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Chapter 9 –Cooperative Strategy

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Agenda1. Introduction to Cooperative Strategy

2. Business-Level Cooperative Strategy

3. Corporate-Level Cooperative Strategy

4. International Cooperative Strategy

5. Network Cooperative Strategy

6. Managing the Risks of Cooperative Strategy

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The Age of “Alliance Capitalism”

“If you think you can go it alone in today’s global economy, you are highly mistaken.”

Jack Welch, former CEO of General Electric

“Not all the smart people work for Sun.”

William Joy, Vice President of R&D, Sun Microsystems

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Cooperative Strategy & Alliances

Cooperative Strategy

A strategy in which firms work together to achieve a shared objective

Strategic alliance

A primary type of cooperative strategy in which firms combine some of their resources and capabilities to create a mutual competitive advantage

Involves the exchange and sharing of resources and capabilities to co-develop or distribute goods and services

Requires cooperative behavior from all partners

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Three Types of Strategic Alliances1. Joint venture

Two or more firms create a legally independent company to share resources and capabilities to develop a competitive advantage

2. Equity strategic alliance Two or more firms own a portion of the equity in the venture

they have created

3. 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

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New products,marketing andsales partners

Channelpartners

(corporate sales)

Barnes & Noble(in-store stores)

Chapters(Canadian bookstores)

United Airlines(in-flight coffee)

Dreyer’s(premium coffee

ice cream)

Pepsico(bottled coffee

beverages)

Alsea(Mexico)

Shinsegne(Korea)

Rustan(Philippines)

Bonvests(Singapore)

Sazaby(Japan)

Westin Hotelsand Resorts

(Coffee servedthroughout hotel)

Host Marriott Services(worldwide airport kiosksand in-hotel coffee cafes)

Geographicexpansion partners

Retail formatpartners

Example for Alliance Strategy

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Business-Level Cooperative Strategy

Created to avoid destructive or excessive competition

Explicit (illegal) vs Tacit collusion

ComplementaryComplementaryAlliancesAlliances

Competition Competition Response AlliancesResponse Alliances

UncertaintyUncertaintyReducing AlliancesReducing Alliances

CompetitionCompetitionReducing AlliancesReducing Alliances

Used to hedge against risk and uncertainty

Occur when firms join forces to respond to a strategic action of another competitor

Combine partner firms’ assets in complementary ways to create new value

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Corporate-Level Cooperative Strategy

A contractual relationship (the franchise) is developed between the franchisee and the franchisor

DiversifyingDiversifyingStrategic AllianceStrategic Alliance

SynergisticSynergisticStrategic AllianceStrategic Alliance

FranchisingFranchising

Joint economies of scope between two or more firms

Expand into new product or market areas without completing a merger or an acquisition

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International Cooperative StrategyCross-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 cross-border strategic alliances?

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

However…

International alliances can be difficult to manage due to differences in management, cultures, or regulatory constraints

Must gauge partner’s strategic intent such that the partner does not become a competitor

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Network Cooperative Strategies

Evolve in industries with rapid technological change leading to short product life cycles

Purpose is often exploration of new ideas

Stable AllianceStable AllianceNetworkNetwork

Dynamic AllianceDynamic AllianceNetworkNetwork

Long term relationships

mature industries where demand is relatively constant predictable

Stable networks exploit economies (scale and/or scope) available between the firms

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Example: Star AllianceCharacteristics (2004):• linking 133 countries, 722

destinations• partner total revenue US-$ 79.3• 271,983 employees• common branding• no cross-shareholding

Areas of cooperation:• global code-sharing• Equipment• flight plans• spare parts• landing rights/airport slots• mile collection programs

Potential extension on• reservation systems• cabin crew• security systems• employee training

Lufthansa

Varig

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Agenda1. Introduction to Cooperative Strategy

2. Business-Level Cooperative Strategy

3. Corporate-Level Cooperative Strategy

4. International Cooperative Strategy

5. Network Cooperative Strategy

6. Managing the Risks of Cooperative Strategy

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Cooperative Strategy“While you are alone you are entirely your own master, and if you have one companion you are but half your own and the less so in proportion to the indiscretion of his behavior.”

Leonardo da Vinci

“Out in the barren plains, cowboys would tie their horses to each other at night, knowing that each horse would pull in a different direction and the group would go nowhere.”

Wild West Analogy

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Managing Competitive Risks in Cooperative Strategies

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Managing Cooperative StrategiesCost minimization management approach

Formal contracts with partners

Contracts specify how cooperative strategy is to be monitored and how partner behavior is to be controlled

Goals that minimize costs and prevent opportunistic behavior by partners

Opportunity maximization management approach

Maximize partnership’s value-creation opportunities

Learn from each other

Explore additional marketplace possibilities

Less formal contracts, fewer constraints, Requires higher Trust