Strategic Management:

Concepts and Cases

Part II: Strategic Actions: Strategy Formulation

Chapter 9: Cooperative Strategy

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The Strategic Management Process

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 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

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 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
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 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)

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 Introduction
 Cooperative strategy
 Firms work together to achieve a shared objective

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 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
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 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
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 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

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 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
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 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
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 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
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 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

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 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

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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)

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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

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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

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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
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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

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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
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 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)

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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
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 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)

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 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

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 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

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 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

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 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
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 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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