1. Strategic Management: Concepts and Cases
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
Two approaches to manage cooperative strategies

4. 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

5. 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)

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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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)

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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)

26. 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

27. 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

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
Two approaches to manage cooperative strategies

29. 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

30. 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)

31. 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

32. 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

33. 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

34. Managing Competitive Risks in Cooperative Strategies

35. 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

36. 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

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

38. 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

39. 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