Strategic Management Concepts and Cases 9 e Part

Strategic Management: Concepts and Cases 9 e Part II: Strategic Actions: Strategy Formulation Chapter 9: Cooperative Strategy © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Strategic Management Process © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 9: Cooperative Strategy • Overview: Seven content areas – Cooperative strategies and why firms use them – Three types of strategic alliances – Business-level cooperative strategies & their use – Corporate-level strategies in diversified firms – Cross-border strategic alliances’ importance as an international cooperative strategy – Competitive risks with cooperative strategies – Two approaches to manage cooperative strategies © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Cooperative Strategies at IBM • By cooperating with others IBM can leverage core competencies to grow and improve performance • Business Systems Group – Develop leading-edge technology – Formed five alliances – Partners provide over 250 scientists and engineers that work with IBM’s own to fuel innovation • Business Analytics Group – Created unit to manage data and improve decisions – Software solutions through small firm partnerships • Overall shift to hardware, solutions, software © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Introduction • Cooperative strategy – Firms work together to achieve a shared objective © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 9: Cooperative Strategy • Overview: Seven content areas – Cooperative strategies and why firms use them – Three types of strategic alliances – Business-level cooperative strategies & their use – Corporate-level strategies in diversified firms – Cross-border strategic alliances’ importance as an international cooperative strategy – Competitive risks with cooperative strategies – Two approaches to manage cooperative strategies © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Primary Type of Cooperative Strategy: Strategic Alliances • Introduction: Strategic Alliance – Cooperative strategy in which firms combine resources and capabilities to create a competitive advantage • Three types of strategic alliances – 1. Joint venture – 2. Equity strategic alliance – 3. Nonequity strategic alliances, which include • Licensing agreements • Distribution agreements • Supply contracts • Outsourcing commitments © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Primary Type of Cooperative Strategy: Strategic Alliances (Cont’d) • 1. Joint venture – Two or more firms create a legally independent company to share resources and capabilities to develop a competitive advantage • 2. Equity strategic alliance – Two or more firms own a portion of the equity in the venture they have created • 3. Nonequity strategic alliance – Two or more firms develop a contractual relationship to share some of their unique resources and capabilities to create a competitive advantage © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Primary Type of Cooperative Strategy: Strategic Alliances (Cont’d) • Many reasons firms implement cooperative strategies and specifically, strategic alliances • Competitive market conditions would include – 1. Slow-cycle markets – 2. Fast-cycle markets – 3. Standard-cycle © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Primary Type of Cooperative Strategy: Strategic Alliances (Cont’d) • Why firms might develop strategic alliances – 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 • be a vehicle for firm growth • enhance the speed of responding to market opportunities, technological changes, and global conditions • allow firms to gain new knowledge and experiences to increase competitiveness © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Primary Type of Cooperative Strategy: Strategic Alliances (Cont’d) • In summary, strategic alliances … – …can reduce competition and enhance a firm’s competitive capabilities and – …create avenue for firm to gain access to resources – …allows firm to take advantage of opportunities, build strategic flexibility and innovate • The competitive conditions -– 1. Slow-cycle markets – 2. Fast-cycle markets – 3. Standard-cycle markets © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Primary Type of Cooperative Strategy: Strategic Alliances (Cont’d) • 1. Slow-cycle markets – becoming rare do to: – Privatization of industries and economies – Rapid expansion of the Internet's capabilities – Quick dissemination of information – Speed with which advancing technologies permit imitation of even complex products • 2. Fast-cycle markets • 3. Standard-cycle © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 9: Cooperative Strategy • Overview: Seven content areas – Cooperative strategies and why firms use them – Three types of strategic alliances – Business-level cooperative strategies & their use – Corporate-level strategies in diversified firms – Cross-border strategic alliances’ importance as an international cooperative strategy – Competitive risks with cooperative strategies – Two approaches to manage cooperative strategies © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Business-Level Cooperative Strategy • Introduction • Complementary strategic alliances (CSA) • 2 Types of CSA: (1) vertical & (2) horizontal • Competition response strategy • Uncertainty-reducing strategy • Competition-reducing strategy • Business-level cooperative strategies assessment © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Business-Level Cooperative Strategy (Cont’d) • Introduction: Business level cooperative strategies used to grow and improve firm performance in individual product markets. Achieved through… • Complementary Strategic Alliances (CSA) © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Business-Level Cooperative Strategy (Cont’d) • Complementary Strategic Alliances (CSA) – Firms share some of their resources and capabilities in complementary ways to develop competitive advantages – Partners may have different • Learning rates • Capabilities to leverage complementary resources • Marketplace reputations • types of actions they can legitimately take – Some firms are more effective at managing alliances and deriving benefits from them – Two forms include vertical and horizontal © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Business-Level Cooperative Strategy (Cont’d) – 2 Types of CSA: (1) vertical & (2) horizontal • 1. Vertical CSA – partnering firms share resources & capabilities from different stages of the value chain to create a competitive advantage. • 2. Horizontal CSA – partnering firms share resources & capabilities from the same stage of the value chain to create a competitive advantage – commonly used for long-term product development and distribution opportunities © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Business-Level Cooperative Strategy (Cont’d) • Competition response strategy – Competitors • initiate competitive actions to attack rivals • launch competitive responses to their competitor’s actions – Strategic alliances (SA) • can be used at the business level to respond to competitor’s attacks • primarily formed to take strategic vs. tactical actions • can be difficult to reverse • expensive to operate © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Business-Level Cooperative Strategy (Cont’d) • Uncertainty-reducing strategy – For example, entering new product markets, emerging economies and establishing a technology standard are unknown areas so by partnering with a firm in the respective industry, a firm’s uncertainty (risk) is reduced – Uncertainty reduced by combining knowledge & capabilities • Competition-reducing strategy – Collusive strategies (CS) differ from strategic alliances in that CS are usually illegal – Two types of CS: • Explicit collusion • Tacit collusion © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Business-Level Cooperative Strategy (Cont’d) • Competition-reducing strategy: Two Collusive Strategies – 1. Explicit collusion – Direct negotiation among firms to establish output levels and pricing agreements that reduce industry competition – 2. Tacit collusion – i. Indirect coordination of production and pricing decisions by several firms, which impacts the degree of competition faced in the industry • Mutual forbearance – firms do not take competitive actions against rivals they meet in multiple markets © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Business-Level Cooperative Strategy (Cont’d) • Business-level cooperative strategy – assessment – Used to develop competitive advantages (CA) for contributing to successful positions & performance in individual product markets – Developing a CA using a strategic alliance, the integrated resources and capabilities must be valuable, rare, imperfectly imitable and nonsubstitutable – Vertical alliances have greatest probability of creating CA; horizontal are sometimes difficult to maintain since they are usually between competitors – SA’s designed to respond to competition and reduce uncertainty are more temporary than complementary (horizontal and vertical) strategic alliances – Competition-reducing has lowest probability of creating a sustainable CA © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 9: Cooperative Strategy • Overview: Seven content areas – Cooperative strategies and why firms use them – Three types of strategic alliances – Business-level cooperative strategies & their use – Corporate-level strategies in diversified firms – Cross-border strategic alliances’ importance as an international cooperative strategy – Competitive risks with cooperative strategies – Two approaches to manage cooperative strategies © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Corporate-Level Cooperative Strategies (Cont’d) • Introduction – Corporate-level cooperative strategies (CLCS) help firm to diversify itself in terms of products offered, markets served or both – Common CLCS forms (N=3) © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Corporate-Level Cooperative Strategies (Cont’d) • Common CLCS forms – 1. Diversifying strategic alliance • Firms share some of their resources & capabilities to diversify into new product or market areas – 2. Synergistic strategic alliance • Firms share some of their resources & capabilities to create economies of scope – 3. Franchising • 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 © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Corporate-Level Cooperative Strategies (Cont’d) • Assessment of corporate-level cooperative strategies – Costs incurred regardless of type selected • Important to monitor expenditures! – In comparison w/ business-level strategies • Usually broader in scope • More complex and therefore more costly – Can develop useful knowledge … and, in order to gain maximum value should organize and verify proper distribution with those involved in forming and using alliances © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 9: Cooperative Strategy • Overview: Seven content areas – Cooperative strategies and why firms use them – Three types of strategic alliances – Business-level cooperative strategies & their use – Corporate-level strategies in diversified firms – Cross-border strategic alliances’ importance as an international cooperative strategy – Competitive risks with cooperative strategies – Two approaches to manage cooperative strategies © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

International Cooperative Strategy • 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 • Why cross-border strategic alliances? – Multinational corporations outperform firms that operate only domestically – Due to limited domestic growth opportunities, firms look outside their national borders to expand business – Some foreign government policies require investing firms to partner with a local firm to enter their markets © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 9: Cooperative Strategy • Overview: Seven content areas – Cooperative strategies and why firms use them – Three types of strategic alliances – Business-level cooperative strategies & their use – Corporate-level strategies in diversified firms – Cross-border strategic alliances’ importance as an international cooperative strategy – Competitive risks with cooperative strategies – Two approaches to manage cooperative strategies © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

International Cooperative Strategy (Cont’d) • Risks – 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 – One partner may make investments specific to the alliance while the other partner may not © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Managing Competitive Risks in Cooperative Strategies © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 9: Cooperative Strategy • Overview: Seven content areas – Cooperative strategies and why firms use them – Three types of strategic alliances – Business-level cooperative strategies & their use – Corporate-level strategies in diversified firms – Cross-border strategic alliances’ importance as an international cooperative strategy – Competitive risks with cooperative strategies – Two approaches to manage cooperative strategies © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Managing Cooperative Strategy • Two primary approaches – 1. Cost minimization – 2. Opportunity maximization © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Managing Cooperative Strategy (Cont’d) • 1. Cost minimization – Relationship with partner is formalized with contracts – Contracts specify how cooperative strategy is to be monitored and how partner behavior is to be controlled – Goal is to minimize costs and prevent opportunistic behaviors by partners – Costs of monitoring cooperative strategy are greater – Formalities tend to stifle partner efforts to gain maximum value from their participation © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Managing Cooperative Strategy (Cont’d) • 2. Opportunity Maximization – Focus: maximizing partnership's value-creation opportunities – Informal relationships and fewer constraints allow partners to • take advantage of unexpected opportunities • learn from each other • explore additional marketplace possibilities – Partners need a high level of trust that each party will act in the partnership's best interest, which is more difficult in international situations © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.