Chapter 9. Cooperative Strategy

Strategic Alliances as a Primary Type of Cooperative Strategy

- A strategic alliance is a cooperative strategy in which firms combine some of their resources to create a competitive advantage.

- Involve firms with some degree of exchange and sharing of resources to jointly develop, sell, and service goods or services

- Are used by firms to leverage their existing resources while working with partners to develop additional resources as the foundation for new competitive advantages

Examples of cooperative behavior that contribute to alliance success include:

§ Actively solving problems

§ Being trustworthy

§ Consistently pursuing ways to combine partners' resources to create value

Three major types of strategic alliances that firms use include:

- Three major types of strategic alliances that firms use include:

1. Joint ventures

2. Equity strategic alliances

3. Non equity strategic alliances

1.Joint Venture

- A joint venture is a strategic alliance in which two or more firms create a legally independent company to share some of their resources to create a competitive advantage.

- Have partners who own equal percentages and contribute equally to the venture's operations

- Are often formed to improve a firm's ability to compete in uncertain competitive environments

Joint ventures can be effective in:

§ Establishing long-term relationships

§ Transferring tacit knowledge between partners

2.Equity Strategic Alliances

- An equity strategic alliance is an alliance in which two or more firms own different percentages of a company that they have formed by combining some of their resources to create a competitive advantage

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- Companies commonly form equity alliances because they want to ensure that they have control over assets that they commit to the alliance.

§ Control of firms' resources, especially intellectual capital, can be quite important when R & D alliances are formed.

3.Non equity strategic alliances

- An non equity strategic alliance is an alliance in which two or more firms develop a contractual relationship to share some of their resources to create a competitive advantage.

Non equity strategic alliances:

§ Are less formal

§ Demand fewer partner commitments than do joint ventures and equity strategic alliances

§ Generally do not foster an intimate relationship between partners

- The informality and lower commitment levels make non equity strategic alliances unsuitable for complex projects where success depends on the transfer of tacit knowledge between partners

Outsourcing commonly occurs through non equity strategic alliances

Two key reasons why firms form strategic alliances are:

1. To create value they couldn't generate by acting independently and entering markets more rapidly

2. Because most (if not all) companies lack the full set of resources needed to pursue all identified opportunities and reach their objectives in the process of doing so on their own

The reasons firms use strategic alliances also vary by

slow-cycle, fast-cycle, and standard-cycle market conditions.

Slow-Cycle

§ Gain access to restricted markets

§ Establish a franchise in a new market

§ Maintain market stability

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

§ 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 Strategy

is a strategy through which firms combine some of their resources to create a competitive advantage by competing in one or more product markets.

Four business-level cooperative strategies are used to help the firm improve its performance in individual product markets:

1. Complementary strategic alliances

2. Competition response strategy

3. Uncertainty-reducing strategy

4. Competition-reducing strategy

1.Complementary strategic alliances

are business-level alliances in which firms share some of their resources in complementary ways to create a competitive advantage.

Two dominant types of complementary strategic alliances are:

1. Vertical

§ In a vertical complementary strategic alliance, firms share some of their resources from different stages of the value chain to create a competitive advantage.

§ Supplier

2. Horizontal

§ A horizontal complementary strategic alliance is an alliance in which firms share some of their resources from the same stage (or stages) of the value chain for creating a competitive advantage.

§ Between buyers

2.Competition Response Strategy

- Competition response strategies are formed to respond to competitors' actions, especially strategic actions.

3.Uncertainty-Reducing Strategy

-Uncertainty-reducing strategies are used to hedge against the risks created by the conditions of uncertain competitive environments (such as new product markets).

4.Competition-Reducing Strategy

- Competition-reducing strategies are used to avoid excessive competition while the firm marshals its resources to improve its strategic competitiveness.

- Collusion is often used to reduce competition

Collusive strategies differ from strategic alliances in that collusive strategies are often an illegal cooperative strategy

Two types of collusive strategies are:

1.Explicit collusion

2.Tacit collusion

1.Explict collusion

- Explicit collusion exists when two or more firms negotiate directly to jointly agree about the amount to produce as well as the prices for what is produced.

- In many economies, explicit collusive strategies are illegal unless sanctioned by government policies.

§ Increasing globalization has led to fewer government-sanctioned situations involving explicit collusion.

2.Tactic collusion

- Tacit collusion exists when several firms in an industry indirectly coordinate their production and pricing decisions by observing each other's competitive actions and responses.

- Tends to take place in industries dominated by a few large firms

- Results in production output that is below fully competitive levels and above fully competitive prices

- Can lead to less competition in markets in which both firms operate

- Mutual forbearance is a form of tacit collusion in which firms do not take competitive actions against rivals they meet in multiple markets.

§ Rather, firms learn how to deter the effects of rivals' competitive attacks and responses without resorting to destructive competition

Assessing Business-Level Cooperative Strategies

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

- Horizontal complementary alliances are sometimes difficult to maintain because often they are formed between firms that compete against each other at the same time they are cooperating.

- Uncertainty-reducing and competition-reducing strategies have the lowest probability of creating a sustainable competitive advantage.

Corporate-Level Cooperative Strategy

- A corporate-level cooperative strategy is a strategy through which a firm collaborates with one or more companies to expand its operations.

Corporate-level strategic alliances are attractive:

§ When a firm seeks to diversify into markets in which the host nation's government prevents mergers and acquisitions

§ Because they can be used as a "test" to determine whether partners might benefit from a future merger or acquisition between them

Compared to mergers and acquisitions, corporate-level strategic alliances:

§ Require fewer resource commitments

§ Permit greater flexibility in terms of efforts to diversify partners' operations

The most commonly used corporate-level cooperative strategies are:

§ Diversifying alliances

§ Synergistic alliances

§ Franchising

Diversifying Strategic Alliance

- A diversifying strategic alliance is a strategy in which firms share some of their resources to engage in product and / or geographic diversification.

- Companies using this strategy typically seek to enter new markets (either domestic or outside of their home setting) with existing products or with newly developed products.

- Managing diversity gained through alliances has fewer financial costs but often requires more managerial expertise.

Synergistic Strategic Alliance

- A synergistic strategic alliance is a strategy in which firms share some of their resources to create economies of scope.

- Similar to the business-level horizontal complementary strategic alliance, synergistic strategic alliances create synergy across multiple functions or multiple businesses between partner firms.

Franchising

- Franchising is a strategy in which a firm (the franchisor) uses a franchise as a contractual relationship to describe and control the sharing of its resources with its partners (the franchisees).

- A franchise is a form of business organization in which a firm that already has a successful product or service (the franchisor) licenses its trademark and method of doing business to other businesses (the franchisees) in exchange for an initial franchise fee and an ongoing royalty rate.

§ Franchising's effectiveness is a product of how well the franchisor can replicate its success across multiple partners in a cost-effective way.

Franchising is:

§ An alternative to pursuing growth through mergers and acquisitions

§ A particularly attractive strategy to use in fragmented industries, such as hotels and motels and retailing, where no firm has a dominant market share

In the most successful franchising strategy, the partners work closely together.

§ The franchisor should develop programs that transfer to the franchisees the knowledge and skills that are needed to successfully compete at the local level.

§ The franchisee should provide feedback to the franchisor regarding how their units could become more effective and efficient.

- The core company's brand name is often the most important competitive advantage for franchisees.

Compared with business-level cooperative strategies, corporate-level cooperative strategies commonly are:

§ Broader in scope

§ More complex

§ More challenging

§ More costly to use

Corporate-level cooperative strategies can create competitive advantages and value for customers when:

§ Successful alliance experiences are internalized.

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

§ The firm is able to develop such strategies and manage them in ways that are valuable, rare, imperfectly imitable, and non-substitutable.

International Cooperative Strategy

- Firms use cross-border strategic alliances as a type of international cooperative strategy.

- A cross-border strategic alliance is a strategy in which firms with headquarters in different countries decide to combine some of their resources to create a competitive advantage

- In a cross-border strategic alliance, the partners cooperate in one or more areas such as development and production processes, partly with the intent to create value in markets throughout the world that neither firm could create operating independently.

Cross-border strategic alliances:

§ Are increasing in number

§ Are not as risky as mergers and acquisitions

§ Can be complex

§ Can be difficult to manage

Key reasons firms use cross-border alliances include:

§ The performance superiority of firms competing in markets outside their domestic market

§ Governmental restrictions on a firm's efforts to grow through mergers and acquisitions

Commonly, cross-border strategic alliances are riskier than their domestic counterparts, because of:

§ The differences in companies and their cultures

§ The frequent difficulty in building trust in order to share resources among the partners

Network Cooperative Strategy

- A network cooperative strategy is a strategy by which several firms agree to form multiple partnerships to achieve shared objectives.

- A firm's opportunity to gain access "to its partner's other partnerships" is a primary benefit of a network cooperative strategy.

- Having access to multiple collaborations increases the likelihood that additional competitive advantages will be formed as the set of shared resources expands.

§ In turn, being able to develop new resources further stimulates product innovations that are critical to achieving strategic competitiveness.

Alliance Network Types

The set of strategic alliance partnerships that firms develop when using a network cooperative strategy is called an alliance network

Alliance networks:

§ Can be stable or dynamic

§ Vary by industry characteristics

§ In mature industries, stable alliance networks are used to extend competitive advantages into new areas.

§ In rapidly changing environments where frequent product innovations occur, dynamic alliance networks are used primarily as a tool of innovation.

There are four risks that cooperative strategies often carry.

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2

3

4

1) A firm may act in a way that its partner thinks is opportunistic.

In general, opportunistic behaviors surface either when:

-Formal contracts fail to prevent them

-An alliance is based on a false perception of partner trustworthiness

2) A firm misrepresents the resources it can bring to the partnership.

This risk is more common when the partner's contribution is based on some of its intangible assets.

3) A firm may fail to make available to its partners the resources that it committed to the cooperative strategy.

§ This risk surfaces most commonly when firms form an international cooperative strategy.

§ Different cultures and languages can cause misrepresentations of contractual terms or trust-based expectations

4) One firm may make investments that are specific to the alliance while its partner does not.

This causes the firm that is making investments to be at a relative disadvantage in terms of returns earned from the alliance compared with investments made to earn the returns.

Managing Cooperative Strategies

- Assigning managerial responsibility for a firm's cooperative strategies to a high-level executive or to a team improves the likelihood that the strategies will be well managed.

Those responsible for managing the firm's cooperative strategies should take the actions necessary to:

§ Coordinate activities

§ Categorize knowledge learned from previous experiences

§ Make certain that what the firm knows about how to effectively form and use cooperative strategies is in the hands of the right people at the right time

§ Learn how to manage both tangible and intangible assets

Two primary approaches firms use to manage cooperative strategies are:

1) Cost minimization

2) Opportunity maximization

1) Cost minimization

In the cost-minimization approach, the firm develops formal contracts with its partners that specify:

-How the cooperative strategy is to be monitored

-How partner behavior is to be controlled

2) Opportunity maximization

§ In the opportunity-maximization approach, the firm develops less formal contracts, with fewer constraints on partners' behaviors, which makes it possible for partners to explore how their resources can be shared in multiple value-creating ways.

Trust is an increasingly important aspect of successful cooperative strategies.

§ In the context of cooperative arrangements, trust is the belief that a firm will not do anything to exploit its partner's vulnerabilities, even if it has an opportunity to do so.

§ Trust between partners increases the likelihood of success when using alliances.

§ When partners trust each other, there is less need to write detailed formal contracts to specify each firm's behaviors.