Competing for ADVANTAGE

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Chapter 7Cooperative Strategy

PART IIICREATING COMPETITIVE ADVANTAGE

The Strategic Management Process

Cooperative Strategy

Key Terms

Cooperative strategy

Strategy in which firms work together to achieve a shared objective

Relational advantage

Condition which exists when a firm’s relationships with other firms put it at an advantage relative to rival firms

Strategic alliance

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

The Importance of Cooperative Strategy

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.

The Importance of Cooperative Strategy

Alliances can be a vehicle for firm growth. Alliances can enhance the speed of

responding to market opportunities, technological changes, and global conditions.

Alliances are a way that firms can gain new knowledge and experiences to increase competitiveness.

Cooperative strategies can enhance strategic flexibility.

The Importance of Cooperative Strategy

Key Terms

Co-opetition

Condition that exists when firms that have formed cooperative strategies also compete against one another in the marketplace

Reasons for Strategic Alliances by Market Type

Strategic Alliances in Slow-Cycle Markets

In slow-cycle markets, competitive advantages are shielded from imitation for relatively long periods, and imitation

is costly.

Competitive advantages are sustainable.

Strategic Alliances in Fast-Cycle Markets

In fast-cycle markets, competitive advantages are not shielded from

imitation.

Long-term sustainability is not possible.

Strategic Alliances in Standard-Cycle Markets

In standard-cycle markets, competitive advantages are moderately shielded

from imitation.

Competitive advantages are partially sustainable.

Types of Alliances

Key Terms

Equity strategic alliance

Alliance in which two or more firms own a portion of the equity in the venture they have created

Nonequity strategic alliance

Alliance in which two or more firms develop a contractual relationship to share some of their unique resources and capabilities to create a competitive advantage

Types of Alliances

Key Terms Joint venture

Strategic alliance in which two or more firms create a legally independent company to share resources and capabilities to develop a competitive advantage

Tacit knowledge

Knowledge which is complex and difficult to codify

Strategic Objectives of Cooperative Strategies

Cooperative Strategies to Differentiate or Reduce Costs

Complementary Strategic Alliances

Network Cooperative Strategies

Complementary Strategic Alliances

Key Terms

Complementary strategic alliance

Business-level alliance in which firms share some of their resources and capabilities in complementary ways to develop competitive advantages

Vertical complementary strategic alliance

When firms share resources and capabilities from different stages of the value chain to create a competitive advantage

Horizontal complementary strategic alliance

When firms share resources and capabilities from the same stage of the value chain to create a competitive advantage

Network Cooperative Strategies

Key Terms

Network cooperative strategy

Cooperative strategy in which multiple firms agree to form partnerships to achieve shared objectives

Alliance Network

Gain information and knowledge from multiple sources

Use heterogeneous knowledge to innovate

Achieve additional competitive advantages

Stimulate product innovation critical to value creation

Firms involved in alliance networks tend to be more innovative.

Alliance Network Success

Effective social relationships and interactions among partners while sharing resources and capabilities

Effective strategic center firm

A Strategic Network

Strategic Center Firms

Outsource and partner with network members

Encourage other members to outsource and partner within the network

Foster development of core competencies and competitive advantages with and across network members

Serve as gatekeepers to exchange of information among members

Types of Alliance Networks

Stable Alliance Network

Dynamic Alliance Network

Stable Alliance Networks

Formed in mature industries in which demand is relatively constant and predictable

Directed primarily toward developing products at a low cost

Built for exploitation of economies available between firms

Dynamic Alliance Networks

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

Built to discover new product innovations, enter new markets, or develop new markets

Cooperative Strategies to Address Forces in the External Environment

Competitive Response Alliances Uncertainty-Reducing Alliances Competition-Reducing

Cooperative Strategies Associations And Consortia

Competitive Response Alliances

Used to respond to competitors' strategic

attacks

Competitive Response Alliances

Used to reduce environmental uncertainty

Competition-Reducing Alliances

Used to reduce competition in an industry

Collusive Strategies

Explicit collusion - direct negotiation amongst firms to establish output levels and pricing agreements to reduce industry competition

Tacit collusion - several firms indirectly coordinate production and pricing decisions which impact the degree of competition faced in the industry

Associations and Consortia

Used to form coalitions with stakeholders to achieve

common objectives

Cooperative Strategies to Promote Growth and/or Diversification

Diversifying Strategic Alliances

Franchising

International Cooperative Strategies

Cooperative strategies are attractive because they require fewer resource

commitments and permit greater strategic flexibility.

Cooperative Strategies to Promote Growth and/or Diversification

Key Terms

Diversifying strategic alliance

Cooperative strategy in which firms share some of their resources and capabilities to diversify into new product or market areas

Cooperative Strategies to Promote Growth and/or Diversification

Key Terms

Franchising

Cooperative strategy in which a 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

Successful Franchising Behaviors

Partners work closely together in ways that strengthen the brand

Franchisors develop strong programs to transfer knowledge and skills needed for franchisees to successfully compete at the local level

Franchisees provide feedback to franchisors regarding how to become more effective and efficient

Use the strategy in fragmented industries where no firm has a dominant share

Franchisees encouraged to own multiple sites

Cooperative Strategies to Promote Growth and/or Diversification

Key Terms

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

Reasons for Cross-Border Alliances

Limited domestic growth opportunities

Restrictive governmental economic policies

To leverage core competencies

To draw from the local expertise of partners

A Distributed Strategic Network

Risks of Cooperative Strategies

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.

Partner may make investments specific to the alliance while the other partner does not.

Managing Competitive Risks in Cooperative Strategies

Implementing and Managing Cooperative Strategies

Internalize experiences with successful cooperative strategies to gain maximum value from the knowledge learned.

Establish appropriate controls to manage both tangible and intangible assets.

Assign managerial responsibility for cooperative strategy to high-level executive or team responsible for overseeing the entire portfolio of alliances.

Include alliances with companies from a variety of value chain activities.

Increasing the level of trust between partners increases the likelihood of alliance success and is an efficient way to influence and control alliance partners' behaviors.

Primary Approaches to Manage Cooperative Strategies

Cost Minimization

Opportunity Maximization

Cost Minimization Approach

Formalized partnership relationship – contracts

Goals – minimize costs and prevent opportunistic behaviors

Requirements – monitoring mechanisms

Opportunity Maximization Approach

Informal relationships – fewer constraints

Goals – maximize partnership's value-creation opportunities

Requirements – high level of trust

Benefits of Trust with Alliance Partners

Creates relationship stability Reduces alliance monitoring costs Maximizes opportunities to create value Positively influences partner behaviors Creates social capital Increases the likelihood of alliance

success Offers the potential to be a source of

competitive advantage

ETHICAL QUESTION

From an ethical perspective, how much information is a firm obliged to provide to a potential complementary alliance partner about what it expects to learn

from a cooperative arrangement?

ETHICAL QUESTION

“A contract is necessary because most firms cannot be trusted to act ethically in a cooperative venture

such as a strategic alliance.” In your opinion, is this statement true or

false? Why? Does the answer vary by country? Why?

ETHICAL QUESTION

Ventures in foreign countries without strong contract law are risky because

managers may be subjected to bribery attempts once their firms’ assets have been invested in the country. How can managers deal with these problems?

ETHICAL QUESTION

This chapter mentions international strategic alliances being formed by the

world’s airline companies. Do these companies face any ethical issues as

they participate in multiple alliances? If so, what are the issues? Are they

different for airline companies headquartered in the United States than for those with European home bases? If so, what are the differences, and what

accounts for them?

ETHICAL QUESTION

Firms with a reputation for ethical behavior in strategic alliances are

likely to have more opportunities to form cooperative strategies than

companies that have not earned this reputation. What actions can firms

take to earn a reputation for behaving ethically as a strategic alliance

partner?