Competing for Advantage

Competing for Advantage
PART III CREATING COMPETITIVE ADVANTAGE Chapter 7 Cooperative Strategy

The Strategic Management Process
Figure 1.6: The Strategic Management Process – A logical approach for responding to 21st century competitive challenges. Provides an outline of the content of the textbook by each chapter. Creating Competitive Advantage Business-level strategy – competitive advantages the firm will use to effectively compete in specific product markets Competitive rivalry and dynamics – analysis of competitor actions and responses is relevant input for selecting and using specific strategies Cooperative strategy – an important trend of forming partnerships to share and develop competitive resources Corporate-level strategy – concerns the businesses in which the company intends to compete and the allocation of resources in diversified organizations Acquisition and restructuring strategies – primary means used by diversified firms to create corporate-level competitive advantages International strategy – significant sources of value creation and above-average returns

Cooperative Strategy Key Terms Cooperative strategy
Strategy in which firms work together to achieve a shared objective Relational advantage Condition which exists when a firm’s relationships with other firms put it at an advantage relative to rival firms Strategic alliance Cooperative strategy in which firms combine resources and capabilities to create a competitive advantage Cooperative Strategy – Conditions in the competitive landscape have created a business environment in which interorganizational cooperation is required, because firms rarely possess all of the knowledge, abilities, and resources needed for success. Increasingly, firms form cooperative relationships with other organizations to develop new sources of competitive advantage. Discussion points: Firms that use cooperative strategies successfully gain relational advantages that allow them to out-perform their rivals in terms of strategic competitiveness and above-average returns. Strategic alliances are the most common form of cooperative strategy.

The Importance of Cooperative Strategy
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. The Importance of Cooperative Strategy – Cooperative strategies have become integral to the competitive landscape and central to the success of partnered companies. Discussion points: They are used to leverage company resources and capabilities. They are used to develop new resources and capabilities. They enable companies to leverage or build resources and capabilities more quickly than if they were acting independently. They are a powerful mechanism for aligning interests and reducing uncertainty in the external environment. Example: Cooperative relationships of automobile manufacturers and their suppliers They enhance strategic flexibility, as they tend to not be permanent arrangements. Firms can enter and exit cooperative strategies more easily than they can start up or shut down parts of their internal operations. Consistent with the stakeholder perspective (from Chapter 1), organizations, as inherently cooperative systems, are inclined to act with partners to achieve common objectives.

Alliances can be a vehicle for firm growth. Alliances can enhance the speed of responding to market opportunities, technological changes, and global conditions. Alliances are a way that firms can gain new knowledge and experiences to increase competitiveness. Cooperative strategies can enhance strategic flexibility. The Importance of Cooperative Strategy – cont.

Key Terms Co-opetition Condition that exists when firms that have formed cooperative strategies also compete against one another in the marketplace The Importance of Cooperative Strategy – Increasingly, cooperative strategies are formed by firms who also compete against one another. Example: Samsung Electronics and Sony Corp. Discussion points: Co-opetition between firms encourages co-opetition among other firms in the same industry. Despite potential advantages, some research suggests that cooperating with a competitor may be associated with lower levels of ground-breaking innovation in the service sector. Example: One study found that firms using their own R&D produce more market innovations than those who rely on information from competitors In some industries, alliance v. alliance competition is becoming more common than firm v. firm competition. Example: Global airline industry Why might service firms that use information from their own research and development processes as well as firms who are involved in science-based product innovation collaborations be more likely to introduce new-to-the-market innovations than firms that rely on information coming from competitors? Firms are probably unlikely to release genuinely novel ideas and technologies to their biggest rivals.

Reasons for Strategic Alliances by Market Type
Table 7.1: Reasons for Strategic Alliances by Market Type – The individually unique competitive conditions of slow-cycle, fast-cycle, and standard-cycle markets (discussed in Chapter 6) lead to firms using cooperative strategies for slightly different reasons. This chapter focuses specifically on the most common form of cooperative strategy, strategic alliances, to describe how purposes tend to vary across the three market types. What types of conditions in new markets might alliance partners better understand than the firm entering the market for the first time? Sociocultural conditions Legal and regulatory conditions Economic conditions Industry influences Existing relationships among customers and suppliers

Strategic Alliances in Slow-Cycle Markets
In slow-cycle markets, competitive advantages are shielded from imitation for relatively long periods, and imitation is costly. Competitive advantages are sustainable. Strategic Alliances in Slow-Cycle Markets Discussion points: These markets have close to monopolistic conditions. Examples: Railroads and, historically, telecommunications, utilities, and financial services Strategic alliances are often used to enter restricted markets or to establish franchises in new markets. Alliance allows quicker entry into these markets because the partner firm has experience in the market of interest, understands conditions in the new market, and can provide knowledge of and relationships with key stakeholders. Example: CSX access to Pacific ports Why are slow-cycle markets becoming rare in the 21st century competitive landscape? Privatization of industries and economies Rapid expansion of the Internet's capabilities Quick dissemination of information Advancing technologies permit quick imitation of even complex products What are the implications of today’s competitive landscape on firms competing in the few remaining slow-cycle markets? It is important for firms competing in the few remaining slow-cycle markets to recognize the future likelihood that they will encounter less sustainable competitive advantages than they have enjoyed in the past. Cooperative strategies can be helpful to firms making the transition from relatively sheltered markets to more competitive ones.

Strategic Alliances in Fast-Cycle Markets
In fast-cycle markets, competitive advantages are not shielded from imitation. Long-term sustainability is not possible. Strategic Alliances in Fast-Cycle Markets Discussion points: Fast-cycle markets tend to be unstable, unpredictable, and complex. Firms are forced to constantly seek new sources of competitive advantage, while creating value by using current ones. Alliances between firms with excess resources and promising capabilities aid in the transition required in evolving markets and to gain rapid entry into new markets. Example: IBM How does focusing on a select few strategic partnerships help businesses respond to the rapidly changing competitive landscape in the IT industry? Drives down costs Integrates technologies that can provide significant business advantages or productivity gains Enables aggressive pursuit of applications that can be shifted to more flexible and cost-effective platforms

Strategic Alliances in Standard-Cycle Markets
In standard-cycle markets, competitive advantages are moderately shielded from imitation. Competitive advantages are partially sustainable. Strategic Alliances in Standard-Cycle Markets Discussion points: These markets are often large and oriented toward economies of scale. Examples: Commercial aerospace and beverage industries Alliances are most likely to be made by partners with complimentary resources and capabilities to gain market power. Example: PepsiCo distribution in China Alliances allow firms to learn new business techniques and technologies from partners.

Types of Alliances Key Terms Equity strategic alliance
Alliance in which two or more firms own a portion of the equity in the venture they have created Nonequity strategic alliance Alliance in which two or more firms develop a contractual relationship to share some of their unique resources and capabilities to create a competitive advantage Types of Alliances and Other Cooperative Strategies – There are two basic types of strategic alliance based on legal form, depending on whether they involve equity or not. Other cooperative strategies relate to the primary strategic objectives of firms. Discussion points: Equity strategic alliances Many direct foreign investments are completed through equity strategic alliances. Some equity strategic alliances take the form of purchasing stock in an existing company. Example: BMW AG purchase of 15% stake in SGL Carbon SE Nonequity strategic alliances Firms in nonequity strategic alliances do not establish a separate independent company. These alliances are less formal. These alliances demand fewer partner commitments. These alliances foster less intimate relationships between partners. These alliances are not suitable for complex projects requiring the transfer of tacit knowledge (see Slide 12) between partners. Research indicates that, even under these constraints, nonequity alliances still create value for participating partners. Name some examples of contractual relationships which exemplify nonequity strategic alliances. Licensing agreements Supply contracts Outsourcing agreements Distribution agreements What are some other forms of cooperative strategies between firms? Coalitions Trade groups Associations Industry panels Labor panels Research consortia Cartels (keiretsu) Collusion

Types of Alliances Key Terms Joint venture Tacit knowledge
Strategic alliance in which two or more firms create a legally independent company to share resources and capabilities to develop a competitive advantage Tacit knowledge Knowledge which is complex and difficult to codify Types of Alliances and Other Cooperative Strategies Discussion points: Joint ventures Joint ventures also involve equity. Typically, partners in a joint venture own equal percentages and contribute equally to operations. Example: JV between Walter Energy and Peace River Coal Partners share resources, costs, and risks associated with the venture. Joint ventures are an attractive way to deal with uncertain competitive conditions, such as economic downturns. Joint ventures are effective mechanisms for establishing long-term relationships and transferring tacit knowledge. Tacit knowledge It is learned through experience. It can be difficult to for rivals to duplicate, making it an important source of competitive advantage.

Strategic Objectives of Cooperative Strategies
Figure 7.1: Strategic Objectives of Cooperative Strategies – Alliances and cooperative strategies can be divided into categories based on their primary strategic objectives. The most common types of cooperative strategies are listed on Figure 7.1.

Cooperative Strategies to Differentiate or Reduce Costs
Complementary Strategic Alliances Network Cooperative Strategies Cooperative Strategies That Enhance Differentiation or Reduce Costs – introduces a discussion of business level cooperative strategies used to combine resources and capabilities to improve firm performance in individual product markets and create competitive advantages that cannot be created by the individual firm There are two general categories of cooperative strategies which are used to enhance differentiation or reduce costs.

Complementary Strategic Alliances
Key Terms Complementary strategic alliance Business-level alliance in which firms share some of their resources and capabilities in complementary ways to develop competitive advantages Vertical complementary strategic alliance When firms share resources and capabilities from different stages of the value chain to create a competitive advantage Horizontal complementary strategic alliance When firms share resources and capabilities from the same stage of the value chain to create a competitive advantage Complementary Strategic Alliances – There are two types of complementary strategic alliances used to support differentiation and low cost objectives. Discussion points: Complementary Even with similar investment levels, the benefits are not always balanced evenly across partnering firms Vertical Frequently created with either a current supplier or customer Often an effort to innovate as a response to environmental changes Example: Dairy industry Horizontal Commonly used for long-term product development and distribution opportunities More likely when resource requirements to develop new products are great and the resources available for development are limited Example: Worldwide aircraft industry What affects the different opportunity levels and benefits that partnering firms are able to achieve through complementary strategic alliances? Partners may learn at different rates. Partners may have different capabilities to leverage complementary resources. Some firms are more effective at managing alliances and deriving benefits from them. Partners may have different reputations in the marketplace, differentiating the types of actions they can legitimately take.

Network Cooperative Strategies
Key Terms Network cooperative strategy Cooperative strategy in which multiple firms agree to form partnerships to achieve shared objectives Network Cooperative Strategies – More and more firms are engaging in several cooperative strategies simultaneously, in both individual firm alliances and multiple networks. Discussion points: They are particularly effective when formed by geographically clustered firms. Examples: Silicon Valley and Singapore’s Silicon Island They facilitate the matching of firms with complementary markets and compatible resources. Research suggests that the positive financial effects of network cooperative strategies will continue to make these strategies important to the success of both suppliers and buyers. However, one of the disadvantages to belonging to an alliance network is that a firm can be locked into its partners, precluding the development of alliances with others. Also, in certain types of networks, such as a Japanese keiretsu, firms in the network are expected to help other firms in the network whenever they need aid, which can become a burden to the firm rendering assistance, thus reducing its performance.

Firms involved in alliance networks tend to be more innovative.
Gain information and knowledge from multiple sources Use heterogeneous knowledge to innovate Achieve additional competitive advantages Stimulate product innovation critical to value creation Firms involved in alliance networks tend to be more innovative. Alliance Network – set of strategic alliance partnerships resulting from the use of a network cooperative strategy Discussion points: They provide information and knowledge from partners and partners’ partners which can be used to produce more and better innovation. Access to multiple collaborations increases the likelihood that additional competitive advantages will be formed as the set of resources and capabilities being shared expands. They stimulate development of product innovations that are critical to value creation in the global economy. Example: Lockheed Martin Cyber Security Alliance

Alliance Network Success
Effective social relationships and interactions among partners while sharing resources and capabilities Effective strategic center firm Alliance Network Success – Effective strategic center firms and social relationships and interactions achieved among partners while sharing resources and capabilities make network cooperative strategy success more likely.

A Strategic Network Figure 7.2: A Strategic Network – Cooperative relationships in alliance networks revolve around an effective strategic center firm which is at the core or center of the alliance network.

Strategic Center Firms
Outsource and partner with network members Encourage other members to outsource and partner within the network Foster development of core competencies and competitive advantages with and across network members Serve as gatekeepers to exchange of information among members Strategic Center Firms – serve as the foundation for an alliance network's structure

Types of Alliance Networks
Stable Alliance Network Dynamic Alliance Network Types of Alliance Networks – Alliance networks vary by industry condition and goal orientation.

Stable Alliance Networks
Formed in mature industries in which demand is relatively constant and predictable Directed primarily toward developing products at a low cost Built for exploitation of economies available between firms Stable Alliance Networks – Through a stable alliance network, firms try to extend their competitive advantages to other settings while continuing to profit from operations in their core, relatively-mature industry.

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 Built to discover new product innovations, enter new markets, or develop new markets Dynamic Alliance Networks – tend to develop where the pace of innovation is too fast for any one company to maintain success over time Discussion points: In some cases these networks even take the form of “open innovation,” composed of collaborators and competitors who share knowledge in the pursuit of co-development of new technologies. Example: Mobile phone industry Members of these alliances can come and go as they please.

Cooperative Strategies to Address Forces in the External Environment
Competitive Response Alliances Uncertainty-Reducing Alliances Competition-Reducing Cooperative Strategies Associations And Consortia Cooperative Strategies That Address Forces in the External Environment – introduces a discussion of business-level cooperative strategies that combine resources and capabilities to meet the challenges of complex and ever-changing external environments Four types of cooperative strategy serve to keep firms abreast of rapid changes in their environments.

Competitive Response Alliances
Used to respond to competitors' strategic attacks Competitive Response Alliances Discussion points: Formed primarily to deal with major strategic actions of competitors Difficult to reverse Expensive to operate Can be powerful mechanisms for responding to strategic actions of competitors Example: Nokia and Microsoft smartphone market alliance

Competitive Response Alliances
Used to reduce environmental uncertainty Uncertainty-Reducing Alliances Discussion points: Can be a powerful mechanism to hedge against risk Especially useful in fast-cycle markets where technology changes rapidly and new products develop quickly Example: Davies Arnold Cooper LLP alliance with Seguros Lex In what types of markets can uncertainty-reducing alliances be effective? Fast-cycle markets New product markets Emerging economies New technologies

Competition-Reducing Alliances
Used to reduce competition in an industry Competition-Reducing Alliances – Virtually all cooperative strategies between or among competitors reduce competition. Alliance networks, in particular, provide advantages to member firms and make it harder for nonmember firms to compete. Example: Groups of preferred suppliers in a pharmaceutical network Discussion points: They give partnering firms differential advantages in their markets. Collusive strategies are a more direct form of competition-reducing strategy (see Slide 28).

Collusive Strategies Explicit collusion - direct negotiation amongst firms to establish output levels and pricing agreements to reduce industry competition Tacit collusion - several firms indirectly coordinate production and pricing decisions which impact the degree of competition faced in the industry Collusive Strategies – Often illegal, two types of collusion work to reduce competition. Discussion points: Explicit collusion Two or more competing firms negotiate directly to jointly agree about the amount to produce as well as the prices that will be charged for what is produced Illegal in the U.S. and most developed economies, where firms can face litigation for noncompetitive actions Exception is regulated industries Tacit collusion Common to highly-concentrated industries Examples: Cereal and airline industries When coordination of production and pricing results from observing competitor actions and responses Firms recognize interdependence among industry participants and that their competitive behavior significantly affects each firm in the industry Results in less than fully competitive production levels and prices that exceed competitive pricing models Mutual forebearance – one form of tacit collusion that occurs because firms fear and avoid competitive attacks against rivals who they compete with in multiple markets Example: PC industry Governments in free market economies need to determine how rivals can collaborate to increase competitiveness without violating established regulations. Examples: Global pharmaceutical and biotechnology industries

Associations and Consortia
Used to form coalitions with stakeholders to achieve common objectives Associations and Consortia Discussion points: Can strengthen dealings with external stakeholders Forms of coalition with stakeholders: Trade groups Associations Industry panels Labor panels Research consortia Can enhance creative efforts that lead to innovation Often used to provide a common voice when dealing with an important external stakeholder Example: Trade group employment of lobbyists Can help firms deal with changing environmental conditions Example: Sustainability Consortium What types of external stakeholders can be better managed with the use of associations and consortia? Legislators Suppliers Customers Why do firms join associations? To gain access to information To obtain legitimacy To gain acceptance To obtain influence

Cooperative Strategies to Promote Growth and/or Diversification
Diversifying Strategic Alliances Franchising International Cooperative Strategies Cooperative strategies are attractive because they require fewer resource commitments and permit greater strategic flexibility. Cooperative Strategies That Promote Growth and/or Diversification – introduce a discussion of cooperative strategies that serve as an attractive alternative when the firm's primary goal is growth and/or diversification Discussion points: Growth is a primary goal in most organizations. Firms may pursue growth through: Internal strategies, like new product development or market development External strategies, like mergers and acquisitions (see Chapter 9) Cooperative strategies are an attractive alternative to M&As for achieving growth. Cooperative strategies can be more attractive than M&A because they require fewer resource commitments and are not permanent, which permits greater strategic flexibility. Alliance can be used to “test” if a M&A is a viable long-term strategy. Example: Davies Arnold Cooper LLP and Seguros Lex alliance Three types of cooperative strategies are frequently used to stimulate growth. These strategies may also promote market diversification (increased market scope) and sometimes product diversification (which is explored more comprehensively in Chapter 8). .

Key Terms Diversifying strategic alliance Cooperative strategy in which firms share some of their resources and capabilities to diversify into new product or market areas Diversifying Strategic Alliances Example: Nasdaq OMX alliance with Bolsa Electronica de Chile (BEC)

Key Terms Franchising Cooperative strategy in which a 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 Franchising Discussion points: Firm is the franchisor. Partners are the franchisees. It is estimated that there are 825,000 franchise businesses across 300 different businesses in the U.S. that generate approximately 18 million jobs and contribute $2.1 trillion to the economy. Considered a hallmark of well-developed economies, franchising is expected to contribute significantly to growth in emerging economies over the next century. Brand name is usually the most important competitive advantage for franchisees operating in their local markets. Name some well-known companies which successfully employ a franchising corporate-level cooperative strategy. McDonald’s Hilton Worldwide UPS Starbuck’s

Successful Franchising Behaviors
Partners work closely together in ways that strengthen the brand Franchisors develop strong programs to transfer knowledge and skills needed for franchisees to successfully compete at the local level Franchisees provide feedback to franchisors regarding how to become more effective and efficient Use the strategy in fragmented industries where no firm has a dominant share Franchisees encouraged to own multiple sites Successful Franchising Behaviors – Franchising is an attractive strategy in fragmented markets where a large number of small and medium sized firms compete as rivals but no firm or small set of firms has a dominant share of the market. In these markets, it is possible to consolidate independent companies through contractual relationships. The most successful users of franchising strategies engage in certain behaviors which contribute to success. Discussion points: Partners work closely together, finding ways to strengthen the core company's brand name. Primary responsibility of the franchisor is to develop programs to transfer to the franchisees the knowledge and skills needed to compete successfully at the local level. Franchisees should provide feedback to the franchisor for ways to improve effectiveness and efficiencies. Research indicates that franchising is especially efficient if franchisees are allowed to own multiple outlets.

Key Terms 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 International Cooperative Strategy Example: GE “memo of understanding” with Newcom LLC What are some of the reasons for the widespread use of cross-border strategic alliances? Limited domestic growth opportunities Restrictive governmental economic policies Enable firms expanding into international markets to leverage core competencies that are the foundation for their domestic success Offers firm expanding into new international markets the local expertise of a domestic partner in that market From an operational perspective, what are some of the success factors that a local partner would have more information about in a particular market? Sources of capital Legal procedures Cultural and institutional norms

Reasons for Cross-Border Alliances
Limited domestic growth opportunities Restrictive governmental economic policies To leverage core competencies To draw from the local expertise of partners Reasons for Cross-Border Alliances – Multinational corporations outperform firms that operate only domestically. Discussion points: Due to limited domestic growth, firms look outside their national borders for business expansion opportunities. Some foreign government policies require investing firms to partner with a local firm to enter their markets. Example: Local ownership policies in India and China Enable firms expanding into international markets to leverage core competencies that are the foundation for their domestic success. Example: Ajinomoto Co. global R&D alliance with Kellogg Firms expanding into new international markets can benefit from the local expertise of a domestic partner in that market.

A Distributed Strategic Network
Figure 7.3: A Distributed Strategic Network – Because firms often have multiple alliances in different geographical regions and countries often have different regulatory environments, alliance networks are frequently formed to manage the complexity and challenges of international cooperative strategies. Distributed alliance networks are often the organizational structure used to manage international cooperative strategies. As shown in Figure 7.3, several regional strategic center firms are included in the distributed network to manage partner firms’ multiple cooperative arrangements. Example: Ericsson, producer of telecommunications exchange equipment

Risks of Cooperative Strategies
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. Partner may make investments specific to the alliance while the other partner does not. Risks of Cooperative Strategies

Managing Competitive Risks in Cooperative Strategies
Figure 7.4: Managing Competitive Risks in Cooperative Strategies – Effective management can reduce the risks associated with cooperative strategies and can enhance firm performance. Discussion points: Despite their advantages, cross-border alliances tend to be more complex and risky than domestic strategic alliances, especially if they are in emerging markets. Although their use has increased significantly, there is a high failure rate for cooperative strategies. 2/3 of cooperative strategies have serious problems in their first 2 years. As many as 70% of them fail. Some research demonstrates that although the stock market responds positively to corporate strategic alliance announcements and activity, about half of them actually reduce shareholder returns. Competitive Risks – prominent risks of cooperative strategies Partners may choose to act opportunistically, either when formal contracts fail to prevent the behavior or when an alliance is based on a false perception of partner trustworthiness. Not infrequently, the opportunistic firm wants to acquire as much of its partner’s tacit knowledge as it can. Full awareness of what a partner wants in a cooperative strategy reduces the likelihood that a firm will suffer from another’s opportunistic actions. Partner competencies may be misrepresented, particularly when expected contributions are intangible assets. Example: Partners often fail to deliver the superior knowledge of local conditions that was expected Asking the partner to provide evidence that it does possess the resources and capabilities it is to share in the cooperative strategy (even when they are largely intangible) may be an effective way to deal with this risk. Partner may fail to make available the complementary resources and capabilities that were committed, which often occurs in international arrangements when different interpretations of contractual terms or trust-based expectations exist. Example: The partner’s most sophisticated technologies Partner may make investments specific to the alliance while the other partner does not. Example: The firm might commit resources and capabilities to develop manufacturing equipment that can be used only to produce items coming from the alliance If the partner isn’t also making alliance-specific investments, the firm is at a relative disadvantage in terms of potential returns on investments made from the alliance. Risk and Asset Management Approaches – Discussion begins on Slide 39.

Implementing and Managing Cooperative Strategies
Internalize experiences with successful cooperative strategies to gain maximum value from the knowledge learned. Establish appropriate controls to manage both tangible and intangible assets. Assign managerial responsibility for cooperative strategy to high-level executive or team responsible for overseeing the entire portfolio of alliances. Include alliances with companies from a variety of value chain activities. Increasing the level of trust between partners increases the likelihood of alliance success and is an efficient way to influence and control alliance partners' behaviors. Implementing and Managing Cooperative Strategies – Cooperative strategies are an important option for firms competing in the global economy, but they are complex and prone to failure. Maximizing benefits from cooperative strategies depends upon building superior skills at effectively implementing and managing cooperative strategies. Because the ability to properly implement and manage cooperative strategies is distributed so unevenly across organizations, superior skills in these areas may be a potential source of competitive advantage. Discussion points: Internalizing learned experiences associated with both successful and unsuccessful cooperative strategies involves organizing and properly distributing the knowledge to those involved with forming and using cooperative strategies. Learn how to manage all assets associated with cooperative arrangements. Since one of the primary reasons for cooperative agreements is to gain knowledge, partnering firms should have explicit systems and processes in place to record and disseminate venture-related knowledge within their firms. Specific managers or teams should be assigned to oversee the firm’s portfolio of alliances in general and the specific learning associated with each particular venture. Maintaining an alliance portfolio has both benefits and costs, so the net benefits depend on how effectively a portfolio is managed. Portfolio managers should be able to visualize it in the context of the entire industry rather than as a series of individual alliances. Firms can increase the performance of their alliance portfolios by including alliances with companies from a variety of different value chain activities, which provides more opportunities to acquire knowledge which they do not already possess. Firms can benefit from experience associated with repeated relationships with the same partners.

Primary Approaches to Manage Cooperative Strategies
Cost Minimization Opportunity Maximization Primary Approaches to Manage Cooperative Strategies – Firms generally use two primary approaches to manage cooperative strategies. Firms can use either approach to manage cooperative strategies.

Cost Minimization Approach
Formalized partnership relationship – contracts Goals – minimize costs and prevent opportunistic behaviors Requirements – monitoring mechanisms Cost Minimization Approach Discussion points: Formal contracts are developed with partners. Specify how to monitor the cooperative strategy Specify how to control partner behavior Formalities can stifle partner efforts to maximize value from the relationship Goal is to minimize costs and to prevent opportunistic behaviors by partners. Monitoring costs associated with this approach are greater.

Opportunity Maximization Approach
Informal relationships – fewer constraints Goals – maximize partnership's value-creation opportunities Requirements – high level of trust Opportunity Maximization Approach Discussion points: Less formal contracts, with fewer constraints on partners’ behaviors, make it possible for partners to explore how they can share their resources and capabilities in multiple value-creating ways. The focus of this approach is on maximizing a partnership’s value-creation opportunities. In this case, partners are prepared to take advantage of unexpected opportunities to learn from each other and to explore additional marketplace possibilities. Partners using this approach need a high level of trust that each party will act in the partnership's best interest.

Benefits of Trust with Alliance Partners
Creates relationship stability Reduces alliance monitoring costs Maximizes opportunities to create value Positively influences partner behaviors Creates social capital Increases the likelihood of alliance success Offers the potential to be a source of competitive advantage Benefits of Building Trust with Alliance Partners – A psychological state, trust involves expectations of positive behavior from partners and a willingness to be vulnerable. Discussion points: It is impossible to specify all of the operational details of a cooperative strategy in a formal contract. When partners trust each other, there is less need for detailed formal contracts to specify behavior, and the cooperative relationship tends to be more stable. When trust exists, monitoring costs are reduced and opportunities to create value are maximized. Social capital provides a stronger position in social networks that are designed to jointly create value. Trust may be the most efficient way to influence and control alliance partners’ behaviors. Trust between partners increases the likelihood of alliance success, which highlights the benefits of the opportunity maximization approach to managing cooperative relationships. Developing trust between partners is more difficult in international situations. Consistent with the stakeholder perspective, research indicates that trust can be a source of competitive advantage in terms of how the firm develops and uses cooperative strategies. What national differences make trust more difficult in international cooperative strategies compared with domestic ones? Trade policies Cultures Laws Politics

Ethical Question From an ethical perspective, how much information is a firm obliged to provide to a potential complementary alliance partner about what it expects to learn from a cooperative arrangement?

Ethical Question “A contract is necessary because most firms cannot be trusted to act ethically in a cooperative venture such as a strategic alliance.” In your opinion, is this statement true or false? Why? Does the answer vary by country? Why?

Ethical Question Ventures in foreign countries without strong contract law are risky because managers may be subjected to bribery attempts once their firms’ assets have been invested in the country. How can managers deal with these problems?

Ethical Question This chapter mentions international strategic alliances being formed by the world’s airline companies. Do these companies face any ethical issues as they participate in multiple alliances? If so, what are the issues? Are they different for airline companies headquartered in the United States than for those with European home bases? If so, what are the differences, and what accounts for them?

Ethical Question Firms with a reputation for ethical behavior in strategic alliances are likely to have more opportunities to form cooperative strategies than companies that have not earned this reputation. What actions can firms take to earn a reputation for behaving ethically as a strategic alliance partner?

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