AB3601/2

Strategic Management

Week #9
Cooperative Strategy
Case: Airbus A380 Part I

Leow Foon Lee

AY2023-24 Semester 2
Jan-Apr 2024
0
 Cooperative Strategy - Lesson Outcomes

 Explain the motives and types of strategic alliances

 Identify the competitive risks within strategic alliances
and potential remedies
Cooperative Strategy - Learning Objectives

• Define cooperative strategies and explain why firms use

them.
• Define and discuss the three major types of strategic
alliances.
• Name the business-level cooperative strategies and describe
their use.
• Discuss the use of corporate-level cooperative strategies.
• Understand why firms use cross-border strategic alliances as
an international cooperative strategy.
• Explain cooperative strategies’ risks.
• Describe two approaches used to manage cooperative
strategies.
 Cooperative Strategy

• Cooperative strategy is a means by which firms collaborate to

achieve shared objective and:
- Create value for customer that it likely could not create by itself
- Create competitive advantages
• Competitive advantage developed through
cooperative strategy is called collaborative or
relational advantage.
• Outperform its rivals in terms of strategic
competitiveness
• Earn above-average returns
 Strategic Alliances (slide 1 of 2)

• A strategic alliance is a cooperative strategy in which firms combine

some of their resources to create a competitive advantage.
• Strategic alliances:
• Involve firms with exchange and sharing of resources to jointly
develop, sell and service goods or services
• Used by firms to leverage existing resources while working with
partners to develop additional resources as foundation for new
competitive advantages
• Cooperative behavior that contribute to alliance success:
• Actively solving problems
• Being trustworthy
• Consistently pursuing ways to combine partners’ resources to
create value
 Strategic Alliances (slide 2 of 2)

• Strategic alliances are contractual arrangements between two

or more independent companies that carry out project or
operate in a specific business area by coordinating skills and
resources jointly rather than either operating on their own or
merging their operations.
• Strategic alliance must have two or more independent
organizations join together to pursue mutual benefits greater
than those from individual efforts.
• “1 + 1 > 2”
 Types of Strategic Alliances

• Yasuda and Iijima (2005) used symmetric and asymmetric

alliances as the first dimension to direct the nature of
resources.
• In symmetric alliances, same kinds of resources are
exchanged, while in asymmetric alliances, different kinds of
resources are exchanged.
• Horizontal alliance is one in which the partners belong to the
same industry, while vertical alliance is one in which partners
are from different industries.
 Strategic Alliances: Matrix

• Vertical strategic alliances describe the collaboration between

company and its upstream and downstream partners in the
supply chain, which means a partnership between its
suppliers and distributors, especially one in which suppliers
get involved in product design and distribution decisions.
• Horizontal strategic alliances are formed by firms that are
active in the same business area. Such partners in the alliance
used to work together to improve market power compared to
other competitors.
Strategic Alliances - Resource-based View (RBV)

• Resource-based view (RBV) perspective examines how the type of

strategic alliance influences firm performance, which is based on the
role of resources, capabilities and knowledge.
• Complementary and idiosyncratic resources foster alliances to succeed.
• Complementary resources are those that firms bring to an alliance that
enable their alliance partners to complete their resource assortments.
• Complementary resources could be tangible facilities or intangible
resources, e.g. knowledge and connections.
• Idiosyncratic resources are developed during the life of the alliance and
are unique to the alliance.
• Idiosyncratic resources, since they are unique to the alliance and are
constantly evolving, help alliances maintain durability and inimitability
of their resource advantage (VRIN).

19
Mutual Interest And Complementary Resources And
Capabilities Drive Success In Strategic Alliance

Resources Resources
Capabilities Capabilities
Core Competencies Core Competencies

Combined
Resources
Capabilities
Core Competencies

Mutual Interest In Primary

Activities (e.g. R&D,
Design, Manufacturing,
Distribution)
Four Forms Of Strategic Alliances

Cooperative Strategies Allow a Firm to Develop Competitive

Advantages by Combining Resources and Capabilities of Partner Firms
 Types of Strategic Alliances (slide 1 of 4)

Three major types of strategic alliances:

1. Joint ventures
2. Equity strategic alliances
3. Nonequity strategic alliances
 Types of Strategic Alliances (slide 2 of 4)

• Joint venture - strategic alliance in which two or more firms create

legally independent company to share some resources to create
competitive advantage.
• Joint ventures:
• Have partners who own equal percentages and contribute
equally to the venture’s operations
• Formed to improve firm’s ability to compete in uncertain
competitive environments
• Joint ventures can be effective in:
• Establishing long-term relationships
• Transferring tacit knowledge between partners
• Tacit knowledge is critical to firms’ efforts to develop
competitive advantages.
 Types of Strategic Alliances (slide 3 of 4)

• Equity strategic alliance - 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.
• 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, is
important when R&D alliances are formed.
 Types of Strategic Alliances (slide 4 of 4)

• Non--equity strategic alliance - an alliance in which two or more

firms develop a contractual relationship to share some of their
resources to create a competitive advantage.
• Nonequity strategic alliances are less formal.
• Demand fewer partner commitments than do joint ventures and
equity strategic alliances
• Generally do not foster intimate relationship between partners
• Informality and lower commitment levels make nonequity strategic
alliances unsuitable for complex projects where success depends on
transfer of tacit knowledge between partners.
• Outsourcing commonly occurs through nonequity strategic
alliances.
Business & Corporate Level Cooperative Strategy

Business Level Cooperative Strategy

 Complementary Strategic Alliances Allow Firms To
Share Complementary Resources And Capabilities To
Create Competitive Advantage
Horizontal Alliance
Potential Competitors
Supply-chain Operations Marketing Follow-up Supply-chain Operations Marketing Follow-up
Distribution Distribution
Management & Sales Service Management & Sales Service

Customer Value
Customer Value
Horizontal complementary
strategy alliance occurs
Management information system
when partnering firms share Management information system

Human resource
resources & capabilities from Human resource
the same stage of the value
Finance Finance
chain to create a competitive
advantage. Such alliances
Vertical Alliance

are commonly used for long- Vertical complementary strategic

term product development alliance is formed between firms that
and distribution agree to use their skills and capabilities
opportunities in different stages of the value chain to
create value for both firms.
Partners may become Outsourcing is an example.
competitors in future. Trust
Supply-chain Marketing Follow-up becomes essential for Example: McDonald’s alliances with oil
Management Operations Distribution
& Sales Service
success companies (Sinopec) and independent
Customer Value

store operators. With just one stop,

customers can fill up car, buy a meal,
Management information system
and pick up items for the home. (China)
Human resource

Finance

* Sourced and adapted from Figure 9.2 of the Ireland / Hoskission / Hitt Textbook “The Management of Strategy, Concepts, 10th Edition”
 Major Competitive Risks Involved In Strategic Alliances
(Transaction Cost Economics And Agency Theory Are
Useful In Identifying These Risks)
Competitive Risks Risk and Asset Management Desired Outcome
Inadequate / Incomplete contracts Detailed contracts (covering Value creation though:
(TCE) possible contingencies) -Reduced friction between
companies (enhanced
Holding alliance partner’s specific Setting up monitoring systems to cooperation)
investment hostage (TCE) ensure goals are met / processes
are proper
- Creating economies of scope
Opportunistic behavior of partner
firms (TCE, Agency Theory) Setting up incentive systems
which reward cooperation and
-Development of new resource,
Partners have hidden / non-mutual facilitate success capabilities and competencies by
agendas (Agency Theory) combination
Develop trusting behaviors
Misrepresentation of competencies through open communications -Setting up a base for future
and interactions collaboration
Partners fail to use their
complementary resources Proper understanding of partner’s -Enhanced innovation / product
competencies to facilitate success development
Understanding Risks Involved Enable Firm to Structure Successful Strategic
Alliance

* Sourced and adapted from Figure 9.4 of the Ireland / Hoskission / Hitt Textbook “The Management of Strategy, Concepts, 10th Edition”
Joint Venture vs Strategic Alliances
 Reasons For Strategic Alliances

 To create value they couldn’t generate by acting

independently and entering markets more rapidly
 Most companies lack full set of resources needed to
pursue all identified opportunitiies
 Reasons firms use strategic alliances also vary by slow-
cycle, fast-cycle and standard-cycle market conditions.
Reasons for Strategic Alliances by Market Type
I. Business-Level Cooperative Strategy

• Business-level cooperative strategy - 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
I. Business-Level Cooperative Strategies
Business-Level Cooperative Strategy
1. Complementary Strategic Alliances

• 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:
1. Vertical
• Firms share some of their resources from different
stages of the value chain to create competitive
advantage.
2. Horizontal
• Firms share some of their resources from same stages
of the value chain to create competitive advantage.
 Vertical & Horizontal Complementary
Strategic Alliance

 Complementary
Strategic Alliances
Allow Firms To
Share
Complementary
Resources And
Capabilities To
Create Competitive
Advantage
2. Competition Response Strategy

• Competition response strategies are formed to respond to

competitors’ actions, especially strategic actions.
Rules of Co-opetition

• Co-opetition - cooperating with a competitor to

achieve a common goal or get ahead has been
gaining traction for three decades.
• Yet many companies are uncomfortable with the
concept and bypass the promising opportunities

38
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 (slide 1 of 3)

• 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
4. Competition-Reducing Strategy (slide 2 of 3)

• 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.
 4. Competition-Reducing Strategy (slide 3 of 3)

• 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.
• Tacit collusion tends to take place in industries dominated by few
large firms and results in production output that is below fully
competitive levels and above fully competitive prices
• Can lead to less competition in markets.
• Mutual forbearance is a form of tacit collusion in which firms do not
take competitive actions against rivals they meet in multiple
markets.
• 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 they are formed between firms that compete
against each other while cooperating (“coopetition”)
• Uncertainty-reducing and competition-reducing strategies have
the lowest probability of creating a sustainable competitive
advantage.
 II. Corporate-Level Cooperative Strategy
(slide 1 of 3)

• Corporate-level cooperative strategy - strategy through which firm

collaborates with one or more companies to expand its operations.
• Corporate-level strategic alliances are attractive:
• When firm seeks to diversify into markets in which the host
nation’s government prevents mergers and acquisitions
• They can be used as a “test” to determine whether partners
might benefit from future merger or acquisition
• Compared to mergers and acquisitions, corporate-level strategic
alliances:
• Require fewer resource commitments
• Permit greater flexibility in terms of efforts to diversify partners’
operations
 II. Corporate-Level Cooperative Strategy
(slide 2 of 2)

• Most commonly used corporate-level cooperative

strategies are:
• Diversifying alliances
• Synergistic alliances
• Franchising
Corporate Level Cooperative Strategy
1. Diversifying Strategic Alliance

• Diversifying strategic alliance - 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 international) with existing
products or with newly developed products.
• Managing diversity gained through alliances has fewer financial
costs but often requires more managerial expertise.
2. Synergistic Strategic Alliance

• 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.
3. Franchising (slide 1 of 2)

• Franchising is a strategy in which a firm (franchisor) uses

franchise as contractual relationship to describe and control
the sharing of its resources with its partners (franchisees).
• A franchise is a form of business organization in which firm that
already has a successful product or service (franchisor) licenses
its trademark and method of doing business to other
businesses (franchisees) in exchange for initial franchise fee
and 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.
3. Franchising (slide 2 of 2)
• Franchising is:
• Alternative to pursuing growth through mergers and
acquisitions
• Attractive strategy to use in fragmented industries, e.g. hotels
and motels and retailing. No firm has dominant market share
• Partners work closely together.
• Franchisor should develop programs that transfer to the
franchisees the knowledge and skills that are needed to
successfully compete at the local level.
• Franchisee should provide feedback to the franchisor
regarding how their units could become more effective and
efficient.
• Core company’s brand name is often the most important
competitive advantage for franchisees.
 Assessing Corporate-Level
Cooperative Strategies
• 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.
• Firm uses such strategies to develop useful knowledge about
how to succeed in the future.
• Firm is able to develop such strategies and manage them in
ways that are valuable, rare, imperfectly imitable and non
substitutable.
 III. International Cooperative Strategy
(slide 1 of 2)

• Firms use cross-border strategic alliances as a type of international

cooperative strategy.
• Cross-border strategic alliance - strategy in which firms with
headquarters in different countries decide to combine some of their
resources to create competitive advantage.
• Partners cooperate in one or more areas such as development and
production processes to create value in markets throughout the world
that neither firm could create operating independently.
• Cross-border strategic alliances:
• Increasing in number
• Not as risky as mergers and acquisitions
• Complex
• Difficult to manage
III. International Cooperative Strategy
(slide 2 of 2)

• Reasons for cross-border alliances:

- Performance superiority of firms competing in markets
outside their domestic market
- Governmental restrictions on a firm’s efforts to grow
through mergers and acquisitions
• Cross-border strategic alliances are riskier than their
domestic counterparts, because of:
- Differences in companies and their cultures
- Difficulty in building trust in order to share resources
among partners
 IV. Network Cooperative Strategy

• Network cooperative strategy - strategy by which several firms

agree to form multiple partnerships to achieve shared objectives.
• Firm’s opportunity to gain access “to its partner’s other
partnerships” is primary benefit of a network cooperative
strategy.
• Having access to multiple collaborations increases likelihood that
additional competitive advantages will be formed as shared
resources expands.
• Being able to develop new resources further stimulates product
innovations that are critical to achieving strategic
competitiveness.
 Alliance Network Types

• Set of strategic alliance partnerships that firms develop when

using network cooperative strategy is called 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 as tool
of innovation.
Managing Competitive Risks in Cooperative
Strategies

Understanding the Risks Involved Enable the Firm to Structure the

Strategic Alliance in a Manner that Facilitates Success
 Managing Competitive Risks in
Cooperative Strategies
Four risks with cooperative strategies:
1. Firm may act in a way that its partner thinks is opportunistic.
Opportunistic behaviors surface when:
• Formal contracts fail to prevent them
• Alliance is based on a false perception of partner
trustworthiness
2. Firm misrepresents the resources it can bring to the partnership when
partner’s contribution is based on some of its intangible assets.
3. Firm fails to make available to its partners the committed resources,
especially when firms form international cooperative strategy.
• Different cultures and languages can cause misrepresentations
of contractual terms or trust-based expectations.
4. 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.
 Managing Cooperative Strategies (slide 1 of 3)

• 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
 Managing Cooperative Strategies (slide 2 of 3)

• Two primary approaches firms use to manage cooperative

strategies are:
1. Cost minimization
• In the cost-minimization approach, 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, 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.
 Managing Cooperative Strategies (slide 3 of 3)

• 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.
• This highlights the benefits of the opportunity-
maximization approach to managing cooperative
strategies.
• When partners trust each other, there is less need to
write detailed formal contracts to specify each firm’s
behaviors.
Strategic Alliances and Marriages

• Partnerships can have significant cost

and speed advantages over alternatives:
to buy or build. They bring significant
value, with lower costs and shared risk.
• Partnerships help companies to:
- Increase speed of innovation and
new product/service development
- Accelerate growth (e.g. opening new
markets or creating opportunities to
sell to new customer segments)
- Rapidly respond to changing market
needs
- Access new capabilities or talent.

*Paul Sanders, Insead Knowledge, 2019

62
Strategic Alliances & Marriages:
Courtship Phase

1. Be selective and faithful (make sure you find “the one”).

2. Find a win-win (the whole should be greater than the sum of the
parts). Kanter refers to the importance of an interdependence where
neither party can accomplish alone what both can do together.
3. Ensure leadership alignment (make sure that the chemistry is right).
While the selection criteria are quite rational, the more emotional
sense of attraction is just as important, especially between senior
counterparts.
4. If the chemistry is strong, the partnership is more likely to endure
difficult times. When there is little chemistry, there is little
resilience and a much greater risk of falling, even at the slightest
hurdle *Paul Sanders, Insead Knowledge, 2019

63
Strategic Alliances & Marriages:
Honeymoon Phase

5. Invest alongside one another (demonstrate your devotion). Early

investments show each partner’s commitment
6. Push connections deeper into the organizations (get to know the
extended family).
7. Balance leading and lagging indicators (don’t rush to judgment). At
the early stages of any partnership, it’s important to be clear on the
partnership’s objectives and business plan. But these hard targets are
typically lagging indicators whose evaluation takes time.
In the honeymoon phase, it’s more important to focus on the leading indicators of
a successful partnership, e.g. do both sides understand the business plan? Is
information flowing easily between the two organizations? Is there a clear process
for escalating issues? Hughes and Weiss talk about the need to develop goals
pegged to alliance progress rather than to hard financial targets only.
*Paul Sanders, Insead Knowledge, 2019

64
 Strategic Alliances & Marriages:
Real Life Phase

8. Deliver on your end of the bargain (live up to expectations). Ensure that you
bring whatever you said you’d bring to the table. Kanter refers to “individual
excellence” and “building on your strengths“.
9. Blend formal governance with informal collaboration (keep communication
lines open). While long-distance marriages are not that common, long-
distance corporate alliances are. This distance makes formal governance
structures like alliance steering committees and operational management
teams essential. But fluid and regular informal communication can be even
more critical, enabling real-time, daily alliance management and issue
resolution.
10.Be open to different ways of collaborating (always keep your relationship
fresh by trying new things). Entering into a partnership is like taking an option
on future collaboration potential. Unless you keep an open mind, you never
know where the next opportunity to work together will come from.
*Paul Sanders, Insead Knowledge, 2019
65
Alliances: Big Tech & Financial Institutions
• Financial institutions know they need to embrace innovation. They have
to find better ways to understand and respond to customers.
• There is new area of opportunity for big tech companies like Alibaba,
Apple, Google, Tencent and others.
• These companies have incredible reach, deep roots into their
customers’ lives and robust customer data.
• Big techs are constantly looking for ways to provide customers with
more value, to enhance customer loyalty by providing more integrated
ecosystem.
• Most already offer payments solutions, so extending offerings to include
financial products makes sense.
• However, there are no strong indicators that the big tech companies
want to become banks. The regulatory burden is considered too high for
their appetite.

70