Chapter 9: Cooperative Strategy

Overview:

Cooperative strategies and why firms use them Three types of strategic alliances Business-level cooperative strategies & their use Corporate-level cooperative strategies in diversified firms Cross-border strategic alliances importance as an international cooperative strategy Network alliances
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Chapter 9: Cooperative Strategy

Introduction
Cooperative strategy A strategy in which firms work together to achieve a shared objective One of 3 means firms use to grow and improve performance (mode)

Internal development, mergers and acquisitions, and cooperation

Core and critical parts of firms strategies today Has implications for a firms corporate, business, and international strategy Competitive advantage and above average returns

Collaborative or relational advantages

Primary Type of Cooperative Strategy: Strategic Alliances

Strategic Alliance A cooperative strategy in which firms combine some of their resources and capabilities to create a competitive advantage Involve firms with some degree of exchange and sharing of resources and capabilities to co-develop, sell, and service goods or services 3 major types of strategic alliances Joint Venture Two or more firms create a legally independent company to share some of their resources and capabilities to develop a competitive advantage Partners typically own equal percentages and contribute equally to the ventures operations 4

Primary Type of Cooperative Strategy: Strategic Alliances

3 major types of strategic alliances Equity Strategic Alliance Two or more firms own different percentages of the company they have formed by combining some of their resources and capabilities to develop a competitive advantage Nonequity Strategic Alliance Two or more firms develop a contractual relationship to share some of their unique resources and capabilities to create a competitive advantage
Licensing agreements

Distribution agreements Supply contracts Outsourcing commitments

A separate independent company is NOT established

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Reasons Firms Develop Strategic Alliances

Why firms develop strategic alliances

They allow partners to create value that they couldnt develop by acting independently They allow partners to enter markets more quickly and with greater market penetration possibilities Most firms lack the full set of resources and capabilities needed to reach their objectives They are a prime vehicle for firm growth mode of entry into new product or geographic markets Can account for 25% of sales revenue in large firms
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Reasons Firms Develop Strategic Alliances

Strategic alliances can be used to

Reduce competition Gain market power Enhance a firms competitive capabilities Gain access to resources and new (restricted) markets Take advantage of opportunities Build strategic flexibility Help the firm innovate Provide for a new source of revenue and for firm growth Enhance organizational response times Gain new knowledge and experiences Overcome trade barriers Establish better economies of scale and scope Lower costs

Business-Level Cooperative Strategy

Business level cooperative strategies are

used to grow and improve firm performance in individual product markets (industries) 4 types

Complementary strategic alliances Competition response strategy Uncertainty-reducing strategy Competition-reducing strategy
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Business-Level Cooperative Strategy

Complementary Strategic Alliances

Firms share some of their resources and capabilities in complementary ways to develop competitive advantages

Two Types:

Vertical CSA
Partnering firms share resources & capabilities from different stages of the value chain to create a competitive advantage.

Horizontal CSA
Partnering firms share resources & capabilities from the same stage(s) of the value chain to create a competitive advantage Commonly used for long-term product development and distribution opportunities
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Business-Level Cooperative Strategy

Competition Response Strategy Competitive Rivalry (Ch. 5)

Competitors initiate competitive actions to attack rivals and launch competitive responses to their competitors actions

Strategic alliances can be used at the business level to respond to competitors attacks

Primarily formed to take strategic actions vs. tactical actions

Can be difficult to reverse and expensive to operate
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Business-Level Cooperative Strategy

Uncertainty-Reducing Strategy

Can be used to hedge against risk and uncertainty As examples, entering new product markets, emerging economies and establishing a technology standard are unknown areas so by partnering with a firm in the respective industry, a firms uncertainty (risk) is reduced Uncertainty is reduced by combining knowledge & capabilities

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Business-Level Cooperative Strategy

Competition-Reducing Strategy Collusive strategies differ from strategic alliances in that they are often illegal 2 Types

Explicit collusion
Direct negotiation among firms to establish output levels and pricing agreements that reduce industry competition

Tacit collusion
Indirect coordination of production and pricing decisions by several firms, which impacts the degree of competition faced in the industry
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Business-Level Cooperative Strategy

Assessment of Business-level cooperative strategies

Used to develop competitive advantages in individual product markets The integrated resources and capabilities must be valuable, rare, imperfectly imitable, and nonsubstitutable Vertical alliances have greatest probability of creating competitive advantage Horizontal alliances are sometimes difficult to maintain since they are usually between rival companies Alliances designed to respond to competition and reduce uncertainty are more temporary in comparison with complementary (horizontal and vertical) strategic alliances Competition-reducing alliances have lowest probability of creating sustainable competitive advantages
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Corporate-Level Cooperative Strategies

Corporate-level cooperative strategies used to help

firm diversify itself in terms of products offered or markets served or both 3 Common Forms

Diversifying strategic alliance

Firms share some of their resources & capabilities to diversify into new product or market areas Firms share some of their resources & capabilities to create economies of scope Diversifies the involved firms into a new business in a 14 synergistic way

Synergistic strategic alliance

Corporate-Level Cooperative Strategies

3 Common Forms (cont.) Franchising

Firm uses a franchise as a contractual relationship to describe and control the sharing of its resources and capabilities with partners Franchise: contractual agreement between two legally independent companies whereby the franchisor grants the right to the franchisee to sell the franchisor's product or do business under its trademarks in a given location for a specified period of time

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Corporate-Level Cooperative Strategies

Assessment of corporate-level cooperative

strategies

Costs incurred regardless of type selected

Important to monitor costs! Usually broader in scope, more complex and therefore more costly

In comparison with business-level strategies

Can be used to develop useful knowledge about how to succeed in the future Can lead to competitive advantage if they are managed in ways that are valuable, rare, imperfectly imitable, and nonsubstitutable 16

International Cooperative Strategy

Cross-Border Strategic Alliance

International cooperative strategy in which firms with headquarters in different nations combine some of their resources and capabilities to create a competitive advantage Can help firms use their resources and capabilities to create value in locations outside their home market Multinational corporations outperform firms that operate only domestically Due to limited domestic growth opportunities, firms look outside their national borders to expand business

Why cross-border strategic alliances?

Some foreign government policies require investing firms to partner with a local firm to enter their markets
Local partners can help firms overcome liabilities of moving into a foreign country (example: lack of knowledge about local culture)
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Network Cooperative Strategy

Network Cooperative Strategy

Cooperative strategy wherein several firms agree to form multiple partnerships to achieve shared objectives Very effective when formed by geographically clustered firms (i.e., Silicon Valley in N. California)

Effective social relationships and interactions among partners, while sharing resources and capabilities increase likelihood of success, including innovation Japanese keiretsus and Korean Chaebols

Firms gain access to their partners other partners - so multiple alliances with multiple partnerships Can increase competitive advantage potential as set of shared resources and capabilities expands Can be problematic - could lock firm in with partners and exclude development of alliances with others
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Network Cooperative Strategy

Alliance network types: Set of strategic alliance

partnerships resulting from use of a network cooperative strategy

Stable alliance network

Formed in mature industries where demand is relatively constant and predictable Directed primarily toward developing products at a low cost and exploiting economies of scale and scope Used in industries characterized by environmental uncertainty, frequent product innovations, and short product life cycles Directed primarily toward continued development of products that are uniquely attractive to customers
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Dynamic Alliance Networks

Competitive Risks with Cooperative Strategies

Risks

2/3 have serious problems in first 2 years and 50% end up failing
Partners may choose to act opportunistically due to inadequate contracts Partner competencies may be misrepresented Partner may fail to make available the complementary resources and capabilities that were committed One partner may make investments specific to the alliance while the other partner may not holding alliance partner's specific investments hostage

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