Cooperative Strategy

Cooperative Strategy

• Cooperative Strategy: A strategy in which firms work together to achieve a shared objective

• Cooperating with other firms is a strategy that:

  • Creates value for a customer

  • Is less than the cost of constructing customer value in other ways

  • Establishes a favorable position relative to competitors

Strategic Alliance

• Strategic Alliance: A primary type of cooperative strategy in which firms combine some of their resources and capabilities to create a mutual competitive advantage

• Involves the exchange and sharing of resources and capabilities to co-develop or distribute goods and services

• Requires cooperative behavior from all partners

Reasons to 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 25-40% of sales revenue in large firms

• 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

Strategic Alliance Behaviors

• Examples of cooperative behavior known to contribute to alliance success:

  • Actively solving problems

  • Being trustworthy

  • Consistently pursuing ways to combine partners’ resources and capabilities to create value

• Collaborative (Relational) Advantage: A competitive advantage developed through a cooperative strategy

3 Types of Strategic Alliances

• Joint Venture: Two or more firms create a legally independent company by sharing some of their resources and capabilities

  • Optimal when firms need to create a competitive advantage that is substantially different from their individual advantages, and when highly uncertain, hypercompetitive markets are targeted

• Equity Strategic Alliance: Partners who own different percentages of equity in each other’s companies

  • Many foreign direct investments, such as those companies from multiple countries are making in China, are completed through an equity strategic alliance

• Nonequity Strategic Alliance: Two or more firms develop a contractual relationship to share some of their unique resources and capabilities

  • less formal, fewer partner commitments, and intimate relationship among partners is not fostered

Strategic Alliance Rationale: Dependent on Market Type

• Slow Cycle

  • Gain access to a restricted market

  • Establish a franchise in a new market

  • Maintain market stability (e.g. establishing standards)

• Fast Cycle

  • Speed up development of new goods or services

  • Speed up new market entry

  • Maintain market leadership

  • Form an industry technology standard

  • Share risky R&D expenses

  • Overcome uncertainty

• Standard Cycle

  • Gain market power (reduce industry overcapacity)

  • Gain access to complementary resources

  • Establish better economies of scale

  • Overcome trade barriers

  • Meet competitive challenges from other competitors

  • Pool resources for very large capital projects

  • Learn new business techniques

Business Level Cooperative Strategies

• Complementary Strategic Alliances: designed to take advantage of market opportunities by combining partner firms’ assets in complementary ways to create new value

  • Vertical

  • Horizontal

  • Intersectional

• Competition response strategy

• Uncertainty-reducing strategy

• Competition-reducing strategy

Complementary Strategic Alliances

Vertical Complementary Strategic Alliance: 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 alliance

Horizontal Complementary Strategic Alliance: Formed when partners agree to combine their resources and skills to create value in the same stage of the value chain

• Focus is on long-term product development and distribution opportunities

• The partners may be competitors, which requires a great deal of trust and coordination between the partners

Intersectional Complementary Strategic Alliance: partnerships where the involved firms are neither vertically nor horizontally connected

Competition Response Strategy

• Competition Response Strategy: Used as a business-level response to competitors’ actions

• Because they can be difficult to reverse and expensive to operate, strategic alliances are primarily formed to respond to strategic rather than tactical actions

Uncertainty Reducing Strategy

• Uncertainty-Reducing Strategy: Used to hedge against risk and uncertainty

• These alliances are most prevalent in fast-cycle markets

• An alliance may be formed to reduce the uncertainty associated with developing new products, establishing technology standards, or entering emerging economies

Competition Reducing Strategy

• Competition-Reducing Strategy: Used to avoid destructive or excessive competition

  • Explicit collusion: when firms directly negotiate production output and pricing agreements in order to reduce competition (illegal)

  • Tacit collusion: when firms in an industry indirectly coordinate their production and pricing decisions by observing other firm’s actions and responses

    • Mutual forbearance: a form of tacit collusion in which firms avoid competitive attacks against those rivals they meet in multiple markets

    • Competition-reducing strategic alliances are reviewed by governments to make sure the collaboration does not violate antitrust laws

Assessment of Cooperative Strategies

• Complementary business-level strategic alliances, especially the vertical ones, have the greatest probability of creating a sustainable competitive advantage

• Horizontal complementary alliances are sometimes difficult to maintain because they are often between rival competitors

• Competitive advantages gained from the competition response and the competition-reducing strategies tend to be temporary

• Competition-reducing alliances have lowest probability of creating sustainable competitive advantages

Corporate Level Cooperative Strategies

• Corporate-level Strategies help the firm diversify in terms of:

  • Products offered to the market

  • The markets it serves

• There are three types of Corporate-level Cooperative Strategies:

  • Diversifying alliances

  • Synergistic alliances

  • Franchising

• Require fewer resource commitments than M&A strategies

Diversifying Strategic Alliances

• Allows a firm to expand into new product or geographic 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 flexibility

• Permits a “test” of whether a future merger between the partners would benefit both parties

Synergistic Strategic Alliances

• Creates joint economies of scope between two or more firms

• Creates synergy across multiple functions or multiple businesses between partner firms

Franchising

• Franchising: Firms use a franchise as a contractual relationship to describe and control the sharing of its resources and capabilities with partners

• Spreads risks and uses resources, capabilities, and competencies without merging or acquiring another company

• A contractual relationship (the franchise) is developed between two parties, the franchisee and the franchisor.  These can be complex agreements in which payments are made by franchisee to the franchisor in the form of an (i) an upfront fee, (ii) payment for training, equipment, or advisory, and (iii) ongoing royalties or a percentage of sales

Assessment of Corporate Level Cooperative Strategies

• Compared to business-level strategies

  • Broader in scope

  • More complex

  • More costly

• Can lead to competitive advantage and value when:

  • Successful alliance experiences are internalized

  • The firm uses such strategies to develop useful knowledge about how to succeed in the future

International Cooperative Strategies

• Cross-border Strategic Alliance: A strategy in which firms with headquarters in different nations combine 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

  • Allows risk sharing by reducing financial investment

  • Host partner knows local market and customs

  • International alliances can be difficult to manage due to differences in management styles, cultures or regulatory constraints

  • Must gauge partner’s strategic intent such that the partner does not gain access to important technology and become a competitor

Network Cooperative Strategies

• Network Cooperative Strategy: A cooperative strategy wherein several firms agree to form multiple partnerships to achieve shared objectives

  • Stable alliance network

  • Dynamic alliance network

• Effective social relationships and interactions among partners are keys to a successful network cooperative strategy

• 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

Network Cooperative Strategies: Stable Alliance Network

• Long term relationships that often appear in mature industries where demand is relatively constant and predictable

• Stable networks are built for exploitation of the economies (scale and/or scope) available between the firms

• Directed primarily toward developing products at a low cost and exploiting economies of scale and scope

Network Cooperative Strategies: Dynamic Alliance Network

• Arrangements that evolve in industries with rapid technological change leading to short product life cycles

• Primarily used to stimulate rapid, value-creating product innovation and subsequent successful market entries

• Purpose is often exploration of new ideas

• Large firms with substantial resources will often create alliances with smaller entrepreneurial startup firms with creative ideas for product innovation

Competitive Risks of 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

Managing Competive Risks in Cooperative Strategies

• Competitive Risks

  • Inadequate contracts

  • Misrepresentation of competencies

  • Partners fail to use their complementary resources

  • Holding alliance partners’ specific investments hostage

• Risk and Asset Management Approach

  • Detailed contracts and monitoring

  • Developing trusting relationships

• Desired Outcome

  • Create Value, Above-Average Returns

Managing Cooperative Strategies

Cost Minimization Management Approach

• Have formal contracts with partners

• Specify how partner behavior is to be controlled

• Specify how strategy is to be monitored

• Set goals that minimize costs and and prevent opportunistic behavior by partners

Opportunity Maximization Approach

• Maximize partnership’s value-creation opportunities

• Learn from each other

• Explore additional marketplace possibilities

• Maintain fewer formal, limiting contracts —> fewer constraints