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

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

Cooperative Strategy Cooperative strategy is a strategy in which firms work together to achieve a shared objective 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

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

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

Types of Cooperative Strategies 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

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

Reasons for Strategic Alliances by Market Type Fast Cycle 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

Reasons for Strategic Alliances by Market Type Standard Cycle 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

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

Business-Level Cooperative Strategies: Complementary Strategic Alliances Buyer Margin Primary Activities Support Activities Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm Infrastructure Human Resource Mgmt. Technological Development Procurement 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 Supplier Vertical Alliance Margin Primary Activities Support Activities Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm Infrastructure Human Resource Mgmt. Technological Development Procurement

Business-Level Cooperative Strategies: Complementary Strategic Alliances Buyer Buyer Horizontal Alliance Margin Primary Activities Support Activities Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm Infrastructure Human Resource Mgmt. Technological Development Procurement Potential Competitors Margin Primary Activities Support Activities Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm Infrastructure Human Resource Mgmt. Technological Development Procurement 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

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

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

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

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

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

Corporate-Level Cooperative Strategies: Diversifying Alliances 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

Corporate-Level Cooperative Strategies: Synergistic Alliances Diversifying 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 Synergistic Alliances

Corporate-Level Cooperative Strategies: Franchising Diversifying Alliances 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 Synergistic Alliances Franchising

International Cooperative Strategies 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

International Cooperative Strategies 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

Network Cooperative Strategies 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 Effective social relationships and interactions among partners are keys to a successful network cooperative strategy

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 Stable Alliance Network

Network Cooperative Strategies: Dynamic Alliance Network Stable 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 Dynamic Alliance Network

Competitive Risks with Cooperative Strategies 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

Competitive Risks with Cooperative Strategies 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) Develop trusting relationships

Approaches for Managing Cooperative Strategies cost minimization formal contracts specify how the cooperative strategy is to be monitored and how partner behavior is to be controlled 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

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