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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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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 Internal development, mergers and acquisitions, and

cooperation Core and critical parts of firms strategies today Has implications for a firm’s corporate, business,

and international strategy Competitive advantage and above average returns

Collaborative or relational advantages

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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

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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 couldn’t

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

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Reasons Firms Develop Strategic Alliances

Strategic alliances can be used to Reduce competition Gain market power Enhance a firm’s 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

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Business-Level Cooperative Strategy

Business level cooperative strategies are used to grow and improve firm performance in individual product markets

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

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

Strategic alliances can be used at the business level to respond to competitor’s 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 firm’s 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

Synergistic strategic alliance Firms share some of their resources & capabilities to create

economies of scope Diversifies the involved firms into a new business in a

synergistic way

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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!

In comparison with business-level strategies Usually broader in scope, more complex and therefore more

costly

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

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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

Why cross-border strategic alliances? 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 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 Firm’s gain access to their partners other partners 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

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

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Competitive Risks with Cooperative Strategies

Risks

2/3 have serious problems in first 2 years and 70% 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