Cooperative Strategy

1. Chapter7 Cooperative Strategy

2. How Can Firms Grow & DevelopCompetitive Advantages? 1. Pursue Internal Opportunities (Ex: Innovation) 2. Merge or Acquire Other Firms 3. Cooperative Strategies

3. Cooperative Strategy • With a Cooperative Strategy, firms (often “competitors”): • Work Together • to Achieve a Shared Objective • Cooperative Strategy with other firms can: • Create a Competitive Advantage

4. Strategic Alliance • A Cooperative Strategy in which: • firms Combine some of their Resources and Capabilities • to Create a Competitive Advantage • Strategic Alliance involves: • Exchange and Sharing of Resources and Capabilities • Co-Development or Distribution of goods or services

5. Firm B Resources Capabilities Core Competencies Resources Capabilities Core Competencies Firm A Mutual Interests in Designing, Manufacturing, or Distributing Goods or Services Combined Resources Capabilities Core Competencies Strategic Alliance

6. 3 Types of Strategic Alliances • Joint Venture: two or more firms create an independent company by combining some of their assets • Equity Strategic Alliance: partners own different percentages of equity in a new venture • Non-Equity Strategic Alliance: contractual agreement given to a company to supply, produce, or distribute a firm’s products without equity sharing. (Ex: Licensing & Outsourcing)

7. Reasons for Strategic Alliances by Market Type Reason Market Slow Cycle • Gain Access to a restricted market • Establish a Franchise in a new market • Maintain Market Stability (e.g., establishing standards)

8. Reasons for Strategic Alliances by Market Type Reason Market • Speed up Development of new goods or service • Speed up new Market Entry • Maintain market Leadership • Form an industry Technology Standard • Share risky R&D Expenses • Overcome Uncertainty Fast Cycle

9. Reasons for Strategic Alliances by Market Type Reason Market • Gain Market Power (Reduce Industry Overcapacity) • Gain Access to Complementary Resources • Establish Economies of Scale • Overcome Trade Barriers • Meet Competitive Challenges from other competitors • Pool Resources for large Capital Projects • Learn new Business Techniques Standard Cycle

10. Complementary Alliances Business-Level Cooperative Strategies: Complementary Strategic Alliances • Take Advantage of Market Opportunities by Combining partner firms’ Assets in Complementary ways to create New Value • includes Distribution, Supplier, or Outsourcing Alliances, where firms rely on upstream or downstream partners to build competitive advantage

11. Margin Margin Margin Margin Service Service Technological Development Technological Development Marketing & Sales Marketing & Sales Support Activities Support Activities Human Resource Mgmt. Human Resource Mgmt. Outbound Logistics Outbound Logistics Firm Infrastructure Firm Infrastructure Procurement Procurement Operations Operations Inbound Logistics Inbound Logistics Primary Activities Primary Activities Business-Level Cooperative Strategies: Complementary Strategic Alliances Buyer • Vertical Strategic Alliance: firms agree to use their Skills and Capabilities in Different Stages of the Value Chain to create value for both firms. • Outsourcingis one example of this type of alliance. Vertical Alliance Supplier

12. Margin Margin Margin Margin Service Service Marketing & Sales Marketing & Sales Support Activities Support Activities Technological Development Technological Development Human Resource Mgmt. Human Resource Mgmt. Outbound Logistics Outbound Logistics Firm Infrastructure Firm Infrastructure Procurement Procurement Operations Operations Inbound Logistics Inbound Logistics Primary Activities Primary Activities Business-Level Cooperative Strategies: Complementary Strategic Alliances Buyer Horizontal Alliance Buyer Potential Competitors • Horizontal Strategic Alliance: partners Combine Resources and Skills to Create Value in the Same Stage of the Value Chain • Focuses on Long-Term product Development and Distribution • Partners may Become Competitors • Requires a great deal of Trust between the partners!

13. Network Cooperative Strategies • Network Strategy - Several firms agree to form Multiple Partnerships to achieve Shared Objectives: • Stable Alliance Network • Dynamic Alliance Network • Effective Social Relationships & Interactions among partners are keys to success

14. Strategic Network • Strategic Network: a Grouping of Organizations formed to Create Value through Participation in various CooperativeArrangements, such as Alliances and Joint Ventures. • The Strategic Network seeks to Develop a Competitive Advantage in primary or support activities. • A Strategic Center Firm often Manages the Network.

15. Strategic Center Firm Strategic Network

16. Strategic Network Strategic Center Firm - 4 Primary Tasks: • Strategic Outsourcing (outsources and partners with more firms than do the other network members). • Competencies (supports members’ efforts to develop core competencies that can benefit the network). • Technology(manages development and sharing of technology-based ideas among network members). • Race to Learn (guides participants in efforts to form network-specific competitive advantages).

17. Stable Alliance Network Network Cooperative Strategies: Stable Alliance Network • Long-Term Relationships that often appear in Mature Industries where Demand is relatively Constant and predictable. • Stable Networks are built to Exploit the Economies (Scale and/or Scope) available between firms.

18. Dynamic Alliance Network Stable Alliance Network Network Cooperative Strategies: Dynamic Alliance Network • Evolve in Industries with Rapid Technological Change leading to Short Product Life Cycles. • Used to Stimulate Rapid product Innovations and successful Market Entries. • Purpose is often to Explore new ideas.

19. Competition Response Alliances Complementary Alliances Business-Level Cooperative Strategies: Competition Response Alliances • Firms join forces to Respond to a Strategic Action of another Competitor • Can be Difficult to Reverse and Expensive to Operate • Competition Response Strategic Alliances are primarily formed to respond to Strategic Actions (rather than tactical actions)

20. Competition Response Alliances Uncertainty Reducing Alliances Complementary Alliances Business-Level Cooperative Strategies: Uncertainty Reducing Alliances • Used to Hedge against Risk and Uncertainty • Most noticed in Fast-Cycle Markets • Alliance may Reduce the Uncertainty associated with Developing New Products or Technology Standards

21. Competition Response Alliances Uncertainty Reducing Alliances Competition Reducing Alliances Complementary Alliances Business-Level Cooperative Strategies: Competition Reducing Alliances • May be created to Avoid Destructive or excessive Competition • Explicit Collusion: firms Directly Negotiate production Output and Pricing agreements in order to Reduce Competition (Illegal!) • Tacit Collusion: several firms in an industry Indirectly Coordinate Production and Pricing decisions by observing each other’s competitive actions and responses

22. Competition Response Alliances Uncertainty Reducing Alliances Competition Reducing Alliances Complementary Alliances Business-Level Cooperative Strategies: Competition Reducing Alliances (cont’d) • Mutual Forbearance is a form of Tacit Collusion. Firms Avoid competitive Attacksagainst rivals they meet inmultiple markets. • Competition Reducing Strategic Alliances may require Governments to find ways to Permit Collaboration among rivals without violating antitrust laws.

23. Corporate-Level Cooperative Strategies • Corporate-Level Cooperative Strategies: Facilitate Product and/or Market Diversification • Diversifying Strategic Alliance • Synergistic Strategic Alliance • Franchising

24. Corporate-Level Cooperative Strategies • Diversifying Alliances and Synergistic Alliances allow firms: • to Grow and Diversify their operations • through a means Other than a Merger or Acquisition

25. Diversifying Alliances Corporate-Level Cooperative Strategies: Diversifying Alliances • Allows a firm to Expand into New product or market Areas Without a Merger or an Acquisition • Provides some potential Synergistic Benefits of a merger or acquisition, but Less Risk and More Flexibility • Permits a “Test” of whether a future Merger would be mutually beneficial

26. Synergistic Alliances Diversifying Alliances Corporate-Level Cooperative Strategies: Synergistic Alliances • Synergistic Alliances create Joint Economies of Scope between two or more firms. • Create Synergy across Multiple Functionsor Multiple Businesses between partner firms

27. Synergistic Alliances Franchising Diversifying Alliances Corporate-Level Cooperative Strategies: Franchising • Franchising spreads Risks and uses Resources, Capabilities, and Competencies Without Mergers or acquisitions. • Contractual Relationship is developed between two parties, the franchisee and the franchisor. • An Alternative to pursuing growth through mergers and acquisitions.

28. International Cooperative Strategies • 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. • Firm may form cross-border strategic alliances to Leverage Core Competencies that are the foundation of its domestic success to expand into international markets.

29. International Cooperative Strategies Reasons for Cross-Border Strategic Alliances 1. Multinational firms Outperform domestic-only firms. 2. Limited Growth Opportunities in domestic market. 3. Gov’t Economic Policies encourage Local Ownership.

30. International Cooperative Strategies • Allows Risk Sharing by reducing financial investment • Host Partner knows local Market and Customs • International Alliances can be Difficult to Manage due to differences in management styles, cultures or regulatory constraints • Must Gauge Partner’s Strategic Intent so they do not gain access to important technology and become a competitor!

31. Competitive Risks with Cooperative Strategies • Partner may act Opportunistically. • Misrepresentation of Competencies brought to the partnership. • Partner Fails to make committed Resources and capabilities Available to its partners. • Firm may make Investments that are specific to the alliance while its Partner does Not.

32. Competitive Risks Risk and Asset Management Approaches Competitive Risks with Cooperative Strategies • Manage the Balance between Learning from partners while Protecting Knowledge and sources of Competitive Advantages from Excessive Learning by partners. • Assign Management Responsibility for a firm’s cooperative strategies to a High-Level Executive or team.

33. Competitive Risks Risk and Asset Management Approaches Competitive Risks with Cooperative Strategies • Specify Resources and capabilities to be Sharedand thoseNot to be shared (requires detailed Contracts and Monitoring). • Develop Trusting Relationships.

34. Desired Outcomes: Competitive Risks Risk and Asset Management Approaches Competitive Risks with Cooperative Strategies • Creating Value • Above-Average Returns

35. Approaches for Managing Cooperative Strategies • Cost Minimization • Formal Contracts specify how the cooperative strategy is to be Monitored and how partner behavior is to be Controlled • Opportunity Maximization • Fewer formal, limiting, Contracts • Maximize partnership’s Value-Creation Opportunities • Partners take advantage of Unexpected Opportunities to learn from each other and to Explore additional marketplace Possibilities