Strategic Formulation:

Cooperative Strategy

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copied or duplicated, or posted to a publicly accessible website, in
whole or in part.
Cooperative Strategy

• Overview: Seven content areas

– Cooperative strategies and why firms use them
– Three types of strategic alliances
– Business-level cooperative strategies & their use
– Corporate-level strategies in diversified firms
– Cross-border strategic alliances’ importance as an
international cooperative strategy
– Competitive risks with cooperative strategies
– Two approaches to manage cooperative strategies

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Introduction

• Cooperative strategy
– Firms work together to achieve a shared objective

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Primary Type of Cooperative Strategy:
Strategic Alliances

• Introduction: Strategic Alliance

– Cooperative strategy in which firms combine resources
and capabilities to create a competitive advantage

• Three types of strategic alliances

– 1. Joint venture
– 2. Equity strategic alliance
– 3. Nonequity strategic alliances, which include
• Licensing agreements
• Distribution agreements
• Supply contracts
• Outsourcing commitments

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Primary Type of Cooperative Strategy:
Strategic Alliances (Cont’d)

• 1. Joint venture
– Two or more firms create a legally independent
company to share resources and capabilities to develop
a competitive advantage

• 2. Equity strategic alliance

– Two or more firms own a portion of the equity in the
venture they have created

• 3. 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Primary Type of Cooperative Strategy:
Strategic Alliances (Cont’d)

• Why firms might develop strategic alliances

– Most firms lack the full set of resources and capabilities
needed to reach their objectives
– Cooperative behavior allows partners to create value
that they couldn't develop by acting independently
– Aligning stakeholder interests (both inside and outside
of the organization) can reduce environmental
uncertainty
– Alliances can …
• provide a new source of revenue
• be a vehicle for firm growth
• enhance the speed of responding to market opportunities,
technological changes, and global conditions
• allow firms to gain new knowledge and experiences to
increase competitiveness

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Primary Type of Cooperative Strategy:
Strategic Alliances (Cont’d)

• In summary, strategic alliances …

– …can reduce competition and enhance a firm’s
competitive capabilities and
– …create avenue for firm to gain access to resources
– …allows firm to take advantage of opportunities, build
strategic flexibility and innovate

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Reasons for Strategic Alliances by Market Type

Market Reason

Slow-Cycle • Gain access to restricted market

• Establish a franchise in a new market
• Maintain market stability (e.g., establishing standard)
• Speed up development of new goods or services
• Speed up new market entry
Fast-Cycle • Maintain market leadership
• Form an industry technology standard
• Share risky R&D expenses
• Overcome uncertainty
• Gain market power (reduce industry overcapacity)
• Gain access to complementary resources
• Establish better economies of scales
Standard-Cycle
• Overcome trade barriers
• Meet competitive challenges from other competitors
• Pool resources for very large capital project
• Learn new business techniques

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Business-Level Cooperative Strategy

• Business level cooperative strategies are used

to grow and improve firm performance in
individual product markets.

• Achieved through Complementary Strategic

Alliances (CSA)

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Business-Level Cooperative Strategy (Cont’d)

• Complementary Strategic Alliances (CSA)

– Firms share some of their resources and capabilities in
complementary ways to develop competitive
advantages
– Partners may have different
• Learning rates
• Capabilities to leverage complementary resources
• Marketplace reputations
• types of actions they can legitimately take
– Some firms are more effective at managing alliances
and deriving benefits from them
– Two forms include vertical and horizontal

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Business-Level Cooperative Strategy (Cont’d)

–2 Types of CSA:
•1. Vertical CSA
– partnering firms share resources & capabilities from
different stages of the value chain to create a competitive
advantage.
– Ex: Nintendo’s partnership with Electronic Arts for
additional software and game

•2. Horizontal CSA

– partnering firms share resources & capabilities from the
same stage of the value chain to create a competitive
advantage
– commonly used for long-term product development and
distribution opportunities
– Ex: Pfizer reached marketing agreements with two Indian
makers of generic drugs

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Business-Level Cooperative Strategy (Cont’d)

• Competition response strategy

– Competitors
• initiate competitive actions to attack rivals
• launch competitive responses to their competitor’s actions

– Strategic alliances (SA)

• can be used at the business level to respond to competitor’s
attacks
• primarily formed to take strategic vs. tactical actions
• can be difficult to reverse
• expensive to operate

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Business-Level Cooperative Strategy (Cont’d)

• Uncertainty-reducing strategy
– For example, 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
firm’s uncertainty (risk) is reduced

– Uncertainty reduced by combining knowledge & capabilities

– Ex: Volkswagen partners with China’s BYD Co. to produce hybrid

and electric vehicles powered by lithium batteries. It also made
agreements with Samsung Electric and Toshiba Corp. to reduce
the uncertainty about the insufficient capacity for lithium-ion
batteries used in hybrid vehicles.

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Business-Level Cooperative Strategy (Cont’d)

• Competition-reducing strategy: Two Collusive Strategies

– Collusive strategies (CS) differ from strategic alliances in that CS
are usually illegal

– 1. Explicit collusion
– Direct negotiation among firms to establish output levels and pricing
agreements that reduce industry competition
– Ex: Luxembourg’s Cargolux, Japan’s Nippon Cargo Airlines, and Korea’s
Asiana Airlines: global conspiracy to fix prices on air freight

– 2. Tacit collusion
– Indirect coordination of production and pricing decisions by several firms,
which impacts the degree of competition faced in the industry
– Ex: Kellogg’s, General Mills, Post, and Quaker
– Mutual forbearance: firms do not take competitive actions against rivals
they meet in multiple markets

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Business-Level Cooperative Strategy (Cont’d)

• Business-level cooperative strategy – assessment

– Used to develop competitive advantages (CA) for contributing to
successful positions & performance in individual product markets

– Developing a CA using a strategic alliance, the integrated

resources and capabilities must be valuable, rare, imperfectly
imitable and nonsubstitutable

– Vertical alliances have greatest probability of creating CA;

horizontal are sometimes difficult to maintain since they are
usually between competitors

– SA’s designed to respond to competition and reduce uncertainty

are more temporary than complementary (horizontal and
vertical) strategic alliances

– Competition-reducing has lowest probability of creating a

sustainable CA

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 Corporate-Level Cooperative Strategies

• Corporate-level cooperative strategies (CLCS) help firm

to diversify itself in terms of products offered, markets
served or both
• Common CLCS forms
– 1. Diversifying strategic alliance
• Firms share some of their resources & capabilities to diversify into new product
or market areas
• Ex: Alcatel-Lucent and 1020 Placecast in mobile advertising

– 2. Synergistic strategic alliance

• Firms share some of their resources & capabilities to create economies of scope
• Ex: Disney’s ABC partners with Google’s YouTube

– 3. 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 (Cont’d)

• Assessment of corporate-level cooperative strategies

– Costs incurred regardless of type selected
• Important to monitor expenditures!
– In comparison w/ business-level strategies
• Usually broader in scope
• More complex and therefore more costly
– Can develop useful knowledge … and, in order to gain
maximum value should organize and verify proper
distribution with those involved in forming and using
alliances

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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
– Ex: IMG Worldwide Inc. has international JV with other
broadcasting firms

• Why cross-border strategic alliances?

– Multinational corporations outperform firms that
operate only domestically
– Due to limited domestic growth opportunities, firms
look outside their national borders to expand business
– Some foreign government policies require investing
firms to partner with a local firm to enter their markets

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Competitive Risks in Cooperative Strategies

• Risks
– Partners may choose to act opportunistically
– 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

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Managing Cooperative Strategy

• Two primary approaches

– 1. Cost minimization
– 2. Opportunity maximization

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Managing Cooperative Strategy (Cont’d)

• 1. Cost minimization
– Relationship with partner is formalized with contracts
– Contracts specify how cooperative strategy is to be
monitored and how partner behavior is to be controlled
– Goal is to minimize costs and prevent opportunistic
behaviors by partners
– Costs of monitoring cooperative strategy are greater
– Formalities tend to stifle partner efforts to gain
maximum value from their participation

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Managing Cooperative Strategy (Cont’d)

• 2. Opportunity Maximization
– Focus: maximizing partnership's value-creation
opportunities
– Informal relationships and fewer constraints allow
partners to
• take advantage of unexpected opportunities
• learn from each other
• explore additional marketplace possibilities
– Partners need a high level of trust that each party will
act in the partnership's best interest, which is more
difficult in international situations

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.