Cooperative Strategy

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 Studying this chapter should provide you with the
strategic management knowledge needed to:
Define cooperative strategies and explain why firms use
them.
Define and discuss three 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 crossborder strategic
alliances as an international cooperative strategy.

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 Studying this chapter should provide you with the strategic
management knowledge needed to:

Describe cooperative strategies risks.

Describe two approaches used to manage cooperative
strategies.

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 Figure 1.1

Open Copyright 2004 South-Western. All rights reserved. 94

 Cooperative Strategy
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
competitors
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 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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 Examples of cooperative behavior known to contribute
to alliance success:
Actively solving problems
Being trustworthy
Consistently pursuing ways to combine partners
resources and capabilities to create value
Exp: General Motors alliances with Honda on internal
combustion engines, Renault on medium-and-heavy
duty vans for Europe

Competitive advantage developed through a

cooperative strategy is called a collaborative or
relational advantage

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 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

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 Joint Venture
Two or more firms create a legally independent company by
sharing some of their resources and capabilities. German
Simens AG & Japan Fujitsu Ltd equally own joint venture
Fujitsu Siemens Computers. Fujitsu increase market share
from 4% to 10%. To be called Fujitsu Technology Solutions
Equity Strategic Alliance
Partners who own different percentages of equity in a
separate company they have formed by combining some of
their resources & capabilities to create competitive
advantage. Exp Investment made by foreign companies such
as Japanese and U.S companies in China. Citigroup Inc
forming strategic alliance with Shanghai Pudong Dev Bank
Co. Doing so through an initial equity investment totaling 5%.
The first foreign bank to own 20% of bank in PRC
Non-equity Strategic Alliance
Two or more firms develop a contractual relationship to share
some of their unique resources and capabilities.
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 Firms do not establish a separate independent
company & dont take equity positions.
It is less formal & demand fewer partner
commitments compared to joint venture &
equity strategic alliances.
Exp licensing agreements, distribution
agreements & supply contract. Dell Inc & most
computer firms - outsource most of their
production of laptop computers & form non
equity strategic alliances
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 Market Reason
Slow Cycle Use Strategic alliance to gain access to a
restricted market
Establish a franchise in a new market
Maintain market stability (e.g., establishing
standards).
Markets close to monopolistic conditions
Exp: American steel industry has 3 major
players: US steel, ISG & Nucor. They have
made strategic alliances in Europe & Asia &
investing in ventures in South America &
Australia. U.S Steel bought a Slovakian steel
producer, VSZ in 2000

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 Market Reason
Tend to be unstable, unpredictable & complex.
Fast Cycle Alliances between firms with current excess resources &
capabilities & those with promising capabilities help
companies to compete in fast-cycle market
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
Exp: Entertainment industry digital mrkt place as
television content is available on web.
GEs NBC universal & News CorpFOX formed a
new web site : http://www.hulu.com. Disney
became 3rd partner contributing content & capital
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 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
Exp: China Sothern Airlines joined Sky Team
alliance. Air China & Shanghai Airlines added to
Star Alliance (United Airlines, Air Canada &
Luftansa .

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 Complementary strategic alliances
Vertical
Horizontal
Competition response strategy
Uncertainty reducing strategy
Competition reducing strategy

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 Figure 9.1

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 Combine partner firms assets
Complementary in complementary ways to
Alliances create new value

Include distribution, supplier or

outsourcing alliances where
firms rely on upstream or
downstream partners to build
competitive advantage

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 Firms agree to use their skills and
capabilities in different stages of the value
chain to create value for both firms
Outsourcing
Exp: Universal Music Group (UMG), a
division of Vivendi Universal, used vertical
strategic alliance by forming a venture to
create new label in music business, recruit
executives who have relationship with
music artist. The all star team includes
executives from Interscope, Island Def Jam,
Universal Motown and Bad Boy

Adapted from Figure 9.2

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 Exp : Nintendo need for additional software &
games for its Wii game console. Develop partnership
with Electronics Arts . It will release 2 sports games
prior to release of its brand new hardware: Tiger
Woods PGA Tour 10 & Grand Slam Tennis

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 Partners combine resources and skills to create value in
the same stage of the value chain
Focus is on long-term product development and
distribution opportunities
Partners may become competitors
Adapted from Figure 9.2

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 Exp: Hyundai Motor sales increase across globe, ambitious goal from being
number 9 automaker to 5. Used horizontal complementary strategic
alliances & joint ventures part of its strategy.

2003, Hyundai & Daimler Chrysler launch joint venture to build 90,000 truck
annually.

Also, Hyundai set up strategic relationship to reach China huge emerging

market. 2002 set up joint venture with Beijing Automotive Industry Holding
Co (6th largest auto company) to sell 50,000 in 2003 increasing to 500,000
cars by 2010.

KIA a wholly subsidiary of Hyundai, has car agreements with Dongfeng

Motor Automobile Co & Yueda Automobile to sell 50,000 cars in China in
2003. Strategic alliances have improve firms growth potential.

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 Complementary Occur when firms join forces to
respond to a strategic action of
Alliances another competitor
Because they can be difficult to
reverse and expensive to operate,
Competition strategic alliances are primarily
Response Alliances formed to respond to strategic rather
than tactical actions.
Exp: Bell South (providing cable
services) has entered into an alliance
with Movielink. Bell south has been
offering services at a cheaper rate to
compete with other cable providers.
Becoming more aggressive in the
broadband arena, Bell hopes to
achieve 2 goals: to compete better
with cable operators and to make
customers of their core phone services
more loyal.
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 Are used to hedge against risk and uncertainty
Complementary These alliances are most noticed in fast-cycle
Alliances markets
An alliance may be formed to reduce the
uncertainty associated with developing new
Competition product or technology standards.
Response Alliances Exp: Dutch Bank ABN AMRO signed on to a
venture called ShoreCap International.
ShoreCap will invest capital in & advise local
Uncertainty financial institutions that do small & micro
Reducing Alliances business lending in developing economies such
as Asia, Africa, central & eastern Europe. It has a
history of collaboration with financial
institutions & other partners including World
Bank. Through cooperative strategies with
other financial institutions , Shore Banks hopes
to reduce risk of providing credit to smaller
borrowers in disadvantaged regions & hopes to
reduce poverty in regions where it invest.
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 Complementary Created to avoid destructive or
excessive competition
Alliances Explicit collusion: when firms
directly negotiate production
output and pricing agreements in
Competition order to reduce competition
Response Alliances (illegal)
Tacit collusion: when firms in an
industry indirectly coordinate
Uncertainty their production and pricing
Reducing Alliances decisions by observing other
firms actions and responses. Do
not negotiate output & pricing
Competition decisions.
Reducing Alliances

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 Complementary business-level strategic alliances,
especially the vertical ones, have the greatest probability
of creating a sustainable competitive advantage

Horizontal complementary alliances are sometimes

difficult to maintain because they are often between rival
competitors

Competitive advantages gained from competition and

uncertainty reducing strategies tend to be temporary

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 Figure 9.3

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 Corporate-level strategies

Help the firm diversify in terms of:

Products offered to the market
The markets it serves

Require fewer resource commitments

Permit greater flexibility in terms of efforts to

diversify partners operations
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 Expand into new product or market areas
Diversifying without completing a merger or an
Strategic Alliance acquisition
Synergistic benefits instead of a merger or
acquisition
less risk
greater flexibility
Assess benefits of future merger between
the partners
Exp: Shell Petrolchemicals & China National
offshore oil corporation (CNOOC) have
announced a joint venture on construction of
4.3 billion petrol chemicals complex in
southern china. Emphasis will be produce
products for Guangdong & high-
consumption areas along the countrys
coastal economic zone. For CNOOC, the dev
is part of its continuing diversification from
its upstream business.

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 Firms share some of their resources &
Diversifying
capabilities to create economies of scope
Strategic Alliance between two or more firms

Synergistic Similar to business level horizontal

Strategic Alliance complementary strategic alliance,
synergistic strategic alliances create
synergy across multiple functions or
multiple businesses between partner firms.

Exp : Cisco traditionally a network

telecomm Equipment manufacturer
moving into computers in particular severs.
Develop partnership with Accenture Ltd &
Tata Consulting Services Ltd to help market
Cisco product around the world
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 Diversifying Spreads risks and uses
resources, capabilities, and
Strategic Alliance
competencies without merger
or acquisition
Synergistic A contractual relationship (the
Strategic Alliance franchise) is developed
between the franchisee and the
franchisor
Franchising Alternative to growth through
mergers and acquisitions
Exp: McDonalds, Hilton
International & Krispy Kreme,
7-Eleven

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 Compared to business-level strategies
Broader in scope More complex
More costly

Can lead to competitive advantage and value when:

Successful alliance experiences are internalized
The firm uses such strategies to develop useful
knowledge about how to succeed in the future

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 Partners may act opportunistically
Partners may misrepresent competencies
brought to the partnership
Partners 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

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 Figure 9.4

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 Cost minimization management approach
Formal contracts with partners
Specify
How strategy is to be monitored
How partner behavior is to be controlled
Goals that minimize costs and prevent
opportunistic behavior by partners

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 Opportunity maximization approach
Maximize partnerships value-creation
opportunities
learn from each other
explore additional marketplace possibilities
less formal contracts, fewer constraints

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