Strategic Management: Concepts and Cases

1. Strategic Management: Concepts and Cases Part II: Strategic Actions: Strategy Formulation Chapter 9: Cooperative Strategy

2. The Strategic Management Process

3. Chapter 9: 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 • Two approaches to manage cooperative strategies

4. Cooperative Strategies at IBM • 350,000 employees who design, manufacture, sell and service advanced information technologies including computer and storage systems, software and microelectronics. • 3 core biz units: Systems & financing; software; services • 3 growth means: internal development (primarily innovation); mergers & acquisitions; cooperative strategies • By cooperating with other companies can leverage core competencies to grow and improve performance

5. Cooperative Strategies at IBM (Cont’d) • Cooperative strategies include strategic alliance and joint ventures (JVs); cooperative relationships with competitors (I.e., Sun Microsystems); collaboration (I.e., SAP); global alliance (I.e., Lenovo)

6. Introduction • Cooperative strategy • Firms work together to achieve a shared objective

7. Chapter 9: 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 • Two approaches to manage cooperative strategies

8. 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

9. 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

10. Primary Type of Cooperative Strategy:Strategic Alliances (Cont’d) • Many reasons firms implement cooperative strategies and specifically, strategic alliances • Competitive market conditions would include • 1. Slow-cycle markets • 2. Fast-cycle markets • 3. Standard-cycle

11. 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

12. 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 • allow firm to take advantage of opportunities, build strategic flexibility and innovate • The competitive conditions • 1. Slow-cycle markets • 2. Fast-cycle markets • 3. Standard-cycle

13. 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 • The competitive conditions -- • 1. Slow-cycle markets • 2. Fast-cycle markets • 3. Standard-cycle

14. Primary Type of Cooperative Strategy:Strategic Alliances (Cont’d) • 1. Slow-cycle markets • Privatization of industries and economies • Rapid expansion of the Internet's capabilities • Quick dissemination of information • Speed with which advancing technologies permit imitation of even complex products • 2. Fast-cycle markets • 3. Standard-cycle

15. Chapter 9: 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 • Two approaches to manage cooperative strategies

16. Business-Level Cooperative Strategy • Introduction • Complementary strategic alliances (SA) • 2 Types of CSA: (1) vertical & (2) horizontal • Competition response strategy • Uncertainty-reducing strategy • Competition-reducing strategy • Business-level cooperative strategies assessment

17. Business-Level Cooperative Strategy (Cont’d) • Introduction: Business level cooperative strategies used to grow and improve firm performance in individual product markets. Achieved through… • Complementary Strategic Alliances (CSA)

18. 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

19. Business-Level Cooperative Strategy (Cont’d) • 2 Types of CSA: (1) vertical & (2) horizontal • 1. Vertical CSA • partnering firms share resources & capabilities from differentstages of the value chain to create a competitive advantage. • 2. Horizontal CSA • partnering firms share resources & capabilities from the samestage of the value chain to create a competitive advantage • commonly used for long-term product development and distribution opportunities

20. 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

21. 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 • Competition-reducing strategy • Collusive strategies (CS) differ from strategic alliances in that CS are usually illegal • Two types of CS: 1. explicit and 2. tacit collusion

22. Business-Level Cooperative Strategy (Cont’d) • Competition-reducing strategy: 2 Collusive Strategies • 1. Explicit collusion • direct negotiation among firms to establish output levels and pricing agreements that reduce industry competition • 2. Tacit collusion • indirect coordination of production and pricing decisions by several firms, which impacts the degree of competition faced in the industry • Mutual forbearance – firms do not take competitive actions against rivals they meet in multiple markets

23. Business-Level Cooperative Strategy (Cont’d) • Assessment of Business-level cooperative strategies • 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 rivaling competitors • SA’s designed to respond to competition and reduce uncertainty are more temporary in comparison with complementary (horizontal and vertical) strategic alliances • Competition-reducing has lowest probability of creating a sustainable CA

24. Chapter 9: 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 • Two approaches to manage cooperative strategies

25. Corporate-Level Cooperative Strategies (Cont’d) • Introduction • Corporate-level cooperative strategies (CLCS) help firm to diversify itself in terms of products offered, markets served or both • Common CLCS forms (N=3)

26. Corporate-Level Cooperative Strategies (Cont’d) • Common CLCS forms (N=3) • 1. Diversifying strategic alliance • Firms share some of their resources & capabilities to diversify into new product or market areas • 2. Synergistic strategic alliance • Firms share some of their resources & capabilities to create economies of scope • 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

27. 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-lvl 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 with forming and using alliances

28. Chapter 9: 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 • Two approaches to manage cooperative strategies

29. 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? • 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

30. International Cooperative Strategy (Cont’d) • Why 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 • May be through a mergers and acquisition (which is riskier)

31. International Cooperative Strategy (Cont’d) • 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

32. 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 • Japan’s keiretsus • Can be problematic - could lock firm in with partners and exclude development of alliances with others

33. Network Cooperative Strategy (Cont’d) • Alliance network types: Set of strategic alliance partnerships resulting from use of a network cooperative strategy (N=2) • 1. Stable alliance network • Formed in mature industries where demand is relatively constant and predictable • Directed primarily toward developing products at a low cost • 2. 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

34. Managing Competitive Risks in Cooperative Strategies

35. Competitive Risks withCooperative Strategies • Risks: Partner(s) may …. • choose to act opportunistically • misrepresent competencies • fail to make available the complementary resources and capabilities that were committed • make investments specific to the alliance while the other partner may not

36. Chapter 9: 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 • Two approaches to manage cooperative strategies

37. Managing Cooperative Strategy • Two primary approaches • 1. Cost minimization • 2. Opportunity maximization

38. 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

39. 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