Chapter 9: Cooperative Strategy

1. 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

2. Chapter 9: Cooperative Strategy

3. 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 firm’s corporate, business, and international strategy • Competitive advantage and above average returns • Collaborative or relational advantages

4. 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

5. 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

6. 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 • Can account for 25% of sales revenue in large firms

7. 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

8. 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

9. 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 differentstages of the value chain to create a competitive advantage. • Horizontal CSA • Partnering firms share resources & capabilities from the samestage(s) of the value chain to create a competitive advantage • Commonly used for long-term product development and distribution opportunities

10. Business-Level Cooperative Strategy • Competition Response Strategy • Competitive Rivalry (Ch. 5) • 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

11. 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

12. 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

13. Business-Level Cooperative Strategy • Assessment of Business-level cooperative strategies • The integrated resources and capabilities must be valuable, rare, imperfectly imitable, and nonsubstitutable • Complementary alliances, especially the vertical ones, have greatest probability of creating competitive advantage • Horizontal alliances are can be hard to maintain since they are usually between rival companies • Competition response and uncertainty reducing alliances tend to create advantages that are more temporary in nature • Competition-reducing alliances have lowest probability of creating sustainable competitive advantages

14. 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

15. 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

16. Corporate-Level Cooperative Strategies • Assessment of corporate-level cooperative strategies • In comparison with business-level strategies • Usually broader in scope and more complex • Also more challenging and 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

17. 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)

18. 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) • Japanese keiretsus and Korean Chaebols • Firm’s 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

19. 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

20. 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