Chapter 6 Network Level Strategy Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit © 2014, Cengage Learning EMEA, ISBN 97814082683

© 2014, Cengage Learning EMEA, ISBN 97814082683 Contents Introduction The issue of inter-organizational relationships The paradox of competition and cooperation Perspectives on network level strategy Managing the paradox of competition and cooperation Network level strategy in international perspective Readings and Case 6 Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit © 2014, Cengage Learning EMEA, ISBN 97814082683

The issue of inter-organizational relationships All firms interact with other organizations in their environment and therefore have inter-organizational relationships Four aspects are particularly important: Who are the potential counterparts with whom a firm can have a relationship (relational actors)? Why do the parties want to enter into a relationship (relational objectives)? What type of influences determine the nature of the relationship? How can relationships be structured to let them function in the manner intended? Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit © 2014, Cengage Learning EMEA, ISBN 97814082683

The issue of inter-organizational relationships Aspects of inter-organizational relations Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit © 2014, Cengage Learning EMEA, ISBN 97814082683

The issue of inter-organizational relationships Relational actors Upstream – vertical (supplier) relations Downstream vertical (buyer) relations Direct horizontal (industry insider) relations Indirect horizontal (industry outsider) relations There are also contacts with condition-setting parties in the broader environment: socio-cultural actors economic actors political/legal actors technological actors Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit © 2014, Cengage Learning EMEA, ISBN 97814082683

The issue of inter-organizational relationships The firm and its web of relational actors Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit © 2014, Cengage Learning EMEA, ISBN 97814082683

The issue of inter-organizational relationships Relational objectives Relations oriented towards leveraging resources: learning lending Relations oriented towards integrating activities: linking (e.g. vertical link between buyer and seller) lumping (bringing together similar activities to gain economies of scale) Relations oriented towards aligning positions: leaning (two or more firms get together to improve their bargaining position) lobbying Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit © 2014, Cengage Learning EMEA, ISBN 97814082683

The issue of inter-organizational relationships Relational factors How inter-organizational relationships develop is influenced by the objectives of the parties but other factors also have an impact: legitimacy urgency frequency power There are four specific types of inter-firm relationships from the perspective of the power position: mutual independence unbalanced independence mutual dependence unbalanced dependence Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit © 2014, Cengage Learning EMEA, ISBN 97814082683

The issue of inter-organizational relationships Relative power positions in inter-organizational relationships Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit © 2014, Cengage Learning EMEA, ISBN 97814082683

The issue of inter-organizational relationships Relational arrangements There are many organizational forms between markets and hierarchies: networks, partnerships and alliances Organizations involved in networks employ different sorts of collaborative arrangements: bilateral arrangements (two parties) multilateral arrangements (three or more parties) non-contractual arrangements contractual arrangements equity-based arrangements Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit © 2014, Cengage Learning EMEA, ISBN 97814082683

The issue of inter-organizational relationships The intent of the collaborative arrangements is to profit from some of the advantages of vertical and horizontal integration, without incurring their costs Such relationships facilitate the process of ‘co-specialization’. As firms focus on performing a limited set of activities they become more effective and efficient. However, the weaknesses of hierarchy and the qualities of the market may increase. Mutual dependence may become skewed, shifting the balance of power to one of the partners. Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit © 2014, Cengage Learning EMEA, ISBN 97814082683

The issue of inter-organizational relationships Examples of collaborative arrangements Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit © 2014, Cengage Learning EMEA, ISBN 97814082683

The paradox of competition and cooperation Firms struggle with the tension created by the need to work with others and the need to pursue their own interests Demand for inter-organizational competition Demand for inter-organizational cooperation Read carefully Exhibit 6.1 London Heathrow: The sky is not the limit Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit © 2014, Cengage Learning EMEA, ISBN 97814082683

Perspectives on network level strategy The discrete organization perspective Managers view companies as independent entities competing in a hostile market environment. Individuals and firms are motivated by aggressive self-interest. Companies must strengthen their competitive position in relation to external forces – effective power requires independence and heavy reliance on specific suppliers, buyers, financiers or public organizations should be avoided. Keeping other organizations at arm’s length facilitates clear and business-like interactions. Collaborative arrangements are always second-best to doing things independently. Collaboration is bad for the company’s long-term health. Companies should strive for ‘strategic self-sufficiency’. Read carefully Exhibit 6.2 Waging wars on the African continent Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit © 2014, Cengage Learning EMEA, ISBN 97814082683

Perspectives on network level strategy The embedded organization perspective Managers believe that business is about value creation. Organizations are brought together to achieve a common goal – they can achieve more by working together. A company can always find many organizations with which it shares an interest and whose objectives are largely parallel to its own. Firms are becoming increasingly integrated into webs of mutually dependent organizations. Firms must be sure that its partners are willing to invest in the relationship and will not behave opportunistically. Durable partnerships are based on mutual dependence and reciprocity. By specializing in a particular area the firm can gain scale and experience advantages. Specialized firms use collaborative arrangements to quickly combine their resources with industry outsiders to create new products and services. Collaboration is a real alternative means of dealing with other organisations. Read carefully Exhibit 6.3 Majid Al Futtaim acquires full ownership of Carrefour franchise in the region Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit © 2014, Cengage Learning EMEA, ISBN 97814082683

Managing the paradox of competition and cooperation Discrete organization versus embedded organization perspective Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit © 2014, Cengage Learning EMEA, ISBN 97814082683

Managing the paradox of competition and cooperation Navigating – by focusing on one contrary element at a time, the paradox is managed by a series of contrary initiatives, e.g. Japanese strategists collaborate with competitors from the West with the intention to learn, and then beat them as competitors. In the retail industry, it is common practice that suppliers cooperate with clients to develop logistical processes and technologies to enhance efficiency. Once the new technology is in place parties start negotiating prices and conditions again. Parallel processing co-opetition – companies interact with partial congruence of interests e.g. car manufacturers share components of city cars while competing for market share. Companies can separate competing and cooperating in different country units, e.g. Danone and Yakult compete in Europe but cooperate in India. Juxtaposing – simultaneously managing competition and cooperation even with the same partners, rivals can become allies and rivals again depending on the situation. Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit © 2014, Cengage Learning EMEA, ISBN 97814082683

Network level strategy in international perspective Firms from different countries display widely divergent propensities to compete and cooperate. There can also be significant variance within a country. Cross-border collaborative arrangements, e.g. cooperative agreements to overcome entry barriers that exist due to import restrictions, and cross-border arrangements within trade blocks, e.g. the EU cooperated to face Japanese competitors in the core technologies and tried to learn lessons from Japanese practices. Type of institutional environment, different institutional structures, governments, banks, universities and unions have developed in each country, and each country has developed its own economic system. Market for corporate control, a relatively open market for corporate control facilitates vertical and horizontal integration. Social networks and cultural values, can place more emphasis on competition or cooperation, e.g. US more individualist than Japan. Negative effects of ‘groupism’, social networks do not always lead to higher efficiency. Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit © 2014, Cengage Learning EMEA, ISBN 97814082683