Competing For Advantage

Competing For Advantage
Part III – Creating Competitive Advantage Chapter 7 – Cooperative Strategy

The Strategic Management Process
The Strategic Management Process - A logical approach for responding to 21st century competitive challenges. Provides an outline of the content of the textbook by each chapter. Chapter 2, Strategic Leadership Strategic leaders are the engines driving the development and use of the strategic management process. Strategic direction is reflected in the firm's vision, mission, purpose, and long-term goals. Part II, Strategic Analysis The two key sources of information-based inputs to the strategic management process are derived from an analysis of the firm's external environment (Ch. 3) and its internal organization (Ch. 4). This analysis identifies opportunities, threats, resources, capabilities, and core competencies that are used collectively to establish strategic direction and strategies to create a competitive advantage. Part III, Creating Competitive Advantage An examination of business-level strategies (Ch. 5) illustrates how firms determine the competitive advantages the firm will use to effectively compete in specific product markets. Competitive rivalry and dynamics, the interactive play between rivals in the marketplace, is taken into consideration when firms select and use strategies (Ch. 6). The trend toward cooperation reflects the increasing importance of forming partnerships between firms to share and develop competitive resources (Ch. 7). Corporate level strategies are employed by diversified organizations to determine the businesses in which they plan to compete and how they will allocate resources (Ch. 8). Merger and acquisition strategies are the primary means diversified firms use to create corporate-level competitive advantages (Ch. 9). International strategies can be used to create value and above-average returns for an organization (Ch. 10). Each type of strategy commands the type of organizational structure that an organization should use to effectively support its strategic efforts. Part IV, Monitoring and Creating Entrepreneurial Opportunities Corporate governance serves to monitor organizational actions to assess their success, make sure they reflect the firm's values, and ensure that they are aligned with stakeholder interests (Ch. 11). To compete in today's competitive environment, firms must continuously seek entrepreneurial opportunities (Ch. 12). Real options analysis is a tool that is useful for evaluating new ventures and increasing strategic flexibility (Ch. 13).

Cooperative Strategies
Key Terms Cooperative Strategy – strategy in which firms work together to achieve a shared objective Strategic Alliance – cooperative strategy in which firms combine resources and capabilities to create a competitive advantage

Cooperative Strategies
Key Terms Co-opetition – condition created when firms that have formed cooperative strategies also compete against one another in the marketplace Importance of Cooperative Strategy - Cooperative strategies have become integral to the competitive landscape and central to the success of partnered companies.

Reasons for Cooperative Strategies
Most firms lack the full set of resources and capabilities needed to reach their objectives Cooperative behavior allows partners to create value that they couldn't develop by acting independently Aligning stakeholder interests (both inside and outside of the organization) can reduce environmental uncertainty Alliances can provide a new source of revenue Importance of Cooperative Strategy - Cooperative strategies have become integral to the competitive landscape and central to the success of partnered companies: Most firms lack the full set of resources and capabilities needed to reach their objectives. Cooperative behavior allows partners to create value that they couldn't develop by acting independently. Aligning stakeholder interests, both inside and outside of the organization, can reduce environmental uncertainty. Alliances can provide a new source of revenue. Alliances can be a vehicle for firm growth. Alliances can enhance the speed of responding to market opportunities, technological changes, and global conditions. Alliances are a way that firms can gain new knowledge and experiences to increase competitiveness. Compare how the reasons for using cooperative strategies vary across market type.

Reasons for Cooperative Strategies (cont.)
Alliances can be a vehicle for firm growth Alliances can enhance the speed of responding to market opportunities, technological changes, and global conditions Alliances allow firms to gain new knowledge and experiences to increase competitiveness Reasons for using cooperative strategies vary across market type Importance of Cooperative Strategy - Cooperative strategies have become integral to the competitive landscape and central to the success of partnered companies: Most firms lack the full set of resources and capabilities needed to reach their objectives. Cooperative behavior allows partners to create value that they couldn't develop by acting independently. Aligning stakeholder interests, both inside and outside of the organization, can reduce environmental uncertainty. Alliances can provide a new source of revenue. Alliances can be a vehicle for firm growth. Alliances can enhance the speed of responding to market opportunities, technological changes, and global conditions. Alliances are a way that firms can gain new knowledge and experiences to increase competitiveness. Compare how the reasons for using cooperative strategies vary across market type.

Reasons for Strategic Alliances by Market Type
The individually unique competitive conditions of slow-cycle, fast-cycle, and standard-cycle markets (discussed in Chapter 6) find firms using cooperative strategies for slightly different reasons (see Table 7.1): Slow-cycle markets - Strategic alliances are used to enter restricted markets or establish franchises in new markets with ease and speed. The alliance partner might better understand the new market's conditions and have knowledge of and relationships with key stakeholders. Fast-cycle markets - Strategic alliances between firms with excess resources and promising capabilities aid in the transition required in evolving markets and to gain rapid entry into new markets. Standard-cycle markets - Strategic alliances between large firms with economies of scale are likely to combine complimentary resources/capabilities to gain market power. This type of partnership allows firms to learn new business techniques and technologies. Additional Discussion Notes for Strategic Alliances by Market Type - These notes include additional materials that cover reasons for strategic alliances by market type, citing corporate examples to illustrate the concepts. The competitive conditions of slow-cycle, fast-cycle, and standard-cycle markets impel firms to use cooperative strategies to achieve slightly different objectives (see Table 7.1 in text). Market type examples of cooperative strategic alliances follow. Slow-Cycle Access to restricted market; establish franchises in new markets; maintain stability (e.g., establishing standards). French steelmaker Usinor formed an equity strategic alliance with Dofasco, Canada’s second largest steel mill, to build a plant to supply car bodies for Honda, Toyota, GM, Ford, and DaimlerChrysler. Through this alliance, Usinor and Dofasco established a new franchise in the import-averse U.S. steel market. American AIG formed a joint venture with India to gain entry into India’s restricted insurance market. Petrochemical companies from Venezuela and Brazil formed a joint venture for cross investments between partners. The eventual goal is to attract other oil companies in the region (Colombia and Mexico). Fast-Cycle Compress R&D time and capital; market leadership; form standards; reduce risk and uncertainty: Visa formed a venture capital program to scout technologies and capabilities that will affect the future of financial services industry in order to meld and integrate the physical and the virtual financial world, where customers have the trust, convenience, protection and security in addition to the ease in performing transactions. Standard-Cycle Gain market power; access to resources; economies of scale; overcome barriers; reduce risk; compress learning: In 1993 Lufthansa and United Airlines formed the Star Alliance. Since then 12 other airlines have joined the Star Alliance to share resources and capabilities and to access over 700 cities in 124 countries. The goal is to combine worldwide routes and offer seamless booking and travel throughout the world.

Slow-Cycle Markets – Becoming Rare
Privatization of industries and economies Rapid expansion of the Internet's capabilities Quick dissemination of information Speed with which advancing technologies permit imitation of even complex products Slow-cycle markets are becoming rare in the 21st century competitive landscape, due to: Privatization of industries and economies Rapid expansion of the Internet's capabilities Quick dissemination of information and speed with which advancing technologies permit quick imitation of even complex products

Types of Alliances Key Terms
Equity Strategic Alliance – alliance in which two or more firms own a portion of the equity in the venture they have created Joint Venture – strategic alliance in which two or more firms create a legally independent company to share resources and capabilities to develop a competitive advantage Nonequity Strategic Alliance – alliance in which two or more firms develop a contractual relationship to share some of their unique resources and capabilities to create a competitive advantage Types of Alliances and Other Cooperative Strategies – There are two basic types of strategic alliance based on legal form: Equity Nonequity Other cooperative strategies relate to the primary strategic objectives of firms.

Tacit Knowledge Tacit knowledge – the complex knowledge that is difficult to codify It is learned through experience When shared between partnering organizations, it can become a source of competitive advantage Tacit knowledge can create a competitive advantage.

Nonequity Strategic Alliances
A separate independent company is not established The partnering firms do not take equity positions in a separate entity The relationship is less formal The relationship demands fewer partner commitments How nonequity strategic alliances differ from equity strategic alliances: A separate independent company is not established The partnering firms do not take equity positions in a separate entity The relationship is less formal The relationship demands fewer partner commitments

Nonequity Strategic Alliances – Types
Licensing agreements Distribution agreements Supply contracts Outsourcing commitments Some types of nonequity strategic alliances that are increasingly being used.

Strategic Objectives of Cooperative Strategies
Common types of cooperative strategies support different strategic objectives. Refer to Figure 7.1, which lists types of cooperative strategies that support the following strategic objectives: Differentiation Low cost Address environmental conditions Growth Diversification Figure 7.1 lists the most common types of cooperative strategies based on whether they are primarily intended to enhance differentiation or reduce costs, help the firm deal more effectively with forces in its external environment, or increase the firm’s growth and diversification. Obviously, any particular alliance can have two or more of these objectives; however, dividing them on the basis of their primary strategic objective will facilitate this discussion. Additional Discussion Notes for Types of Strategic Alliances - These notes include additional materials that cover different types of strategic alliances, with specific examples of joint ventures, equity strategic alliances, and nonequity strategic alliances. Joint Ventures Sprint and Virgin Group’s joint venture targets 15- to 30-year-olds as customers for pay-as-you-go wireless phone service. Brand (from Virgin) and service (from Sprint). Sony Pictures, Warner Bros., Universal Pictures, Paramount Pictures, and Metro-Goldwyn-Mayer, each has a 20% stake in a joint venture to use the Internet to deliver feature films on demand. Equity Strategic Alliance Foreign direct investments made by Japanese and U.S. companies in China are completed through equity strategic alliances. Cott Corporation, the world’s largest soft drink supplier, and J.D. Iroquois Enterprises formed an equity strategic alliance. Cott gained exclusive supply rights for Iroquois’ private label spring water products and Iroquois expanded its branded business in the West and Far East. Nonequity Strategic Alliance Licensing agreements, distribution agreements, supply contracts are used. For example, chemical processes tend to be improved along technology corridors; and therefore, licensing and cross licensing are well-established practices in chemical and pharmaceutical industries. Licensing and cross licensing mitigates the potential impact of overbroad patents. Ralph Lauren uses licensing agreements to support its Polo brand. It uses 29 domestic licensing agreements, including West Point Stevens (bedding), Reebok (casual shoes), and ICI Paints (Ralph Lauren Home Products). Magna International, a leading global supplier of automotive systems, components, and modules, has formed many nonequity strategic alliances with GM, Ford, Honda, DaimlerChrysler, Toyota. Procter & Gamble (P&G) has formed over 120 strategic alliances. These are with Dana Undies to make Pampers cotton underwear; with Magla to make Mr. Clean disposable gloves and mops; with GM to distribute its Tempo car cleanup towels; and with Whirlpool to develop a new “clothes refresher” product and appliance.

Cooperative Strategies to Differentiate or Reduce Costs
Complementary strategic alliances Network cooperative strategies Cooperative Strategies That Enhance Differentiation or Reduce Costs - Introduces a discussion of business level cooperative strategies used to combine resources and capabilities to improve firm performance in individual product markets and create competitive advantages that cannot be created by the individual firm. Two general categories of cooperative strategies used to enhance differentiation or reduce costs: Complementary strategic alliances Network cooperative strategies

Complementary Strategic Alliances
Key Terms Complementary Strategic Alliance – business-level alliances in which firms share some of their resources and capabilities in complementary ways to develop competitive advantages Complementary Strategic Alliances – There are two types of complementary strategic alliances used to support differentiation and cost objectives. The benefits of such partnerships are not always balanced evenly across partnering firms.

Vertical complementary strategic alliances Horizontal complementary strategic alliances Complementary Strategic Alliances – There are two types of complementary strategic alliances used to support differentiation and cost objectives: Vertical complementary strategic alliances - the partnering firms share their resources and capabilities from different stages of the value chain to create a competitive advantage. Horizontal complementary strategic alliances - the partnering firms share their resources and capabilities from the same stage of the value chain to create a competitive advantage - commonly used for long-term product development and distribution opportunities. The benefits of such partnerships are not always balanced evenly across partnering firms. (See Additional Notes at the end of slide 18.)

Complementary Strategic Alliances – There are two types of complementary strategic alliances used to support differentiation and cost objectives: Vertical complementary strategic alliances - the partnering firms share their resources and capabilities from different stages of the value chain to create a competitive advantage. Horizontal complementary strategic alliances - the partnering firms share their resources and capabilities from the same stage of the value chain to create a competitive advantage - commonly used for long-term product development and distribution opportunities. The benefits of such partnerships are not always balanced evenly across partnering firms. (See Additional Notes at the end of slide 18.)

Complementary Strategic Alliances – Imbalanced Partner Benefits
Partners may learn at different rates Partners may have different capabilities to leverage complementary resources Some firms are more effective at managing alliances and deriving benefits from them Partners may have different reputations in the marketplace, differentiating the types of actions they can legitimately take Complementary Strategic Alliances – There are two types of complementary strategic alliances used to support differentiation and cost objectives. The benefits of such partnerships are not always balanced evenly across partnering firms. What affects the different opportunity levels and benefits that partnering firms are able to achieve through complementary alliances? Partners may learn at different rates. Partners may have different capabilities to leverage complementary resources. Some firms are more effective at managing alliances and deriving benefits from them. Partners may have different reputations in the marketplace, differentiating the types of actions they can legitimately take. Additional Discussion Notes for Complementary Strategic Alliances - These notes include additional materials that provide examples of vertical and horizontal complementary strategic alliances to illustrate the business-level cooperative strategies. Vertical McDonald’s has alliances with oil companies and independent store operators. With just one stop, customers can fill up car, buy a meal, and pick up items for the home. Boeing’s 777 alliance is accredited with the fastest and most efficient construction of a new commercial aircraft. The partners, including UAL, brought unique resources and capabilities to a different part of the value chain. Horizontal SCM is a 40-year old joint venture between Caterpillar and Mitsubishi to share resources and capabilities in order to yield products that neither firm could design and produce by itself. CSK Auto Inc. (Checker Auto Parts, Shuck’s Auto Supply, Kragen Auto Parts) and Advance Auto Parts established PartsAmerica.com. The venture provides easy access to nearly $1.5 billion in inventory and 3,000 locations in all 50 states, where buyers can use either store to pick up and return parts ordered online.

Network Cooperative Strategies
Key Terms Network Cooperative Strategy – cooperative strategy in which multiple firms agree to form partnerships to achieve shared objectives (also known as alliance networks) Strategic Center Firm – the firm at the core of an alliance network and around which the network's cooperative relationships revolve Network Cooperative Strategies - Network cooperative strategies can be effectively used. The strategic center firms plays a specific role in alliance networks.

A Strategic Network An effective strategic center firm is at the core or center of an alliance network, around which the network’s cooperative relationships revolve.

Network Cooperative Strategies – Effective Use
Knowledge and information gained from multiple sources can produce more and better innovations Network alliances can be particularly effective for geographically clustered firms Effective social relationships and interactions among partners while sharing resources and capabilities lead to more successful network alliances A strategic center firm that manages the complex, cooperative interactions among network partners also contributes to the effectiveness of network alliances Gaining access to partners' partners can open up advantages to the networking firms Multiple collaborations increase the likelihood of additional competitive advantages and value creation Network cooperative strategies can be effectively used to benefit participating firms: Knowledge and information gained from multiple sources can produce more and better innovations. Network alliances can be particularly effective for geographically clustered firms. Effective social relationships and interactions among partners while sharing resources and capabilities lead to more successful network alliances. A strategic center firm that manages the complex, cooperative interactions among network partners also contributes to the effectiveness of network alliances. Gaining access to partners' partners can open up advantages to the networking firms. Multiple collaborations increase the likelihood of additional competitive advantages and value creation. (See Additional Notes at the end of slide 22.)

Strategic Center Firm – Primary Tasks
Strategic outsourcing with non-network members Support of efforts to develop core competencies Coordination and sharing of technology-based ideas and efforts Emphasis on healthy rivalry to generate network-based competitive advantages As the foundation for an alliance network's structure, the primary tasks of a strategic center firm are: Strategic outsourcing with non-network members Support of efforts to develop core competencies Coordination and sharing of technology-based ideas and efforts Emphasis on healthy rivalry to generate network-based competitive advantages Additional Discussion Notes for Network Cooperative Strategies - These notes include additional materials that uses the airline industry to illustrate multiple partners in network cooperative strategies. Network Cooperative Strategies: Numerous Partners United Technologies is involved with more than 100 worldwide cooperative strategies. One of these networks is the alliance formed by the firm’s Sikorsky business unit to produce the S-92 helicopter. Five firms from four continents joined with Sikorsky to form this alliance. Using its unique resources and capabilities, each partner assumed different responsibilities for the design and production of the S-92. No individual member of the alliance could have developed the design nor manufactured it, a product with size and cost benefits over competing helicopters. The combination of the partners’ resources and capabilities has resulted in a competitive advantage for the alliance. Unlike the chemical and pharmaceutical industry, some experts note that initial progress in the airline industry was hindered because of lack of cross licensing agreements (cf., Merges & Nelson, 1990). That is, the Wright brothers’ patent—an efficient stabilizing and steering system that enabled a multiplicity of future flying machines—significantly held back the pace of development of aircrafts and the entire airline industry. In the absence of cross-licensing strategies, incumbents (like Curtiss and even the Wright brothers) wasted huge energies and diverted their efforts simply to avoid infringement, not to advance technology. The problems caused by Wright brothers’ initial patent were compounded as improvements and complementary patents, owned by different companies, came into existence, but compatibility was null. The situation was so serious that at the insistence of the Secretary of the Navy, during World War I, an arrangement was worked out to enable automatic cross licensing. This, like in the licensing of automobile patents, turned out to be a durable institution. By the end of World War I there were many patents on different aircraft features and rivals could easily negotiate licenses to produce state-of-the-art planes.

Two Types of Alliance Networks
Stable Alliance Network Dynamic Alliance Network

Stable Alliance Networks
Formed in mature industries in which demand is relatively constant and predictable Directed primarily toward developing products at a low cost

Dynamic Alliance Networks
Used in industries characterized by environmental uncertainty, frequent product innovations, and short product life cycles Directed primarily toward continued development of products that are uniquely attractive to customers

Cooperative Strategies to Address Forces in the External Environment
Competitive response alliances Uncertainty-reducing alliances Competition-reducing cooperative strategies Associations and consortia Cooperative Strategies that Address Forces in the External Environment - Introduce a discussion of business level cooperative strategies that combine resources and capabilities to meet the challenges of complex and ever-changing external environments. Four types of cooperative strategies serve to keep firms abreast of rapid changes in their environments: Competitive response alliances - used to respond to competitors' strategic attacks Uncertainty-reducing alliances - used to reduce environmental uncertainty, particularly in fast-cycle markets, new product markets, emerging economies, or new technologies Competition-reducing cooperative strategies - used to reduce competition in an industry, often through the use of collusion Associations and consortia - used to form coalitions with stakeholders to achieve common objectives Additional Discussion Notes for Cooperative Strategies That Address Forces in the External Environment - These notes include additional materials that cover the competition response strategy, uncertainty-reducing strategy, and competition-reducing strategy and examples to illustrate each concept. Competition Response Strategy FedEx responded to the success of UPS’s logistics business. FedEx formed a strategic alliance with KPMG to deliver end-to-end supply-chain solutions to large and midsized companies. FedEx committed its supply-chain consulting, IT systems, and transportation and logistics expertise, whereas KPMG provided its supply-chain consulting and e-integration services. Marathon Oil and Russia’s Yukos formed an alliance to achieve international expansion and as a response to rivals’ alliances. Uncertainty Reducing Strategy Overcapacity, risk, uncertainty, and cost competition led Siemens and Fujitsu to form an alliance associated with their PC operations. By uniquely combining technology from Fujitsu with manufacturing, marketing, and logistics capabilities from Siemens, the joint venture has become Europe’s top supplier of PCs. GM and Toyota (# 1 U.S. and Japanese automakers) formed an R&D alliance to develop and standardize alternative-power cars. GM, Toyota, Ford, DaimlerChrysler, and Renault joined to develop a standard for communications and entertainment equipment for automobiles. Competition Reducing Strategy Explicit Collusion (illegal): Examples include the 1995 price-fixing scandal, in which Archer Daniels Midland executives were convicted for cooperating with competitors to fix prices. Similarly, Toys ‘R’ Us colluded with toy manufacturers to not sell popular toys to rivals, such as Costco and Sam’s Club. Tacit Collusion: Kellogg, General Mills, Post, and Quaker accounted for 84% of the U.S. cereal market. Some believe the high price gaps vis-à-vis rivals in this industry suggest the possibility that the dominant firms were using a tacit collusion cooperative strategy. Mutual Forebearance: Firms choose not to attack each other or engage in what could be destructive competition in multiple product markets.

Forms of Collusion Explicit collusion – direct negotiation among firms to establish output levels and pricing agreements that reduce industry competition Tacit collusion – indirect coordination of production and pricing decisions by several firms, which impacts the degree of competition faced in the industry Two types of collusion reduce competition: Explicit collusion, which is illegal in the U.S., involves direct negotiation amongst firms to establish output levels and pricing agreements to reduce industry competition Tacit collusion, common to highly-concentrated industries, involves several firms indirectly coordinating production and pricing decisions which impact the degree of competition faced in the industry (Mutual forbearance is one form of tacit collusion that occurs when firms avoid competitive attacks against rivals that they face in multiple markets)

Cooperative Strategies to Promote Growth and/or Diversification
Diversifying strategic alliances Franchising International cooperative strategies Cooperative Strategies That Promote Growth and/or Diversification - Introduce a discussion of cooperative strategies that serve as an attractive alternative when the firm's primary goal is growth and/or diversification. (See Additional Notes at the end of slide 33.)

Key Terms Diversifying Strategic Alliances – corporate-level cooperative strategy in which firms share some of their resources and capabilities to diversify into new product or market areas Cooperative Strategies That Promote Growth and/or Diversification - Introduce a discussion of cooperative strategies that serve as an attractive alternative when the firm's primary goal is growth and/or diversification. (See Additional Notes at the end of slide 33.)

Key Terms Franchising – cooperative strategy in which a firm uses a franchise as a contractual relationship to describe and control the sharing of its resources and capabilities with partners Franchise – contractual agreement between two legally independent companies whereby the franchisor grants the right to the franchisee to sell the franchisor's product or do business under its trademarks in a given location for a specified period of time Cooperative Strategies That Promote Growth and/or Diversification - Introduce a discussion of cooperative strategies that serve as an attractive alternative when the firm's primary goal is growth and/or diversification. (See Additional Notes at the end of slide 33.)

Key Terms Cross-Border Strategic Alliance – international cooperative strategy in which firms with headquarters in different nations combine some of their resources and capabilities to create a competitive advantage Distributed Alliance Network – organizational structure used to manage complex and challenging international cooperative strategies Cooperative Strategies That Promote Growth and/or Diversification - Introduce a discussion of cooperative strategies that serve as an attractive alternative when the firm's primary goal is growth and/or diversification. (See Additional Notes at the end of slide 33.)

A Distributed Strategic Network
As shown in Figure 7.4, several regional strategic center firms are included in the distributed network to manage partner firms’ multiple cooperative arrangements. Strategic centers for Ericsson (telecommunications exchange equipment) and Electrolux (white goods, washing machines) are located in countries throughout the world, instead of only in Sweden where the firms are headquartered. Ericsson, for example, is active in more than countries and employs more than 90,000 people. The company has five major alliance networks and has formed cooperative agreements with companies throughout the world through each network. As a founding member of an Ethernet alliance (Intel and Cisco are also members), Ericsson acts as the strategic center firm for this cooperative arrangement, which promotes open industry standards and provides interoperability testing for its members. (See Additional Notes at the end of slide 33.)

Require fewer resource commitments
Attractiveness of Cooperative Strategies to Achieve Growth and/or Diversification Require fewer resource commitments Permit greater strategic flexibility Are not as permanent Cooperative strategies might be an attractive alternative to mergers and acquisitions (presented in Chapter 9) to achieve growth or diversification goals because they: Require fewer resource commitments Permit greater strategic flexibility Not as permanent Additional Discussion Notes for Cooperative Strategies that Promote Growth and/or Diversification - These notes include additional materials that illustrate diversifying strategic alliances and franchising as cooperative strategies that promote growth and/or diversification. Diversifying Strategic Alliances Boeing and Insitu formed an alliance to develop an unmanned aerial vehicle system. Boeing brings systems integration, communications technologies, and payload technologies. Insitu is designing its capabilities in producing low-cost, long-endurance unmanned aerial vehicles (an earlier prototype flew 2,000 miles using 1.5 gallons of gasoline). Boeing hopes to diversify into government and commercial markets. Insitu gains “big firm” experience and access to Boeing’s technology, resources, and capabilities. Franchising Franchising is a lower-risk strategy to grow the brand. It is attractive when you don’t have the capital for growth. It is particularly attractive in fragmented industries, where a company can gain a large market share by consolidating independent companies through contractual relationships (e.g., Papa Johns, McDonald’s, Hilton International). Source: Robert P. Merges and Richard R. Nelson, On the Complex Economics of Patent Scope, 90 Colum. L. Rev. 839 (

Franchising Partners working closely together, finding ways to strengthen the core company's brand name Franchisors developing programs to transfer knowledge and skills needed for franchisees to successfully compete at the local level Franchisees providing feedback to franchisors regarding how to become more effective and efficient Firms using the strategy in fragmented industries where no firm has a dominant share Certain behaviors contribute to the successful use of franchising as a cooperative strategy: Partners working closely together, finding ways to strengthen the core company's brand name Franchisors developing programs to transfer knowledge and skills needed for franchisees to successfully compete at the local level Franchisees providing feedback to franchisors regarding how to become more effective and efficient Using the strategy in fragmented industries where no firm has a dominant share

Cross-Border Alliances
Multinational corporations outperform firms that operate only domestically Due to limited domestic growth opportunities, firms look outside their national borders to expand business Some foreign government policies require investing firms to partner with a local firm to enter their markets Reasons for the increase in use of cross-border strategic alliances: Multinational corporations outperform firms that operate only domestically Due to limited domestic growth opportunities, firms look outside their national borders to expand business Some foreign government policies require investing firms to partner with a local firm to enter their markets

Risks of Cooperative Strategies
Partners may choose to act opportunistically Partner competencies may be misrepresented Partner may fail to make available the complementary resources and capabilities that were committed Partner may make investments specific to the alliance while the other partner may not Competitive Risks of Cooperative Strategies – There is a high failure rate for cooperative strategies. Several factors have a negative impact on their success. Prominent risks of cooperative strategies: Partners may choose to act opportunistically, either when formal contracts fail to prevent the behavior or when an alliance is based on a false perception of partner trustworthiness Partner competencies may be misrepresented, particularly when the contributions are intangible assets Partner may fail to make available the complementary resources and capabilities that were committed, which often occurs in international arrangements when different interpretations of contractual terms or trust-based expectations exist Partner may make investments specific to the alliance while the other partner does not

Managing Competitive Risks in Cooperative Strategies
Prominent risks of cooperative strategy are shown in the top box of Figure 7.5 (the rest of the figure is explained later in this chapter). One is that a partner may act opportunistically. Opportunistic behaviors surface either when formal contracts fail to prevent them or when an alliance is based on a false perception of partner trustworthiness. Not infrequently, the opportunistic firm wants to acquire as much of its partner’s tacit knowledge as it can. Full awareness of what a partner wants in a cooperative strategy reduces the likelihood that a firm will suffer from another’s opportunistic actions. Some cooperative strategies fail when it is discovered that a firm has misrepresented the competencies it can bring to the partnership. This risk is more common when the partner’s contribution is grounded in some of its intangible assets. Superior knowledge of local conditions is an example of an intangible asset that partners often fail to deliver. Asking the partner to provide evidence that it does possess the resources and capabilities it is to share in the cooperative strategy (even when they are largely intangible) may be an effective way to deal with this risk. Another risk is that a firm fails to make available to its partners the complementary resources and capabilities (such as its most sophisticated technologies) that it committed to the cooperative strategy. This risk surfaces most commonly when firms form an international cooperative strategy. In these instances, different cultures can result in different interpretations of contractual terms or trust-based expectations. A final risk is that the firm may make investments that are specific to the alliance while its partner does not. For example, the firm might commit resources and capabilities to develop manufacturing equipment that can be used only to produce items coming from the alliance. If the partner isn’t also making alliance-specific investments, the firm is at a relative disadvantage in terms of returns earned from the alliance compared with investments made to earn the returns.

Effective Implementation of Cooperative Strategies
Internalize successful experiences to gain maximum value from the knowledge learned, by organizing the knowledge and properly distributing it to those involved with forming and using cooperative strategies Establish appropriate controls Assign managerial responsibility for cooperative strategy to high-level executive or team Increase the level of trust between partners to increase the likelihood of alliance success, thereby efficiently influencing alliance partners' behaviors Implementing and Managing Cooperative Strategies – Building superior skills at effectively implementing and managing cooperative strategies has value for the firm. Several effective ways to effectively implement and manage cooperative strategies: Internalize experiences with successful cooperative strategies to gain maximum value from the knowledge learned (this involves organizing the knowledge and properly distributing it to those involved with forming and using cooperative strategies) Establish appropriate controls Assign managerial responsibility for cooperative strategy to high-level executive or team Increasing the level of trust between partners increases the likelihood of alliance success and is an efficient way to influence and control alliance partners' behaviors

Managing Cooperative Strategies
Cost Minimization Opportunity Maximization Two methods used to manage cooperative strategies: Cost minimization Relationship with partner is formalized with contracts Contracts specify how the cooperative strategy is to be monitored and how partner behavior is to be controlled Goal is to minimize costs and prevent opportunistic behaviors by partners Costs of monitoring cooperative strategy are greater Formalities tend to stifle partner efforts to gain maximum value from their participation Opportunity maximization Focus is on maximizing partnership's value-creation opportunities Informal relationships and fewer constraints allow the partners to take advantage of unexpected opportunities to learn from each other and explore additional marketplace possibilities Partners need a high level of trust that each party will act in partnership's best interest, which is more difficult in international situations

Cost Minimization Relationship with partner is formalized with contracts Contracts specify how cooperative strategy is to be monitored and how partner behavior is to be controlled Goal is to minimize costs and prevent opportunistic behaviors by partners Costs of monitoring cooperative strategy are greater Formalities tend to stifle partner efforts to gain maximum value from their participation Two methods used to manage cooperative strategies: Cost minimization Relationship with partner is formalized with contracts Contracts specify how the cooperative strategy is to be monitored and how partner behavior is to be controlled Goal is to minimize costs and prevent opportunistic behaviors by partners Costs of monitoring cooperative strategy are greater Formalities tend to stifle partner efforts to gain maximum value from their participation Opportunity maximization Focus is on maximizing partnership's value-creation opportunities Informal relationships and fewer constraints allow the partners to take advantage of unexpected opportunities to learn from each other and explore additional marketplace possibilities Partners need a high level of trust that each party will act in partnership's best interest, which is more difficult in international situations

Opportunity Maximization
Focus is on maximizing partnership's value-creation opportunities Informal relationships and fewer constraints allow partners to take advantage of unexpected opportunities, to learn from each other, and explore additional marketplace possibilities Partners need a high level of trust that each party will act in the partnership's best interest, which is more difficult in international situations Two methods used to manage cooperative strategies: Cost minimization Relationship with partner is formalized with contracts Contracts specify how the cooperative strategy is to be monitored and how partner behavior is to be controlled Goal is to minimize costs and prevent opportunistic behaviors by partners Costs of monitoring cooperative strategy are greater Formalities tend to stifle partner efforts to gain maximum value from their participation Opportunity maximization Focus is on maximizing partnership's value-creation opportunities Informal relationships and fewer constraints allow the partners to take advantage of unexpected opportunities to learn from each other and explore additional marketplace possibilities Partners need a high level of trust that each party will act in partnership's best interest, which is more difficult in international situations

Ethical Questions From an ethical perspective, how much information is a firm obliged to provide to a potential complementary alliance partner about what it expects to learn from a cooperative arrangement?

Ethical Questions “A contract is necessary because most firms cannot be trusted to act ethically in a cooperative venture such as a strategic alliance.” In your opinion, is this statement true or false? Why? Does the answer vary by country? Why?

Ethical Questions Ventures in foreign countries without strong contract law are more risky because managers may be subjected to bribery attempts once their firms’ assets have been invested in the country. How can managers deal with these problems?

Ethical Questions International strategic alliances are being considered by the world’s airline companies. Do these companies face any ethical issues as they participate in multiple alliances? If so, what are the issues? Are the they different for companies headquartered in the U.S. as compared to those with European home bases? If so, what are the differences, and what accounts for them?

Ethical Questions Firms with a reputation for ethical behavior in strategic alliances are likely to have more opportunities to form cooperative strategies than those that have not earned this reputation. What actions can firms take to earn a reputation for behaving ethically as a strategic alliance partner?

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