Chapter 9 Cooperative Strategy Michael A Hitt R

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Chapter 9 Cooperative Strategy Michael A. Hitt R. Duane Ireland Robert E. Hoskisson ©

Chapter 9 Cooperative Strategy Michael A. Hitt R. Duane Ireland Robert E. Hoskisson © 2003 Southwestern Publishing Company 1

Strategic Inputs The Strategic Management Process Chapter 2 The External Environment Strategic Intent Strategic

Strategic Inputs The Strategic Management Process Chapter 2 The External Environment Strategic Intent Strategic Mission Chapter 3 The Internal Environment Strategy Implementation Strategic Outcomes Strategic Actions Strategy Formulation Chapter 5 Chapter 4 Competitive Rivalry Business-Level and Competitive Strategy Dynamics Chapter 7 Acquisition and Restructuring Strategies Chapter 8 International Strategy Chapter 6 Corporate. Level Strategy Chapter 10 Corporate Governance Chapter 11 Organizational Structure and Controls Chapter 9 Cooperative Strategy Chapter 12 Strategic Leadership Chapter 13 Strategic Entrepreneurship Strategic Competitiveness Above-Average Returns Feedback 2

Cooperative Strategy l Cooperative strategy is a strategy in which firms – work together

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 3

Strategic Alliance l A strategic alliance is a cooperative strategy in which – firms

Strategic Alliance 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 4

Strategic Alliance Firm A Resources Capabilities Core Competencies Firm B Resources Capabilities Core Competencies

Strategic Alliance Firm A Resources Capabilities Core Competencies Firm B Resources Capabilities Core Competencies Combined Resources Capabilities Core Competencies Mutual interests in designing, manufacturing, or distributing goods or services 5

Types of Cooperative Strategies l l l Joint venture: two or more firms create

Types of Cooperative Strategies l l l Joint venture: two or more firms create an independent company by combining parts of their assets Equity strategic alliance: partners who own different percentages of equity in a new venture Nonequity strategic alliances: contractual agreements given to a company to supply, produce, or distribute a firm’s goods or services without equity sharing 6

Reasons for Strategic Alliances by Market Type Market Slow Cycle Reason • Gain access

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) 7

Reasons for Strategic Alliances by Market Type Market Fast Cycle Reason • Speed up

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 8

Reasons for Strategic Alliances by Market Type Market Standard Cycle Reason • Gain market

Reasons for Strategic Alliances by Market Type Market Standard Cycle 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 9

Business-Level Cooperative Strategies: Complementary Strategic Alliances Complementary Alliances • complementary strategic alliances are designed

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 10

Business-Level Cooperative Strategies: Complementary Strategic Alliances Buyer M in ar g ar Marketing &

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 M gin 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 Human Resource Mgmt. Firm Infrastructure M Technological Development ar Support Activities Vertical Alliance M gin Outbound Logistics Operations Inbound Logistics Primary Activities 11

Business-Level Cooperative Strategies: Complementary Strategic Alliances Operations Inbound Logistics Primary Activities Human Resource Mgmt.

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 Human Resource Mgmt. Firm Infrastructure Support Activities Technological Development a M Potential Competitors ar Support Activities M in rg 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 12

Business-Level Cooperative Strategies: Competition Response Alliances Complementary Alliances Competition Response Alliances • competition response

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 13

Business-Level Cooperative Strategies: Uncertainty Reducing Alliances Complementary Alliances Competition Response Alliances Uncertainty Reducing Alliances

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 14

Business-Level Cooperative Strategies: Competition Reducing Alliances Complementary Alliances Competition Response Alliances Uncertainty Reducing Alliances

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 15 responses

Business-Level Cooperative Strategies: Competition Reducing Alliances Complementary Alliances Competition Response Alliances Uncertainty Reducing Alliances

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 16

Corporate-Level Cooperative Strategies • Corporate-level cooperative strategies are designed to facilitate product and/or market

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 17

Corporate-Level Cooperative Strategies: Diversifying Alliances • diversifying strategic alliance allows a firm to expand

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 18

Corporate-Level Cooperative Strategies: Synergistic Alliances Diversifying Alliances Synergistic Alliances • synergistic strategic alliances create

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 19

Corporate-Level Cooperative Strategies: Franchising Diversifying Alliances Synergistic Alliances Franchising • franchising spreads risks and

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 20

International Cooperative Strategies l Cross-border strategic alliance – an international cooperative strategy in which

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 21

International Cooperative Strategies l l Allows risk sharing by reducing financial investment Host partner

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 22

Network Cooperative Strategies l A network strategy is a cooperative strategy wherein several firms

Network Cooperative Strategies l A network strategy is a cooperative strategy wherein several firms agree to form multiple partnerships to achieve shared objectives – stable alliance network – dynamic alliance network l Effective social relationships and interactions among partners are keys to a successful network cooperative strategy 23

Network Cooperative Strategies: Stable Alliance Network • long term relationships that often appear in

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 for exploitation of the economies available between firms 24

Network Cooperative Strategies: Dynamic Alliance Network Stable Alliance Network Dynamic Alliance Network • arrangements

Network Cooperative Strategies: Dynamic Alliance Network Stable Alliance Network Dynamic Alliance Network • 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 25

Competitive Risks with Cooperative Strategies Competitive Risks • Partner may act opportunistically • Misrepresentation

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 26

Competitive Risks with Cooperative Strategies Competitive Risks Risk and Asset Management Approaches • Manage

Competitive Risks with 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) 27 • Develop trusting relationships

Approaches for Managing Cooperative Strategies l cost minimization – formal contracts specify how the

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 28

Competitive Risks with Cooperative Strategies Competitive Risks Risk and Asset Management Approaches Desired Outcome

Competitive Risks with Cooperative Strategies Competitive Risks Risk and Asset Management Approaches Desired Outcome • Creating value • Above-average returns 29