Strategic Management:
Concepts and Cases
Part II: Strategic Actions: Strategy Formulation
Chapter 9: Cooperative Strategy
1
The Strategic Management Process
2
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
3
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
4
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)
5
Introduction
Cooperative strategy
Firms work together to achieve a shared objective
6
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
7
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
8
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
9
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
10
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
11
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
12
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
13
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
14
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
15
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
16
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)
17
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 18
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
19
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
20
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
21
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
22
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
23
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
24
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)
25
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 26
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
27
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
28
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 29
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)
30
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
31
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
32
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 33
Managing Competitive Risks in
Cooperative Strategies
34
Competitive Risks with
Cooperative 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
35
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
36
Managing Cooperative Strategy
Two primary approaches
1. Cost minimization
2. Opportunity maximization
37
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
38
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
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