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

The Strategic Management Process

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

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

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)

Introduction Cooperative strategy Firms work together to achieve a shared objective

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

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

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

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

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

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

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

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

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

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

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)

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

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

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

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

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

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

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

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)

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

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

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

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

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)

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

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

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

Managing Competitive Risks in Cooperative Strategies

Competitive Risks with Cooperative 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

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

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

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

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