1. 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

2. Chapter 9: Cooperative Strategy

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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)

18. 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

19. 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

20. 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