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Chapter 10

Cooperative Strategy

Robert E. Hoskisson
Michael A. Hitt
R. Duane Ireland

©2004 by South-Western/Thomson Learning 1


The Strategic Management Process
Chapter 1
Strategic Chapter 2
Introduction to
Thinking Strategic Leadership
Strategic Management

Chapter 3 Chapter 4
Strategic Strategic Intent
The External The Internal
Analysis Environment Organization
Strategic Mission

Chapter 5 Chapter 6
Chapter 7
Business-Level Competitive Rivalry and
Creating Strategy Competitive Dynamics
Corporate-Level Strategy
Competitive
Advantage Chapter 8
Chapter 9 Chapter 10
Acquisition and
International Strategy Cooperative Strategy
Restructuring Strategies

Monitoring
And Creating Chapter 11 Chapter 12
Entrepreneurial Corporate Governance Strategic Entrepreneurship
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Opportunities
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 3
Strategic Alliance as a
Cooperative Strategy
 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
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Strategic Alliance
Firm A Firm B
Resources Resources
Capabilities Capabilities
Core Competencies Core Competencies
Combined
Resources
Capabilities
Core Competencies

Mutual interests in designing, manufacturing,


or distributing goods or services
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Four Types of Strategic Alliances
 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
 Strategic cooperative network: multiple firms
agree to form partnerships to achieve shared
objectives
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Strategic Network

Strategic
Center
Firm

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Strategic Network
 A strategic network is a grouping of
organizations that has been formed to
create value through participation in an
array of cooperative arrangements, such
as alliances and joint ventures
 The strategic network seeks to develop a
competitive advantage in primary or
support activities
 A strategic center firm often manages the
network
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Strategic Network
 strategic center firm engages in four
primary tasks
– strategic outsourcing (outsources and partners
with more firms than do other network members)
– competencies (supports each member’s efforts to
develop core competencies that can benefit the
network)

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Strategic Network
 strategic center firm engages in four
primary tasks
– technology (manages the development and
sharing of technology-based ideas among network
members)
– race to learn (guides participants in efforts to form
network-specific competitive advantages)

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

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Reasons for Strategic Alliances
by Market Type
Market Reason
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

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Reasons for Strategic Alliances
by Market Type
Market Reason
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
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Business-Level Cooperative
Strategies: Complementary Strategic Alliances
Complementary • complementary strategic alliances
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

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Business-Level Cooperative
Strategies: Complementary Strategic Alliances
Buyer
gin
M
ar • vertical complementary
ar gin
M
Human Resource Mgmt.

Technological Development
strategic alliance is formed
between firms that agree to
Support Activities

Service
Firm Infrastructure

Marketing & Sales

use their skills and


Procurement

Outbound Logistics

Operations
Vertical Alliance

Inbound Logistics capabilities in different stages


Primary Activities
of the value chain to create
Supplier value for both firms
M
ar
gin
M
ar
gin • outsourcing is one example
of this type of alliance
Technological Development
Human Resource Mgmt.
Support Activities

Service
Firm Infrastructure

Marketing & Sales


Procurement

Outbound Logistics

Operations
Inbound Logistics

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Primary Activities
Business-Level Cooperative
Strategies: Complementary Strategic Alliances
Buyer Horizontal Alliance Buyer
M Potential Competitors M
gin ar gin ar
ar gin ar gin
M M

Technological Development
Technological Development
Human Resource Mgmt.

Human Resource Mgmt.


Support Activities

Support Activities
Service Service
Firm Infrastructure

Firm Infrastructure
Marketing & Sales Marketing & Sales
Procurement

Procurement
Outbound Logistics Outbound Logistics

Operations Operations
Inbound Logistics Inbound Logistics

Primary Activities Primary Activities

• 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
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• requires a great deal of trust between the partners
Business-Level Cooperative
Strategies: Competition Response Alliances
Complementary • competition response strategic
Alliances alliances occur when firms join
forces to respond to a strategic
Competition action of another competitor
Response Alliances • 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

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

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Business-Level Cooperative
Strategies: Competition Reducing Alliances
Complementary • competition reducing strategic
Alliances alliances may be created to avoid
destructive or excessive competition
Competition • explicit collusion exists when firms
Response Alliances directly negotiate production output
and pricing agreements in order to
Uncertainty reduce competition (illegal)
Reducing Alliances • tacit collusion exists when several
firms in an industry indirectly
Competition Reducing coordinate their production and
Alliances pricing decisions by observing each
other’s competitive actions and
responses 19
Business-Level Cooperative
Strategies: Competition Reducing Alliances
Complementary • mutual forbearance is a form of tacit
Alliances collusion in which firms avoid
competitive attacks against those
Competition rivals they meet in multiple markets
Response Alliances • competition reducing strategic
alliances may require governments
Uncertainty to find ways to permit collaboration
Reducing Alliances among rivals without violating
antitrust laws
Competition Reducing
Alliances
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Implementing Business-Level
Cooperative Strategies
 Complementary business-level strategic
alliances have the greatest probability of
creating a sustainable competitive
advantage
 Strategic alliances designed to respond to
competition and reduce uncertainty can
create competitive advantages that may
be more temporary in nature
 Competition reducing strategy has lowest
probability of creating a sustainable
competitive advantage
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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
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Corporate-Level Cooperative
Strategies: Diversifying Alliances
Diversifying • diversifying strategic alliance
Alliances 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
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Corporate-Level Cooperative
Strategies: Synergistic Alliances
Diversifying • synergistic strategic alliances create
Alliances joint economies of scope between
two or more firms
Synergistic • create synergy across multiple
Alliances functions or multiple businesses
between partner firms

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Corporate-Level Cooperative
Strategies: Franchising
Diversifying • franchising spreads risks and uses
Alliances resources, capabilities, and
competencies without merging or
Synergistic acquiring another company
Alliances • contractual relationship concerning
the franchise that is developed
between two parties, the franchisee
Franchising and the franchisor
• an alternative to pursuing growth
through mergers and acquisitions

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Implementing Corporate-Level
Cooperative Strategies
 Corporate-level cooperative strategies are
broader in scope, more complex and more
costly than business-level strategies
 Competitive advantages and value are
created when those employing the
strategies can also use them to develop
useful knowledge about how to succeed in
the future
– valuable – imperfectly imitable
– rare – nonsubstitutable
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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

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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 28
Implementing International
Cooperative Strategies
 Differences among countries’ regulatory
environments increase the challenge of
managing international networks and
verifying that, at a minimum, the network’s
operations comply with all legal
requirements
 Distributed strategic networks are often
the organizational structure used to
manage international cooperative
strategies

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Distributed Strategic Network

Main
Strategic
Strategic
Center
Center
Firm
Firm

= Distributed Strategic Center Firms 30


Distributed Strategic Network
 International cooperative strategies often
require more complex networks
 Many large multinational firms form
distributed strategic networks with
multiple regional strategic centers to
manage their array of cooperative
arrangements with partner firms
 Breaking large networks into multiple
manageably-sized networks helps to
manage the complexity of maintaining
many relationships
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Network Cooperative Strategies
 A network strategy is a cooperative
strategy wherein several firms agree to
form multiple partnerships to achieve
shared objectives
– stable strategic cooperative network
– dynamic strategic cooperative network
 Effective social relationships and
interactions among partners are keys to a
successful network cooperative strategy

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Network Cooperative Strategies:
Stable Strategic Cooperative Network
• long term relationships that often
Stable Strategic
appear in mature industries where
Cooperative Network
demand is relatively constant and
predictable
• stable networks are built for
exploitation of the economies
available between firms

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Network Cooperative Strategies:
Dynamic Strategic Cooperative Network
• arrangements that evolve in
Stable Strategic
industries with rapid technological
Cooperative Network
change leading to short product life
cycles
Dynamic Strategic
• primarily used to stimulate rapid,
Cooperative Network
value-creating product innovations
and subsequent successful market
entries
• purpose is often exploration of new
ideas

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Competitive Risks with
Cooperative Strategies

Competitive
Risks

• 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 35
Managing Competitive Risks in
Cooperative Strategies
Risk and Asset
Competitive
Management
Risks
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 36
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 37
Managing Competitive Risks in
Cooperative Strategies
Risk and Asset
Competitive Desired
Management
Risks Outcome
Approaches

• Creating value
• Above-average
returns

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