Chapter 10 Cooperative Strategy Robert E Hoskisson Michael

The Strategic Management Process Strategic Thinking Chapter 1 Introduction to Strategic Management Chapter 2 Strategic Leadership Strategic Analysis Chapter 3 The External Environment Chapter 4 The Internal Organization Strategic Intent Strategic Mission Chapter 5 Business-Level Strategy Chapter 6 Competitive Rivalry and Competitive Dynamics Chapter 7 Corporate-Level Strategy Chapter 8 Acquisition and Restructuring Strategies Chapter 9 International Strategy Chapter 10 Cooperative Strategy Creating Competitive Advantage Monitoring And Creating Entrepreneurial Opportunities Chapter 11 Corporate Governance Chapter 12 Strategic Entrepreneurship 2

Discussion Questions Click Here 1. What is cooperative strategy? Click Here 2. What are the four general types of strategic alliances that introduce Chapter 10? How is a strategic cooperative network different from a single strategic alliance? Click Here 3. What are the central reasons why firms are motivated to engage in strategic alliances in each market type (slow, standard and fast cycle)? Click Here More discussion questions 3

Discussion Questions (cont. ) Click Here 4. What is the difference between horizontal and vertical complementary business level strategic alliances? Click Here 5. Are competition reduction, competition response and uncertainty reduction strategic alliances likely to lead to competitive advantage? Click Here 6. What is the difference between corporate level and business level strategic alliances? Click Here More discussion questions 4

Discussion Questions (cont. ) Click Here 7. When are international cooperative strategies used and how are they implemented? Click Here 8. How can you classify networks which are formed for different purposes? Click Here 9. What are the competitive risks of strategic alliances? How is the strategic approach different if an alliance is based on a formal contract versus trust? 5

Discussion Question 1 What is cooperative strategy? 6

Cooperative Strategy l Cooperative strategy is a strategy in which firms – work together – to achieve a shared objective l Cooperating with other firms is a strategy that – creates value for a customer – exceeds the cost of constructing customer value in other ways – establishes a favorable position relative to competition 7

Strategic Alliance as a Cooperative Strategy l A strategic alliance is a cooperative strategy in which – firms combine some of their resources and capabilities – to create a competitive advantage l A strategic alliance involves – exchange and sharing of resources and capabilities – co-development or distribution of goods or services 8

Strategic Alliance Firm A Resources Capabilities Core Competencies Click Here Return to Discussion Questions Firm B Resources Capabilities Core Competencies Combined Resources Capabilities Core Competencies Mutual interests in designing, manufacturing, or distributing goods or services 9

Discussion Question 2 What are the four general types of strategic alliances that introduce Chapter 10? How is a strategic cooperative network different from a single strategic alliance? 10

Four Types of Strategic Alliances Joint venture: two or more firms create an independent company by combining parts of their assets l Equity strategic alliance: partners who own different percentages of equity in a new venture l Nonequity strategic alliances: contractual agreements given to a company to supply, produce, or distribute a firm’s goods or services without equity sharing l Strategic cooperative network: multiple firms agree to form partnerships to achieve shared objectives l 11

Strategic Network Strategic Center Firm 12

Strategic Network A strategic network is a grouping of organizations that has been formed to create value through participation in an array of cooperative arrangements, such as alliances and joint ventures l The strategic network seeks to develop a competitive advantage in primary or support activities l A strategic center firm often manages the network l 13

Strategic Network l strategic center firm engages in four primary tasks – strategic outsourcing (outsources and partners with more firms than do other network members) – competencies (supports each member’s efforts to develop core competencies that can benefit the network) 14

Strategic Network l strategic center firm engages in four primary tasks – technology (manages the development and sharing of technology-based ideas among network members) – race to learn (guides participants in efforts to form network-specific competitive advantages) Click Here Return to Discussion Questions 15

Discussion Question 3 What are the central reasons why firms are motivated to engage in strategic alliances in each market type (slow, standard and fast cycle)? 16

Reasons for Strategic Alliances by Market Type Market Slow Cycle Reason • Gain access to a restricted market • Establish a franchise in a new market • Maintain market stability (e. g. , establishing standards) 17

Reasons for Strategic Alliances by Market Type Market Fast Cycle Reason • 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 18

Reasons for Strategic Alliances by Market Type Market Standard Cycle Click Here Reason • 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 very large capital projects • Learn new business techniques Return to Discussion Questions 19

Discussion Question 4 What is the difference between horizontal and vertical complementary business level strategic alliances? 20

Business-Level Cooperative Strategies: Complementary Strategic Alliances Complementary Alliances • complementary strategic alliances are designed to take advantage of market opportunities by combining partner firms’ assets in complementary ways to create new value – these include distribution, supplier or outsourcing alliances where firms rely on upstream or downstream partners to build competitive advantage 21

Business-Level Cooperative Strategies: Complementary Strategic Alliances Buyer M in ar g ar Marketing & Sales Procurement Technological Development Human Resource Mgmt. Firm Infrastructure Support Activities Service Outbound Logistics Operations Inbound Logistics Primary Activities Supplier ar gin Service • vertical complementary strategic alliance is formed between firms that agree to use their skills and capabilities in different stages of the value chain to create value for both firms • outsourcing is one example of this type of alliance Marketing & Sales Procurement Technological Development Human Resource Mgmt. Firm Infrastructure M M n gi ar Support Activities Vertical Alliance M gin Outbound Logistics Operations Inbound Logistics Primary Activities 22

Business-Level Cooperative Strategies: Complementary Strategic Alliances Operations Inbound Logistics Primary Activities Human Resource Mgmt. Outbound Logistics M Firm Infrastructure Marketing & Sales M in ar g ar Technological Development gin Service Procurement Technological Development Human Resource Mgmt. Firm Infrastructure Potential Competitors ar a M Support Activities Return to Discussion Questions M in rg Support Activities Click Here Buyer Horizontal Alliance gin Service Marketing & Sales Procurement Buyer Outbound Logistics Operations Inbound Logistics Primary Activities • horizontal complementary strategic alliance is formed between partners who agree to combine their resources and skills to create value in the same stage of the value chain • focus on long-term product development and distribution opportunities • the partners may become competitors • requires a great deal of trust between the partners 23

Discussion Question 5 Are competition reduction, competition response and uncertainty reduction strategic alliances likely to lead to competitive advantage? 24

Business-Level Cooperative Strategies: Competition Response Alliances Complementary Alliances Competition Response Alliances • competition response strategic alliances occur when firms join forces to respond to a strategic action of another competitor • because they can be difficult to reverse and expensive to operate, competition response strategic alliances are primarily formed to respond to strategic rather than tactical actions 25

Business-Level Cooperative Strategies: Uncertainty Reducing Alliances Complementary Alliances Competition Response Alliances Uncertainty Reducing Alliances • uncertainty reducing strategic alliances are used to hedge against risk and uncertainty • these alliances are most noticed in fast-cycle markets • alliance may be formed to reduce the uncertainty associated with developing new product or technology standards 26

Business-Level Cooperative Strategies: Competition Reducing Alliances Complementary Alliances Competition Response Alliances Uncertainty Reducing Alliances Competition Reducing Alliances • competition reducing strategic alliances may be created to avoid destructive or excessive competition • explicit collusion exists when firms directly negotiate production output and pricing agreements in order to reduce competition (illegal) • tacit collusion exists when several firms in an industry indirectly coordinate their production and pricing decisions by observing each other’s competitive actions and 27 responses

Business-Level Cooperative Strategies: Competition Reducing Alliances Complementary Alliances Competition Response Alliances Uncertainty Reducing Alliances • mutual forbearance is a form of tacit collusion in which firms avoid competitive attacks against those rivals they meet in multiple markets • competition reducing strategic alliances may require governments to find ways to permit collaboration among rivals without violating antitrust laws Competition Reducing Alliances 28

Implementing Business-Level Cooperative Strategies Complementary business-level strategic alliances have the greatest probability of creating a sustainable competitive advantage l Strategic alliances designed to respond to competition and reduce uncertainty can create competitive advantages that may be more temporary in nature l Competition reducing strategy has lowest probability of creating a sustainable competitive advantage l Click Here Return to Discussion Questions 29

Discussion Question 6 What is the difference between corporate level and business level strategic alliances? 30

Corporate-Level Cooperative Strategies • Corporate-level cooperative strategies are designed to facilitate product and/or market diversification - diversifying strategic alliance - synergistic strategic alliance - franchising • Diversifying alliances and synergistic alliances allow firms - to grow and diversify their operations - through a means other than a merger or acquisition 31

Corporate-Level Cooperative Strategies: Diversifying Alliances • diversifying strategic alliance allows a firm to expand into new product or market areas without completing a merger or an acquisition • provides some of the potential synergistic benefits of a merger or acquisition, but with less risk and greater levels of flexibility • permits a “test” of whether a future merger between the partners would benefit both parties 32

Corporate-Level Cooperative Strategies: Synergistic Alliances Diversifying Alliances Synergistic Alliances • synergistic strategic alliances create joint economies of scope between two or more firms • create synergy across multiple functions or multiple businesses between partner firms 33

Corporate-Level Cooperative Strategies: Franchising Diversifying Alliances Synergistic Alliances Franchising • franchising spreads risks and uses resources, capabilities, and competencies without merging or acquiring another company • contractual relationship concerning the franchise that is developed between two parties, the franchisee and the franchisor • an alternative to pursuing growth through mergers and acquisitions 34

Implementing Corporate-Level Cooperative Strategies Corporate-level cooperative strategies are broader in scope, more complex and more costly than business-level strategies l Competitive advantages and value are created when those employing the strategies can also use them to develop useful knowledge about how to succeed in the future l Click Here – imperfectly imitable – valuable – nonsubstitutable – rare Return to Discussion Questions 35

Discussion Question 7 When are international cooperative strategies used and how are they implemented? 36

International Cooperative Strategies l Cross-border strategic alliance – an international cooperative strategy in which firms with headquarters in different nations combine some of their resources and capabilities to create a competitive advantage – a firm may form cross-border strategic alliances to leverage core competencies that are the foundation of its domestic success to expand into international markets 37

International Cooperative Strategies l l 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 38

Implementing International Cooperative Strategies Differences among countries’ regulatory environments increase the challenge of managing international networks and verifying that, at a minimum, the network’s operations comply with all legal requirements l Distributed strategic networks are often the organizational structure used to manage international cooperative strategies l 39

Distributed Strategic Network Main Strategic Center Firm = Distributed Strategic Center Firms 40

Distributed Strategic Network International cooperative strategies often require more complex networks l Many large multinational firms form distributed strategic networks with multiple regional strategic centers to manage their array of cooperative arrangements with partner firms l Breaking large networks into multiple manageably-sized networks helps to manage the complexity of maintaining many relationships l Click Here Return to Discussion Questions 41

Discussion Question 8 How can you classify networks which are formed for different purposes? 42

Network Cooperative Strategies l A network strategy is a cooperative strategy wherein several firms agree to form multiple partnerships to achieve shared objectives – stable strategic cooperative network – dynamic strategic cooperative network l Effective social relationships and interactions among partners are keys to a successful network cooperative strategy 43

Network Cooperative Strategies: Stable Strategic Cooperative Network • long term relationships that often appear in mature industries where demand is relatively constant and predictable • stable networks are built for exploitation of the economies available between firms 44

Network Cooperative Strategies: Dynamic Strategic Cooperative Network Stable Strategic Cooperative Network Dynamic Strategic Cooperative Network Click Here • arrangements that evolve in industries with rapid technological change leading to short product life cycles • primarily used to stimulate rapid, value-creating product innovations and subsequent successful market entries • purpose is often exploration of new ideas Return to Discussion Questions 45

Discussion Question 9 What are the competitive risks of strategic alliances? How is the strategic approach different if an alliance is based on a formal contract versus trust? 46

Competitive Risks with Cooperative Strategies Competitive Risks • 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 47

Managing Competitive Risks in Cooperative Strategies Competitive Risks Risk and Asset Management Approaches • Manage the balance between learning from partners while protecting knowledge and sources of competitive advantages from excessive learning by partners • Assign managerial responsibility for a firm’s cooperative strategies to a high-level executive or team • Specify resources and capabilities that will be shared and those that will not be shared (detailed contracts and monitoring) 48 • Develop trusting relationships

Approaches for Managing Cooperative Strategies l cost minimization – formal contracts specify how the cooperative strategy is to be monitored and how partner behavior is to be controlled l opportunity maximization – maximize partnership’s value-creation opportunities – partners take advantage of unexpected opportunities to learn from each other and to explore additional marketplace possibilities – fewer formal, limiting, contracts 49

Managing Competitive Risks in Cooperative Strategies Competitive Risks Risk and Asset Management Approaches Desired Outcome • Creating value • Above-average returns 50