©2004 by South-Western/Thomson Learning 1 Cooperative Strategy Robert E. Hoskisson Michael A. Hitt R. Duane Ireland Chapter 10

2 Chapter 2 Chapter 2 Strategic Leadership Strategic Leadership Chapter 4 Chapter 4 The Internal The Internal Organization Chapter 6 Chapter 6 Competitive Rivalry and Competitive Rivalry and Competitive Dynamics Competitive Dynamics Chapter 9 Chapter 9 International Strategy International Strategy Chapter 1 Chapter 1 Introduction to Introduction to Strategic Management Strategic Management Chapter 3 Chapter 3 The External The External Environment Chapter 5 Chapter 5 Business-Level Strategy Chapter 8 Chapter 8 Acquisition and Acquisition and Restructuring Strategies Restructuring Strategies Chapter 11 Chapter 11 Corporate Governance Corporate Governance Strategic Intent Strategic Intent Strategic Mission Strategic Mission Chapter 7 Chapter 7 Corporate-Level Strategy Corporate-Level Strategy Chapter 10 Chapter 10 Cooperative Strategy Cooperative Strategy Chapter 12 Chapter 12 Strategic Entrepreneurship Strategic Entrepreneurship Strategic Analysis Strategic Thinking Creating Competitive Advantage Monitoring And Creating Entrepreneurial Opportunities The Strategic Management Process

3 Cooperative Strategy Cooperative strategy is a strategy in which firms Cooperative strategy is a strategy in which firms –work together –to achieve a shared objective Cooperating with other firms is a strategy that Cooperating with other firms is a strategy that –creates value for a customer –exceeds the cost of constructing customer value in other ways –establishes a favorable position relative to competition

4 Strategic Alliance as a Cooperative Strategy A strategic alliance is a cooperative strategy in which A strategic alliance is a cooperative strategy in which –firms combine some of their resources and capabilities –to create a competitive advantage A strategic alliance involves A strategic alliance involves –exchange and sharing of resources and capabilities –co-development or distribution of goods or services

5 CombinedResourcesCapabilities Core Competencies ResourcesCapabilities ResourcesCapabilities Strategic Alliance Firm A Firm B Mutual interests in designing, manufacturing, or distributing goods or services

6 Four Types of Strategic Alliances Joint venture: two or more firms create an independent company by combining parts of their assets Joint venture: two or more firms create an independent company by combining parts of their assets Equity strategic alliance: partners who own different percentages of equity in a new venture Equity strategic alliance: partners who own different percentages of equity in a new venture Nonequity strategic alliances: contractual agreements given to a company to supply, produce, or distribute a firm’s goods or services without equity sharing Nonequity strategic alliances: contractual agreements given to a company to supply, produce, or distribute a firm’s goods or services without equity sharing Strategic cooperative network: multiple firms agree to form partnerships to achieve shared objectives Strategic cooperative network: multiple firms agree to form partnerships to achieve shared objectives

7 Strategic Network StrategicCenterFirm

8 A strategic network is a grouping of organizations that has been formed to create value through participation in an array of cooperative arrangements, such as alliances and joint ventures A strategic network is a grouping of organizations that has been formed to create value through participation in an array of cooperative arrangements, such as alliances and joint ventures The strategic network seeks to develop a competitive advantage in primary or support activities The strategic network seeks to develop a competitive advantage in primary or support activities A strategic center firm often manages the network A strategic center firm often manages the network

9 Strategic Network strategic center firm engages in four primary tasks strategic center firm engages in four primary tasks –strategic outsourcing (outsources and partners with more firms than do other network members) –competencies (supports each member’s efforts to develop core competencies that can benefit the network)

10 Strategic Network strategic center firm engages in four primary tasks strategic center firm engages in four primary tasks –technology (manages the development and sharing of technology-based ideas among network members) –race to learn (guides participants in efforts to form network-specific competitive advantages)

11 MarketReason Slow CycleGain access to a restricted market Establish a franchise in a new market Maintain market stability (e.g., establishing standards) Reasons for Strategic Alliances by Market Type

12 MarketReason Fast CycleSpeed up development of new goods or service Speed up new market entry Maintain market leadership Form an industry technology standard Share risky R&D expenses Overcome uncertainty Reasons for Strategic Alliances by Market Type

13 MarketReason Standard CycleGain market power (reduce industry overcapacity) Gain access to complementary resources Establish economies of scale Overcome trade barriers Meet competitive challenges from other competitors Pool resources for very large capital projects Learn new business techniques Reasons for Strategic Alliances by Market Type

14 Business-Level Cooperative Strategies: ComplementaryAlliances complementary strategic alliances are designed to take advantage of market opportunities by combining partner firms’ assets in complementary ways to create new valuecomplementary strategic alliances are designed to take advantage of market opportunities by combining partner firms’ assets in complementary ways to create new value –these include distribution, supplier or outsourcing alliances where firms rely on upstream or downstream partners to build competitive advantage Complementary Strategic Alliances

15 Business-Level Cooperative Strategies: Margin Primary Activities Support Activities Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm InfrastructureHuman Resource Mgmt.Technological DevelopmentProcurement Margin Primary Activities Support Activities Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm InfrastructureHuman Resource Mgmt.Technological DevelopmentProcurement Vertical Alliance Supplier vertical complementary strategic alliance is formed between firms that agree to use their skills and capabilities in different stages of the value chain to create value for both firmsvertical complementary strategic alliance is formed between firms that agree to use their skills and capabilities in different stages of the value chain to create value for both firms outsourcing is one example of this type of allianceoutsourcing is one example of this type of alliance Buyer Complementary Strategic Alliances

16 Business-Level Cooperative Strategies: Margin Primary Activities Support Activities Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm InfrastructureHuman Resource Mgmt.Technological DevelopmentProcurement Margin Primary Activities Support Activities Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm InfrastructureHuman Resource Mgmt.Technological DevelopmentProcurement Horizontal Alliance Buyer Potential Competitors horizontal complementary strategic alliance is formed between partners who agree to combine their resources and skills to create value in the same stage of the value chainhorizontal complementary strategic alliance is formed between partners who agree to combine their resources and skills to create value in the same stage of the value chain focus on long-term product development and distribution opportunities the partners may become competitorsthe partners may become competitors requires a great deal of trust between the partnersrequires a great deal of trust between the partners Buyer Complementary Strategic Alliances

17 Business-Level Cooperative Strategies: competition response strategic alliances occur when firms join forces to respond to a strategic action of another competitorcompetition response strategic alliances occur when firms join forces to respond to a strategic action of another competitor because they can be difficult to reverse and expensive to operate, competition response strategic alliances are primarily formed to respond to strategic rather than tactical actionsbecause they can be difficult to reverse and expensive to operate, competition response strategic alliances are primarily formed to respond to strategic rather than tactical actions Competition Response Alliances Competition Response Alliances ComplementaryAlliances

18 Business-Level Cooperative Strategies: uncertainty reducing strategic alliances are used to hedge against risk and uncertaintyuncertainty reducing strategic alliances are used to hedge against risk and uncertainty these alliances are most noticed in fast-cycle marketsthese alliances are most noticed in fast-cycle markets alliance may be formed to reduce the uncertainty associated with developing new product or technology standardsalliance may be formed to reduce the uncertainty associated with developing new product or technology standards Uncertainty Reducing Alliances Competition Response Alliances Uncertainty Reducing Alliances ComplementaryAlliances

19 Business-Level Cooperative Strategies: competition reducing strategic alliances may be created to avoid destructive or excessive competitioncompetition reducing strategic alliances may be created to avoid destructive or excessive competition explicit collusion exists when firms directly negotiate production output and pricing agreements in order to reduce competition (illegal)explicit collusion exists when firms directly negotiate production output and pricing agreements in order to reduce competition (illegal) tacit collusion exists when several firms in an industry indirectly coordinate their production and pricing decisions by observing each other’s competitive actions and responsestacit collusion exists when several firms in an industry indirectly coordinate their production and pricing decisions by observing each other’s competitive actions and responses Competition Reducing Alliances Competition Reducing Alliances Competition Response Alliances Uncertainty Reducing Alliances ComplementaryAlliances

20 Business-Level Cooperative Strategies: mutual forbearance is a form of tacit collusion in which firms avoid competitive attacks against those rivals they meet in multiple marketsmutual forbearance is a form of tacit collusion in which firms avoid competitive attacks against those rivals they meet in multiple markets competition reducing strategic alliances may require governments to find ways to permit collaboration among rivals without violating antitrust lawscompetition reducing strategic alliances may require governments to find ways to permit collaboration among rivals without violating antitrust laws Competition Reducing Alliances Competition Response Alliances Uncertainty Reducing Alliances ComplementaryAlliances Competition Reducing Alliances

21 Implementing Business-Level Cooperative Strategies Complementary business-level strategic alliances have the greatest probability of creating a sustainable competitive advantage Strategic alliances designed to respond to competition and reduce uncertainty can create competitive advantages that may be more temporary in nature Competition reducing strategy has lowest probability of creating a sustainable competitive advantage

22 Corporate-Level Cooperative Strategies Corporate-level cooperative strategies are designed to facilitate product and/or market diversificationCorporate-level cooperative strategies are designed to facilitate product and/or market diversification -diversifying strategic alliance -synergistic strategic alliance -franchising Diversifying alliances and synergistic alliances allow firmsDiversifying alliances and synergistic alliances allow firms -to grow and diversify their operations -through a means other than a merger or acquisition

23 Corporate-Level Cooperative Strategies: DiversifyingAlliances diversifying strategic alliance allows a firm to expand into new product or market areas without completing a merger or an acquisitiondiversifying strategic alliance allows a firm to expand into new product or market areas without completing a merger or an acquisition provides some of the potential synergistic benefits of a merger or acquisition, but with less risk and greater levels of flexibilityprovides some of the potential synergistic benefits of a merger or acquisition, but with less risk and greater levels of flexibility permits a “test” of whether a future merger between the partners would benefit both partiespermits a “test” of whether a future merger between the partners would benefit both parties Diversifying Alliances

24 Corporate-Level Cooperative Strategies: synergistic strategic alliances create joint economies of scope between two or more firmssynergistic strategic alliances create joint economies of scope between two or more firms create synergy across multiple functions or multiple businesses between partner firmscreate synergy across multiple functions or multiple businesses between partner firms SynergisticAlliances Synergistic Alliances DiversifyingAlliances

25 Corporate-Level Cooperative Strategies: franchising spreads risks and uses resources, capabilities, and competencies without merging or acquiring another companyfranchising spreads risks and uses resources, capabilities, and competencies without merging or acquiring another company contractual relationship concerning the franchise that is developed between two parties, the franchisee and the franchisorcontractual relationship concerning the franchise that is developed between two parties, the franchisee and the franchisor an alternative to pursuing growth through mergers and acquisitionsan alternative to pursuing growth through mergers and acquisitions Franchising Franchising DiversifyingAlliances SynergisticAlliances

26 Implementing Corporate-Level Cooperative Strategies Corporate-level cooperative strategies are broader in scope, more complex and more costly than business-level strategies Competitive advantages and value are created when those employing the strategies can also use them to develop useful knowledge about how to succeed in the future –valuable –rare –imperfectly imitable –nonsubstitutable

27 International Cooperative Strategies Cross-border strategic alliance Cross-border strategic alliance –an international cooperative strategy in which firms with headquarters in different nations combine some of their resources and capabilities to create a competitive advantage –a firm may form cross-border strategic alliances to leverage core competencies that are the foundation of its domestic success to expand into international markets

28 International Cooperative Strategies Allows risk sharing by reducing financial investment Allows risk sharing by reducing financial investment Host partner knows local market and customs Host partner knows local market and customs International alliances can be difficult to manage due to differences in management styles, cultures or regulatory constraints International alliances can be difficult to manage due to differences in management styles, cultures or regulatory constraints Must gauge partner’s strategic intent so they do not gain access to important technology and become a competitor Must gauge partner’s strategic intent so they do not gain access to important technology and become a competitor

29 Implementing International Cooperative Strategies Differences among countries’ regulatory environments increase the challenge of managing international networks and verifying that, at a minimum, the network’s operations comply with all legal requirements Distributed strategic networks are often the organizational structure used to manage international cooperative strategies

30 StrategicCenterFirm Distributed Strategic Network = Distributed Strategic Center Firms MainStrategicCenterFirm

31 Distributed Strategic Network International cooperative strategies often require more complex networks International cooperative strategies often require more complex networks Many large multinational firms form distributed strategic networks with multiple regional strategic centers to manage their array of cooperative arrangements with partner firms Many large multinational firms form distributed strategic networks with multiple regional strategic centers to manage their array of cooperative arrangements with partner firms Breaking large networks into multiple manageably-sized networks helps to manage the complexity of maintaining many relationships Breaking large networks into multiple manageably-sized networks helps to manage the complexity of maintaining many relationships

32 Network Cooperative Strategies A network strategy is a cooperative strategy wherein several firms agree to form multiple partnerships to achieve shared objectives A network strategy is a cooperative strategy wherein several firms agree to form multiple partnerships to achieve shared objectives –stable strategic cooperative network –dynamic strategic cooperative network Effective social relationships and interactions among partners are keys to a successful network cooperative strategy Effective social relationships and interactions among partners are keys to a successful network cooperative strategy

33 Network Cooperative Strategies: Stable Strategic Cooperative Network long term relationships that often appear in mature industries where demand is relatively constant and predictablelong term relationships that often appear in mature industries where demand is relatively constant and predictable stable networks are built for exploitation of the economies available between firmsstable networks are built for exploitation of the economies available between firms Stable Strategic Cooperative Network

34 Network Cooperative Strategies: Dynamic Strategic Cooperative Network arrangements that evolve in industries with rapid technological change leading to short product life cyclesarrangements that evolve in industries with rapid technological change leading to short product life cycles primarily used to stimulate rapid, value-creating product innovations and subsequent successful market entriesprimarily used to stimulate rapid, value-creating product innovations and subsequent successful market entries purpose is often exploration of new ideaspurpose is often exploration of new ideas Dynamic Strategic Cooperative Network Stable Strategic Cooperative Network

35 Competitive Risks with Cooperative Strategies CompetitiveRisks Partner may act opportunistically Misrepresentation of competencies brought to the partnership Partner fails to make committed resources and capabilities available to its partners Firm may make investments that are specific to the alliance while its partner does not

36 Managing Competitive Risks in Cooperative Strategies Risk and Asset ManagementApproachesCompetitiveRisks Manage the balance between learning from partners while protecting knowledge and sources of competitive advantages from excessive learning by partners Assign managerial responsibility for a firm’s cooperative strategies to a high-level executive or team Specify resources and capabilities that will be shared and those that will not be shared (detailed contracts and monitoring) Develop trusting relationships

37 Approaches for Managing Cooperative Strategies cost minimization –formal contracts specify how the cooperative strategy is to be monitored and how partner behavior is to be controlled opportunity maximization –maximize partnership’s value-creation opportunities –partners take advantage of unexpected opportunities to learn from each other and to explore additional marketplace possibilities –fewer formal, limiting, contracts

38 Managing Competitive Risks in Cooperative Strategies Risk and Asset ManagementApproachesCompetitiveRisks DesiredOutcome Creating value Above-average returns