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Strategic Management: Concepts and Cases

Part II: Strategic Actions: Strategy Formulation

Chapter 9: Cooperative Strategy

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The Strategic Management Process

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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

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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

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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)

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Introduction

Cooperative strategy Firms work together to achieve a shared objective

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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)

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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

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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

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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

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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

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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

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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

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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

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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)

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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

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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

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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

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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

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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)

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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

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Network Cooperative Strategy

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

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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

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Managing Competitive Risks in Cooperative Strategies

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Competitive Risks withCooperative 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

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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

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Managing Cooperative Strategy

Two primary approaches 1. Cost minimization 2. Opportunity maximization

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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

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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