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

Chapter 9: Cooperative Strategy

Introduction Cooperative strategy A strategy in which firms work together to achieve a shared objective Go beyond normal company to company dealings 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

Primary Type of Cooperative Strategy: Strategic Alliances 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

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

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

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

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

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 different stages of the value chain to create a competitive advantage Supplier or distributor Horizontal CSA Partnering firms share resources & capabilities from the same stage(s) of the value chain to create a competitive advantage Competitor Commonly used for long-term product development and distribution opportunities

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

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

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

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

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

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

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 Learn and then acquire or internally develop Can lead to competitive advantage if they are managed in ways that are valuable, rare, imperfectly imitable, and nonsubstitutable

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)

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

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

Competitive Risks with Cooperative Strategies 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