©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Strategic Management: Concepts and Cases 9e Part II: Strategic Actions: Strategy Formulation Chapter 9: Cooperative Strategy

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Strategic Management Process

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Introduction Cooperative strategy –Firms work together to achieve a shared objective

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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)

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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)

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Managing Competitive Risks in Cooperative Strategies

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Managing Cooperative Strategy Two primary approaches –1. Cost minimization –2. Opportunity maximization

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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