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
2
Opportunities
 Discussion Questions
Click
Here 1. What is cooperative strategy?
Click
Here 2. What are the four general types of
strategic alliances that introduce Chapter
10? How is a strategic cooperative
network different from a single strategic
alliance?
Click
Here
3. What are the central reasons why firms
are motivated to engage in strategic
alliances in each market type (slow,
standard and fast cycle)?
Click
Here More discussion questions 3
Discussion Questions (cont.)
Click
Here 4. What is the difference between horizontal
and vertical complementary business
level strategic alliances?
Click
Here
5. Are competition reduction, competition
response and uncertainty reduction
strategic alliances likely to lead to
competitive advantage?
Click
Here
6. What is the difference between corporate
level and business level strategic
alliances?
Click
Here More discussion questions 4
 Discussion Questions (cont.)
Click
Here 7. When are international cooperative strategies
used and how are they implemented?
8. How can you classify networks which are
Click
formed for different purposes?
Here
9. What are the competitive risks of strategic
alliances? How is the strategic approach
Click
Here different if an alliance is based on a formal
contract versus trust?

5
Discussion Question 1

What is cooperative strategy?

6
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 7
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
8
Strategic Alliance Return to
Click
Here

Discussion
Questions
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
9
 Discussion Question 2

What are the four general types of

strategic alliances that introduce
Chapter 10? How is a strategic
cooperative network different from a
single strategic alliance?

10
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
11
Strategic Network

Strategic
Center
Firm

12
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
13
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)

14
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)

Click
Here Return to Discussion Questions 15
 Discussion Question 3

What are the central reasons why

firms are motivated to engage in
strategic alliances in each market
type (slow, standard and fast cycle)?

16
 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)

17
 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

18
 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
Click
Here Return to Discussion Questions 19
Discussion Question 4

What is the difference between

horizontal and vertical
complementary business level
strategic alliances?

20
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

21
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

22
Primary Activities
 Business-Level Cooperative
Strategies: Complementary Strategic Alliances
Buyer Horizontal Alliance Buyer
Click
Here
M Potential Competitors M
gin gin
Return to M
ar
ar
gin
M
ar
ar
gin

Technological Development
Technological Development
Discussion
Human Resource Mgmt.

Human Resource Mgmt.

Support Activities

Support Activities
Service Service
Firm Infrastructure

Firm Infrastructure
Questions 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
23
• requires a great deal of trust between the partners
 Discussion Question 5

Are competition reduction,

competition response and uncertainty
reduction strategic alliances likely to
lead to competitive advantage?

24
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

25
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

26
 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 27
 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
28
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
Click
Here Return to Discussion Questions 29
Discussion Question 6

What is the difference between

corporate level and business level
strategic alliances?

30
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
31
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
32
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

33
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

34
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
Click
Here Return to Discussion Questions 35
Discussion Question 7

When are international

cooperative strategies used and
how are they implemented?

36
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

37
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 38
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

39
Distributed Strategic Network

Main
Strategic
Strategic
Center
Center
Firm
Firm

= Distributed Strategic Center Firms 40

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
Click
Here Return to Discussion Questions 41
Discussion Question 8

How can you classify networks which

are formed for different purposes?

42
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

43
 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

44
 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

Click
Here Return to Discussion Questions 45
Discussion Question 9

What are the competitive risks of strategic

alliances? How is the strategic approach
different if an alliance is based on a formal
contract versus trust?

46
 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 47
 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 48
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 49
 Managing Competitive Risks in
Cooperative Strategies
Risk and Asset
Competitive Desired
Management
Risks Outcome
Approaches

• Creating value
• Above-average
returns

50