Muhammad Haikal Bin Rizal

22879

COOPERATIVE Rintan Pebri Antika

2001786

STRATEGY Amin Murshidi

16000241
Table of content

Introduction_________________________________________________________2

Strategic Alliance_____________________________________________________3

Business Level Cooperative Strategy_____________________________________7

Cooperate Level Cooperative Strategy___________________________________13

Cooperative Strategy risk______________________________________________15

Managing Risk_______________________________________________________16

Managing Cooperative Strategy_________________________________________16

Questions and Answer to Review Chapter 8_______________________________18

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Introduction

The definition of cooperative strategy is a strategy in which firms work together to

achieve a shared objective. Several companies apply cooperative strategies to increase their

profits through cooperation with other companies. Instead of competing in marketing,

companies can work together that most likely benefiting each other. The cooperating process

involves collaboration of resources, capabilities, and core competencies. It is the result from

the mutual interest between firms in designing, manufacturing, or distributing goods or

services. The firms that involved also actively solving problems, being trustworthy, and

consistently pursuing ways to combine partners’ resources and capabilities to create value

Cooperation between firms can creates value for customers. The combination of

products and services delivers better results than an individual company. It helps the

manufacturers and suppliers serve their customer through guarantee the continuity and

quality supply. The collaboration also results in new production-enhancing technologies to

the market. Besides, it can establish a favourable position relative to competitors.

Competitive advantage developed through a cooperative strategy is called a collaborative or

relational advantage. There are business-level cooperative strategies and cooperate-level

cooperative strategies.

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Strategic Alliance

Strategic Alliance is a primary type of cooperative strategy which firms combine some

of their resources and capabilities to create a mutual competitive advantage. It Involves the

exchange and sharing of resources and capabilities to co-develop or distribute goods and

services. Customers often pay attention to pay for the best value. They always choose the

company with the most expertise to share. Firms that can form an alliance with other firms,

their resources are able to go further than if an individual firm were developing resources on

their own. That leads to products or services which have more innovation, which provides

customers with more value, and that is a path which leads to better results.

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 There are three types of strategic alliance, which is a joint venture, equity strategic

alliance, and non-equity strategic alliance. Joint venture definition is two or more firms create

a legally independent company by sharing some of their resources and capabilities. It is

established when the parent companies establish a new child company. For example,

Company A and Company B (parent companies) can form a joint venture by creating Company

C (child company). A good example is when German Siemens AG & Japan Fujitsu Ltd equally

own joint venture Fujitsu Siemens Computers. Fujitsu increase market share from 4% to 10%.

To be called Fujitsu Technology Solution.

Equity Strategic Alliance by definition is partners who own different percentages of

equity in a separate company they have formed by combining some of their resources &

capabilities to create competitive advantage. If Company A purchases 40% of the equity in

Company B, an equity strategic alliance would be formed. As by example, Citigroup Inc

forming strategic alliance with Shanghai Pudong Dev Bank Co. Doing so through an initial

equity investment totalling 5%. The first foreign bank to own 20% of bank in PRC.

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 A non-equity strategic alliance is created when two or more companies sign a

contractual relationship to pool their resources and capabilities together. It is a strategy in

which organizations create an agreement to share resources without creating a separate

entity or sharing equity. It is less formal and demand fewer partner commitments. For

instance, the partnership between Starbucks and Kroger: Starbucks has kiosks in many Kroger

supermarkets.

For a better understanding about the reasons for strategic alliances, there are three

different product life cycles which is a slow cycle, standard cycle, and fast cycle. The product

life cycle is determined by the need to innovate and continually create new products in an

industry. For companies, whose product falls in a different product lifecycle, the reasons for

strategic alliances are different.

In a slow cycle, a company’s competitive advantages are shielded for relatively long

periods of time. The example for this cycle is the pharmaceutical industry, who operates in a

slow product life cycle as the products are not developed yearly and patents last a long time.

In the cycle, markets often seek to establish a monopoly, either in terms of geography or

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products with one-of-a-kind attributes. A product design that is not easily imitated may

dominate its market for decades. Strategic alliances are formed to gain access to a restricted

market, setting product standards, and establish a franchise in a new market. Another

example is American steel industry has 3 major players: US steel, ISG & Nucor. They have

made strategic alliances in Europe & Asia & investing in ventures in South America & Australia.

U.S Steel bought a Slovakian steel producer, VSZ in 2000.

In a standard cycle, the company launches a new product every few years and may or

may not be able to maintain its leading position in an industry. The reason for strategic

alliance is to gain market power in which they reduce industry overcapacity. They can meet

competitive challenges from other competitors. In addition, they can learn new business

techniques. For instance, China Southern Airlines joined Sky Team alliance. Air China &

Shanghai Airlines added to Star Alliance (United Airlines, Air Canada & Luftansa.

Fast cycle companies are markets where the firm’s competitive advantages are not

shielded from imitation so that those advantages cannot be sustained for long. Fast cycle

markets are unstable, unpredictable, and complex. Alliances between firms with current

excess resources & promising capabilities help companies to compete in fast-cycle market.

The uncertainty may cause by the involvement of trend and constant changes in the society

and environment. Companies can also share risky Research and Development (R & D)

expenses. The strategic alliance is to overcome the uncertainty. In addition, the combination

can speed up development of new goods or service. Most of the companies from the

information technology (IT) market are in the fast cycle such as the entertainment industry.

It is a digital marketplace as television content is available on web.

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BUSINESS-LEVEL COOPERATIVE STRATEGY

A business-level cooperative strategy is used to help the firm improve its performance in

individual product markets. There are four business-level cooperative strategies

The four general business level cooperative strategies are:

● Complementary strategic alliances (vertical and horizontal)

● Competition response strategy

● Uncertainty reducing strategy

● Competition reducing strategy

A firm forms a business-level cooperative strategy when it believes combining its resources

and capabilities with one or more partners creates competitive advantages that it can’t create

by itself and that will lead to success in a specific product market.

1. Complementary Strategic Alliances

Complementary strategic alliances are partnerships that are designed to take advantage of

market opportunities by combining partner firms’ resources and capabilities in

complementary ways so that new value is created.

1 a. Vertical Complementary Strategic Alliance

A vertical complementary strategic alliance is formed between firms that agree to use their

resources and capabilities in different stages of the value chain to create value. Oftentimes,

vertical complementary alliances are formed in reaction to environmental changes – i.e., they

serve as a means of adaptation to the environmental changes.

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A critical issue for firms is how much technological knowledge they should share with their

partner. They need the partners to have adequate knowledge to perform the task effectively

and to be complimentary to their capabilities. Part of this decision depends on the trust and

social capital developed between the partners.

A vertical complementary strategic alliance links suppliers, manufacturers, and/or

distributors and represents linkages between different segments of each partner’s value

chain.

This kind of alliance is largely seen between upstream and downstream value chain of firms

product. For E.g. Ink manufacturers entering into a strategic alliance with Pigment

manufacturers, this kind of arrangement ensures ink manufacturers with a consistent supply

of requisite kind of Pigment. Further, a car manufacturer entering new geography may enter

into an Srategic Alliance with distributors which enable it to expand rapidly.

1 b. Horizontal Complementary Strategic Alliance

It is an alliance between companies operating in the same business area. In other words,

companies which were competitors previously now join hands to enhance their

competitiveness against other competitors in the market.

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The classic example of this kind of Strategic Alliance is Renault – Nissan Alliance. The Strategic

Alliace between both the entities is neither by a merger of nor by an acquisition, however, it

is through a cross holding agreement. This kind of Strategic Alliance provided both the

companies with competitive advantages like economies of scale as the raw material cost can

be negotiated for larger volumes, logistics cost can be rationalized, research & development

cost can be rationalized and even marketing and servicing network can be commonly utilized.

Horizontal complementary strategic alliances are partnerships that link similar

activities of firms. Horizontal complementary alliances are used to increase each firm’s

competitive advantage and often focus on the long-term development of product and service

technology

Importantly, horizontal alliances may require equal investments of resources by the partners

but they rarely provide equal benefits to the partners. There are several potential reasons for

the imbalance in benefits.

● Frequently, the partners have different opportunities as a result of the alliance.

● Partners may learn at different rates and have different capabilities to leverage the

complimentary resources provided in the alliance.

● Some firms are more effective in managing alliances and in deriving the benefits from

them.

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● The partners may have different reputations in the market thus differentiating the types

of actions firms can legitimately take in the marketplace.

A horizontal complementary strategic alliance is an arrangement that links similar segments

of competing firms’ value chains, such as linking R&D or new product development activities

2. Competition Response Strategy

Cooperative strategic alliances also may be established to enable partner firms to respond to

major strategic actions initiated by competitors. Because they can be difficult to reverse and

expensive to operate, strategic alliances are primarily formed to respond to strategic rather

than tactical actions.

Example :

fedEx responded to the success pf UPS logistics

3. Uncertainty Reducing Strategy

Firms also may form strategic alliances to hedge against risk and uncertainty (especially in

fast-cycle markets).

Alliances are often used where uncertainty exists, such as in entering new product markets

or emerging economies. For example, Dutch bank ABN AMRO signed on to a venture called

ShoreCap International which will invest capital in and advise local financial institutions that

do small and microbusiness lending in developing countries. Through this cooperative

strategy with other financial institutions, ShoreBank (the venture’s leading sponsor) hopes to

be able to reduce the risk of providing credit to smaller borrowers in disadvantaged regions.

It also hopes to reduce poverty in the regions where it invests.

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In other cases, firms form alliances to reduce the uncertainty associated with developing new

product or technology standards. For example, the alliance between France Telecom and

Microsoft is a competition response alliance for France Telecom but it is an uncertainty

reducing alliance for Microsoft. Microsoft is using the alliance to learn more about the

telecom industry and business. It wants to learn how it can develop software to satisfy needs

in this industry. By partnering with a firm in this industry, it is reducing its uncertainty about

the market and software needs. And, the alliance is clearly designed to develop new products

so the alliance reduces the uncertainty for both firms by combining their knowledge and

capabilities.

4. Competition-Reducing Strategy

Explicit collusion exists when firms get together to negotiate production output and pricing

agreements with the goal of reducing competition. Explicit collusion strategies are illegal in

the United States and most developed economies (except in regulated industries).

Some firms may adopt explicit alliances to reduce competition that is perceived as potentially

destructive or excessive. Examples include the following:

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● OPEC, which manages the price and output of oil companies in member countries

● manufacturing and distribution cartels in Japan

● industry trade organizations

● government-industry relationships

● direct collusion or price-fixing agreements among participants in an industry or between

industry participants and government agencies

There are implicit cooperative alliances, such as tacit collusion, which exist when several firms

in an industry observe others’ competitive actions and respond to reduce industry output

below the potential competitive level to maintain higher-than-competitive prices. Another

form of tacit collusion is mutual forbearance, by which firms avoid competitive attacks against

rivals they meet in multiple markets. Rivals learn a great deal about each other when

engaging in multimarket competition, including how to deter the effects of their rival’s

competitive attacks and responses. Given what they know about each other as a competitor,

firms choose not to engage in what could be destructive competitions in multiple product

markets.

Tacit collusion tends to be used as a business-level competition-reducing strategy in highly

concentrated industries.

At a broad level in free-market economies, governments must determine how rivals can

collaborate to increase their competitiveness without violating established regulations.

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CORPORATE-LEVEL COOPERATIVE STRATEGY

Corporate-level cooperative strategy are designed for organization to expand their businesses
using means other than mergers and acquisition. This is when alliance and franchising strategy
play an important roles for growth. Sometimes, host nation government restrict merger and
acquisition activities to stabilise the market, so alliances are a good substitute for expanding.
Alliances requires fewer resource commitment, are more flexible, and easier to quit.
Companies sometimes also use alliances to gauge whether it is beneficial to go a step further
for merger or acquisition with the partner company.

There are three type of corporate-level cooperative strategy, namely:

-Diversifying strategic alliances

-Synergistic strategic alliances
-Franchising

Diversifying Strategic Alliances

There are two different goal for a diversifying strategic alliance, with the first aim is to share
some resources and capabilities and to diversify into new product or market areas. An easy
example for this is the alliances between two vehicles making company Toyota and General
Motors. With the alliance, General Motors gets a higher production volume with a joint
production with Toyota, and Toyota gets to expand its market into North America.

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The next reason to go for a diversifying strategic alliances is to reduce diversification for an
over-diversified firms, like what Fujitsu had done by having an alliance with Advance Micro
Devices (AMD). Fujitsu dumps all of its flash-memory business into a joint venture company
controlled by AMD to helps them refocus on its core business.

Synergistic Strategic Alliances

The main reason for going into a synergistic strategic alliances is to create an economy of
scope. Economy of scope means that, a production of one good reduces the cost of producing
another related goods. It creates efficiency and are more cost effective, meaning lesser
spending. An example for this type of alliance can be seen with Toyota alliancing themselves
with GM to develop a hybrid and electric vehicles, with Volkswagen for their intelligent
transporting system, recycling and marketing, and with Panasonic EV for batteries production.

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Franchising

The third and last strategy in corporate-level cooperative strategy is franchising. Franchising
is a contract between two legally independent companies. The contract allows a franchisee
to sell and use the franchisor’s products and trademarks. This is an effective strategy to gain
a very large market share globally. It is also a good approach as it has a spread risks. An
example of this strategy can be seen used by McDonald’s and 7-Eleven.

RISKS IN COOPERATIVE STRATEGY

Below are some of the listed risks in cooperative strategy:

-going for alliances based on managerial motives instead of for strategic competitiveness
-partners fail to provide committed resources and capabilities
-misrepresentation of competencies

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MANAGING THE RISKS

To better manage and mitigate the risk of failure in cooperative strategy, the desired outcome
when going for one must always be for creating value and a competitive advantage in the
organization. Organizations also must always have a detailed contracts and monitoring in the
cooperative strategy, and develop a trusting relationship with partners of the contracts.

MANAGING COOPERATIVE STRATEGIES

Cooperative strategies are an important option for firms competing in the global economy;

however, they are complex and challenging to manage.

The two basic approaches to managing cooperative strategies are:

● cost minimization

● opportunity maximization

In the cost-minimization approach, the firm develops formal contracts with its partners.

These contracts specify how the cooperative strategy is to be monitored and how partner

behavior is controlled. The goal of this approach is to minimize the cooperative strategy’s cost

and to prevent opportunistic behavior by partners.

The opportunity-maximization approach focuses on a partnership’s value-creation

opportunities. In this case, partners are prepared to take advantage of unexpected

opportunities to learn from each other and to explore additional marketplace possibilities.

Less formal contracts, with fewer constraints on partners’ behaviors, make it possible for

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partners to explore how their resources and capabilities can be shared in multiple value-

creating ways.

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Questions and Answer to Review Chapter 8

1. What is the definition of cooperative strategy and why is this strategy important to

firms competing in the twenty-first century competitive landscape?

A cooperative strategy is a strategy in which firms work together to achieve a shared

objective. Cooperative strategy is the third major alternative (internal growth and mergers

and acquisitions are the other two) firms use to grow, develop value-creating competitive

advantages, and create differences between them and competitors. Thus, cooperating with

other firms is another strategy that is used to create value for a customer that exceeds the

cost of creating that value and to create a favorable position in the marketplace. The

increasing importance of cooperative strategies as a growth engine shouldn’t be

underestimated. This means that effective competition in the twenty-first century landscape

results when the firm learns how to cooperate with, as well as compete against, competitors.

2. What is a strategic alliance? What are the three types of strategic alliances firms use

to develop a competitive advantage?

A strategic alliance is a partnership between firms whereby each firm’s resources and

capabilities are combined to create a competitive advantage.

The three types of explicit cooperative strategies mentioned are (1) joint ventures, (2) equity

strategic alliances, and (3) nonequity strategic alliances. However, tacit collusion and mutual

forbearance (the latter being a form of tacit collusion) are also included as implicit cooperative

arrangements.

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1) A joint venture is an alliance where a new, independent firm is formed by two or more

partners who share some of their resources and capabilities to develop a competitive

advantage.

2) An equity strategic alliance is an alliance where partner firms share resources and

capabilities, but own unequal shares of equity in a new venture. Many foreign direct

investments are completed through equity strategic alliances, such as those involving

Japanese or U.S. companies operating in China.

3) A nonequity strategic alliance is an alliance where a contract is granted to a company to

supply, produce, or distribute a firm’s products or services. No equity sharing is involved.

Other types of cooperative contractual arrangements concern marketing and information

sharing. Because they do not involve the forming of separate ventures or equity

investments, nonequity strategic alliances are less formal and demand fewer

commitments from partners as compared to both joint ventures and equity strategic

alliances. However, the attributes of nonequity alliances make them unsuitable for

complex projects where success is to be influenced by effective transfer of tacit

knowledge between partners.

3. What are the four business-level cooperative strategies and what are the

differences among them?

Complementary strategic alliances are partnerships that are designed to take

advantage of market opportunities by combining partner firms’ assets in complementary

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ways so that new value is created. These are classified as either vertical or horizontal

complementary strategic alliances.

Vertical complementary strategic alliances are formed between firms that agree to use their

skills and capabilities in different stages of the value chain to create value.

Horizontal complementary strategic alliances represent partnerships that link similar

activities of rival firms. Horizontal complementary alliances often are used to increase each

firm’s strategic competitiveness, focusing on the long-term development of product and

service technology and distribution opportunities.

Competition response strategies are cooperative strategic alliances that are established to

enable partner firms to respond to major strategic actions (but typically not tactical actions)

initiated by competitors or to enable firms to more effectively compete in emerging markets.

Uncertainty reducing strategies represent cooperative alliances that are used as strategic

options to hedge against risk and uncertainty. Thus, the rapidly changing 21 st-century

competitive landscape may create uncertain outcomes for firms as their rivals form and use

cooperative strategies to reduce their own risks. (For example, firms form alliances to reduce

the uncertainty associated with developing new product or technology standards.) However,

in terms of competitive dynamics, one firm’s alliances can create risks and uncertainty for its

competitors.

Competition reducing strategies are cooperative strategies adopted by some firms to reduce

competition that they perceive as potentially destructive or excessive. Examples of

competition reduction strategies include explicit collusion and tacit collusion (or mutual

forbearance). Alliances formed to reduce competition are likely to result in inefficiencies in

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both manufacturing and service industries and these often lead to below-average firm

performance in international markets.

Tacit collusion exists when several firms in an industry cooperate tacitly to reduce industry

output below the potential competitive level, thereby increasing prices above the competitive

level. Most strategic alliances, however, exist not to reduce industry output but to increase

learning, facilitate growth, or increase returns and strategic competitiveness. Cooperative

agreements may also be explicitly collusive, but this is illegal in the United States, unless

regulated by the government (for example, the telecommunications industries prior to

deregulation). Mutual forbearance is tacit recognition of interdependence, but it has the

same effect as explicit collusion in that it reduces output and increases prices.

4. What are the three corporate-level cooperative strategies? How do firms use

each one to create a competitive advantage?

Strategic alliances used to facilitate product or market diversification are called

corporate-level cooperative strategies. Three types of strategic alliances are used at the

corporate level to facilitate cooperation among diversified companies. As shown in Figure

9.3, the corporate-level strategic alliances are called diversifying alliances, synergistic

alliances, and franchising. However, it is instructive to note that managing a large number of

strategic alliances is difficult. Therefore, if relatively few firms are able to do it well, alliance

management in itself may represent a source of competitive advantage. Nonetheless, while

alliance networks may enable firms to achieve industry leadership, they also involve risks and

their management is a complex and potentially costly challenge.

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 Diversifying strategic alliances allow a company to expand into new product or market

areas without completing a merger or an acquisition. A corporate-level strategic alliance is a

viable strategic option for a firm that wants to grow but chooses not to merge with or acquire

another company to do so. Such corporate-level alliances provide some of the potential

synergistic benefits of a merger or acquisition, but with less risk and greater levels of flexibility.

These benefits accrue to a firm because exiting a strategic alliance is less difficult and costly

as compared to divesting an acquisition that did not contribute as expected to strategic

success.

Synergistic strategic alliances allow firms to share resources and capabilities to create

joint economies of scope. Similar to the horizontal complementary strategic alliance that is

used at the business level, synergistic strategic alliances create synergy across multiple

functions or multiple businesses controlled by partner firms. Two firms might, for example,

create joint research and manufacturing facilities that they both use to their advantage and

thus attain economies of scope without a merger.

Franchising is a cooperative strategy a firm uses to spread risk and to use resources

and capabilities productively, but without merging with or acquiring another company. As a

cooperative strategy, franchising is based on a contractual relationship concerning a franchise

that is developed between two parties—the franchisee and the franchisor. Thus, franchising

is an alternative to diversification. Defined formally, a franchise is a contractual arrangement

between two independent companies whereby the franchisor grants the right to the

franchisee to sell the franchisor’s product or do business under its trademarks over a given

territory and time period. The foundation for this cooperative strategy’s success is the ability

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to gain economies of scale by forming multiple units while deriving operational efficiencies

from the work of individual units competing in specific local markets. Franchising permits

relatively strong centralized control and facilitates knowledge transfer without significant

capital investment. Brand name is thought to be the most effective competitive advantage

for a franchise since this can signal both tangible and intangible consumer benefits.

Franchising reduces financial risk because franchisors often invest some of their own capital

in the local venture, and this capital investment motivates franchisors to perform well by

emphasizing quality, standards, and a brand name that are associated with the franchisee’s

original business. Because of these potential benefits, franchising may provide growth with

less risk than diversification.

5. Why do firms use cross-border strategic alliances?

The first reason firms decide to use cross-border strategic alliances is that

multinational corporations usually outperform firms operating in domestic-only markets. In

the context of cooperative strategies, this general evidence suggests that a firm can form

cross-border strategic alliances to leverage core competencies that are the foundation of its

domestic success to expand into international markets.

Second, cross-border alliances can be used when opportunities to grow through either

acquisitions or alliances are limited within a firm’s home nation.

The third reason firms choose to form cross-border alliances revolves around

government policies. Some countries regard local ownership as an important national policy

objective, so investment by foreign firms may be allowed only through cooperative

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agreements such as cross-border alliances. This is often true in newly industrialized and

developing countries with emerging markets. Cooperative arrangements can be helpful to

foreign partners because the local partner can provide information about local markets,

capital sources, and management skills.

The fourth primary reason cross-border alliances are used is to help a firm transform

itself in light of rapidly changing environmental conditions.

In general, cross-border alliances are complex and more risky than domestic strategic

alliances. However, the fact that firms competing internationally tend to outperform

domestic-only competitors suggests the importance of learning how to diversify into

international markets. Compared to mergers and acquisitions, cross-border alliances may be

a better way to learn this process, especially in the early stages of the firms’ geographic

diversification efforts.

6. What risks are firms likely to experience as they use cooperative strategies?

Because firms that are cooperating may also be competing with each other, four

significant risks accompany cooperative strategies. As summarized in Figure 9.4, the primary

competitive risks associated with cooperative strategies are:

(1) poor contract development that may result in one (or more) of the partners acting

opportunistically and taking advantage of other venture partners;

(2) misrepresentation of a partner firm’s competencies by misstating or exaggerating an

intangible resource such as knowledge of local market conditions;

(3) failure of partner firm(s) to make complementary resources available to the venture; and

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(4) being held hostage through specific investments (whose value is associated only with the

venture or the local partner), especially if laws in a country do not protect investments in

the case of nationalization.

7. What are the differences between the cost-minimization approach and the

opportunity-maximization approach to managing strategic alliances?

Two primary approaches are used to manage cooperative strategies. In one instance, the firm

develops formal contracts with its partners. These contracts specify how the cooperative

strategy is to be monitored and partner behavior controlled. The goal is to minimize the cost

of an alliance and to prevent opportunistic behavior by a partner, thus the use of the term

cost-minimization.

The focus of the second managerial approach is on maximizing value-creation opportunities

as the partners participate in the alliance. In this case, partners are prepared to take

advantage of unexpected opportunities to learn from each other and to explore additional

marketplace possibilities. Trust-based relationships and complementary assets must exist

between partners for this approach to be used successfully. When trust exists, there is less

need to write detailed formal contracts to specify each firm’s alliance behaviors, and the

cooperative relationship tends to be more stable. Research showing that trust between

partners increases the likelihood of alliance success seems to highlight the benefits of the

opportunity maximization approach to managing cooperative strategies.

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