Strategic Management: Concepts and Cases 9e

1. Strategic Management: Concepts and Cases 9e 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 • Competitive risks with cooperative strategies • Two approaches to manage cooperative strategies

4. Cooperative Strategies at IBM • By cooperating with others IBM can leverage core competencies to grow and improve performance • Business Systems Group • Develop leading-edge technology • Formed five alliances • Partners provide over 250 scientists and engineers that work with IBM’s own to fuel innovation • Business Analytics Group • Created unit to manage data and improve decisions • Software solutions through small firm partnerships • Overall shift to hardware, solutions, software

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

6. 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 • Competitive risks with cooperative strategies • Two approaches to manage cooperative strategies

7. 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

8. 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

9. 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

10. 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

11. 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 markets

12. Primary Type of Cooperative Strategy:Strategic Alliances (Cont’d) • 1. Slow-cycle markets – becoming rare do to: • 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

13. 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 • Competitive risks with cooperative strategies • Two approaches to manage cooperative strategies

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

15. 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)

16. 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

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

18. 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

19. 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: • Explicit collusion • Tacit collusion

20. Business-Level Cooperative Strategy (Cont’d) • Competition-reducing strategy: Two Collusive Strategies • 1. Explicit collusion • Direct negotiation among firms to establish output levels and pricing agreements that reduce industry competition • 2. Tacit collusion • iIndirect 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

21. Business-Level Cooperative Strategy (Cont’d) • Business-level cooperative strategy – assessment • 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 competitors • SA’s designed to respond to competition and reduce uncertainty are more temporary than complementary (horizontal and vertical) strategic alliances • Competition-reducing has lowest probability of creating a sustainable CA

22. 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 • Competitive risks with cooperative strategies • Two approaches to manage cooperative strategies

23. 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)

24. Corporate-Level Cooperative Strategies (Cont’d) • Common CLCS forms • 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

25. 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-level 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 in forming and using alliances

26. 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 • Competitive risks with cooperative strategies • Two approaches to manage cooperative strategies

27. 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

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 • Competitive risks with cooperative strategies • Two approaches to manage cooperative strategies

29. 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

30. Managing Competitive Risks in Cooperative Strategies

31. 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 • Competitive risks with cooperative strategies • Two approaches to manage cooperative strategies

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

33. 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

34. 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