Cooperative Strategy

The Strategic Management Process Chapter 1 Introduction to Strategic Management Chapter 2 Strategic Leadership Strategic Thinking Chapter 3 The External Environment Chapter 4 The Internal Organization Strategic Intent Strategic Mission Strategic Analysis Chapter 5 Business-Level Strategy Chapter 6 Competitive Rivalry and Competitive Dynamics Chapter 7 Corporate-Level Strategy Creating Competitive Advantage Chapter 8 Acquisition and Restructuring Strategies Chapter 9 International Strategy Chapter 10 Cooperative Strategy Monitoring And Creating Entrepreneurial Opportunities Chapter 11 Corporate Governance Chapter 12 Strategic Entrepreneurship

Cooperative Strategy • Cooperative strategy is a strategy in which firms • work together • to achieve a shared objective • Cooperating with other firms is a strategy that • creates value for a customer • exceeds the cost of constructing customer value in other ways • establishes a favorable position relative to competition

Strategic Alliance as a Cooperative Strategy • A strategic alliance is a cooperative strategy in which • firms combine some of their resources and capabilities • to create a competitive advantage • A strategic alliance involves • exchange and sharing of resources and capabilities • co-development or distribution of goods or services

Firm B Resources Capabilities Core Competencies Resources Capabilities Core Competencies Firm A Mutual interests in designing, manufacturing, or distributing goods or services Combined Resources Capabilities Core Competencies Strategic Alliance

Four Types of Strategic Alliances • Joint venture: two or more firms create an independent company by combining parts of their assets • Equity strategic alliance: partners who own different percentages of equity in a new venture • Nonequity strategic alliances: contractual agreements given to a company to supply, produce, or distribute a firm’s goods or services without equity sharing • Strategic cooperative network: multiple firms agree to form partnerships to achieve shared objectives

Strategic Center Firm Strategic Network

Strategic Network • A strategic network is a grouping of organizations that has been formed to create value through participation in an array of cooperative arrangements, such as alliances and joint ventures • The strategic network seeks to develop a competitive advantage in primary or support activities • A strategic center firm often manages the network

Strategic Network • strategic center firm engages in four primary tasks • strategic outsourcing (outsources and partners with more firms than do other network members) • competencies (supports each member’s efforts to develop core competencies that can benefit the network)

Strategic Network • strategic center firm engages in four primary tasks • technology (manages the development and sharing of technology-based ideas among network members) • race to learn (guides participants in efforts to form network-specific competitive advantages)

Reasons for Strategic Alliances by Market Type Market Reason Slow Cycle • Gain access to a restricted market • Establish a franchise in a new market • Maintain market stability (e.g., establishing standards)

Reasons for Strategic Alliances by Market Type Market Reason Fast Cycle • Speed up development of new goods or service • Speed up new market entry • Maintain market leadership • Form an industry technology standard • Share risky R&D expenses • Overcome uncertainty

Reasons for Strategic Alliances by Market Type Market Reason Standard Cycle • Gain market power (reduce industry overcapacity) • Gain access to complementary resources • Establish economies of scale • Overcome trade barriers • Meet competitive challenges from other competitors • Pool resources for very large capital projects • Learn new business techniques

Complementary Alliances Business-Level Cooperative Strategies: Complementary Strategic Alliances • complementary strategic alliances are designed to take advantage of market opportunities by combining partner firms’ assets in complementary ways to create new value • these include distribution, supplier or outsourcing alliances where firms rely on upstream or downstream partners to build competitive advantage

Margin Margin Margin Margin Service Service Marketing & Sales Marketing & Sales Technological Development Technological Development Human Resource Mgmt. Human Resource Mgmt. Support Activities Support Activities Outbound Logistics Outbound Logistics Firm Infrastructure Firm Infrastructure Procurement Procurement Operations Operations Inbound Logistics Inbound Logistics Primary Activities Primary Activities Business-Level Cooperative Strategies: Complementary Strategic Alliances Buyer • vertical complementary strategic alliance is formed between firms that agree to use their skills and capabilities in different stages of the value chain to create value for both firms • outsourcing is one example of this type of alliance Supplier Vertical Alliance

Margin Margin Margin Margin Service Service Marketing & Sales Marketing & Sales Technological Development Technological Development Human Resource Mgmt. Human Resource Mgmt. Support Activities Support Activities Outbound Logistics Outbound Logistics Firm Infrastructure Firm Infrastructure Procurement Procurement Operations Operations Inbound Logistics Inbound Logistics Primary Activities Primary Activities Business-Level Cooperative Strategies: Complementary Strategic Alliances Buyer Buyer Horizontal Alliance Potential Competitors • horizontal complementary strategic alliance is formed between partners who agree to combine their resources and skills to create value in the same stage of the value chain • focus on long-term product development and distribution opportunities • the partners may become competitors • requires a great deal of trust between the partners

Competition Response Alliances Complementary Alliances Business-Level Cooperative Strategies: Competition Response Alliances • competition response strategic alliances occur when firms join forces to respond to a strategic action of another competitor • because they can be difficult to reverse and expensive to operate, competition response strategic alliances are primarily formed to respond to strategic rather than tactical actions

Competition Response Alliances Uncertainty Reducing Alliances Complementary Alliances Business-Level Cooperative Strategies: Uncertainty Reducing Alliances • uncertainty reducing strategic alliances are used to hedge against risk and uncertainty • these alliances are most noticed in fast-cycle markets • alliance may be formed to reduce the uncertainty associated with developing new product or technology standards

Competition Response Alliances Uncertainty Reducing Alliances Competition Reducing Alliances Complementary Alliances Business-Level Cooperative Strategies: Competition Reducing Alliances • competition reducing strategic alliances may be created to avoid destructive or excessive competition • explicit collusion exists when firms directly negotiate production output and pricing agreements in order to reduce competition (illegal) • tacit collusion exists when several firms in an industry indirectly coordinate their production and pricing decisions by observing each other’s competitive actions and responses

Competition Response Alliances Uncertainty Reducing Alliances Competition Reducing Alliances Complementary Alliances Business-Level Cooperative Strategies: Competition Reducing Alliances • mutual forbearance is a form of tacit collusion in which firms avoid competitive attacks against those rivals they meet in multiple markets • competition reducing strategic alliances may require governments to find ways to permit collaboration among rivals without violating antitrust laws

Implementing Business-Level Cooperative Strategies • Complementary business-level strategic alliances have the greatest probability of creating a sustainable competitive advantage • Strategic alliances designed to respond to competition and reduce uncertainty can create competitive advantages that may be more temporary in nature • Competition reducing strategy has lowest probability of creating a sustainable competitive advantage

Corporate-Level Cooperative Strategies • Corporate-level cooperative strategies are designed to facilitate product and/or market diversification • diversifying strategic alliance • synergistic strategic alliance • franchising • Diversifying alliances and synergistic alliances allow firms • to grow and diversify their operations • through a means other than a merger or acquisition

Diversifying Alliances Corporate-Level Cooperative Strategies: Diversifying Alliances • diversifying strategic alliance allows a firm to expand into new product or market areas without completing a merger or an acquisition • provides some of the potential synergistic benefits of a merger or acquisition, but with less risk and greater levels of flexibility • permits a “test” of whether a future merger between the partners would benefit both parties

Synergistic Alliances Diversifying Alliances Corporate-Level Cooperative Strategies: Synergistic Alliances • synergistic strategic alliances create joint economies of scope between two or more firms • create synergy across multiple functions or multiple businesses between partner firms

Synergistic Alliances Franchising Diversifying Alliances Corporate-Level Cooperative Strategies: Franchising • franchising spreads risks and uses resources, capabilities, and competencies without merging or acquiring another company • contractual relationship concerning the franchise that is developed between two parties, the franchisee and the franchisor • an alternative to pursuing growth through mergers and acquisitions

Implementing Corporate-Level Cooperative Strategies • Corporate-level cooperative strategies are broader in scope, more complex and more costly than business-level strategies • Competitive advantages and value are created when those employing the strategies can also use them to develop useful knowledge about how to succeed in the future • imperfectly imitable • nonsubstitutable • valuable • rare

International Cooperative Strategies • Cross-border strategic alliance • an international cooperative strategy in which firms with headquarters in different nations combine some of their resources and capabilities to create a competitive advantage • a firm may form cross-border strategic alliances to leverage core competencies that are the foundation of its domestic success to expand into international markets

International Cooperative Strategies • Allows risk sharing by reducing financial investment • Host partner knows local market and customs • International alliances can be difficult to manage due to differences in management styles, cultures or regulatory constraints • Must gauge partner’s strategic intent so they do not gain access to important technology and become a competitor

Implementing International Cooperative Strategies • Differences among countries’ regulatory environments increase the challenge of managing international networks and verifying that, at a minimum, the network’s operations comply with all legal requirements • Distributed strategic networks are often the organizational structure used to manage international cooperative strategies

Strategic Center Firm Main Strategic Center Firm = Distributed Strategic Center Firms Distributed Strategic Network

Distributed Strategic Network • International cooperative strategies often require more complex networks • Many large multinational firms form distributed strategic networks with multiple regional strategic centers to manage their array of cooperative arrangements with partner firms • Breaking large networks into multiple manageably-sized networks helps to manage the complexity of maintaining many relationships

Network Cooperative Strategies • A network strategy is a cooperative strategy wherein several firms agree to form multiple partnerships to achieve shared objectives • stable strategic cooperative network • dynamic strategic cooperative network • Effective social relationships and interactions among partners are keys to a successful network cooperative strategy

Stable Strategic Cooperative Network Network Cooperative Strategies: Stable Strategic Cooperative Network • long term relationships that often appear in mature industries where demand is relatively constant and predictable • stable networks are built for exploitation of the economies available between firms

Dynamic Strategic Cooperative Network Stable Strategic Cooperative Network Network Cooperative Strategies: Dynamic Strategic Cooperative Network • arrangements that evolve in industries with rapid technological change leading to short product life cycles • primarily used to stimulate rapid, value-creating product innovations and subsequent successful market entries • purpose is often exploration of new ideas

Competitive Risks Competitive Risks with Cooperative Strategies • Partner may act opportunistically • Misrepresentation of competencies brought to the partnership • Partner fails to make committed resources and capabilities available to its partners • Firm may make investments that are specific to the alliance while its partner does not

Competitive Risks Risk and Asset Management Approaches Managing Competitive Risks in Cooperative Strategies • Manage the balance between learning from partners while protecting knowledge and sources of competitive advantages from excessive learning by partners • Assign managerial responsibility for a firm’s cooperative strategies to a high-level executive or team • Specify resources and capabilities that will be shared and those that will not be shared (detailed contracts and monitoring) • Develop trusting relationships

Approaches for Managing Cooperative Strategies • cost minimization • formal contracts specify how the cooperative strategy is to be monitored and how partner behavior is to be controlled • opportunity maximization • maximize partnership’s value-creation opportunities • partners take advantage of unexpected opportunities to learn from each other and to explore additional marketplace possibilities • fewer formal, limiting, contracts

Desired Outcome Competitive Risks Risk and Asset Management Approaches Managing Competitive Risks in Cooperative Strategies • Creating value • Above-average returns

Cooperative Strategy