Competing for Advantage Chapter 7 Cooperative Strategy PART III CREATING COMPETITIVE ADVANTAGE
Cooperative Strategy • Key Terms • Cooperative strategy Strategy in which firms work together to achieve a shared objective • Relational advantage Condition which exists when a firm’s relationships with other firms put it at an advantage relative to rival firms • Strategic alliance Cooperative strategy in which firms combine resources and capabilities to create a competitive advantage
The Importance of Cooperative Strategy • 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.
The Importance of Cooperative Strategy • Alliances can be a vehicle for firm growth. • Alliances can enhance the speed of responding to market opportunities, technological changes, and global conditions. • Alliances are a way that firms can gain new knowledge and experiences to increase competitiveness. • Cooperative strategies can enhance strategic flexibility.
The Importance of Cooperative Strategy • Key Terms • Co-opetition Condition that exists when firms that have formed cooperative strategies also compete against one another in the marketplace
Strategic Alliances in Slow-Cycle Markets In slow-cycle markets, competitive advantages are shielded from imitation for relatively long periods, and imitation is costly. Competitive advantages are sustainable.
Strategic Alliances in Fast-Cycle Markets In fast-cycle markets, competitive advantages are not shielded from imitation. Long-term sustainability is not possible.
Strategic Alliances in Standard-Cycle Markets In standard-cycle markets, competitive advantages are moderately shielded from imitation. Competitive advantages are partially sustainable.
Types of Alliances • Key Terms • Equity strategic alliance Alliance in which two or more firms own a portion of the equity in the venture they have created • Nonequity strategic alliance Alliance in which two or more firms develop a contractual relationship to share some of their unique resources and capabilities to create a competitive advantage
Types of Alliances • Key Terms • Joint venture Strategic alliance in which two or more firms create a legally independent company to share resources and capabilities to develop a competitive advantage • Tacit knowledge Knowledge which is complex and difficult to codify
Cooperative Strategies to Differentiate or Reduce Costs • Complementary Strategic Alliances • Network Cooperative Strategies
Complementary Strategic Alliances • Key Terms • Complementary strategic alliance Business-level alliance in which firms share some of their resources and capabilities in complementary ways to develop competitive advantages • Vertical complementary strategic alliance When firms share resources and capabilities from different stages of the value chain to create a competitive advantage • Horizontal complementary strategic alliance When firms share resources and capabilities from the same stage of the value chain to create a competitive advantage
Network Cooperative Strategies • Key Terms • Network cooperative strategy Cooperative strategy in which multiple firms agree to form partnerships to achieve shared objectives
Alliance Network • Gain information and knowledge from multiple sources • Use heterogeneous knowledge to innovate • Achieve additional competitive advantages • Stimulate product innovation critical to value creation Firms involved in alliance networks tend to be more innovative.
Alliance Network Success • Effective social relationships and interactions among partners while sharing resources and capabilities • Effective strategic center firm
Strategic Center Firms • Outsource and partner with network members • Encourage other members to outsource and partner within the network • Foster development of core competencies and competitive advantages with and across network members • Serve as gatekeepers to exchange of information among members
Types of Alliance Networks • Stable Alliance Network • Dynamic Alliance Network
Stable Alliance Networks • Formed in mature industries in which demand is relatively constant and predictable • Directed primarily toward developing products at a low cost • Built for exploitation of economies available between firms
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 • Built to discover new product innovations, enter new markets, or develop new markets
Cooperative Strategies to Address Forces in the External Environment • Competitive Response Alliances • Uncertainty-Reducing Alliances • Competition-Reducing Cooperative Strategies • Associations And Consortia
Competitive Response Alliances Used to respond to competitors' strategic attacks
Competitive Response Alliances Used to reduce environmental uncertainty
Competition-Reducing Alliances Used to reduce competition in an industry
Collusive Strategies • Explicit collusion - direct negotiation amongst firms to establish output levels and pricing agreements to reduce industry competition • Tacit collusion - several firms indirectly coordinate production and pricing decisions which impact the degree of competition faced in the industry
Associations and Consortia Used to form coalitions with stakeholders to achieve common objectives
Cooperative Strategies to Promote Growth and/or Diversification • Diversifying Strategic Alliances • Franchising • International Cooperative Strategies Cooperative strategies are attractive because they require fewer resource commitments and permit greater strategic flexibility.
Cooperative Strategies to Promote Growth and/or Diversification • Key Terms • Diversifying strategic alliance Cooperative strategy in which firms share some of their resources and capabilities to diversify into new product or market areas
Cooperative Strategies to Promote Growth and/or Diversification • Key Terms • Franchising Cooperative strategy in which a 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
Successful Franchising Behaviors • Partners work closely together in ways that strengthen the brand • Franchisors develop strong programs to transfer knowledge and skills needed for franchisees to successfully compete at the local level • Franchisees provide feedback to franchisors regarding how to become more effective and efficient • Use the strategy in fragmented industries where no firm has a dominant share • Franchisees encouraged to own multiple sites
Cooperative Strategies to Promote Growth and/or Diversification • Key Terms • 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
Reasons for Cross-Border Alliances • Limited domestic growth opportunities • Restrictive governmental economic policies • To leverage core competencies • To draw from the local expertise of partners
Risks of Cooperative Strategies • 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. • Partner may make investments specific to the alliance while the other partner does not.
Implementing and Managing Cooperative Strategies • Internalize experiences with successful cooperative strategies to gain maximum value from the knowledge learned. • Establish appropriate controls to manage both tangible and intangible assets. • Assign managerial responsibility for cooperative strategy to high-level executive or team responsible for overseeing the entire portfolio of alliances. • Include alliances with companies from a variety of value chain activities. • Increasing the level of trust between partners increases the likelihood of alliance success and is an efficient way to influence and control alliance partners' behaviors.
Primary Approaches to Manage Cooperative Strategies • Cost Minimization • Opportunity Maximization
Cost Minimization Approach • Formalized partnership relationship – contracts • Goals – minimize costs and prevent opportunistic behaviors • Requirements – monitoring mechanisms
Opportunity Maximization Approach • Informal relationships – fewer constraints • Goals – maximize partnership's value-creation opportunities • Requirements – high level of trust
Benefits of Trust with Alliance Partners • Creates relationship stability • Reduces alliance monitoring costs • Maximizes opportunities to create value • Positively influences partner behaviors • Creates social capital • Increases the likelihood of alliance success • Offers the potential to be a source of competitive advantage
Ethical Question From an ethical perspective, how much information is a firm obliged to provide to a potential complementary alliance partner about what it expects to learn from a cooperative arrangement?
Ethical Question “A contract is necessary because most firms cannot be trusted to act ethically in a cooperative venture such as a strategic alliance.” In your opinion, is this statement true or false? Why? Does the answer vary by country? Why?
Ethical Question Ventures in foreign countries without strong contract law are risky because managers may be subjected to bribery attempts once their firms’ assets have been invested in the country. How can managers deal with these problems?
Ethical Question This chapter mentions international strategic alliances being formed by the world’s airline companies. Do these companies face any ethical issues as they participate in multiple alliances? If so, what are the issues? Are they different for airline companies headquartered in the United States than for those with European home bases? If so, what are the differences, and what accounts for them?
Ethical Question Firms with a reputation for ethical behavior in strategic alliances are likely to have more opportunities to form cooperative strategies than companies that have not earned this reputation. What actions can firms take to earn a reputation for behaving ethically as a strategic alliance partner?