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Ch. 9 Cooperative strategy (is (One of 3 means firms use to grow and…
Ch. 9 Cooperative strategy
is
A strategy in which firms work together to achieve a shared objective
One of 3 means firms use to grow and improve performance
Internal development
mergers and acquisitions
cooperation
Core and critical parts of firms strategies today
Has implications for a firm’s corporate, business, and international strategy
creates value by
creates value for a customer.
exceeds the cost of constructing customer value in other ways.
establishes a favorable position relative to competitors.
Primary Types
Strategic Alliance
A cooperative strategy in which firms combine some of their resources and capabilities to create a competitive advantage
Involve firms with some degree of exchange and sharing of resources and capabilities to co-develop, sell, and service goods or services
major types
Joint Venture
Two or more firms create a legally independent company to share some of their resources and capabilities to develop a competitive advantage
Partners typically own equal percentages and contribute equally to the ventures operations
Equity Strategic Alliance
Two or more firms own different percentages of the company they have formed by combining some of their resources and capabilities to develop a competitive advantage
Nonequity Strategic Alliance
Two or more firms develop a contractual relationship to share some of their unique resources and capabilities to create a competitive advantage
eg
Licensing agreements
Distribution agreements
Supply contracts
Outsourcing commitments
A separate independent company is NOT established
Why firms develop strategic alliances
They allow partners to create value that they couldn’t develop
allow partners to enter markets more quickly and with greater market penetration possibilities
Most firms lack the full set of resources and capabilities needed to reach their objectives
They are a prime vehicle for firm growth – mode of entry into new product or geographic markets
Can account for 25% of sales revenue in large firms
Can be used to
Reduce competition
Gain market power
Enhance a firm’s competitive capabilities
Gain access to resources and new (restricted) markets
Take advantage of opportunities
Build strategic flexibility
Help the firm innovate
Provide for a new source of revenue and for firm growth
Enhance organizational response times
Gain new knowledge and experiences
Overcome trade barriers
Establish better economies of scale and scope
Lower costs
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
For reasons for strategic alliance by market type refer to Exhibit 1 in appendix
Porter’s earlier dissent on alliances
Competitive advantage arises from integrating activities on worldwide basis
Alliances & other cooperative strategies impede integration
Require strategic & organizational coordination with partner with different goals
Are poor substitutes for internal development of capabilities
May have role as temporary devices in industries facing transition or uncertainty
Could be tools for “second-tier” competitors trying to catch up
Life stages
Formation
Industry boundaries fuzzy
No established players yet
Entrepreneurial discovery strategies prevail (Schumpeterian)
Players collaborate: to gain needed resources, to reduce down-side risk of heavy resource commitment
Maturity
Stable boundaries, rising entry barriers
Large established players have consolidated their position
Industrial organization strategies prevail
5-forces strategy and rivalry applies
Alliances mainly for 2nd tier rivals
Reconfiguration
Industry boundaries eroding, reforming or being permeated
Entrepreneurial discovery by marginal players or maverick established players break old rules
Industrial organization style strategies still common, but becoming less relevant
Collaboration becomes essential for learning & survival
refer to Exhibit 2 for diagrammatic representation
Business-Level Cooperative Strategy
Business level cooperative strategies are used to grow and improve firm performance in individual product markets (industries)
4 types
Complementary strategic alliances
Firms share some of their resources and capabilities in complementary ways to develop competitive advantages
Two Types
Vertical CSA
Partnering firms share resources & capabilities from different stages of the value chain to create a competitive advantage
eg Supplier or distributor
Horizontal CSA
Partnering firms share resources & capabilities from the same stage(s) of the value chain to create a competitive advantage
eg. Competitors
Commonly used for long-term product development and distribution opportunities
Competition response strategy
Competitive Rivalry
Competitors initiate competitive actions to attack rivals and launch competitive responses to their competitor’s actions
Strategic alliances can be used at the business level to respond to competitor’s attacks
Primarily formed to take strategic actions (long term) vs. tactical actions (short term)
Can be difficult to reverse and expensive to operate
Uncertainty-reducing strategy
Can be used to hedge against risk and uncertainty
As examples, entering new product markets, emerging economies and establishing a technology standard are unknown areas so by partnering with a firm in the respective industry, a firm’s uncertainty (risk) is reduced
Uncertainty is reduced by combining knowledge & capabilities
Competition-reducing strategy
Collusive strategies differ from strategic alliances in that they are often illegal
2 Types
Explicit collusion
Direct negotiation among firms to establish output levels and pricing agreements that reduce industry competition
Tacit collusion
Indirect coordination of production and pricing decisions by several firms, which impacts the degree of competition faced in the industry
Assessment of Business-level cooperative strategies
The integrated resources and capabilities must be valuable, rare, imperfectly imitable, and nonsubstitutable
Complementary alliances, especially the vertical ones, have greatest probability of creating competitive advantage
Horizontal alliances are can be hard to maintain since they are usually between rival companies
Competition response and uncertainty reducing alliances tend to create advantages that are more temporary in nature
Competition-reducing alliances have lowest probability of creating sustainable competitive advantages
Corporate-Level Cooperative Strategies
Corporate-level cooperative strategies used to help firm diversify itself in terms of products offered or markets served or both
3 Common Forms
Diversifying strategic alliance
Firms share some of their resources & capabilities to diversify into new product or market areas
Synergistic strategic alliance
Firms share some of their resources & capabilities to create economies of scope
Diversifies the involved firms into a new business in a synergistic way
Franchising
Firm uses a franchise as a contractual relationship to describe and control the sharing of its resources and capabilities with partners
Franchise: contractual agreement between two legally independent companies whereby the franchisor grants the right to the franchisee to sell the franchisor's product or do business under its trademarks in a given location for a specified period of time
Assessment of corporate-level cooperative strategies
In comparison with business-level strategies
Usually broader in scope and more complex
Also more challenging and costly
Can be used to develop useful knowledge about how to succeed in the future
(Learn and then acquire or internally develop)
Can lead to competitive advantage if they are managed in ways that are valuable, rare, imperfectly imitable, and nonsubstitutable
International Cooperative Strategy
Cross-Border Strategic Alliance
International cooperative strategy in which firms with headquarters in different nations combine some of their resources and capabilities to create a competitive advantage
Why
Can help firms use their resources and capabilities to create value in locations outside their home market
Multinational corporations outperform firms that operate only domestically
Due to limited domestic growth opportunities, firms look outside their national borders to expand business
Some foreign government policies require investing firms to partner with a local firm to enter their markets
Local partners can help firms overcome liabilities of moving into a foreign country (example: lack of knowledge about local culture)
Network Cooperative Strategy
Cooperative strategy wherein several firms agree to form multiple partnerships to achieve shared objectives
Very effective when formed by geographically clustered firms (i.e., Silicon Valley in N. California)
Firm’s gain access to their partners and other' partners - so multiple alliances with multiple partnerships
Can increase competitive advantage potential as set of shared resources and capabilities expands
Can be problematic - could lock firm in with partners and exclude development of alliances with others
Alliance network types: Set of strategic alliance partnerships resulting from use of a network cooperative strategy
Stable alliance network
Formed in mature industries where demand is relatively constant and predictable
Directed primarily toward developing products at a low cost and exploiting economies of scale and scope
Dynamic Alliance Networks
Used in industries characterized by environmental uncertainty, frequent product innovations, and short product life cycles
Directed primarily toward continued development of products that are uniquely attractive to customers
Competitive Risks with Cooperative Strategies
2/3 have serious problems in first 2 years and 50% end up failing
Partners may choose to act opportunistically due to inadequate contracts
Partner competencies may be misrepresented
Partner may fail to make available the complementary resources and capabilities that were committed
One partner may make investments specific to the alliance while the other partner may not – holding alliance partner's specific investments hostage
Collaborative (Relational) Advantage
A competitive advantage developed through a cooperative strategy.
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