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Chapter 10. Cooperative Strategy. Robert E. Hoskisson Michael A. Hitt R. Duane Ireland. The Strategic Management Process. Chapter 1 Introduction to Strategic Management. Chapter 2 Strategic Leadership. Strategic Thinking. Chapter 3 The External Environment. Chapter 4 The Internal

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Chapter 10

Cooperative Strategy

Robert E. Hoskisson

Michael A. Hitt

R. Duane Ireland

©2004 by South-Western/Thomson Learning


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The Strategic Management Process

Chapter 1

Introduction to

Strategic Management

Chapter 2

Strategic Leadership

Strategic

Thinking

Chapter 3

The External

Environment

Chapter 4

The Internal

Organization

Strategic Intent

Strategic Mission

Strategic

Analysis

Chapter 5

Business-Level

Strategy

Chapter 6

Competitive Rivalry and

Competitive Dynamics

Chapter 7

Corporate-Level Strategy

Creating

Competitive

Advantage

Chapter 8

Acquisition and

Restructuring Strategies

Chapter 9

International Strategy

Chapter 10

Cooperative Strategy

Monitoring

And Creating

Entrepreneurial

Opportunities

Chapter 11

Corporate Governance

Chapter 12

Strategic Entrepreneurship


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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


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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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Firm B

Resources

Capabilities

Core Competencies

Resources

Capabilities

Core Competencies

Firm A

Mutual interests in designing, manufacturing,

or distributing goods or services

Combined

Resources

Capabilities

Core Competencies

Strategic Alliance


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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

Center

Firm

Strategic Network


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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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Complementary

Alliances

Business-Level Cooperative Strategies:

Complementary Strategic Alliances

  • complementary 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


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Margin

Margin

Margin

Margin

Service

Service

Marketing & Sales

Marketing & Sales

Technological Development

Technological Development

Human Resource Mgmt.

Human Resource Mgmt.

Support Activities

Support Activities

Outbound Logistics

Outbound Logistics

Firm Infrastructure

Firm Infrastructure

Procurement

Procurement

Operations

Operations

Inbound Logistics

Inbound Logistics

Primary Activities

Primary Activities

Business-Level Cooperative Strategies:

Complementary Strategic Alliances

Buyer

  • 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 firms

  • outsourcing is one example of this type of alliance

Supplier

Vertical Alliance


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Margin

Margin

Margin

Margin

Service

Service

Marketing & Sales

Marketing & Sales

Technological Development

Technological Development

Human Resource Mgmt.

Human Resource Mgmt.

Support Activities

Support Activities

Outbound Logistics

Outbound Logistics

Firm Infrastructure

Firm Infrastructure

Procurement

Procurement

Operations

Operations

Inbound Logistics

Inbound Logistics

Primary Activities

Primary Activities

Business-Level Cooperative Strategies:

Complementary Strategic Alliances

Buyer

Buyer

Horizontal Alliance

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 chain

  • focus on long-term product development and distribution opportunities

  • the partners may become competitors

  • requires a great deal of trust between the partners


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Competition

Response Alliances

Complementary

Alliances

Business-Level Cooperative Strategies:

Competition Response Alliances

  • competition 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 actions


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Competition

Response Alliances

Uncertainty

Reducing Alliances

Complementary

Alliances

Business-Level Cooperative Strategies:

Uncertainty Reducing Alliances

  • uncertainty reducing strategic alliances are used to hedge against risk and uncertainty

  • these alliances are most noticed in fast-cycle markets

  • alliance may be formed to reduce the uncertainty associated with developing new product or technology standards


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Competition

Response Alliances

Uncertainty

Reducing Alliances

Competition Reducing

Alliances

Complementary

Alliances

Business-Level Cooperative Strategies:

Competition Reducing Alliances

  • competition 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)

  • tacit collusion exists when several firms in an industry indirectly coordinate their production and pricing decisions by observing each other’s competitive actions and responses


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Competition

Response Alliances

Uncertainty

Reducing Alliances

Competition Reducing

Alliances

Complementary

Alliances

Business-Level Cooperative Strategies:

Competition Reducing Alliances

  • mutual 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 laws


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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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Diversifying

Alliances

Corporate-Level Cooperative Strategies:

Diversifying Alliances

  • diversifying 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 flexibility

  • permits a “test” of whether a future merger between the partners would benefit both parties


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Synergistic

Alliances

Diversifying

Alliances

Corporate-Level Cooperative Strategies:

Synergistic Alliances

  • synergistic strategic alliances create joint economies of scope between two or more firms

  • create synergy across multiple functions or multiple businesses between partner firms


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Synergistic

Alliances

Franchising

Diversifying

Alliances

Corporate-Level Cooperative Strategies:

Franchising

  • franchising 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 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

  • imperfectly imitable

  • nonsubstitutable

  • valuable

  • rare


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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


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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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Strategic

Center

Firm

Main

Strategic

Center

Firm

= Distributed Strategic Center Firms

Distributed Strategic Network


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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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Stable Strategic

Cooperative Network

Network Cooperative Strategies:

Stable Strategic Cooperative Network

  • long 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 firms


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Dynamic Strategic

Cooperative Network

Stable Strategic

Cooperative Network

Network Cooperative Strategies:

Dynamic Strategic Cooperative Network

  • arrangements 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 entries

  • purpose is often exploration of new ideas


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Competitive

Risks

Competitive Risks with Cooperative Strategies

  • 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


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Competitive

Risks

Risk and Asset

Management

Approaches

Managing Competitive Risks in Cooperative Strategies

  • 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


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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


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Desired

Outcome

Competitive

Risks

Risk and Asset

Management

Approaches

Managing Competitive Risks in Cooperative Strategies

  • Creating value

  • Above-average returns


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