HI6006

Competitive Strategy

Lecture 9: Cooperative Strategy

The Strategic Management Process
KNOWLEDGE OBJECTIVES
Define cooperative strategies and explain why firms
use them.
Define and discuss the three major types of strategic
alliances.
Name the business-level cooperative strategies and
describe their use.
Discuss the use of corporate-level cooperative
strategies in diversified firms.

Understand the importance of cross-border strategic

alliances as an international cooperative strategy.

Explain the risks of cooperative strategies.

Describe two approaches used to manage cooperative

strategies.
 Why Cooperate?

 Firms collaborate for the purpose of working

together to achieve a shared objective.

 Cooperating with other firms is a strategy that:

 creates value for a customer
 eliminates the cost of constructing customer value
in other ways
 establishes a favourable position relative to
competitors.
 STRATEGIC ALLIANCES

• A strategic alliance is cooperative strategy in

which firms combine resources and capabilities to
create a competitive advantage.

• There are three major types of strategic alliances:

– joint venture
– equity strategic alliance
– non-equity strategic alliances, including these 4:

• licensing agreements
• distribution agreements
• supply contracts
• outsourcing commitments.
 TYPES OF ALLIANCES
A joint venture involves two or more firms creating a legally
independent company to share resources and capabilities
to develop a competitive advantage.
• It is an optimal choice when firms need to combine their
resources and capabilities to create a competitive
advantage that is substantially different from individual
advantages and when highly uncertain, hypercompetitive
markets are targeted.
• Example: In 1999, Germany’s Siemens AG and Japan’s
Fujitsu Ltd. each owned 50 per cent of the joint venture
Fujitsu Siemens Computers B.V., later to become Fujitsu
Technology Solutions when Fujitsu bought Siemens’
share of the joint venture.
 TYPES OF ALLIANCES
An equity strategic alliance involves two or more firms
owning different percentages of the company they
have formed by combining some of their resources and
capabilities for the purpose of creating a competitive
advantage.
• Many foreign direct investments, such as those being
made in China, are completed through an equity
strategic alliance.
• Example: Japanese telecom NTT DOCOMO Inc. and
Chinese Internet search operator Baidu Inc.
established an equity strategic alliance in China to
distribute games and other mobile phone content.
 TYPES OF ALLIANCES
A non-equity strategic alliance involves two or more firms
developing a contractual relationship to share some of their
unique resources and capabilities to create a competitive
advantage.
• This does not establish a separate interdependent
company, so there are no equity positions.
• The alliance is less formal, has fewer partner commitments
and does not foster an intimate relationship among
partners.
• Example include licensing agreements, distribution
agreements and supply contracts. Hewlett-Packard actively
uses this type of cooperative strategy to license some of its
intellectual property.
Different Markets require Alliances for different reasons
 In-Class Activity

Consider examples of Strategic Alliances that are currently evident, in

each of the following market categories:

Standard Cycle
(tip: think of an industry where the power has shifted due to members of
one link in the supply chain deciding to cooperate)
[note: collusion wrt price fixing is illegal]

Slow Cycle
(tip: think of industries or businesses entering third world countries for the
first time)

Fast Cycle
(tip: think of a business hoping to set up in the USA, Japan or Singapore)
 REASONS for ALLIANCES

• Most firms lack the full set of resources and capabilities

needed to reach their objectives.
• Allows partners to create value that they could not
develop by acting independently.
• Particularly valuable for small firms with constrained
resources for reaching new customers and broadening
their distribution channels.
• Aligning stakeholder interests (both inside and outside
the organisation) can reduce environmental uncertainty.
 REASONS for ALLIANCES

Alliances can:
• provide a new source of revenue (i.e. 25 per cent
or more of a firm’s sales revenue)
• be a vehicle for firm growth
• enhance the speed and depth of responding to
market opportunities, technological changes and
global conditions
• allow firms to gain new knowledge and
experiences to increase competitiveness.
 REASONS for ALLIANCES

• In a slow-cycle market, a firm’s competitive

advantages are shielded from imitation for
relatively long periods, as imitation is costly.
• These markets are close to monopolistic.
Railroads and, historically, telecommunications,
utilities, financial services and steel
manufacturers are industries characterised as
slow-cycle markets.
 REASONS for ALLIANCES

• Slow-cycle markets are becoming rare due to:

– privatisation of industries and economies
– rapid expansion of the Internet's capabilities
– quick dissemination of information
– speed with which advancing technologies
permit imitation of even complex products.
• Cooperative strategies can help firms transition
from sheltered markets to more competitive ones.
 REASONS for ALLIANCES

Market Reason
Slow- • Gain access to a restricted
cycle market
• Establish a franchise in a new
market
• Maintain market stability
(e.g. establishing standards)
 REASONS for ALLIANCES

Fast-cycle markets are hypercompetitive, unstable,

unpredictable and complex.
• Firm’s competitive advantages are not shielded
from imitation, preventing their long-term
sustainability.
• These conditions virtually preclude establishing
long-lasting competitive advantages, forcing firms
to constantly seek sources of new competitive
advantages while creating value by using current
ones.
 REASONS for ALLIANCES

Fast-cycle markets
• ‘Collaboration mind-set’ is paramount.
• Alliances between firms with current excess
resources and capabilities and those with
promising capabilities help companies compete
in fast-cycle markets to effectively transition from
the present to the future and to gain rapid entry
into new markets.
REASONS FIRMS DEVELOP
STRATEGIC ALLIANCES
Market Reason
Fast- • Speed up development of
cycle new goods or service
• Speed up new market entry
• Maintain market leadership
• Form an industry technology
standard
• Share risky R&D expenses
• Overcome uncertainty
 REASONS for ALLIANCES

Standard-cycle markets
• Competitive advantages are moderately shielded
from imitation in these markets, typically allowing
them to be sustained for a longer period than in
fast-cycle market situations, but for a shorter period
than in slow-cycle markets.
• Alliances are more likely to be made by partners
that have complementary resources and
capabilities.
• E.g. Airlines
 REASONS for ALLIANCES

Market Reason
Standard- • Gain market power (reduce
cycle 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
 BUSINESS COOPERATION
Firms using a business-level cooperative strategy
combine some of their resources and capabilities for
the purpose of creating a competitive advantage by
competing in one or more product markets, eg:

- Sharing of key resources

- Sharing of knowledge

- Benchmarking of Performance

- Cooperating on projects or tenders

- Joint public relations or promotions

- Activity: How many examples can the class mention where

businesses cooperate for mutual benefit?
 BUSINESS COOPERATION

Complementary • Firms share some of their resources and

capabilities in complementary ways to
strategic develop competitive advantages.
alliances • Alliances include distribution, supplier or
outsourcing where firms rely on upstream
or downstream partners to create value.
• Partners may have different:
– learning rates
– capabilities to leverage
– complementary resources
– marketplace reputations
– types of actions they can legitimately
take.
• Two forms include vertical and horizontal
alliances.
 BUSINESS-LEVEL COOPERATION

Complementary • Competitors:
strategic – initiate competitive actions to
alliances attack rivals
– launch competitive responses to
Competition their competitor’s actions.
response strategy • Strategic alliances:
– can be used at the business level
to respond to competitor’s attacks
– are primarily formed to take
strategic actions, as opposed to
tactical actions
– can be difficult to reverse
– Are expensive to operate.
 BUSINESS-LEVEL COOPERATION

Complementary • Uncertainty-reducing strategies

strategic – These strategies are used to hedge
alliances against risk and uncertainty.
– These alliances are most noticed in
Competition fast-cycle markets.
response strategy – Uncertainty is reduced by combining
knowledge and capabilities.
Uncertainty- • For example, when entering unknown
reducing strategy areas such as new product markets,
emerging economies and establishing
technology standards, a firm can reduce
its uncertainty (risk) by partnering with a
firm in the respective industry.
 BUSINESS-LEVEL COOPERATION
Competition-reducing strategies
Complementary • Collusive strategies differ from strategic
strategic alliances in that they are usually illegal. They
alliances are created to avoid destructive or excessive
competition.
Competition • Explicit collusion involves direct negotiation
response strategy among firms to establish output levels and
pricing agreements that reduce industry
competition. It is illegal.
Uncertainty-
• Tacit collusion is the indirect coordination of
reducing strategy production and pricing decisions by several
firms. It impacts the degree of competition
Competition- faced in the industry.
reducing strategy – Mutual forbearance: Firms do not take
competitive actions against rivals they
meet in multiple markets.
 CORPORATE-LEVEL COOPERATION

The corporate-level cooperative strategy is a

strategy in which a firm collaborates with one or
more companies for the purpose of expanding its
operations. The strategy
• helps a firm diversify itself in terms of products
offered, markets served or both
• requires fewer resource commitments
• permits greater flexibility in terms of efforts to
diversify partners’ operations.
 CORPORATE-LEVEL COOPERATION
• Firms share some of their resources
and capabilities to diversify into new
Diversifying product or market areas.
strategic alliance • Diversifying strategic alliances:
– allow firms to expand into new
product or market areas without
completing a merger or acquisition
– provide potential synergistic
benefits of a merger or acquisition,
but with less risk and greater levels
of flexibility
– permit a ‘test’ of whether a future
merger would benefit both parties.
 CORPORATE-LEVEL COOPERATION

Diversifying • Firms share some of their

strategic alliance resources and capabilities to
create economies of scope.
Synergistic • These alliances create synergy
strategic alliance across multiple functions or
multiple businesses between
partner firms.
 CORPORATE-LEVEL COOPERATION
• A contractual relationship to describe and
control the sharing of its resources and
Diversifying capabilities with partners
strategic alliance • A franchise is contractual agreement
between two legally independent
companies whereby the franchisor grants
Synergistic the right to the franchisee to sell the
franchisor’s product or do business under
strategic alliance
its trademarks in a given location for a
specified period .
• Franchising spreads risks and enables
Franchising firms to use resources, capabilities and
competencies without merging or
acquiring another company.
 INTERNATIONAL COOPERATION

A cross-border strategic alliance is an

international cooperative strategy in which firms with
headquarters in different nations combine some of
their resources and capabilities to create a
competitive advantage.
• These alliances are sometimes formed instead of
mergers and acquisitions, which can be riskier.
• Cross-border alliances can be complex and hard
to manage.
 INTERNATIONAL COOPERATION

Why form cross-border strategic alliances?

• 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.

• Due to limited domestic growth opportunities

• Some foreign government policies require investing

firms to partner with a local firm to enter their markets.
 NETWORK COOPERATION
• Network cooperative strategy is a strategy
wherein several firms agree to form multiple
partnerships to achieve shared objectives. This
strategy includes:
– stable alliance networks
– dynamic alliance networks.
• Effective social relationships and interactions
among partners are key to a successful
network cooperative strategy.
• Firms involved in networks of alliances use
heterogeneous knowledge and are more
innovative.
 NETWORK COOPERATION

• There are disadvantages to participating in

networks, as a firm can be locked into its
partnerships, precluding the development of
alliances with others.
• In certain network configurations, such as
Japanese keiretsu, firms in a network are expected
to help other firms in that network whenever
support is required.
• Such expectations can become a burden and
negatively affect the focal firm’s performance over
time.
 NETWORK COOPERATION

Stable alliance networks are:

Stable alliance
• long-term relationships that
network
often appear in mature
industries where demand is
relatively constant and
predictable
• built for exploitation of the
economies of scale and/or
scope available between the
firms.
 NETWORK COOPERATION

Dynamic alliance networks are:

Stable alliance • arrangements that evolve in
network industries with rapid
technological change leading to
short product life cycles
• primarily used to stimulate
Dynamic alliance
rapid, value-creating product
network
innovation and subsequent
successful market entries
• often used for exploration of
new ideas.
 COMPETITIVE RISKS WITH COOPERATION

• Partners may choose to act opportunistically.

• 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.
COMPETITIVE RISKS WITH COOPERATION
 MANAGING COOPERATION

Cost Minimisation
• The partner relationship is formalised with
contracts.

• The goal is to minimise costs and prevent

opportunistic behaviours by partners.

• The costs of monitoring cooperative strategy can

be high.

• Formalities tend to stifle partner efforts to gain

maximum value from their participation.
 MANAGING COOPERATION

Opportunity Maximisation
• The focus is maximising a partnership’s value-
creation opportunities.
• Informal relationships and fewer constraints allow
partners to:
– take advantage of unexpected opportunities
– learn from each other
– explore additional marketplace possibilities.

• Partners need a high level of trust that each

party will act in the partnership’s best interest
 Tutorial Case

Consider the Case of BP Russia in the light of what we

have learnt about Cooperative Strategy

1. What are the main issues BP Russia faces?

2. What type of strategic alliances would be useful?

3. What advantages and disadvantages would each

bring?

4. Think about other similar situations where strategic

cooperation could be beneficial