CHAPTER 9 Cooperative Strategic ManagementManagement

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CHAPTER 9STRATEGICACTIONS:STRATEGYFORMULATIONPowerPoint Presentation by Charlie CookThe University of West Alabama 2007 Thomson/SouthThomson/South-Western.All rights reserved.Cooperative StrategicManagementStrategicManagementManagementof StrategyCompetitiveness and Globalization:Concepts and CasesSeventh editionConcepts and CasesMichael A. Hitt R. Duane Ireland Robert E. Hoskisson

KNOWLEDGE OBJECTIVESStudying this chapter should provide you with the strategicmanagement knowledge needed to:1. Define cooperative strategies and explain why firmsuse them.2. Define and discuss three types of strategic alliances.3. Name the business-level cooperative strategies anddescribe their use.4. Discuss the use of corporate-level cooperativestrategies in diversified firms.5. Understand the importance of cross-border strategicalliances as an international cooperative strategy. 2007 Thomson/South-Western. All rights reserved.9–2

KNOWLEDGE OBJECTIVES (cont’d)Studying this chapter should provide you with the strategicmanagement knowledge needed to:6. Explain cooperative strategies’risks.7. Describe two approaches used to manage cooperativestrategies. 2007 Thomson/South-Western. All rights reserved.9–3

Cooperative Strategy Cooperative Strategy A strategy in which firms work together to achieve ashared objective. Cooperating with other firms is a strategy that: Creates value for a customer. Exceeds the cost of constructing customer value inother ways. Establishes a favorable position relative tocompetitors. 2007 Thomson/South-Western. All rights reserved.9–4

Strategic Alliance A primary type of cooperative strategy in whichfirms combine some of their resources andcapabilities to create a mutual competitiveadvantage. Involves the exchange and sharing of resources andcapabilities to co-develop or distribute goods andservices. Requires cooperative behavior from all partners. 2007 Thomson/South-Western. All rights reserved.9–5

Strategic Alliance Behaviors Examples of cooperative behavior known tocontribute to alliance success: Actively solving problems. Being trustworthy. Consistently pursuing ways to combine partners’resources and capabilities to create value. Collaborative (Relational) Advantage A competitive advantage developed through acooperative strategy. 2007 Thomson/South-Western. All rights reserved.9–6

Strategic AllianceFirm AFirm BResourcesCapabilitiesCore CompetenciesResourcesCapabilitiesCore CompetenciesCombinedResourcesCapabilitiesCore CompetenciesMutual interests in designing, manufacturing,or distributing goods or services 2007 Thomson/South-Western. All rights reserved.9–7

Three Types of Strategic Alliances Joint Venture Two or more firms create a legally independentcompany by sharing some of their resources andcapabilities. Equity Strategic Alliance Partners who own different percentages of equity in aseparate company they have formed. Nonequity Strategic Alliance Two or more firms develop a contractual relationshipto share some of their unique resources andcapabilities. 2007 Thomson/South-Western. All rights reserved.9–8

Table 9.1Reasons for Strategic Alliances by Market TypeMarketReasonSlow-Cycle Gain access to a restricted market Establish a franchise in a new market Maintain market stability (e.g., establishing standards)Fast-Cycle Speed up development of new goods or services Speed up new market entry Maintain market leadership Form an industry technology standard Share risky R&D expenses Overcome uncertaintyStandard-Cycle Gain market power (reduce industry overcapacity) Gain access to complementary resources Establish better economies of scale Overcome trade barriers Meet competitive challenges from other competitors Pool resources for very large capital projects Learn new business techniques 2007 Thomson/South-Western. All rights reserved.9–9

Reasons for Strategic AlliancesMarketReasonSlow Cycle Gain access to a restrictedmarket Establish a franchise in a newmarket Maintain market stability (e.g.,establishing standards) 2007 Thomson/South-Western. All rights reserved.9–10

Reasons for Strategic Alliances (cont’d)MarketReasonFast Cycle Speed up development of newgoods or service Speed up new market entry Maintain market leadership Form an industry technologystandard Share risky R&D expenses Overcome uncertainty 2007 Thomson/South-Western. All rights reserved.9–11

Reasons for Strategic Alliances (cont’d)MarketReasonStandard Cycle Gain market power (reduceindustry overcapacity) Gain access to complementaryresources Establish economies of scale Overcome trade barriers Meet competitive challenges fromother competitors Pool resources for very largecapital projects Learn new business techniques 2007 Thomson/South-Western. All rights reserved.9–12

FIGURE9.1Business-Level Cooperative Strategies 2007 Thomson/South-Western. All rights reserved.9–13

Business-Level Cooperative StrategiesComplementaryAlliances 2007 Thomson/South-Western. All rights reserved. Combine partner firms’assetsin complementary ways tocreate new value. Include distribution, supplier oroutsourcing alliances wherefirms rely on upstream ordownstream partners to buildcompetitive advantage.9–14

FIGURE9.2Vertical andHorizontalComplementaryStrategic Alliances 2007 Thomson/South-Western. All rights reserved.9–15

Complementary Strategic Alliances Vertical Complementary Strategic Alliance Formed between firms that agree to use their skills andcapabilities in different stages of the value chain to create valuefor both firms. Outsourcing is one example of this type of alliance. Horizontal Complementary Strategic Alliance Formed when partners who agree to combine their resourcesand skills to create value in the same stage of the value chain. Focus is on long-term product development and distributionopportunities. The partners may become competitors which requires a great dealof trust between the partners. 2007 Thomson/South-Western. All rights reserved.9–16

Competition Response StrategyComplementaryAlliancesCompetitionResponse Alliances 2007 Thomson/South-Western. All rights reserved. Occur when firms join forcesto respond to a strategicaction of another competitor. Because they can be difficultto reverse and expensive tooperate, strategic alliancesare primarily formed torespond to strategic ratherthan tactical actions.9–17

Uncertainty-Reducing StrategyComplementaryAlliancesCompetitionResponse AlliancesUncertaintyReducing Alliances 2007 Thomson/South-Western. All rights reserved. Are used to hedge againstrisk and uncertainty. These alliances are mostnoticed in fast-cycle markets An alliance may be formed toreduce the uncertaintyassociated with developingnew product or technologystandards.9–18

Competition-Reducing StrategyComplementaryAlliancesCompetitionResponse AlliancesUncertaintyReducing AlliancesCompetitionReducing Alliances 2007 Thomson/South-Western. All rights reserved. Created to avoid destructive orexcessive competition Explicit collusion: when firms directlynegotiate production output andpricing agreements in order toreduce competition (illegal). Tacit collusion: when firms in anindustry indirectly coordinate theirproduction and pricing decisions byobserving other firm’s actions andresponses.9–19

Assessment of Cooperative Strategies Complementary business-level strategic alliances,especially the vertical ones, have the greatest probabilityof creating a sustainable competitive advantage. Horizontal complementary alliances are sometimesdifficult to maintain because they are often between rivalcompetitors. Competitive advantages gained from competition anduncertainty reducing strategies tend to be temporary. 2007 Thomson/South-Western. All rights reserved.9–20

FIGURE9.3Corporate-Level Cooperative Strategies 2007 Thomson/South-Western. All rights reserved.9–21

Corporate-Level Cooperative Strategy 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 diversifypartners’operations. 2007 Thomson/South-Western. All rights reserved.9–22

Diversifying Strategic AlliancesDiversifyingStrategic Alliance 2007 Thomson/South-Western. All rights reserved. Allows a firm to expand into newproduct or market areas withoutcompleting a merger or anacquisition. Provides some of the potentialsynergistic benefits of a merger oracquisition, but with less risk andgreater levels of flexibility. Permits a “test”of whether a futuremerger between the partners wouldbenefit both parties.9–23

Synergistic Strategic AlliancesDiversifyingStrategic AllianceSynergisticStrategic Alliance 2007 Thomson/South-Western. All rights reserved. Creates joint economies ofscope between two or morefirms. Creates synergy acrossmultiple functions or multiplebusinesses between partnerfirms.9–24

FranchisingDiversifyingStrategic AllianceSynergisticStrategic AllianceFranchising 2007 Thomson/South-Western. All rights reserved. Spreads risks and uses resources,capabilities, and competencieswithout merging or acquiringanother company. A contractual relationship (thefranchise) is developed betweentwo parties, the franchisee and thefranchisor. An alternative to pursuing growththrough mergers and acquisitions.9–25

Assessment of Corporate-Level CooperativeStrategies Compared to business-level strategies Broader in scope More complex More costly Can lead to competitive advantage and valuewhen: Successful alliance experiences are internalized. The firm uses such strategies to develop usefulknowledge about how to succeed in the future. 2007 Thomson/South-Western. All rights reserved.9–26

International Cooperative Strategies Cross-border Strategic Alliance A strategy in which firms with headquarters indifferent nations combine their resources andcapabilities to create a competitive advantage. A firm may form cross-border strategic alliances toleverage core competencies that are the foundation ofits domestic success to expand into internationalmarkets. 2007 Thomson/South-Western. All rights reserved.9–27

International Cooperative Strategies (cont’d) Synergistic Strategic Alliance Allows risk sharing by reducing financial investment. Host partner knows local market and customs. International alliances can be difficult to manage dueto differences in management styles, cultures orregulatory constraints. Must gauge partner’s strategic intent such that thepartner does not gain access to important technologyand become a competitor. 2007 Thomson/South-Western. All rights reserved.9–28

Network Cooperative Strategy A cooperative strategy wherein several firmsagree to form multiple partnerships to achieveshared objectives. Stable alliance network Dynamic alliance network Effective social relationships and interactionsamong partners are keys to a successful networkcooperative strategy. 2007 Thomson/South-Western. All rights reserved.9–29

Network Cooperative Strategies (cont’d)Stable AllianceNetwork 2007 Thomson/South-Western. All rights reserved. Long term relationships thatoften appear in matureindustries where demand isrelatively constant andpredictable Stable networks are built forexploitation of the economies(scale and/or scope)available between the firms9–30

Network Cooperative Strategies (cont’d)Stable AllianceNetworkDynamic AllianceNetwork Arrangements that evolve inindustries with rapidtechnological change leadingto short product life cycles. Primarily used to stimulaterapid, value-creating productinnovation and subsequentsuccessful market entries. Purpose is often explorationof new ideas 2007 Thomson/South-Western. All rights reserved.9–31

Competitive Risks of Cooperative Strategies Partners may act opportunistically. Partners may misrepresent competenciesbrought to the partnership. Partners fail to make committed resources andcapabilities available to other partners. One partner may make investments that arespecific to the alliance while its partner does not. 2007 Thomson/South-Western. All rights reserved.9–32

FIGURE9.4Managing Competitive Risks in Cooperative Strategies 2007 Thomson/South-Western. All rights reserved.9–33

Managing Risks in Cooperative Strategies Inadequate contracts Misrepresentation of competenciesCompetitiveRisks Partners fail to use theircomplementary resources Holding alliance partner’s specificinvestments hostageRisk and AssetManagementApproachesDesired Outcome 2007 Thomson/South-Western. All rights reserved. Detailed contracts and management Developing trusting relationships Creating value9–34

Managing Cooperative Strategies Cost Minimization Management Approach Have formal contracts with partners. Specify how strategy is to be monitored. Specify how partner behavior is to be controlled. Set goals that minimize costs and to preventopportunistic behavior by partners. 2007 Thomson/South-Western. All rights reserved.9–35

Managing Cooperative Strategies (cont’d) Opportunity Maximization Approach Maximize partnership’s value-creation opportunities Learn from each other Explore additional marketplace possibilities Maintain less formal contracts, fewer constraints 2007 Thomson/South-Western. All rights reserved.9–36

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. 4. Discuss the use of corporate-level cooperative strategies in diversified firm

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