Chapter 9 Chapter 9 9 Cooperative Strategy
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Slide 1
Chapter 9 9 Chapter 9 Cooperative Strategy
PowerPoint slides by:
R. Dennis Middlemist
Colorado State University Copyright © 2004 South-Western All rights reserved.
Slide 2
Cooperative Strategy • Cooperative Strategy Ø A strategy in which firms work together to achieve a shared objective
• Cooperating with other firms is a strategy that: Ø Creates value for a customer Ø Exceeds the cost of constructing customer value in other ways Ø Establishes a favorable position relative to competitors
Copyright © 2004 South-Western. All rights reserved.
Slide 3
9–2
Types of Corporate & Grand Strategies Concentrated Growth
Conglomerate Diversification
Market Development
Turnaround
Product Development
Divestiture
Innovation
Liquidation
Horizontal Integration
Bankruptcy
Vertical Integration
Joint Ventures
Concentric Diversification
Strategic Alliances
Copyright © 2004 South-Western. All rights reserved.
Consortia
9–3
Slide 4
Strategic Alliance Firm A
Firm B
Resources Capabilities Core Competencies
Resources Resources Capabilities Core Competencies
Combined Resources Capabilities Core Competencies
Mutual interests in designing, manufacturing, or distributing goods or services Copyright © 2004 South-Western. All rights reserved.
Slide 5
9–4
Three Types of Strategic Alliances • Joint Venture Ø Two or more firms create a legally independent company by sharing some of their resources and capabilities
• Equity Strategic Alliance Ø Partners who own different percentages of equity in a separate company they have formed
• Nonequity Strategic Alliance Ø Two or more firms develop a contractual relationship to share some of their unique resources and capabilities
Copyright © 2004 South-Western. All rights reserved.
Slide 6
9–5
Reasons for Strategic Alliances Market Slow Cycle
Reason • Gain access to a restricted market • Establish a franchise in a new market • Maintain market stability (e.g., establishing standards)
Copyright © 2004 South-Western. All rights reserved.
9–6
Slide 7
Reasons for Strategic Alliances (cont’d) Market Fast Cycle
Reason • 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
Copyright © 2004 South-Western. All rights reserved.
Slide 8
9–7
Reasons for Strategic Alliances (cont’d) Market Standard Cycle
Reason • 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
Copyright © 2004 South-Western. All rights reserved.
Slide 9
9–8
Business-Level Cooperative Strategies • Complementary strategic alliances Ø Vertical Ø Horizontal
• Competition response strategy • Uncertainty reducing strategy • Competition reducing strategy
Copyright © 2004 South-Western. All rights reserved.
9–9
Slide 10
Business-Level Cooperative Strategies
Figure 9.1 Copyright © 2004 South-Western. All rights reserved.
Slide 11
9–10
Business-Level Cooperative Strategies • Combine partner firms’ assets in complementary ways to create new value
Complementary Complementary Alliances
• Include distribution, supplier or outsourcing alliances where firms rely on upstream or downstream partners to build competitive advantage
Copyright © 2004 South-Western. All rights reserved.
Slide 12
9–11
Vertical Complementary Strategic Alliances
• Firms agree to use their skills and capabilities in different stages of the value chain to create value for both firms • Outsourcing
Adapted from Figure 9.2 Copyright © 2004 South-Western. All rights reserved.
9–12
Slide 13
Horizontal Complementary Strategic Alliances
• 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 Copyright © 2004 South-Western. All rights reserved.
Slide 14
9–13
Competition Response Strategy Complementary Complementary Alliances Competition Response Alliances
• Occur when firms join forces to respond to a strategic action of another competitor • Because they can be difficult to reverse and expensive to operate, strategic alliances are primarily formed to respond to strategic rather than tactical actions
Copyright © 2004 South-Western. All rights reserved.
Slide 15
9–14
Uncertainty Reducing Strategy Complementary Complementary Alliances Competition Response Alliances Uncertainty Reducing Alliances
Copyright © 2004 South-Western. All rights reserved.
• Are used to hedge against risk and uncertainty • These alliances are most noticed in fast-cycle markets • An alliance may be formed to reduce the uncertainty associated with developing new product or technology standards
9–15
Slide 16
Competition Reducing Strategy Complementary Complementary Alliances Competition Response Alliances Uncertainty Reducing Alliances Competition Reducing Alliances
• Created to avoid destructive or excessive competition • Explicit collusion: when firms directly negotiate production output and pricing agreements in order to reduce competition (illegal) • Tacit collusion: when firms in an industry indirectly coordinate their production and pricing decisions by observing other firm’s actions and responses
Copyright © 2004 South-Western. All rights reserved.
Slide 17
9–16
Assessment of Cooperative Strategies • 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
Copyright © 2004 South-Western. All rights reserved.
Slide 18
9–17
Corporate-Level Cooperative Strategies
Figure 9.3 Copyright © 2004 South-Western. All rights reserved.
9–18
Slide 19
Corporate-Level Cooperative Strategy • Corporate-level strategies Ø Help the firm diversify in terms of: v Products v The
offered to the market
markets it serves
Ø Require fewer resource commitments Ø Permit greater flexibility in terms of efforts to diversify partners’ operations
Copyright © 2004 South-Western. All rights reserved.
Slide 20
9–19
Diversifying Strategic Alliances Diversifying Strategic Alliance Alliance
• Expand into new product or market areas without completing a merger or an acquisition • Synergistic benefits of a merger or acquisition Ø less risk Ø greater flexibility • Assess benefits of future merger between the partners
Copyright © 2004 South-Western. All rights reserved.
Slide 21
9–20
Synergistic Strategic Alliances Diversifying Strategic Alliance Alliance Synergistic Synergistic Strategic Alliance Alliance
Copyright © 2004 South-Western. All rights reserved.
• Joint economies of scope between two or more firms • Synergy across multiple functions or multiple businesses between partner firms
9–21
Slide 22
Franchising Diversifying Strategic Alliance Alliance Synergistic Synergistic Strategic Alliance Alliance Franchising
• Spreads risks 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
Copyright © 2004 South-Western. All rights reserved.
Slide 23
9–22
Assessment of Corporate -Level Cooperative Strategies • Compared to business-level strategies Ø Broader in scope
Ø More complex
Ø More costly
• Can lead to competitive advantage and value when: Ø Successful alliance experiences are internalized Ø The firm uses such strategies to develop useful knowledge about how to succeed in the future
Copyright © 2004 South-Western. All rights reserved.
Slide 24
9–23
International Cooperative Strategies • Cross-border Strategic Alliance Ø A strategy in which firms with headquarters in different nations combine their resources and capabilities to create a competitive advantage Ø A firm may form cross-border strategic alliances to leverage core competencies that are the foundation of its domestic success to expand into international markets
Copyright © 2004 South-Western. All rights reserved.
9–24
Slide 25
International Cooperative Strategies (cont’d) • Synergistic Strategic Alliance Ø Allows risk sharing by reducing financial investment Ø Host partner knows local market and customs Ø International alliances can be difficult to manage due to differences in management styles, cultures or regulatory constraints Ø Must gauge partner’s strategic intent such that the partner does not gain access to important technology and become a competitor Copyright © 2004 South-Western. All rights reserved.
Slide 26
9–25
Network Cooperative Strategy • A cooperative strategy wherein several firms agree to form multiple partnerships to achieve shared objectives Ø Stable alliance network Ø Dynamic alliance network
• Keys to a successful network cooperative strategy Ø Effective social relationships Ø Interactions among partners Copyright © 2004 South-Western. All rights reserved.
Slide 27
9–26
Network Cooperative Strategies (cont’d) Stable Alliance Network Network
• Long term relationships Ø mature industries where demand is Ø relatively constant Ø predictable
• Stable networks exploit economies (scale and/or scope) available between the firms
Copyright © 2004 South-Western. All rights reserved.
9–27
Slide 28
Network Cooperative Strategies (cont’d) Stable Alliance Network Network Dynamic Alliance Network Network
• Evolve in industries with rapid technological change leading to short product life cycles • Primarily used to stimulate rapid, value-creating product innovation and subsequent successful market entries • Purpose is often exploration of new ideas
Copyright © 2004 South-Western. All rights reserved.
Slide 29
9–28
Competitive Risks of Cooperative Strategies • 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
Copyright © 2004 South-Western. All rights reserved.
Slide 30
9–29
Managing Risks in Cooperative Strategies
Figure 9.4 Copyright © 2004 South-Western. All rights reserved.
9–30
Slide 31
Managing Cooperative Strategies • Cost minimization management approach Ø Formal contracts with partners Ø Specify v
How strategy is to be monitored
v
How partner behavior is to be controlled
Ø Goals that minimize costs and prevent opportunistic behavior by partners
• Opportunity maximization approach Ø Maximize partnership’s value-creation opportunities Ø learn from each other Ø explore additional marketplace possibilities Ø less formal contracts, fewer constraints Copyright © 2004 South-Western. All rights reserved.
Slide 32
9–31
Grand Strategy Selection Matrix Overcome weaknesses
Internal (redirected resources within the firm)
Turnaround or retrenchment Divestiture Liquidation
II III Concentrated growth Market development Product development Innovation
Vertical integration Conglomerate diversification External (acquisition or merger for resource capability) Horizontal integration Concentric diversification Joint venture
I IV
Copyright © 2004 South-Western. All rights reserved.
Maximize strengths
Slide 33
9–32
Model of Grand Strategy Clusters Rapid market growth 1. Concentrated growth 2. Vertical integration 3. Concentric diversification
1. Reformulation of concentrated growth 2. Horizontal integration 3. Divestiture 4. Liquidation Strong Weak I II competitive competitive position IV III position 1. Concentric 1. Turnaround or retrenchment diversification 2. Concentric diversification 2. Conglomerate 3. Conglomerate diversification diversification 4. Divestiture 3. Joint venture 5. Liquidation Copyright © 2004 South-Western. All rights reserved. 9–33 Slow market growth
Chapter 9 9 Chapter 9 Cooperative Strategy
PowerPoint slides by:
R. Dennis Middlemist
Colorado State University Copyright © 2004 South-Western All rights reserved.
Slide 2
Cooperative Strategy • Cooperative Strategy Ø A strategy in which firms work together to achieve a shared objective
• Cooperating with other firms is a strategy that: Ø Creates value for a customer Ø Exceeds the cost of constructing customer value in other ways Ø Establishes a favorable position relative to competitors
Copyright © 2004 South-Western. All rights reserved.
Slide 3
9–2
Types of Corporate & Grand Strategies Concentrated Growth
Conglomerate Diversification
Market Development
Turnaround
Product Development
Divestiture
Innovation
Liquidation
Horizontal Integration
Bankruptcy
Vertical Integration
Joint Ventures
Concentric Diversification
Strategic Alliances
Copyright © 2004 South-Western. All rights reserved.
Consortia
9–3
Slide 4
Strategic Alliance Firm A
Firm B
Resources Capabilities Core Competencies
Resources Resources Capabilities Core Competencies
Combined Resources Capabilities Core Competencies
Mutual interests in designing, manufacturing, or distributing goods or services Copyright © 2004 South-Western. All rights reserved.
Slide 5
9–4
Three Types of Strategic Alliances • Joint Venture Ø Two or more firms create a legally independent company by sharing some of their resources and capabilities
• Equity Strategic Alliance Ø Partners who own different percentages of equity in a separate company they have formed
• Nonequity Strategic Alliance Ø Two or more firms develop a contractual relationship to share some of their unique resources and capabilities
Copyright © 2004 South-Western. All rights reserved.
Slide 6
9–5
Reasons for Strategic Alliances Market Slow Cycle
Reason • Gain access to a restricted market • Establish a franchise in a new market • Maintain market stability (e.g., establishing standards)
Copyright © 2004 South-Western. All rights reserved.
9–6
Slide 7
Reasons for Strategic Alliances (cont’d) Market Fast Cycle
Reason • 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
Copyright © 2004 South-Western. All rights reserved.
Slide 8
9–7
Reasons for Strategic Alliances (cont’d) Market Standard Cycle
Reason • 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
Copyright © 2004 South-Western. All rights reserved.
Slide 9
9–8
Business-Level Cooperative Strategies • Complementary strategic alliances Ø Vertical Ø Horizontal
• Competition response strategy • Uncertainty reducing strategy • Competition reducing strategy
Copyright © 2004 South-Western. All rights reserved.
9–9
Slide 10
Business-Level Cooperative Strategies
Figure 9.1 Copyright © 2004 South-Western. All rights reserved.
Slide 11
9–10
Business-Level Cooperative Strategies • Combine partner firms’ assets in complementary ways to create new value
Complementary Complementary Alliances
• Include distribution, supplier or outsourcing alliances where firms rely on upstream or downstream partners to build competitive advantage
Copyright © 2004 South-Western. All rights reserved.
Slide 12
9–11
Vertical Complementary Strategic Alliances
• Firms agree to use their skills and capabilities in different stages of the value chain to create value for both firms • Outsourcing
Adapted from Figure 9.2 Copyright © 2004 South-Western. All rights reserved.
9–12
Slide 13
Horizontal Complementary Strategic Alliances
• 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 Copyright © 2004 South-Western. All rights reserved.
Slide 14
9–13
Competition Response Strategy Complementary Complementary Alliances Competition Response Alliances
• Occur when firms join forces to respond to a strategic action of another competitor • Because they can be difficult to reverse and expensive to operate, strategic alliances are primarily formed to respond to strategic rather than tactical actions
Copyright © 2004 South-Western. All rights reserved.
Slide 15
9–14
Uncertainty Reducing Strategy Complementary Complementary Alliances Competition Response Alliances Uncertainty Reducing Alliances
Copyright © 2004 South-Western. All rights reserved.
• Are used to hedge against risk and uncertainty • These alliances are most noticed in fast-cycle markets • An alliance may be formed to reduce the uncertainty associated with developing new product or technology standards
9–15
Slide 16
Competition Reducing Strategy Complementary Complementary Alliances Competition Response Alliances Uncertainty Reducing Alliances Competition Reducing Alliances
• Created to avoid destructive or excessive competition • Explicit collusion: when firms directly negotiate production output and pricing agreements in order to reduce competition (illegal) • Tacit collusion: when firms in an industry indirectly coordinate their production and pricing decisions by observing other firm’s actions and responses
Copyright © 2004 South-Western. All rights reserved.
Slide 17
9–16
Assessment of Cooperative Strategies • 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
Copyright © 2004 South-Western. All rights reserved.
Slide 18
9–17
Corporate-Level Cooperative Strategies
Figure 9.3 Copyright © 2004 South-Western. All rights reserved.
9–18
Slide 19
Corporate-Level Cooperative Strategy • Corporate-level strategies Ø Help the firm diversify in terms of: v Products v The
offered to the market
markets it serves
Ø Require fewer resource commitments Ø Permit greater flexibility in terms of efforts to diversify partners’ operations
Copyright © 2004 South-Western. All rights reserved.
Slide 20
9–19
Diversifying Strategic Alliances Diversifying Strategic Alliance Alliance
• Expand into new product or market areas without completing a merger or an acquisition • Synergistic benefits of a merger or acquisition Ø less risk Ø greater flexibility • Assess benefits of future merger between the partners
Copyright © 2004 South-Western. All rights reserved.
Slide 21
9–20
Synergistic Strategic Alliances Diversifying Strategic Alliance Alliance Synergistic Synergistic Strategic Alliance Alliance
Copyright © 2004 South-Western. All rights reserved.
• Joint economies of scope between two or more firms • Synergy across multiple functions or multiple businesses between partner firms
9–21
Slide 22
Franchising Diversifying Strategic Alliance Alliance Synergistic Synergistic Strategic Alliance Alliance Franchising
• Spreads risks 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
Copyright © 2004 South-Western. All rights reserved.
Slide 23
9–22
Assessment of Corporate -Level Cooperative Strategies • Compared to business-level strategies Ø Broader in scope
Ø More complex
Ø More costly
• Can lead to competitive advantage and value when: Ø Successful alliance experiences are internalized Ø The firm uses such strategies to develop useful knowledge about how to succeed in the future
Copyright © 2004 South-Western. All rights reserved.
Slide 24
9–23
International Cooperative Strategies • Cross-border Strategic Alliance Ø A strategy in which firms with headquarters in different nations combine their resources and capabilities to create a competitive advantage Ø A firm may form cross-border strategic alliances to leverage core competencies that are the foundation of its domestic success to expand into international markets
Copyright © 2004 South-Western. All rights reserved.
9–24
Slide 25
International Cooperative Strategies (cont’d) • Synergistic Strategic Alliance Ø Allows risk sharing by reducing financial investment Ø Host partner knows local market and customs Ø International alliances can be difficult to manage due to differences in management styles, cultures or regulatory constraints Ø Must gauge partner’s strategic intent such that the partner does not gain access to important technology and become a competitor Copyright © 2004 South-Western. All rights reserved.
Slide 26
9–25
Network Cooperative Strategy • A cooperative strategy wherein several firms agree to form multiple partnerships to achieve shared objectives Ø Stable alliance network Ø Dynamic alliance network
• Keys to a successful network cooperative strategy Ø Effective social relationships Ø Interactions among partners Copyright © 2004 South-Western. All rights reserved.
Slide 27
9–26
Network Cooperative Strategies (cont’d) Stable Alliance Network Network
• Long term relationships Ø mature industries where demand is Ø relatively constant Ø predictable
• Stable networks exploit economies (scale and/or scope) available between the firms
Copyright © 2004 South-Western. All rights reserved.
9–27
Slide 28
Network Cooperative Strategies (cont’d) Stable Alliance Network Network Dynamic Alliance Network Network
• Evolve in industries with rapid technological change leading to short product life cycles • Primarily used to stimulate rapid, value-creating product innovation and subsequent successful market entries • Purpose is often exploration of new ideas
Copyright © 2004 South-Western. All rights reserved.
Slide 29
9–28
Competitive Risks of Cooperative Strategies • 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
Copyright © 2004 South-Western. All rights reserved.
Slide 30
9–29
Managing Risks in Cooperative Strategies
Figure 9.4 Copyright © 2004 South-Western. All rights reserved.
9–30
Slide 31
Managing Cooperative Strategies • Cost minimization management approach Ø Formal contracts with partners Ø Specify v
How strategy is to be monitored
v
How partner behavior is to be controlled
Ø Goals that minimize costs and prevent opportunistic behavior by partners
• Opportunity maximization approach Ø Maximize partnership’s value-creation opportunities Ø learn from each other Ø explore additional marketplace possibilities Ø less formal contracts, fewer constraints Copyright © 2004 South-Western. All rights reserved.
Slide 32
9–31
Grand Strategy Selection Matrix Overcome weaknesses
Internal (redirected resources within the firm)
Turnaround or retrenchment Divestiture Liquidation
II III Concentrated growth Market development Product development Innovation
Vertical integration Conglomerate diversification External (acquisition or merger for resource capability) Horizontal integration Concentric diversification Joint venture
I IV
Copyright © 2004 South-Western. All rights reserved.
Maximize strengths
Slide 33
9–32
Model of Grand Strategy Clusters Rapid market growth 1. Concentrated growth 2. Vertical integration 3. Concentric diversification
1. Reformulation of concentrated growth 2. Horizontal integration 3. Divestiture 4. Liquidation Strong Weak I II competitive competitive position IV III position 1. Concentric 1. Turnaround or retrenchment diversification 2. Concentric diversification 2. Conglomerate 3. Conglomerate diversification diversification 4. Divestiture 3. Joint venture 5. Liquidation Copyright © 2004 South-Western. All rights reserved. 9–33 Slow market growth
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