Cooperative Strategy Week 8 1

Cooperative Strategy
Week 8
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Outline
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Types of cooperative strategies
Reasons firms develop strategic alliances
Business level cooperative strategies
Corporate level cooperative strategies
International cooperative strategies
Network cooperative strategies
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Strategic Alliance
Partnerships between firms where their:
Resources
Capabilities
Core
Competencies
are combined to pursue mutual interests to:
Develop
Goods
Manufacture
Distribute
Services
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Strategic Alliance
 The primary cooperative strategy
 Explicit forms of relationships between firms
 Joint venture
 Equity strategic alliance
 Non-equity strategic alliance
 Implicit forms
 Tacit collusion
 Mutual forebearance
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Forms of Strategic Alliance
 Joint venture
An independent firm is created by joining the assets of
two separate firms, where each contributes 50% of the
total
 Equity strategic alliance
A partnership where the two partners do not own equal
shares
 Non-equity strategic alliance
 A contract is given to supply, produce or distribute a
firm’s goods or services (without equity sharing)
 Includes licensing, distribution agreements, supply
contracts
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Implicit Cooperative Strategies
 Tacit collusion**
Tacit cooperation between firms to reduce
industry output below potential competitive level
to maintain higher prices
 Mutual forbearance**
Recognition of interdependence
**Illegal, unless regulated by the government
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Types of Market
 Slow Cycle
 Standard Cycle
 Fast Cycle
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Slow Cycle Markets
Markets that are sheltered or are near monopolies.
 These are often used in emerging markets with
restricted entry.
 Cooperation is often designed to develop
standards.
 Government regulation generally is present to
avoid price discrimination.
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Standard-Cycle Markets
 Are often large and oriented toward economies
of scale
 Alliances are more likely to be between partners
with complementary resources, capabilities, and
core competencies.
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Fast-Cycle Markets
 Fast-cycle markets are entrepreneurial and
dynamic, with new products or services imitated
rapidly.
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Reasons for Strategic Alliances
In Slow-cycle markets:
 Gaining access to a market that is not open to
other entry strategies
 Establishing a franchise in a new market
 Maintaining market stability
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Reasons for Strategic Alliances
In Standard-cycle markets:
 Gaining market power
 Gaining access to complementary resources
 Overcoming trade barriers
 Meeting competitive challenges from other
competitors
 Pooling resources for very large capital projects
 Learning new business techniques
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Reasons for Strategic Alliances
In Fast cycle markets:
 Speeding up the development of goods/services
 Speeding up new market entry
 Maintaining market leadership
 Forming an industry technology standard
 Sharing risky R&D expenses
 Overcoming uncertainty
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Types of Strategic Alliance
Complementary Alliances
BusinessLevel
Competition-Reduction Alliances
Competition-Response Alliances
Uncertainty-Reduction Alliances
Diversification Alliances
Corporate
- Level
Synergistic Alliances
Franchising
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Vertical Complementary Strategic Alliance
Supplier Value
Chain
Buyer Value
Chain
Vertical
Alliance
Partnerships that build on the
complementarities among firms
that make each more
competitive
Include distribution, supplier or
outsourcing alliances where
firms rely on upstream or
downstream partners to build
competitive advantage 15
Horizontal Complementary Strategic Alliance
 Arrangement that links similar segments of competing
firms value chains, such as R&D or new product
development
 Used to increase the strategic competitiveness of the
partners
Supplier Value
Chain
Horizontal
Alliance
Buyer
Value Chain
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Competition Reduction Strategies
 Avoiding competition by using tacit collusion
such as price fixing
 Cartels such as OPEC, manufacturing and
distribution cartels in Japan, industry trade
organisations
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Competition Response Strategies
 Established to enable partner firms to respond to
major strategic actions initiated by their
competitors
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Uncertainty Reduction Strategies
 Alliances can be used to hedge against risk and
uncertainty
 Used particularly in fast cycle markets
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Competitive advantage?
 Alliances to reduce competition are only likely to
achieve average returns
 Complementary alliances (especially vertical)
are more likely to create competitive advantage
when they lead to combined complementary
resources that reduce costs or create
competitive advantage.
 Uncertainty reducing strategies historically
resulted in competitive parity and average
returns
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Corporate level cooperative strategies
Designed to facilitate product and market
diversification
 Diversifying
 Synergistic
 franchising
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Synergistic Strategic Alliances
 Create joint economies of scope
 Are similar to horizontal acquisitions at the
business level
 Create synergy across multiple functions
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Franchising
 Cooperative strategy to spread risk and use
resources, capabilities and competencies
productively without merging with or acquiring
another company.
 Allows firms to grow and enables relatively
strong centralised control without significant
capital investment
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Franchising
 Spreads risk and shares resources (including
knowledge)
 In Australia, about 25% of retail volume comes from
franchised operations, while in the USA this figure is
around 40%
 The future of new business is likely to be franchising
because of the associated efficiencies
 An interesting corollary is the spread of national
culture: McDonalds, for example, provides a powerful
cultural message
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International Cooperative Strategies
 May create more value than if the business
operated as a separate entity
 Growth when these opportunities are limited
within the firms home nation
 Allows risk sharing by reducing financial
investment
 Host partner knows local market and customs
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But..
 More complex and risky than domestic alliances
 More likely to fail
 Difficult to manage due to differences in
management styles, cultures or regulatory
constraints
 Require significant processing of information to
enhance partners ability to cooperate
 Must gauge partner’s strategic intent so they do
not gain access to important technology and
become a competitor
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Network Strategies
 Network strategies involve a group of
interrelated firms that work for the common good
of all
 Three types
 Stable
 Dynamic
 Internal
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Network Strategies
 Stable
Long-term relationships that often appear in
mature industries with largely predictable market
cycles
 Dynamic
Arrangements that evolve in industries
experiencing rapid technological change leading
to short product life-cycles
 Internal
A management system used to coordinate a
global web of suppliers and customers
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Cooperative Buying Online
 New technology facilitates cooperative
strategies: for example, on-line buying and
computer networking means cooperation to buy
goods is easier
 Fourteen of Australia’s largest companies are in
a cooperative-buying operation: the buying
power they achieve lowers prices
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Competitive Risks
 Inadequate contracts
 Misrepresentation of competencies
 Partners failing to make complementary
resources available
 Being held hostage through specific investments
made with a partner
 Misunderstanding a partner’s strategic intent
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Managing Competitive Risks
Risks can be managed
 Detailed contracts, but
 Costly
 May prevent from taking opportunities
 Monitoring
 Developing trusting relationships
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Managing Competitive Risks
Competitive
Risks
* Inadequate contracts
* Misrepresentation of
competencies
* Partner fails to use
complementary
resources
* Holding alliance
partner’s specific
investments hostage
Risk and Asset
Management
Approaches
* Detailed
contracts and
monitoring
* Developing
trusting
relationships
Outcome
Value
Creation
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Trust as a Strategic Asset
 Creates confidence
 More predictable partner actions
 Less resources to monitor and control the
alliance
 Valuable, rare, imperfectly imitable and often
non-substitutable
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Managing Alliances: Strategic approaches
 Cost-minimisation
 Value creation maximisation
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Cost Minimisation
Cost minimisation requires:
 Capabilities to create effective partner contracts
 Contract monitoring capabilities
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Value-maximisation
 Partners with complementary assets
 Emphasises trust
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