BM2200 Business Strategy Analysis: Strategic Alliances and Cooperative Strategies
Overview of BM2200 Business Strategy Analysis - Week 10
Course and Instructor Information - Course Code: BM2200 - Course Title: Business Strategy Analysis - Academic Period: Week - - Instructor: Dr. Senem Aydin Ozden - Institution: Bayes Business School, City University of London
Introduction to Cooperative Strategy
Core Definition and Conceptual Framework - A cooperative strategy involves firms working together to achieve a shared objective. - A competitive advantage that is specifically developed through the implementation of a cooperative strategy is formally known as a collaborative advantage or a relational advantage.
Strategic Value of Cooperation - The successful implementation of these strategies allows a firm to outcompete standard rivals. - It enables firms to attain strategic competitiveness and achieve significantly higher levels of performance than they would by operating in isolation.
Primary Types of Strategic Alliances
Joint Ventures - Definition: A specific form of strategic alliance where two or more distinct firms create a legally independent company. - Purpose: Partners share resources and capabilities through this new entity to develop a competitive advantage. - Applications: These are frequently formed to improve the ability of firms to compete within uncertain competitive environments. - Strategic Benefits: - Extremely beneficial for establishing long-term relationships between partner firms. - Facilitates the transfer of tacit knowledge, such as specific professional experience, which is otherwise difficult to codify or share. - Ownership Structure: In a typical joint venture, partners possess equal ownership and contribute resources equally.
Equity Strategic Alliances - Definition: An alliance formed when one company purchases equity in another business, which can be categorized as a partial acquisition. - Purpose: Companies utilize equity alliances to ensure they maintain sufficient control over the specific assets they commit to the partnership. - Detailed Case Study: Panasonic and Tesla (2009) - In , Panasonic entered a supply agreement with Tesla Motors for lithium-ion battery cells intended for use in Tesla's electric vehicles. - Financial Investment: Panasonic made a direct investment of in Tesla. - Operational Impact: The agreement provided Tesla with sufficient battery cells to produce more than vehicles. - Strategic Fulfillment: This supply was critical for Tesla to meet an aggressive production ramp-up and to fulfill more than existing Model S reservations. - Long-term Collaboration: This specific agreement built upon a multi-year collaboration aimed at developing next-generation automotive-grade battery cells and accelerating the global expansion of the electric vehicle market.
Nonequity Strategic Alliances - Definition: An alliance where two or more firms develop a contractual relationship to share resources and capabilities without forming a new company or taking equity positions. - Characteristics: - The arrangement is less formal than joint ventures or equity alliances. - Demands fewer long-term commitments from the partners. - Despite being less formal, it remains highly effective in creating value for the involved entities. - Common Examples: - Outsourcing agreements. - Distribution agreements. - Supply contracts. - Detailed Look at Outsourcing: - Outsourcing is formally organized as a nonequity strategic alliance. - It is defined as the purchase of a specific value-chain activity or a support function activity from an external firm.
General Motivations and Reasons for Strategic Alliances
The Competitive Landscape - Cooperative strategies are an integral and unavoidable part of the modern competitive landscape. - Competition is increasingly shifting away from firm-versus-firm rivalry and toward rivalry among strategic alliances. - Examples of this shift are most prominent in the airline industry with global alliances such as OneWorld, Star Alliance, and SkyTeam.
Value Creation and Resource Management - Alliances permit firms to create value that would be impossible to generate through independent action. - They allow for more rapid entry into new markets. - Most companies lack the exhaustive resources required to pursue every opportunity they identify; partnerships bridge this resource gap.
Performance Objectives - Partnering increases the mathematical probability of reaching firm-specific performance targets, such as: - Reaching new customer segments. - Broadening the overall product offering. - Improving product distribution networks.
Strategic Alliances and Market Cycles
Slow-Cycle Markets - Market Definition: Environments where competitive advantages are sustained for long periods due to high imitation costs (e.g., railroads, utilities, financial services). - Rationale for Alliance: - To gain access to restricted or closed markets (exemplified by the Chinese market). - To establish a franchise or presence in a brand-new market. - To maintain market stability, often through the establishment of industry standards.
Fast-Cycle Markets - Market Definition: Hypercompetitive, unstable, unpredictable, and complex markets where advantages are not shielded from imitation (e.g., electronics, computers). - Rationale for Alliance: Firms adopt a "collaboration mindset" to navigate the rapid pace of change.
Standard-Cycle Markets - Market Definition: Markets where advantages are moderately shielded, sustaining advantages longer than fast-cycle but shorter than slow-cycle markets (e.g., the airline industry). - Rationale for Alliance: - To gain complementary resources. - To achieve economies of scale. - To meet specific competitive challenges. - Specific Benefits in Airline Alliances: - Enhanced cost control. - Joint purchasing power. - Shared physical facilities, including boarding gates, service centers, and airport lounges.
Business-Level Cooperative Strategies
Complementary Strategic Alliances - Firms share resources in complementary ways to build advantage. - Vertical Alliances: Focus on different stages of the value chain, including distribution, supplier, or outsourcing alliances where firms rely on upstream or downstream partners. - Horizontal Alliances: An alliance where firms share resources while operating at the same stage of the value chain.
Competition Response Strategy - Strategic alliances are utilized at the business level as a defensive or offensive tool to respond to attacks from competitors.
Uncertainty-Reducing Strategy - Frequently seen in fast-cycle markets to hedge against high risk. - Used when entering entirely new product markets or when attempting to develop dominant technology standards.
Competition-Reducing (Collusive) Strategies - Alliances designed to avoid destructive or excessive competition. - Explicit Collusion: When firms jointly and directly agree on the volume of output produced and the price to be charged. - Tacit Collusion: Firms indirectly coordinate production and pricing by carefully observing and reacting to each other's competitive actions and responses.
Corporate-Level Cooperative Strategies
General Framework - Used to improve performance as an alternative or supplement to organic growth and Mergers & Acquisitions (M&As). - These require fewer resource commitments and offer significantly greater flexibility compared to M&As.
Diversifying Strategic Alliance - Definition: A strategy where firms share resources to engage in product or geographic diversification. - Purpose: To enter new domestic or international markets or to transition into new product categories.
Synergistic Strategic Alliance - Definition: Firms share resources to create economies of scope. - Notes: This is functionally similar to a horizontal complementary strategic alliance. - Outcome: Creates synergies across multiple functions or business units (e.g., sharing resources to develop unified manufacturing platforms).
Franchising - Definition: A strategy where a firm (the franchisor) uses a contractual relationship to control resource sharing with partners (franchisees). - Structure: A business organization form where a firm with a successful product/service licenses its trademark and business methods. - Financials: Licenses are granted in exchange for an initial lump sum payment followed by ongoing royalty fees.
Competitive Risks in Cooperative Strategies
Failure Statistics - A large proportion of cooperative strategies fail to meet their objectives. - Roughly of these alliances encounter significant problems within the first . - Overall, approximately of cooperative strategies result in failure.
Case Study Reference - Novartis - Google Healthcare Alliance: A prominent example used to illustrate the complexity and potential for risk in strategic partnerships across the pharmaceutical and technology sectors.