Cooperative Strategy Chapter Nine BA 495.009. 9–2 Today’s Agenda Strategic AlliancesStrategic Alliances Business-level Cooperative StrategiesBusiness-level.

Cooperative Cooperative StrategyStrategy

Cooperative Cooperative StrategyStrategy

Chapter NineChapter Nine

BA 495.009BA 495.009

9–2

Today’s AgendaToday’s Agenda

• Strategic AlliancesStrategic Alliances• Business-level Cooperative StrategiesBusiness-level Cooperative Strategies• Corporate-level Cooperative StrategiesCorporate-level Cooperative Strategies• Other Types of Cooperative Strategies Other Types of Cooperative Strategies

InternationalInternational NetworkNetwork

• Risks & Managerial ProblemsRisks & Managerial Problems• Wrap-upWrap-up

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Strategic Alliances

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““If you think you can go it alone in today’sIf you think you can go it alone in today’s global economy, you are highly mistaken.” global economy, you are highly mistaken.”

Jack Welch, former CEO of General ElectricJack Welch, former CEO of General Electric

““Not all the smart people work Not all the smart people work for Sun.”for Sun.”

William Joy, Vice President of William Joy, Vice President of R&D, Sun MicrosystemsR&D, Sun Microsystems

The Age of “Alliance Capitalism”The Age of “Alliance Capitalism”

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Cooperative StrategyCooperative Strategy

• Cooperative StrategyCooperative Strategy A strategy in which firms work together to achieve a A strategy in which firms work together to achieve a

shared objective.shared objective.

• Cooperating with other firms is a strategy that:Cooperating with other firms is a strategy that: Creates value for a customer.Creates value for a customer.

Provides value that exceeds the cost of providing that Provides value that exceeds the cost of providing that value.value.

Establishes a favorable position relative to Establishes a favorable position relative to competitors.competitors.

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Strategic AllianceStrategic Alliance

• A primary type of cooperative strategy in which A primary type of cooperative strategy in which firms combine some of their resources and firms combine some of their resources and capabilities to create a mutual competitive capabilities to create a mutual competitive advantage.advantage. Involves the exchange and sharing of resources and Involves the exchange and sharing of resources and

capabilities to co-develop or distribute goods and capabilities to co-develop or distribute goods and services.services.

Requires cooperative behavior from all partners.Requires cooperative behavior from all partners.

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Three Types of Strategic AlliancesThree Types of Strategic Alliances• Joint VentureJoint Venture

Two or more firms create a legally independent Two or more firms create a legally independent company by sharing some of their resources and company by sharing some of their resources and capabilities.capabilities.

• Equity Strategic AllianceEquity Strategic Alliance Partners who own different percentages of equity in a Partners who own different percentages of equity in a

company (one of the companies involved may be the company (one of the companies involved may be the venture on which equity is being shared).venture on which equity is being shared).

• Nonequity Strategic AllianceNonequity Strategic Alliance Two or more firms develop a contractual relationship Two or more firms develop a contractual relationship

to share some of their unique resources and to share some of their unique resources and capabilities.capabilities.

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Market Reason

Slow-Cycle • Gain access to a restricted market• Establish a franchise in a new market• Maintain market stability (e.g., establishing standards)

Fast-Cycle • Speed up development of new goods or services• Speed up new market entry• Maintain market leadership• Form an industry technology standard• Share risky R&D expenses• Overcome uncertainty

Standard-Cycle • Gain market power (reduce industry overcapacity)• Gain access to complementary resources• Establish better economies of scale• Overcome trade barriers• Meet competitive challenges from other competitors• Pool resources for very large capital projects• Learn new business techniques

Reasons for Strategic AlliancesReasons for Strategic Alliances

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Example for Alliance StrategyExample for Alliance Strategy

New products,marketing andsales partners

Channelpartners

(corporate sales)

Barnes & Noble(in-store stores)

Chapters(Canadian bookstores)

United Airlines(in-flight coffee)

Dreyer’s(premium coffee

ice cream)

Pepsico(bottled coffee

beverages)

Alsea(Mexico)

Shinsegne(Korea)

Rustan(Philippines)

Bonvests(Singapore)

Sazaby(Japan)

Westin Hotelsand Resorts

(Coffee servedthroughout hotel)

Host Marriott Services(worldwide airport kiosksand in-hotel coffee cafes)

Geographicexpansion partners

Retail formatpartners

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Business-level Cooperative Strategies

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Business-level Cooperative StrategiesBusiness-level Cooperative Strategies

• A business-level cooperative strategy is used to A business-level cooperative strategy is used to help the firm improve its performance in help the firm improve its performance in individual product markets.individual product markets.

• Types of business-level cooperative strategies:Types of business-level cooperative strategies: Complementary strategic allianceComplementary strategic alliance

• VerticalVertical• HorizontalHorizontal

Competition response strategyCompetition response strategy Uncertainty-reducing strategyUncertainty-reducing strategy Competition-reducing strategyCompetition-reducing strategy

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Business-Level Cooperative StrategiesBusiness-Level Cooperative Strategies

• Combine partner firms’ assets Combine partner firms’ assets in complementary ways to in complementary ways to create new value.create new value.

• Include distribution, supplier or Include distribution, supplier or outsourcing alliances where outsourcing alliances where firms rely on upstream or firms rely on upstream or downstream partners to build downstream partners to build competitive advantage.competitive advantage.

ComplementaryComplementaryAlliancesAlliances

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Complementary Strategic AlliancesComplementary Strategic Alliances• Vertical Complementary Strategic AllianceVertical Complementary Strategic Alliance

Formed between firms that agree to use their skills and Formed between firms that agree to use their skills and capabilities in different stages of the value chain to create value capabilities in different stages of the value chain to create value for both firms.for both firms.

• E-commerce & outsourcing are examples.E-commerce & outsourcing are examples.

• Horizontal Complementary Strategic AllianceHorizontal Complementary Strategic Alliance Formed when partners who agree to combine their resources Formed when partners who agree to combine their resources

and skills to create value in the same stage of the value chain.and skills to create value in the same stage of the value chain.

• Focus is on long-term product development and distribution Focus is on long-term product development and distribution opportunities.opportunities.

• The partners may become competitors which requires a great deal The partners may become competitors which requires a great deal of trust between the partners.of trust between the partners.

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Competition Response StrategyCompetition Response Strategy

• Occur when firms join forces Occur when firms join forces to respond to a strategic to respond to a strategic action of another competitor.action of another competitor.

• Because they can be difficult Because they can be difficult to reverse and expensive to to reverse and expensive to operate, strategic alliances are operate, strategic alliances are primarily formed to respond to primarily formed to respond to strategic rather than tactical strategic rather than tactical actions.actions.

ComplementaryComplementaryAlliancesAlliances

Competition Competition Response AlliancesResponse Alliances

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Uncertainty-Reducing StrategyUncertainty-Reducing Strategy

• Are used to hedge against Are used to hedge against risk and uncertainty.risk and uncertainty.

• These alliances are most These alliances are most prevalent in fast-cycle prevalent in fast-cycle marketsmarkets

• An alliance may be formed to An alliance may be formed to reduce the uncertainty reduce the uncertainty associated with developing associated with developing new product or technology new product or technology standards.standards.

ComplementaryComplementaryAlliancesAlliances

Competition Competition Response AlliancesResponse Alliances

UncertaintyUncertaintyReducing AlliancesReducing Alliances

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Competition-Reducing StrategyCompetition-Reducing Strategy

• Created to avoid destructive or Created to avoid destructive or excessive competitionexcessive competition

• Explicit collusion:Explicit collusion: when firms directly when firms directly negotiate production output and negotiate production output and pricing agreements in order to pricing agreements in order to reduce competition (illegal).reduce competition (illegal).

• Tacit collusion:Tacit collusion: when firms in an when firms in an industry indirectly coordinate their industry indirectly coordinate their production and pricing decisions by production and pricing decisions by observing other firm’s actions and observing other firm’s actions and responses.responses.

ComplementaryComplementaryAlliancesAlliances

Competition Competition Response AlliancesResponse Alliances

UncertaintyUncertaintyReducing AlliancesReducing Alliances

CompetitionCompetitionReducing AlliancesReducing Alliances

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Results of Business-level Cooperative Results of Business-level Cooperative StrategiesStrategies• To develop competitive advantage from an alliance, the To develop competitive advantage from an alliance, the

combined resources and capabilities must be valuable, combined resources and capabilities must be valuable, rare, difficult to imitate and nonsubstitutable.rare, difficult to imitate and nonsubstitutable.

• Complementary business-level strategic alliances, Complementary business-level strategic alliances, especially the vertical ones, have the greatest probability especially the vertical ones, have the greatest probability of creating a sustainable competitive advantage.of creating a sustainable competitive advantage.

• Horizontal complementary alliances are sometimes Horizontal complementary alliances are sometimes difficult to maintain because they are often between rival difficult to maintain because they are often between rival competitors.competitors.

• Competitive advantages gained from competition and Competitive advantages gained from competition and uncertainty reducing strategies tend to be temporary.uncertainty reducing strategies tend to be temporary.

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Corporate-level Cooperative Strategies

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Corporate-Level Cooperative StrategyCorporate-Level Cooperative Strategy

• Corporate-level StrategiesCorporate-level Strategies

Help the firm diversify in terms of:Help the firm diversify in terms of:

• Products offered to the marketProducts offered to the market

• The markets it servesThe markets it serves

Require fewer resource commitments than Require fewer resource commitments than acquisitions.acquisitions.

Permit greater flexibility in terms of efforts to diversify Permit greater flexibility in terms of efforts to diversify partners’ operations.partners’ operations.

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Diversifying Strategic AlliancesDiversifying Strategic Alliances

• Allows a firm to expand into new Allows a firm to expand into new product or market areas without product or market areas without completing a merger or an completing a merger or an acquisition.acquisition.

• Provides some of the potential Provides some of the potential synergistic benefits of a merger or synergistic benefits of a merger or acquisition, but with less risk and acquisition, but with less risk and greater levels of flexibility.greater levels of flexibility.

• Permits a “test” of whether a future Permits a “test” of whether a future merger between the partners would merger between the partners would benefit both parties.benefit both parties.

DiversifyingDiversifyingStrategic AllianceStrategic Alliance

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Synergistic Strategic AlliancesSynergistic Strategic Alliances

• Creates joint economies of Creates joint economies of scope between two or more scope between two or more firms.firms.

• Creates synergy across Creates synergy across multiple functions or multiple multiple functions or multiple businesses between partner businesses between partner firms.firms.

DiversifyingDiversifyingStrategic AllianceStrategic Alliance

SynergisticSynergisticStrategic AllianceStrategic Alliance

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FranchisingFranchising

• Spreads risks and uses resources, Spreads risks and uses resources, capabilities, and competencies capabilities, and competencies without merging or acquiring without merging or acquiring another company.another company.

• A contractual relationship (the A contractual relationship (the franchise) is developed between franchise) is developed between two parties, the franchisee and the two parties, the franchisee and the franchisor.franchisor.

• An alternative to pursuing growth An alternative to pursuing growth through mergers and acquisitions.through mergers and acquisitions.

DiversifyingDiversifyingStrategic AllianceStrategic Alliance

SynergisticSynergisticStrategic AllianceStrategic Alliance

FranchisingFranchising

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Assessment of Corporate-Level Assessment of Corporate-Level Cooperative StrategiesCooperative Strategies

• Compared to business-level strategiesCompared to business-level strategies Broader in scopeBroader in scope More complex More complex More costlyMore costly

• Can lead to competitive advantage and value Can lead to competitive advantage and value when:when: The results of the alliance are valuable, rare, costly to The results of the alliance are valuable, rare, costly to

imitate and non-substitutableimitate and non-substitutable Successful alliance experiences are internalized.Successful alliance experiences are internalized. The firm uses such strategies to develop useful The firm uses such strategies to develop useful

knowledge about how to succeed in the future.knowledge about how to succeed in the future.

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OtherCooperative Strategies

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International Cooperative StrategiesInternational Cooperative Strategies

• Cross-border Strategic AllianceCross-border Strategic Alliance

A strategy in which firms with headquarters in A strategy in which firms with headquarters in different nations combine their resources and different nations combine their resources and capabilities to create a competitive advantage.capabilities to create a competitive advantage.

A firm may form cross-border strategic alliances to A firm may form cross-border strategic alliances to leverage core competencies that are the foundation of leverage core competencies that are the foundation of its domestic success to expand into international its domestic success to expand into international markets.markets.

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International Cooperative StrategiesInternational Cooperative Strategies

• Reasons for Increasing Use:Reasons for Increasing Use:

Multinational corporations outperform firms operating Multinational corporations outperform firms operating on only a domestic basis.on only a domestic basis.

Limited domestic growth opportunities also cause Limited domestic growth opportunities also cause firms to use cross-border alliances.firms to use cross-border alliances.

Government economic policies can influence firms to Government economic policies can influence firms to form cross-border alliances.form cross-border alliances.

Strategic alliances with local partners can help firms Strategic alliances with local partners can help firms overcome certain liabilities of moving into a foreign overcome certain liabilities of moving into a foreign country, such as lack of knowledge of the local culture country, such as lack of knowledge of the local culture or institutional norms.or institutional norms.

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Network Cooperative StrategyNetwork Cooperative Strategy

• A cooperative strategy wherein several firms A cooperative strategy wherein several firms agree to form multiple partnerships to achieve agree to form multiple partnerships to achieve shared objectives.shared objectives. Stable alliance networkStable alliance network

Dynamic alliance networkDynamic alliance network

• Effective social relationships and interactions Effective social relationships and interactions among partners are keys to a successful network among partners are keys to a successful network cooperative strategy.cooperative strategy.

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Network Cooperative StrategiesNetwork Cooperative Strategies

• Long term relationships that Long term relationships that often appear in mature often appear in mature industries where demand is industries where demand is relatively constant and relatively constant and predictablepredictable

• Stable networks are built for Stable networks are built for exploitationexploitation of the economies of the economies (scale and/or scope) (scale and/or scope) available between the firmsavailable between the firms

Stable AllianceStable AllianceNetworkNetwork

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Network Cooperative StrategiesNetwork Cooperative Strategies

• Arrangements that evolve in Arrangements that evolve in industries with rapid industries with rapid technological change leading technological change leading to short product life cycles.to short product life cycles.

• Primarily used to stimulate Primarily used to stimulate rapid, value-creating product rapid, value-creating product innovation and subsequent innovation and subsequent successful market entries.successful market entries.

• Purpose is often Purpose is often explorationexploration of new ideasof new ideas

Stable AllianceStable AllianceNetworkNetwork

Dynamic AllianceDynamic AllianceNetworkNetwork

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Managing Risk in Cooperative Strategy

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Competitive Risks of Cooperative Competitive Risks of Cooperative StrategiesStrategies• Partners may act opportunistically.Partners may act opportunistically.

• Partners may misrepresent competencies Partners may misrepresent competencies brought to the partnership.brought to the partnership.

• Partners fail to make committed resources and Partners fail to make committed resources and capabilities available to other partners.capabilities available to other partners.

• One partner may make investments that are One partner may make investments that are specific to the alliance while its partner does not.specific to the alliance while its partner does not.

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Managing Cooperative StrategiesManaging Cooperative Strategies• Establish systems within the firm for managing Establish systems within the firm for managing

alliancesalliances Specific department (Business Development)Specific department (Business Development)

Specific criteriaSpecific criteria

• Cost Minimization Management ApproachCost Minimization Management Approach Have formal contracts with partners.Have formal contracts with partners.

Specify how strategy is to be monitored.Specify how strategy is to be monitored.

Specify how partner behavior is to be controlled.Specify how partner behavior is to be controlled.

Set goals that minimize costs and to prevent Set goals that minimize costs and to prevent opportunistic behavior by partners.opportunistic behavior by partners.

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Managing Cooperative Strategies Managing Cooperative Strategies

• Opportunity Maximization ApproachOpportunity Maximization Approach

Maximize partnership’s value-creation opportunities.Maximize partnership’s value-creation opportunities.

Learn from each other.Learn from each other.

Explore additional marketplace possibilities.Explore additional marketplace possibilities.

Maintain less formal contracts, fewer constraints.Maintain less formal contracts, fewer constraints.

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Wrap-up

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Wrap-upWrap-up

• Strategic AlliancesStrategic Alliances• Business-level Cooperative StrategiesBusiness-level Cooperative Strategies• Corporate-level Cooperative StrategiesCorporate-level Cooperative Strategies• Other Types of Cooperative Strategies Other Types of Cooperative Strategies

InternationalInternational NetworkNetwork

• Risks & Managerial ProblemsRisks & Managerial Problems• Wrap-upWrap-up