Chapter 9 – Cooperative Strategy

Agenda Introduction to Cooperative Strategy Business-Level Cooperative Strategy Corporate-Level Cooperative Strategy International Cooperative Strategy Network Cooperative Strategy Managing the Risks of Cooperative Strategy

The Age of “Alliance Capitalism” “If you think you can go it alone in today’s global economy, you are highly mistaken.” Jack Welch, former CEO of General Electric “Not all the smart people work for Sun.” William Joy, Vice President of R&D, Sun Microsystems

Cooperative Strategy & Alliances A strategy in which firms work together to achieve a shared objective Strategic alliance A primary type of cooperative strategy in which firms combine some of their resources and capabilities to create a mutual competitive advantage Involves the exchange and sharing of resources and capabilities to co-develop or distribute goods and services Requires cooperative behavior from all partners

Three Types of Strategic Alliances Nonequity Strategic Alliance Two or more firms develop a contractual relationship to share some of their unique resources and capabilities Equity Strategic Alliance Partners who own different percentages of equity in a separate company they have formed Joint Venture Two or more firms create a legally independent company by sharing some of their resources and capabilities

Importance of Alliances Why are strategic alliances becoming so important? Proliferation of knowledge (e.g., pharmaceutical industry) leads to increasing specialization requires collaboration across companies Converging industry boundaries (e.g., telecommunications industry) requires collaborations across industries

Example for Alliance Strategy Sazaby (Japan) Shinsegne (Korea) Rustan (Philippines) Alsea (Mexico) Bonvests (Singapore) Geographic expansion partners Westin Hotels and Resorts (Coffee served throughout hotel) Dreyer’s (premium coffee ice cream) New products, marketing and sales partners Channel partners (corporate sales) Pepsico (bottled coffee beverages) United Airlines (in-flight coffee) Retail format partners Barnes & Noble (in-store stores) Chapters (Canadian bookstores) Host Marriott Services (worldwide airport kiosks and in-hotel coffee cafes)

Alliances Proliferation & Failure The top 500 global business companies average 60 major strategic alliances each. 80 percent of the top-level executives consider strategic alliances to be primary growth vehicles and expect alliances to account for 25 percent of their company’s market value in 2005. Alliance failure rates between 50 and 80 percent. Alliances become both strategically critical and harder to manage. Alliances Proliferation & Failure …to: “How do we make our alliance(s) succeed?” From: “Why do an alliance?”…

Agenda Introduction to Cooperative Strategy Business-Level Cooperative Strategy Corporate-Level Cooperative Strategy International Cooperative Strategy Network Cooperative Strategy Managing the Risks of Cooperative Strategy

Business-Level Cooperative Strategy Complementary Alliances Combine partner firms’ assets in complementary ways to create new value Include distribution, supplier, or outsourcing alliances where firms rely on upstream or downstream partners to build competitive advantage

Vertical Complementary Alliances Firms agree to use their skills and capabilities in different stages of the value chain to create value for both firms Outsourcing

Horizontal Complementary Alliances Partners combine resources and skills to create value in the same stage of the value chain Focus is on long-term product development and distribution opportunities Partners may become competitors

Competition Response Strategy Complementary 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, strategic alliances are primarily formed to respond to strategic rather than tactical actions Competition Response Alliances

Uncertainty Reducing Strategy Complementary Alliances Are used to hedge against risk and uncertainty These alliances are most noticed in fast-cycle markets An alliance may be formed to reduce the uncertainty associated with developing new product or technology standards Competition Response Alliances Uncertainty Reducing Alliances

Competition Reducing Strategy Complementary Alliances Created to avoid destructive or excessive competition Explicit collusion: When firms directly negotiate production output and pricing agreements in order to reduce competition (illegal!) Tacit collusion: When firms in an industry indirectly coordinate their production and pricing decisions by observing other firm’s actions and responses Competition Response Alliances Uncertainty Reducing Alliances Competition Reducing Alliances

Assessment of Cooperative Strategies Complementary business-level strategic alliances, especially the vertical ones, have the greatest probability of creating a sustainable competitive advantage Horizontal complementary alliances are sometimes difficult to maintain because they are often between rival competitors Competitive advantages gained from competition- and uncertainty-reducing strategies tend to be temporary more proactive more reactive

Agenda Introduction to Cooperative Strategy Business-Level Cooperative Strategy Corporate-Level Cooperative Strategy International Cooperative Strategy Network Cooperative Strategy Managing the Risks of Cooperative Strategy

Diversifying Strategic Alliances Expand into new product or market areas without completing a merger or an acquisition Synergistic benefits of a merger or acquisition less risk greater flexibility Assess benefits of future merger between the partners

Synergistic Strategic Alliances Diversifying Strategic Alliance Joint economies of scope between two or more firms Synergy across multiple functions or multiple businesses between partner firms Synergistic Strategic Alliance

Diversifying Strategic Alliance Synergistic Strategic Alliance Franchising Diversifying Strategic Alliance Spreads risks and uses resources, capabilities, and competencies without merger or acquisition A contractual relationship (the franchise) is developed between the franchisee and the franchisor Alternative to growth through mergers and acquisitions Synergistic Strategic Alliance Franchising

Assessment of Corporate-Level Cooperative Strategies Compared to business-level strategies Broader in scope  More complex More costly Can lead to competitive advantage and value when: Successful alliance experiences are internalized The firm uses such strategies to develop useful knowledge about how to succeed in the future

Agenda Introduction to Cooperative Strategy Business-Level Cooperative Strategy Corporate-Level Cooperative Strategy International Cooperative Strategy Network Cooperative Strategy Managing the Risks of Cooperative Strategy

International Cooperative Strategy Cross-Border Strategic Alliance A strategy in which firms with headquarters in different nations combine 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 Strategy International Strategic Alliance 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 such that the partner does not gain access to important technology and become a competitor

Agenda Introduction to Cooperative Strategy Business-Level Cooperative Strategy Corporate-Level Cooperative Strategy International Cooperative Strategy Network Cooperative Strategy Managing the Risks of Cooperative Strategy

Network Cooperative Strategy A cooperative strategy wherein several firms agree to form multiple partnerships to achieve shared objectives Stable alliance network Dynamic alliance network Keys to a successful network cooperative strategy Effective social relationships Interactions among partners

Network Cooperative Strategies Stable Alliance Network Long term relationships mature industries where demand is relatively constant predictable Stable networks exploit economies (scale and/or scope) available between the firms

Example: Star Alliance Characteristics (2004): linking 133 countries, 722 destinations partner total revenue US-$ 79.3 271,983 employees common branding no cross-shareholding Areas of cooperation: global code-sharing Equipment flight plans spare parts landing rights/airport slots mile collection programs Potential extension on reservation systems cabin crew security systems employee training Lufthansa Varig

Network Cooperative Strategies Stable Alliance Network Evolve in industries with rapid technological change leading to short product life cycles Primarily used to stimulate rapid, value-creating product innovation and subsequent successful market entries Purpose is often exploration of new ideas Dynamic Alliance Network

Agenda Introduction to Cooperative Strategy Business-Level Cooperative Strategy Corporate-Level Cooperative Strategy International Cooperative Strategy Network Cooperative Strategy Managing the Risks of Cooperative Strategy

Cooperative Strategy “While you are alone you are entirely your own master, and if you have one companion you are but half your own and the less so in proportion to the indiscretion of his behavior.” Leonardo da Vinci “Out in the barren plains, cowboys would tie their horses to each other at night, knowing that each horse would pull in a different direction and the group would go nowhere.” Wild West Analogy

Competitive Risks Partners may act opportunistically : “Learning race” Partners may misrepresent competencies brought to the partnership Partners fail to make committed resources and capabilities available to other partners One partner may make investments that are specific to the alliance while its partner does not : “Learning race”

Successful Alliance Behaviors Examples of cooperative behavior known to contribute to alliance success: Actively solving problems Being trustworthy Consistently pursuing ways to combine partners’ resources and capabilities to create value Competitive advantage developed through a cooperative strategy is called a collaborative or relational advantage

Managing Cooperative Strategies Cost minimization management approach Formal contracts with partners Specify How strategy is to be monitored How partner behavior is to be controlled Goals that minimize costs and prevent opportunistic behavior by partners

Managing Cooperative Strategies Opportunity maximization approach Maximize partnership’s value-creation opportunities Learn from each other Explore additional marketplace possibilities Less formal contracts, fewer constraints