The Strength of Churning Ties:

A Dynamic Theory of Interorganizational Relationships*

SERGIO G. LAZZARINI
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

TODD R. ZENGER
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 argument. 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.
2
 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 relationship. 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 they 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 contracts 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 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.

Keywords

Interorganizational collaboration, strategic alliances, networks, cooperative strategy.

 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 relationship-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 types 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 group” (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 extracting

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 relationships (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 literature 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 tie 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; Williamson,

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 benefit not only from a strong tie, but also

4
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

innovation 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. In

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

associated 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 relationship, 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 exchange 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 partner and in the process unravel its existing strong tie. This existing tie then

becomes weak, showing high autonomy, but low cooperation.

5
 We contend that a static theory of tie strength is misguided, because managers have no

capacity to statically choose 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 essentially

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 contracts 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 controllable, 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 may 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 cooperation

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

6
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 industry

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 PERFORMANCE

Granovetter (1973: 1361) originally defined tie strength as a “combination of the amount of

time, the 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 deliver 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 alternative

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 allows 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.

7
exchange that is potentially (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

cooperation 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; Axelrod, 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 contractual 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, strong

social attachments reduce conflicts and promote cohesion (Krackhardt, 1992; Nelson, 1989).

2
This 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., 1992).
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
individuals are likely to disseminate to other members of the partnering firms and generate collective expectations
and norms (Zaheer, McEvily, & Perrone, 1998).

8
Relational norms such as reciprocity also curb firms’ willingness to defect and thus support

mutual trust (Berg, Dickhaut, & McCabe, 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., 1998), 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 manager 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 escalating

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 the 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

9
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 (Katz, 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 interpersonal 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 suggests 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 opportunistic

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, 1994; Yamagishi et al., 1998) and organizational economists

10
(Barzel, 1982; Holmstrom & Milgrom, 1994) highlight additionally the role of measurement

difficulty in the choice of governance. More difficult measurement of exchange performance

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

resources (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 exploitation (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 around here>

WHAT IF FIRMS WANT TO COMBINE THE ADVANTAGES OF BOTH WEAK AND

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

11
strength. Second, managers cannot directly choose or control informal processes that influence

tie strength. We consider these issues next.

Conflicting 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 knowledge (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

relationship-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 both 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 organizations 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 literature 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’ flexibility 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

12
(1998: 21) conclude 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. Consider, 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

that 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 balances 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 autonomy. 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 Dynamics 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 the 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 establishing 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).

13
These informal processes 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 perfectly 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 undermined 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, appropriate 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 individuals

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 shared 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 well 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

14
may become less 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 change 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 pursue 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 knowledge 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 relationship 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 responsible 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 investments 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 expectation 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
diminishes the quality of the relationship. When interaction between deals decreases, the relative significance of

15
 Figure 1 illustrates 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

tie 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 uncertain 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 presence of conflicting

contingencies by promoting dynamic adjustments in tie strength in order to reap temporarily the

benefits from autonomy and cooperation.

transactions decreases, further reinforcing the perception of an increased transactional [arms’s-length] orientation on
the part of the customer” (Eccles 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.

16
 CHURNING TIES: DYNAMICALLY ADJUSTING TIE STRENGTH

The preceding discussion provides us with two assumptions 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 cooperation 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 decreases. 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 interaction 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 processes 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 dynamics 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 strengthen 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.

17
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 formally 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

level 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 strength. 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

contractually 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, since 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 duration. 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

18
familiarity with their new partners will be an impediment to promoting investments in

relationship-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 relationships, 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 benefits 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 cannot 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 temporarily 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 weakening—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 cooperation 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. Thus, 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).

19
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 outset 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

induces 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, consequently, 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 determine 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 increasingly 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 collaborative 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 relatively 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 contractual 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.

20
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 case 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 downstream 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 compensate 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 commit 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, but 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 to increase

21
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 likely 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 negotiated 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.

Managers 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 reduce 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 seller 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 costly, 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 dissolution 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.

22
substantial changes in the extent of co-specialization or socialization, they may be mostly

redistributing, rather 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 real 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 (Inkpen 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 negotiate 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, bilateral 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, bilateral 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 terminate 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”

(Eccles, 1981: 353). Mandating that procurement transactions will be managed through an

Internet “business-to-business” auction may have this precise effect (Lucking-Reiley et al., 2001;
13
For instance, a new buyer representative may have an indirect tie with a seller representative 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 supplier.

23
Wise & Morrison, 2000). Competitive bidding may not only 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 termination 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 quickly 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 practices 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 at 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. There also appears to be an asymmetry in this process: relationships can be more

easily unraveled than developed, though changes that more quickly weaken ties are more costly

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.

24
as well (e.g., litigation expenses and downstream reputation losses). Thus, the challenge 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 that 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 the 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] served 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 dealings 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

the formation of new relationships outside restricted circles. Although cooperation easily

25
unfolds in those societies through committed relations (Dyer & Singh, 1998), the resulting strong

ties are 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 present. 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.

Another 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 cooperation 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 ownership, 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 increase.15

Summary of Propositions

15
It is likely that relational competencies are formed through cumulative experience with past alliances, as firms
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).

26
 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 interorganizational 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 order 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 mechanisms 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
termination, 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 isolation. 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

redundant or not, rather than the extent of its strength (Burt, 1992). Namely, a firm should avoid

27
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 provide 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 have.”

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 portfolio 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

exchange. 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

cooperate (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 cooperation.

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

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).

28
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 consequence 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 optimal 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 sever

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.

CONCLUSIONS

Given 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 interfirm governance mechanisms is warranted.

17
For instance, in their analysis of corporate customer-bank relationships, Eccles and Crane (1988: 89) show how
certain customers “downgrade” certain banks formerly connected through a strong tie to “upgrade” other banks
formerly connected through a weak tie.

29
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 want 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

functionality 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 view 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 commitment 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 capturing 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 contingency 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

highlighting the role of conflicting contingencies, our theory is consistent with dialectical models

of interorganizational relations, which assert that contradictory forces are crucial to explain

change (e.g. Das & Teng, 2000; Zeitz, 1980). We contribute to this literature by describing both

30
the key sources of conflict and the resulting dynamics of change involving interorganizational

ties.

Second, 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 of 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. Also, 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 restructure 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 is 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 possibility: 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 “often staked

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

31
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 individuals 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

mechanisms 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, firms 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 increase 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 the 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 prestigious 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 adoption 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

potential partners. Such firm-specific variables 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

32
alternative 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 influenced 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.

33
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 TABLE 1

Fit (Alignment) Between Contingencies and Tie Strength

Contingency Weak tie Strong tie

(autonomy) (cooperation)
Exchange attributes
Asset specificity Low High
Difficulty to measure performance Low High
Type of knowledge Codified Tacit

Industry characteristics
Technological innovation High Low
Market volatility High Low
Generic task objective Exploration Exploitation

42
 FIGURE 1

The Dynamics of Tie Change

Cooperation

S
X

Autonomy

43
 FIGURE 2

Churning Ties

Cooperation

X
S

(a)
X′

(b)

Autonomy

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

Self-reinforcing processes causing further weakening or strengthening

44
 FIGURE 3

The Theory of Churning Ties

Loose contractual
agreements
Strengthening of ties
when they become Long-term contracts
weak
Joint ownership

P2

Conflicting P1 Churning Relational P4

contingencies ties competence of
partners

P5
P3
Institutional Unilateral
environment termination
Weakening of ties
when they become Bilateral termination
strong
Reorganization

Increasing ability to strengthen or

weaken the tie

45