s founder or top scientist graduated, and reputation with his or her publication counts and citation rates.
When Reputation and Status Align
The team found that how status and reputation align is extremely important to partnership formation. The greater a founding scientist’s reputation, the more likely he or she was to successfully form an alliance with a pharmaceutical company—and to do so earlier. The same was true with status.
More interesting, though, was the relationship between these two factors. When reputation and status were both high, they amplified each other. “What happens,” says Stern, “is that when they align, we use one kind of process to form a perception.” This process is known as category-based perception formation—a type of mental shortcut. “So I see someone graduated from a great university and also has a great CV. I can economize on my mental processing and right away categorize her as a star scientist.” When status and reputation do not align, Stern says, “I have to go into an analysis process,” representing a very different way in which to form a perception of someone.
When reputation and status were both low, though, the amplification effect was even greater than when they were both high. “The double combination of low status and low reputation,” the authors write, “creates a particularly difficult situation for newly emerging firms seeking alliances, as evidenced by a particularly retarding effect on alliance formation.”
Stern says he was surprised to see the extent to which negatives had a stronger impact than positives. “When we form perceptions of others,” Stern explains, “we tend to always remember the negatives.” This can have major implications for managers, who often focus on highlighting positives but might be better off trying to overcome negatives. If you are putting together a team for a start-up company, in other words, you should identify potential shortcomings and try to find ways to compensate—such as building teams that complement one another.
It may seem like basing business decisions on something as simple as someone’s alma mater is unfair. But to Stern, it is simply human nature. “We’re all trying to economize on the psychological processes through which we form perceptions,” he says. “The underlying question is how to inform perceptions of other people and other companies. For years it was obvious that one’s status and reputation affect the perception of others. But we are showing it’s not one’s reputation or status but the alignment of those signals.”
Stern, Ithai, Janet Dukerich, and Edward Zajac. Forthcoming. “Unmixed Signals: How Reputation and Status Affect Alliance Formation.” Strategic Management Journal.