University of Newcastle, Singapore Trimester 3, 2011

Huong.Ha@newcastle.edu.au
@2011, Ha 1

Dr. Huong Ha

FISH

F I S H

Fun Innovative Sharing Helping

Work together as a group

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Knowledge objectives Strategic alliances as a primary type of cooperative strategy Business-level cooperative strategy

Corporate-level cooperative strategy

International cooperative strategy Network cooperative strategy Competitive risks with cooperative strategies Managing cooperative strategies
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Studying this chapter should provide you with the strategic management knowledge needed to:
1. define cooperative strategies and explain why firms use them 2. define and discuss three types of strategic alliances

3. name the business-level cooperative strategies and describe their use

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4. discuss the use of corporate-level cooperative strategies in diversified firms 5. understand the importance of cross-border strategic alliances as an international cooperative strategy 6. explain the cooperative strategies risks 7. describe two approaches used to manage cooperative strategies.
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 Corporate strategy a strategy in which firms work together to achieve a shared objective a strategy to create value through cooperation and to establish favourable position

Strategic alliances:

are a primary type of cooperative strategy; allow firms to leverage their existing resources, capabilities and core competencies; assist with partners to develop additional resources and capabilities as the foundation for new competitive advantages.
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Three types of strategic alliances

Joint venture
Two or more firms create a legally

independent company to share some of their resources and capabilities to develop a competitive advantage.
Joint venture is effective in establishing long-

term relationships and in transferring tacit knowledge.

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Three types of strategic alliances (cont.)

Equity strategic alliance
Two or more firms own different percentages of

equity in a new venture.

Non-equity strategic alliance

Two or more firms form alliances through

contractual agreements given to a company to supply, produce or distribute a firms goods or services without equity sharing.

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Reasons firms develop strategic alliances

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 A business-level cooperative strategy improves a firms performance in individual product markets.

The combination of resources and the capabilities of partnering firms create competitive advantages that a firm cannot

create by itself.

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Business-level cooperative strategy (cont.)

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Business-level cooperative strategy (cont.)

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Business-level cooperative strategy (cont.)

Complementary strategic alliances

Combine partner firms assets in complementary ways to create new value Two types: Vertical (firms share resources and
capabilities from different stages of the value chain to create a competitive advantage)

Horizontal (firms share some of the

resources & capabilities from the same stage of the value chain to create a competitive advantage)
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Business-level cooperative strategy (cont.)

Complementary strategic alliances Competition response strategy

Firms join forces to respond to a strategic action of a competitor.

Often difficult to reverse and expensive to operate, so strategic alliances are primarily formed to respond to strategic rather than tactical actions.

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Business-level cooperative strategy (cont.)

Complementary alliances

These strategic alliances are used to hedge/evade against risk and uncertainty.
They are particularly used in fast-cycle markets. An alliance may be formed to reduce the uncertainty associated with developing new product or technology standards.

Competition response strategy

Uncertaintyreducing strategy

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Business-level cooperative strategy (cont.)

Created to avoid destructive or excessive competition
Complementary alliances Competition response strategy

Explicit collusion: when firms

directly negotiate production output and pricing agreements in order to reduce competition (illegal)

Uncertaintyreducing strategy
Competitionreducing strategy

Tacit collusion: when firms in an

industry indirectly coordinate their production and pricing decisions by observing other firms actions and responses. Tends to be used in highly concentrated industries. Legal aspect

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Assessment of business-level cooperative strategies

Complementary business-level strategic alliances have the greatest probability of creating a sustainable competitive advantage.
Alliances used to reduce competition are more likely to achieve competitive parity/similarity than competitive advantage. Horizontal complementary alliances are sometimes difficult to sustain because they are often partnerships between rival competitors.
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 This strategy consists of alliances designed to

facilitate product and/or market diversification.

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Corporate-level cooperative strategy (cont.)

Diversifying strategic alliance

A diversifying strategic alliance allows a firm to expand into new product or market areas without completing a merger or an acquisition. This has the synergistic benefits of a merger or acquisition, but also has: less risk greater flexibility. It enables the firm to assess the benefits of a future merger between partners.
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Corporate-level cooperative strategy (cont.)

Diversifying strategic alliance

Creates joint economies of scope between two or more firms Creates synergy across multiple functions or multiple businesses between partner firms

Synergistic strategic alliance

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Corporate-level cooperative strategy (cont.)

Diversifying strategic alliance Synergistic strategic alliance Franchising

Spreads risk and uses resources, capabilities, and competencies without merger or acquisition
A contractual relationship (the franchise) is developed between the franchisee and the franchisor. Alternative to growth through mergers and acquisitions It is an increasingly popular strategic option on a global basis.
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Assessment of corporate-level cooperative strategies

Compared to business-level strategies, corporate-level cooperative strategies:
are broader in scope, more complex and more costly; can be influenced by opportunistic managerial

motives, such as growth of the firm to increase managers compensation;

require time and effort to monitor and maintain

trusting relationships;
can lead to competitive advantage and value when

successful alliance experiences are internalised.

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 Cross-border strategic alliance

a strategy in which firms with headquarters in different

nations combine their resources and capabilities to create a competitive advantage

reasons for forming cross-border alliances:

multinational corporations outperform domestic firms limited growth opportunities in the home nation foreign government policy requires an alliance with a local company to facilitate organisational transformation in core businesses
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International cooperative strategy (cont.)

Synergistic strategic alliance
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 assess partners strategic intent such that the

partner does not gain access to important technology and become a competitor.

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 Definition
A cooperative strategy wherein several firms form

multiple partnerships to achieve shared objectives.

An alliance network helps to form geographically

clustered firms.
It creates effective social relationships and interactions

among partners increasing mutual commitment

The mutual dependence induces partners to work

together to serve the common interests of all parties.

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Network cooperative strategy (cont.)

Alliance network types
Stable alliance networks

Long term relationships Typical of mature industries where demand is relatively constant and predictable Stable networks are built to exploit economies (scale and scope) available between firms.

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Network cooperative strategy (cont.)

Alliance network types (cont.)
Evolve in industries with rapid technological change leading to short product life cycles of goods and services Stimulate rapid, value-creating product innovation and subsequent successful market entries Often exploration of new ideas is a key purpose
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Stable alliance networks

Dynamic alliance networks

 Partners may act opportunistically.

Partners may misrepresent competencies brought to

the partnership.
Partners may fail to make committed resources and

capabilities available to other partners.

One partner may make investments that are specific

to the alliance while its partner does not.

Failure to make complementary resources available

to a partner most commonly occurs between partners located in different nations.

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Managing competitive risks in cooperation strategies

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 Cost minimisation management approach

formal contracts with partners that specify:

how the cooperative strategy is to be monitored how the partner behaviour is to be controlled

The goal is to minimise costs and prevent

opportunistic behaviour by a partner.

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Managing cooperative strategies (cont.)

Opportunity-maximisation management

approach:
maximises partnerships value-creation opportunities; takes advantage of unexpected opportunities to learn

from each other;

allows exploration of additional marketplace

possibilities;
fewer formal contracts & constraints make it possible to

explore multiple alternatives for sharing resources and capabilities, leading to value-creation.
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