1. Cooperative Strategy Hitt, Ireland, and Hoskisson
Chapter 9
Cooperative Strategy
Hitt, Ireland, and Hoskisson
In chapter 9 we will discuss cooperative strategies. A cooperative strategy is a strategy in which firms work together to achieve a shared objective.
In this chapter we will examine several topics in this chapter. First, we define and offer examples of different strategic alliances as primary types of cooperative strategies. Next, we discuss the extensive use of cooperative strategies in the global economy and reasons for them. In succession, we then describe business-level (including collusive strategies), corporate level, international, and network cooperative strategies. The chapter closes with discussion of the risks of using cooperative strategies as well as how effective management of them can reduce those risks.

2. Cooperative strategies
Strategic alliances
Collusive alliances
We will discuss two types of cooperative strategies. A strategic alliance is a cooperative strategy in which firms combine some of their resources and capabilities to create a competitive advantage. A collusive alliance is the second type. In many economies, explicit collusive alliances are illegal unless sanctioned by government policies. Increasing globalization has led to fewer government-sanctioned situations of explicit collusion. Tacit collusion, also called mutual forbearance, is a cooperative strategy through which firms tacitly cooperate to reduce industry output below the potential competitive output level, thereby raising prices above the competitive level.
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3. Cooperative strategy: Strategic alliances
Joint venture
Two or more firms create a legally independent company by sharing some of their resources and capabilities.
Equity strategic alliance
Partners who own different percentages of equity in a separate company they have formed.
Nonequity strategic alliance
Two or more firms develop a contractual relationship to share some of their unique resources and capabilities.
A cooperative strategy is one where firms work together to achieve a shared objective. In a strategic alliance, firms combine some of their resources and capabilities to create a competitive advantage. There are three types of strategic alliances: joint ventures (where firms create and own equal shares of a new venture that is intended to develop competitive advantages), equity strategic alliances (where firms own different shares of a newly created venture), and nonequity strategic alliances (where firms cooperate through a contractual relationship). Outsourcing commonly occurs as firms form nonequity strategic alliances.
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4. Cooperative strategy: Collusive strategies
Explicit collusive strategies
Illegal unless sanctioned by government policies.
Reduced by increasing globalization
Tacit collusion - also called mutual forbearance
A cooperative strategy through which firms tacitly cooperate to reduce industry output below the potential competitive output level, thereby raising prices above the competitive level.
Although not frequently used, collusive strategies are another type of cooperative strategy discussed in this chapter. In a collusive strategy, two or more firms cooperate to increase prices above the fully competitive level. Explicit collusion is illegal in many countries unless sanctioned by government policies. Still, the number of these instances has been reduced due to increasing globalization.
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5. Reasons to use cooperative strategies
Market
Reason
Slow-Cycle
• Gain access to a restricted market • Establish a franchise in a new market • Maintain market stability (such as establishing standards)
Fast-Cycle
• Speed up development of new goods or services • Speed up new market entry • Maintain market leadership • Form an industry technology standard • Share risky R&D expenses • Overcome uncertainty
Standard-Cycle
• Gain market power (reduce industry overcapacity) • Gain access to complementary resources • Establish better economies of scale • Overcome trade barriers • Meet competitive challenges from other competitors • Pool resources for very large capital projects • Learn new business techniques
The individually unique competitive conditions of slow-cycle, fast-cycle, and standard-cycle markets find firms using cooperative strategies to achieve slightly different objectives. Slow-cycle markets are markets where the firm’s competitive advantages are shielded from imitation for relatively long periods of time and where imitation is costly. These markets are close to monopolistic conditions. Railroads and, historically, telecommunications, utilities, and financial services are examples of industries characterized as slow-cycle markets. In fast-cycle markets, the firm’s competitive advantages aren’t shielded from imitation, preventing their long-term sustainability. Competitive advantages are moderately shielded from imitation in standard-cycle markets, typically allowing them to be sustained for a longer period of time than in fast-cycle market situations, but for a shorter period of time than in slow-cycle markets.
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6. Business-level cooperative strategies
Complementary strategic alliances
Vertical
Horizontal
Competition-responding strategies
Competition-reducing strategies
Uncertainty-reducing strategies
Four business-level cooperative strategies are used to help the firm improve its performance in individual product markets. First, through vertical and horizontal complementary alliances, companies combine their resources and capabilities to create value in different parts (vertical) or the same parts (horizontal) of the value chain. Second, competition responding strategies are formed to respond to competitors’ actions, especially strategic ones. Third, competition-reducing strategies are used to avoid excessive competition while the firm marshals its resources and capabilities to improve its competitiveness. Fourth, uncertainty-reducing strategies are used to hedge against the risks created by the conditions of uncertain competitive environments (such as new product markets). Complementary alliances have the highest probability of yielding a sustainable competitive advantage; competition-reducing alliances have the lowest probability of doing so.
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7. Corporate-level cooperative strategies
Diversifying alliances
Synergistic alliances
Franchising
Firms use corporate-level cooperative strategies to engage in product and/or geographic diversification. Through diversifying strategic alliances, firms agree to share some of their resources and capabilities to enter new markets or produce new products. Synergistic alliances are ones where firms share resources and capabilities to develop economies of scope. This alliance is similar to the business level horizontal complementary alliance where firms try to develop operational synergy, except that synergistic alliances are used to develop synergy at the corporate level. Franchising is a corporate-level cooperative strategy where the franchisor uses a franchise as a contractual relationship to specify how resources and capabilities will be shared with franchisees.
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8. International cooperative strategy
Cross-border alliance
Used for several reasons, including the performance superiority of firms competing in markets outside their domestic market and governmental restrictions on growth through mergers and acquisitions.
Are riskier than their domestic counterparts, particularly when partners aren’t fully aware of each other’s purpose for participating in the partnership.
A cross-border strategic alliance is an international cooperative strategy in which firms with headquarters in different nations decide to combine some of their resources and capabilities to create a competitive advantage. Taking place in virtually all industries, the number of cross-border alliances continues to increase. These alliances too are sometimes formed instead of mergers and acquisitions (which can be riskier). Even though cross-border alliances can themselves be complex and hard to manage, they have the potential to help firms use their resources and capabilities to create value in locations outside their home market.
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9. Network cooperative strategy
Definition
A cooperative strategy in which several firms form multiple partnerships to achieve shared objectives.
Primary benefit
A firm has the opportunity to gain access to its partner’s other partnerships.
Increasingly, firms use several cooperative strategies. In addition to forming their own alliances with individual companies, a growing number of firms are joining forces in multiple networks. A network cooperative strategy is a cooperative strategy in which several firms agree to form multiple partnerships to achieve shared objectives.
A primary benefit of a network cooperative strategy is the firm’s opportunity to gain access to its partner’s other partnerships. When this happens, the probability greatly increases that partners will find unique ways to share their resources and capabilities to form competitive advantages. Network cooperative strategies are used to form either a stable alliance network or a dynamic alliance network. Used in mature industries, partners use stable networks to extend competitive advantages into new areas. In rapidly changing environments where frequent product innovations occur, dynamic networks are primarily used as a tool of innovation.
A network cooperative strategy is particularly effective when it is formed by geographically clustered firms. Firms involved in networks gain information and knowledge from multiple sources. They can use these heterogeneous knowledge sets to produce more and better innovation. As a result, firms involved in networks of alliances tend to be more innovative.
However, there are disadvantages to participating in networks as a firm can be locked in to its partners, precluding the development of alliances with others.
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10. Alliance networks Stable alliance networks Dynamic alliance networks
Formed in mature industries primarily to exploit the economies (scale and/or scope) that exist between the partners
Dynamic alliance networks
Used in industries characterized by frequent product innovations and short product life cycles. In dynamic alliance networks, partners typically explore new ideas and possibilities with the potential to lead to product innovations, entries to new markets, and the development of new markets.
The set of strategic alliance partnerships resulting from the use of a network cooperative strategy is commonly called an alliance network. The alliance networks that companies develop vary by industry conditions.
A stable alliance network is formed in mature industries where demand is relatively constant and predictable. Through a stable alliance network, firms try to extend their competitive advantages to other settings while continuing to profit from operations in their core, relatively mature industry. Thus, stable networks are built primarily to exploit the economies (scale and/or scope) that exist between the partners.
Dynamic alliance networks are used in industries characterized by frequent product innovations and short product life cycles. For instance, the pace of innovation in the information technology (IT) industry (as well as other industries that are characterized by fast-cycle markets) is too fast for any one company to be successful across time if it only competes independently. In dynamic alliance networks, partners typically explore new ideas and possibilities with the potential to lead to product innovations, entries to new markets, and the development of new markets. Often, large firms in such industries as software and pharmaceuticals create networks of relationships with smaller entrepreneurial start-up firms in their search for innovation-based outcomes. An important outcome for small firms successfully partnering with larger firms in an alliance network is the credibility they build by being associated with their larger collaborators.
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11. Competitive risks in cooperative strategies
Cooperative strategies aren’t risk free. If a contract is not developed appropriately, or if a partner misrepresents its competencies or fails to make them available, failure is likely. Furthermore, a firm may be held hostage through asset specific investments made in conjunction with a partner, which may be exploited.
Many cooperative strategies fail. In fact, evidence shows that two-thirds of cooperative strategies have serious problems in their first two years and that as many as 70 percent of them fail. This failure rate suggests that even when the partnership has potential complementarities and synergies, alliance success is elusive.
One cooperative strategy risk is that a partner may act opportunistically. Opportunistic behaviors surface either when formal contracts fail to prevent them or when an alliance is based on a false perception of partner trustworthiness.
Some cooperative strategies fail when it is discovered that a firm has misrepresented the competencies it can bring to the partnership.
Another risk is a firm failing to make available to its partners the resources and capabilities (such as the most sophisticated technologies) that it committed to the cooperative strategy. This risk surfaces most commonly when firms form an international cooperative strategy.
A final risk is that one firm may make investments that are specific to the alliance while its partner does not.
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12. Trust and partnerships
With trust
Trust is an increasingly important aspect of successful cooperative strategies.
Firms recognize the value of partnering with companies known for their trustworthiness.
When trust exists, a cooperative strategy is managed to maximize the pursuit of opportunities between partners.
Without trust
Formal contracts and extensive monitoring systems must be used to manage cooperative strategies.
In this case, the interest is to minimize costs rather than to maximize opportunities by participating in a cooperative strategy.
Research showing that trust between partners increases the likelihood of alliance success seems to highlight the benefits of the opportunity maximization approach to managing cooperative strategies. Trust may also be the most efficient way to influence and control alliance partners’ behaviors. Research indicates that trust can be a capability that is valuable, rare, imperfectly imitable, and often nonsubstitutable. Thus, firms known to be trustworthy can have a competitive advantage in terms of how they develop and use cooperative strategies. One reason is that it is impossible to specify all operational details of a cooperative strategy in a formal contract. Confidence that its partner can be trusted reduces the firm’s concern about the inability to contractually control all alliance details.
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