Chapter 9: Cooperative Strategy

 Overview:
 Cooperative strategies and why firms use them
 Three types of strategic alliances
 Business-level cooperative strategies & their use
 Corporate-level cooperative strategies in diversified
firms
 Cross-border strategic alliances’ importance as an
international cooperative strategy
 Network alliances
1
Chapter 9: Cooperative Strategy

2
 Introduction
 Cooperative strategy
 A strategy in which firms work together to achieve a
shared objective
 Go beyond normal company to company dealings
 One of 3 means firms use to grow and improve
performance (mode)
 Internal development, mergers and acquisitions, and
cooperation
 Core and critical parts of firms strategies today
 Has implications for a firm’s corporate, business, and
international strategy
 Competitive advantage and above average returns
 Collaborative or relational advantages 3
 Primary Type of Cooperative Strategy:
Strategic Alliances
 Strategic Alliance
 A cooperative strategy in which firms combine some of their
resources and capabilities to create a competitive advantage
 Involve firms with some degree of exchange and sharing of
resources and capabilities to co-develop, sell, and service
goods or services
 3 major types of strategic alliances
 Joint Venture
 Two or more firms create a legally independent company to

share some of their resources and capabilities to develop a

competitive advantage
 Partners typically own equal percentages and contribute

equally to the ventures operations 4

 Primary Type of Cooperative Strategy:
Strategic Alliances
 3 major types of strategic alliances
 Equity Strategic Alliance
 Two or more firms own different percentages of the

company they have formed by combining some of their

resources and capabilities to develop a competitive
advantage
 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
 Licensing agreements
 Distribution agreements
 Supply contracts
 Outsourcing commitments
 A separate independent company is NOT established 5
 Reasons Firms Develop Strategic
Alliances
 Why firms 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% of sales revenue in large
firms
6
 Reasons Firms Develop Strategic
Alliances
 Strategic alliances can be used to
 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 7
 Business-Level Cooperative Strategy

 Business level cooperative strategies are

used to grow and improve firm performance
in individual product markets (industries)
 4 types
 Complementary strategic alliances
 Competition response strategy
 Uncertainty-reducing strategy
 Competition-reducing strategy

8
 Business-Level Cooperative Strategy

 Complementary Strategic Alliances

 Firms share some of their resources and capabilities in
complementary ways to develop competitive advantages
 Two Types:
 Vertical CSA
 Partnering firms share resources & capabilities from different
stages of the value chain to create a competitive advantage
 Supplier or distributor
 Horizontal CSA
 Partnering firms share resources & capabilities from the same
stage(s) of the value chain to create a competitive advantage
 Competitor
 Commonly used for long-term product development and distribution
opportunities 9
 Business-Level Cooperative Strategy

 Competition Response Strategy

 Competitive Rivalry (Ch. 5)
 Competitors initiate competitive actions to attack
rivals and launch competitive responses to their
competitor’s actions
 Strategic alliances can be used at the business
level to respond to competitor’s attacks
 Primarily formed to take strategic actions vs. tactical
actions
 Can be difficult to reverse and expensive to operate

10
 Business-Level Cooperative Strategy

 Uncertainty-Reducing Strategy
 Can be used to hedge against risk and uncertainty
 As examples, 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 is reduced by combining knowledge &
capabilities

11
 Business-Level Cooperative Strategy
 Competition-Reducing Strategy
 Collusive strategies differ from strategic alliances in that
they are often illegal
 2 Types
 Explicit collusion
 Direct negotiation among firms to establish output levels
and pricing agreements that reduce industry competition
 Tacit collusion
 Indirect coordination of production and pricing decisions by
several firms, which impacts the degree of competition
faced in the industry
12
 Business-Level Cooperative Strategy
 Assessment of Business-level cooperative strategies
 The integrated resources and capabilities must be valuable, rare,
imperfectly imitable, and nonsubstitutable
 Complementary alliances, especially the vertical ones, have
greatest probability of creating competitive advantage
 Horizontal alliances are can be hard to maintain since they are
usually between rival companies
 Competition response and uncertainty reducing alliances tend to
create advantages that are more temporary in nature
 Competition-reducing alliances have lowest probability of creating
sustainable competitive advantages

13
 Corporate-Level Cooperative Strategies

 Corporate-level cooperative strategies used to help

firm diversify itself in terms of products offered or
markets served or both
 3 Common Forms
 Diversifying strategic alliance
 Firms share some of their resources & capabilities to diversify
into new product or market areas
 Synergistic strategic alliance
 Firms share some of their resources & capabilities to create
economies of scope
 Diversifies the involved firms into a new business in a
synergistic way 14
 Corporate-Level Cooperative Strategies

 3 Common Forms (cont.)

 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

15
 Corporate-Level Cooperative Strategies

 Assessment of corporate-level cooperative

strategies
 In comparison with business-level strategies
 Usually broader in scope and more complex
 Also more challenging and costly
 Can be used to develop useful knowledge about how to
succeed in the future
 Learn and then acquire or internally develop
 Can lead to competitive advantage if they are managed in
ways that are valuable, rare, imperfectly imitable, and
nonsubstitutable
16
 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?
 Can help firms use their resources and capabilities to create value
in locations outside their home market
 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
 Local partners can help firms overcome liabilities of moving into a
foreign country (example: lack of knowledge about local culture)
17
 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)
 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
 Can be problematic - could lock firm in with partners and
exclude development of alliances with others
18
 Network Cooperative Strategy

 Alliance network types: Set of strategic alliance

partnerships resulting from use of a network
cooperative strategy
 Stable alliance network
 Formed in mature industries where demand is relatively
constant and predictable
 Directed primarily toward developing products at a low cost and
exploiting economies of scale and scope
 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
19
 Competitive Risks with Cooperative
Strategies
 Risks
 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 20