Strategic Management (MGT501) Lecture 23 Dr Muhammad Mustafa Raziq

Topic Covered in the Previous Lecture Diversification and Integration Strategies Mergers, Acquisitions, and Takeover Strategies

Topics to be covered in this lecture Strategic Alliances Joint Venture’s Strategies International Business Entry Level Strategies

6.4. Strategic Alliances There are four types of perspectives that firms follow with respect to other firms in the same industry Competition for the same market Cooperation to jointly manage some shared aspects of their environment Cooperation to influence industry characteristics No competition, but have a specialized niche market with a differentiated product (rare occurrence or short- term phenomenon)

6.4. Strategic Alliances (continued) With respect to the allocating decisions and extent of influence on environment for growth, competitive, and cooperative positions a firm takes can be illustrated as follows: Factors Competition Cooperation Resource allocation for Individual Survival need Individual position making Collective survival need Collective strategy Industry position making Joint mobilization of resources Influence the shared environment for growth Standalone growth strategy Single firm growth alters the institution Collective growth strategy Influencing key suppliers, consumers, regulatory agencies, community, civil society etc for institutional change

6.4. Strategic Alliances (continued) With respect to the allocating decisions and extent of influence on environment for growth, competitive, and cooperative positions a firm Factors Competition Cooperation Focus Cooperation to better the competitive position of a single firm through alliances, network, joint venture etc Legally enforceable contracts Cooperation to better the position of an entire industry, not just gain advantage for a single firm or group of firms Institutional structure creation Returns Tangible profits or shareholder value or reputation for the firm Participation enforceable Create uncertain, intangible, industry-level public goods in the future (free rider problem may ensue)

6.4.1. Communal Strategy Communal strategy is a bridge between collective strategy (organizations with common concerns collaborate to determine how they will approach certain issues) and institutional strategy (related to the aspects of the organizational external environment) focusing on collective action to bring about institutional (rules of the game) change Communal strategy contributes to public good from which all firms in the industry benefits Peer pressure and trust are the forces unifying the members of the industry. Member firms adhere voluntarily to an industry code of practice, participate in events, initiatives, and contribute membership dues, and other donations

6.4.2. Corporate Strategic Alliances Strategic alliances are contractual business agreements to pool resources and engage in a new business venture with or without an equity investment Such a business venture has a finite length with partners performing specific tasks and partner contributions be in the area of technology, product development, marketing, licensing, research or skills. There are two generic types of alliances: Vertical alliances vs horizontal strategic alliances (horizontal alliances are more favored) International vs domestic strategic alliances (international is more successful and are across national boundaries)

6.4.3. Alliance network strategy The position of a particular firm in an alliance network affects firm’s performance. Firms pursue a network strategy that enables them to attain a position of prominence in the network (Kokar and Prescott, 2008) The advantages of forming alliances in a network are as follows: Access to critical and key information (information volume) Information diversity Act as channel of resources Affiliation-based benefits provide opportunities for the prominent firm in the network to establish its strategic agenda as the defining norm of the industry or network Facilitate joint and coordinated action by the partners, thereby giving performance benefits Legitimacy and reputation benefits through alliance with significant partners

6.4.4. Design of a Firm’s Alliance Portfolio Firms adopt alliance network strategies to gain competitive advantages. There are two ways the firms design the network strategy: Attain a position of prominence or being in control in the network Occupy an entrepreneurial position in the network by acting as bridges between different parts of network, recombining information, and knowledge in novel combinations, and thus getting first-mover advantages Alliances portfolio is determined by the strategy of the firm. If a firm’s strategy execution needs critical and key information, then the firm should form into alliance in a network for flow of information.

6.5. Joint Venture’s Strategies Joint ventures pool together resources on a disorganized, experimental basis, and offer the possibility of sequential investment Theories in information economics, transaction cost economics, and agency theory are useful in understanding why firms engage in joint ventures and partnerships

6.5.1. Advantages of Joint Ventures Joint ventures cease to exist when the goals of partnership are achieved. The advantages of joint ventures are as follows: Entry into a new geographical market through JV Access to technology or expertise Gain new capacities Risk sharing Less expose a firm fully to the partner Offer opportunities to exit from non-core businesses A business can be separated or isolated from the main organization through a JV

6.5.2. Collaborative Partnerships Partnerships and JV are similar in the sense that both are strategic alliances, but can have different business implications A partnership usually involves a long-term continuing business relationship There are three types of partnerships including JV as a type of partnership: General partnerships where the agreement provides for the percentage of promotional distribution of profits, management control, and liability Limited partnerships: where partnerships have limited liability and decision making roles are different (e.g. between a manufacturing firm and a retailer) JV: partnerships for limited period of time

6.6. International Business Entry Level Strategies The international entry modes and establishment modes for firms may be different but seek to have a strategy fit, internal fit, external fit, and an overall fit. An overall fit between the firm’s organizational capabilities, environmental contingencies, and international strategies promote performance. While adopting a global strategy in order to gain competitive advantages, one of the sources of this advantage is the difference between countries that is exploited as a source of value creation arbitrage.

6.6. International Business Entry Level Strategies (continued) The following are various forms of arbitrage (taking advantage of a difference between two or more markets), leveraging the differences for value or disadvantages: Knowledge arbitrage Labour arbitrage Tax arbitrage Capital arbitrage (low cost machinery, financial capital etc) Administrative arbitrage (environmental laws and regional trade agreements) Cultural arbitrage (country of origin effects, liability of origin effects) Geographic arbitrage (cost of transportation differences) Specialized input arbitrage (differences in availability of raw materials, their cost, and quality)

6.7. Multinationals and Strategy Global Strategy Integration and Responsiveness Subsidiary own Strategy

Summary of the topics covered in this lecture Strategic Alliances Joint Venture’s Strategies International Business Entry Level Strategies

Topics for the next lecture Political Strategies for Competitive Advantage Reverse Logistics as Sustainable Competitive Advantage Outsourcing Strategies: Make versus Buy Franchising Strategies Portfolio Analysis