1. ©2003 South-Western Publishing Company 1 Cooperative Strategy Michael A. Hitt R. Duane Ireland Robert E. Hoskisson Chapter 9

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

3. 3 Cooperative Strategy Cooperative strategy is a strategy in which firms Cooperative strategy is a strategy in which firms –work together –to achieve a shared objective Cooperating with other firms is a strategy that 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

4. 4 Strategic Alliance A strategic alliance is a cooperative strategy in which 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 A strategic alliance involves –exchange and sharing of resources and capabilities –co-development or distribution of goods or services

5. 5 CombinedResourcesCapabilities Core Competencies ResourcesCapabilities ResourcesCapabilities Strategic Alliance Firm A Firm B Mutual interests in designing, manufacturing, or distributing goods or services

6. 6 Types of Cooperative Strategies Joint venture: two or more firms create an independent company by combining parts of their assets 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 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 Nonequity strategic alliances: contractual agreements given to a company to supply, produce, or distribute a firm’s goods or services without equity sharing

7. 7 MarketReason Slow Cycle Gain access to a restricted marketGain access to a restricted market Establish a franchise in a new marketEstablish a franchise in a new market Maintain market stability (e.g., establishing standards)Maintain market stability (e.g., establishing standards) Reasons for Strategic Alliances by Market Type

8. 8 MarketReason Fast Cycle Speed up development of new goods or serviceSpeed up development of new goods or service Speed up new market entrySpeed up new market entry Maintain market leadershipMaintain market leadership Form an industry technology standardForm an industry technology standard Share risky R&D expensesShare risky R&D expenses Overcome uncertaintyOvercome uncertainty Reasons for Strategic Alliances by Market Type

9. 9 MarketReason Standard Cycle Gain market power (reduce industry overcapacity)Gain market power (reduce industry overcapacity) Gain access to complementary resourcesGain access to complementary resources Establish economies of scaleEstablish economies of scale Overcome trade barriersOvercome trade barriers Meet competitive challenges from other competitorsMeet competitive challenges from other competitors Pool resources for very large capital projectsPool resources for very large capital projects Learn new business techniquesLearn new business techniques Reasons for Strategic Alliances by Market Type

10. 10 Business-Level Cooperative Strategies: ComplementaryAlliances complementary strategic alliances are designed to take advantage of market opportunities by combining partner firms’ assets in complementary ways to create new valuecomplementary 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 Complementary Strategic Alliances

11. 11 Business-Level Cooperative Strategies: Margin Primary Activities Support Activities Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm InfrastructureHuman Resource Mgmt.Technological DevelopmentProcurement Margin Primary Activities Support Activities Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm InfrastructureHuman Resource Mgmt.Technological DevelopmentProcurement Vertical Alliance Supplier 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 firmsvertical 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 allianceoutsourcing is one example of this type of alliance Buyer Complementary Strategic Alliances

12. 12 Business-Level Cooperative Strategies: Margin Primary Activities Support Activities Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm InfrastructureHuman Resource Mgmt.Technological DevelopmentProcurement Margin Primary Activities Support Activities Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm InfrastructureHuman Resource Mgmt.Technological DevelopmentProcurement Horizontal Alliance Buyer Potential Competitors 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 chainhorizontal 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 competitorsthe partners may become competitors requires a great deal of trust between the partnersrequires a great deal of trust between the partners Buyer Complementary Strategic Alliances

13. 13 Business-Level Cooperative Strategies: competition response strategic alliances occur when firms join forces to respond to a strategic action of another competitorcompetition 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 actionsbecause 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 Competition Response Alliances ComplementaryAlliances

14. 14 Business-Level Cooperative Strategies: uncertainty reducing strategic alliances are used to hedge against risk and uncertaintyuncertainty reducing strategic alliances are used to hedge against risk and uncertainty these alliances are most noticed in fast-cycle marketsthese alliances are most noticed in fast-cycle markets alliance may be formed to reduce the uncertainty associated with developing new product or technology standardsalliance may be formed to reduce the uncertainty associated with developing new product or technology standards Uncertainty Reducing Alliances Competition Response Alliances Uncertainty Reducing Alliances ComplementaryAlliances

15. 15 Business-Level Cooperative Strategies: competition reducing strategic alliances may be created to avoid destructive or excessive competitioncompetition 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)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 responsestacit 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 Reducing Alliances Competition Reducing Alliances Competition Response Alliances Uncertainty Reducing Alliances ComplementaryAlliances

16. 16 Business-Level Cooperative Strategies: mutual forbearance is a form of tacit collusion in which firms avoid competitive attacks against those rivals they meet in multiple marketsmutual 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 lawscompetition reducing strategic alliances may require governments to find ways to permit collaboration among rivals without violating antitrust laws Competition Reducing Alliances Competition Reducing Alliances Competition Response Alliances Uncertainty Reducing Alliances ComplementaryAlliances

17. 17 Corporate-Level Cooperative Strategies Corporate-level cooperative strategies are designed to facilitate product and/or market diversificationCorporate-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 firmsDiversifying alliances and synergistic alliances allow firms -to grow and diversify their operations -through a means other than a merger or acquisition

18. 18 Corporate-Level Cooperative Strategies: DiversifyingAlliances diversifying strategic alliance allows a firm to expand into new product or market areas without completing a merger or an acquisitiondiversifying 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 flexibilityprovides 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 partiespermits a “test” of whether a future merger between the partners would benefit both parties Diversifying Alliances

19. 19 Corporate-Level Cooperative Strategies: synergistic strategic alliances create joint economies of scope between two or more firmssynergistic strategic alliances create joint economies of scope between two or more firms create synergy across multiple functions or multiple businesses between partner firmscreate synergy across multiple functions or multiple businesses between partner firms SynergisticAlliances Synergistic Alliances DiversifyingAlliances

20. 20 Corporate-Level Cooperative Strategies: franchising spreads risks and uses resources, capabilities, and competencies without merging or acquiring another companyfranchising 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 franchisorcontractual relationship concerning the franchise that is developed between two parties, the franchisee and the franchisor an alternative to pursuing growth through mergers and acquisitionsan alternative to pursuing growth through mergers and acquisitions Franchising Franchising DiversifyingAlliances SynergisticAlliances

21. 21 International Cooperative Strategies Cross-border strategic alliance 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

22. 22 International Cooperative Strategies Allows risk sharing by reducing financial investment Allows risk sharing by reducing financial investment Host partner knows local market and customs Host partner knows local market and customs International alliances can be difficult to manage due to differences in management styles, cultures or regulatory constraints 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 Must gauge partner’s strategic intent so they do not gain access to important technology and become a competitor

23. 23 Network Cooperative Strategies A network strategy is a cooperative strategy wherein several firms agree to form multiple partnerships to achieve shared objectives 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 Effective social relationships and interactions among partners are keys to a successful network cooperative strategy

24. 24 Network Cooperative Strategies: Stable Alliance Network long term relationships that often appear in mature industries where demand is relatively constant and predictablelong 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 firmsstable networks are built for exploitation of the economies available between firms Stable Alliance Network

25. 25 Network Cooperative Strategies: Dynamic Alliance Network arrangements that evolve in industries with rapid technological change leading to short product life cyclesarrangements 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 entriesprimarily used to stimulate rapid, value-creating product innovations and subsequent successful market entries purpose is often exploration of new ideaspurpose is often exploration of new ideas Dynamic Alliance Network Stable Alliance Network

26. 26 Competitive Risks with Cooperative Strategies CompetitiveRisks Partner may act opportunisticallyPartner may act opportunistically Misrepresentation of competencies brought to the partnershipMisrepresentation of competencies brought to the partnership Partner fails to make committed resources and capabilities available to its partnersPartner 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 notFirm may make investments that are specific to the alliance while its partner does not

27. 27 Competitive Risks with Cooperative Strategies Risk and Asset ManagementApproachesCompetitiveRisks Manage the balance between learning from partners while protecting knowledge and sources of competitive advantages from excessive learning by partnersManage 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 teamAssign 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)Specify resources and capabilities that will be shared and those that will not be shared (detailed contracts and monitoring) Develop trusting relationshipsDevelop trusting relationships

28. 28 Approaches for Managing Cooperative Strategies cost minimization cost minimization –formal contracts specify how the cooperative strategy is to be monitored and how partner behavior is to be controlled opportunity maximization 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

29. 29 Competitive Risks with Cooperative Strategies Risk and Asset ManagementApproachesCompetitiveRisks DesiredOutcome Creating valueCreating value Above-average returnsAbove-average returns