Alliances and Business-Level Performance/Alliances and Corporate-Level Performance

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WEEK 4 READINGS

Chapter 9 Cooperative Strategy

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

· 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 firms.

· 5. Understand the importance of cross-border strategic alliances as an international cooperative strategy.

· 6. Explain cooperative strategies' risks.

· 7. Describe two approaches used to manage cooperative strategies.

USING COOPERATIVE STRATEGIES AT IBM

A company widely known throughout the world, IBM, has over 350,000 employees working in design, manufacturing, sales, and service advanced information technologies such as computer systems, storage systems, software, and microelectronics. The firm's extensive lineup of products and services is grouped into three core business units—Systems and Financing, Software, and Services.

As is true for all companies, IBM uses three means to grow—internal developments (primarily through innovation), mergers and acquisitions (such as the recent purchase of France-based ILOG, which produces software tools to automate and speed up a firm's decision-making process), and cooperative strategies. Interestingly, IBM had a ten-year partnership with ILOG before making the acquisition. By cooperating with other companies, IBM is able to leverage its core competencies to grow and improve its performance.

Through cooperative strategies (e.g., strategic alliances and joint ventures, both of which are defined and discussed in this chapter), IBM finds itself working with a variety of firms in order to deliver products and services. However, IBM has specific performance-related objectives it wants to accomplish as it engages in an array of cooperative arrangements. For example, with regard to its systems business, IBM works to develop leading-edge chip technology. In order to do this it has formed five separate alliances to develop the most advanced semiconductor research and expand its facilities by purchasing the latest chip-making equipment. These allies provide brainpower, including more than 250 scientists and engineers that work along with IBM's engineers and scientists to foster innovation. Some of these innovations come through new advances in materials and chemistry. For instance, IBM signed an agreement with Japan's JSR, a Japanese firm engaged in materials science, to develop materials and processes for circuitry necessary to advance futuristic semiconductors.

IBM works in collaboration with several companies in Europe such as CEA, a French public research and technology organization focused on semiconductor and nano-electronics technology.

Even during the economic downturn, IBM's business analytics business is growing. The ILOG acquisition, noted previously, is an example of IBM's thrust into this area. IBM has created a new unit called IBM Business Analytics and Optimization Services. This business provides software solutions to help a firm better analyze data and make smarter decisions. It has 4,000 consultants who examine IBM's research and software divisions for algorithms, applications, and other innovations to help provide solutions to companies. This is just one aspect of the services business that IBM pursues with its consulting services. Of course it needs software to produce the solutions. Many of these solutions come through partnerships with small providers that IBM manages through cooperative agreements and often these cooperative agreements lead to an acquisition (see for instance the ILOG acquisition noted earlier).

However, other firms are entering into this space through their own acquisitions or alliances. For instance, Sun Microsystems had an alliance with IBM to produce software in competition with Hewlett-Packard. IBM bid for Sun in an acquisition attempt but was bested by Oracle, which won with a $7.3 billion bid. Thus the competition for the solutions service and network business has heated up through acquisitions and especially through partnerships, which IBM has used to facilitate its change from solely producing hardware to adding solution services and software. One study concluded that IBM was able to make this significant shift by managing its alliance of networks according to three principles. First, that company alliance networks may be used not just for individual projects but to facilitate strategic change inside a company; second, that two principal mechanisms can bring about this change: (1) increasing speed of change through partners and (2) finding partners in areas outside existing competencies; and finally, that companies can shape their alliance networks by conscious actions. Other firms are observing IBM's actions and learning and seeking to catch up fast through their own partnerships, as illustrated by a recent partnership between Cisco and the Japanese firm Fujitsu. These two firms are traditionally hardware firms that build networks, such as for phone companies, but are moving to increase their service options, especially among mobile telephone providers.

As one might anticipate, a firm as large and diverse as IBM is involved with a number of cooperative relationships. Given the challenges associated with achieving and maintaining superior performance, and in light of its general success with cooperative relationships, IBM will likely continue to use cooperative strategies as a path toward growth and enhanced performance.

A cooperative strategy is a strategy in which firms work together to achieve a shared objective.

As explained in the Opening Case, IBM is involved with a number of cooperative arrangements. The intention of serving customers better than its competitors serve them and of gaining an advantageous position relative to competitors drive this firm's use of cooperative strategies. IBM's corporate-level cooperative strategy in services and software finds it seeking to deliver server technologies in ways that maximize customer value while improving the firm's position relative to competitors. For example, Hewlett-Packard recently bought EDS to battle IBM for the leadership position in the global services market.5 IBM has many business-level alliances with partner firms focusing on what they believe are better ways to improve services for customer firms, such as the cooperative agreements that IBM has through its new division in business analytics.6 The objectives IBM and its various partners seek by working together highlight the reality that in the twenty-first century landscape, firms must develop the skills required to successfully use cooperative strategies as a complement to their abilities to grow and improve performance through internally developed strategies and mergers and acquisitions.7

We examine several topics in this chapter. First, we define and offer examples of different strategic alliances as primary types of cooperative strategies. Next, we discuss the extensive use of cooperative strategies in the global economy and reasons for them. In succession, we describe business-level (including collusive strategies), corporate-level, international, and network cooperative strategies. The chapter closes with discussion of the risks of using cooperative strategies as well as how effective management of them can reduce those risks.

As you will see, we focus on strategic alliances in this chapter because firms use them more frequently than other types of cooperative relationships. Although not frequently used, collusive strategies are another type of cooperative strategy discussed in this chapter. In a collusive strategy, two or more firms cooperate to increase prices above the fully competitive level.8

Strategic Alliances as a Primary Type of Cooperative Strategy

A strategic alliance is a cooperative strategy in which firms combine some of their resources and capabilities to create a competitive advantage.9 Thus, strategic alliances involve firms with some degree of exchange and sharing of resources and capabilities to co-develop, sell, and service goods or services.10 Strategic alliances allow firms to leverage their existing resources and capabilities while working with partners to develop additional resources and capabilities as the foundation for new competitive advantages.11 To be certain, the reality today is that “strategic alliances have become a cornerstone of many firms' competitive strategy.”12

A strategic alliance is a cooperative strategy in which firms combine some of their resources and capabilities to create a competitive advantage.

Consider the case of Kodak. CEO Antonio Perez stated, “Kodak today is involved with partnerships that would have been unthinkable a few short years ago.”13 His comment suggests the breadth and depth of cooperative relationships with which the firm is involved. Each of the cooperative relationships is intended to lead to a new competitive advantage as a source of growth and performance improvement. Kodak has changed from a firm rooted in film and imaging into a digital technology-oriented company.14

A competitive advantage developed through a cooperative strategy often is called a collaborative or relational advantage.15 As previously discussed, particularly in Chapter 4, competitive advantages enhance the firm's marketplace success. Rapid technological changes and the global economy are examples of factors challenging firms to constantly upgrade current competitive advantages while they develop new ones to maintain strategic competitiveness.16

Many firms, especially large global competitors, establish multiple strategic alliances. Although we discussed only a few of them in the Opening Case, the reality is that IBM has formed hundreds of partnerships through cooperative strategies. IBM is not alone in its decision to frequently use cooperative strategies as a means of competition. Focusing on developing advanced technologies, Lockheed Martin has formed more than 250 alliances with firms in more than 30 countries as it concentrates on its primary business of defense modernization and serving the needs of the air transportation industry. For instance, Lockheed Martin recently entered into an alliance with Northrop Grumman Corp. and Alliant Techsystems Inc. These three firms are contracted to develop multirole missiles which have both air-to-air and air-to-ground capabilities. This missile would give aircraft much more flexibility in pursuing either air or ground targets and thus boost the target efficiency of each flight sortie.17 For all cooperative arrangements, including those we are describing here, success is more likely when partners behave cooperatively. Actively solving problems, being trustworthy, and consistently pursuing ways to combine partners' resources and capabilities to create value are examples of cooperative behavior known to contribute to alliance success.18

Three Types of Strategic Alliances

The three major types of strategic alliances include joint venture, equity strategic alliance, and nonequity strategic alliance. These alliance types are classified by their ownership arrangements; later, we classify alliances by strategic categorizations.

A joint venture is a strategic alliance in which two or more firms create a legally independent company to share some of their resources and capabilities to develop a competitive advantage. Joint ventures, which are often formed to improve firms' abilities to compete in uncertain competitive environments,19 are effective in establishing long-term relationships and in transferring tacit knowledge. Because it can't be codified, tacit knowledge is learned through experiences such as those taking place when people from partner firms work together in a joint venture.20 As discussed in Chapter 3, tacit knowledge is an important source of competitive advantage for many firms.21

A joint venture is a strategic alliance in which two or more firms create a legally independent company to share some of their resources and capabilities to develop a competitive advantage.

Typically, partners in a joint venture own equal percentages and contribute equally to the venture's operations. Germany's Siemens AG and Japan's Fujitsu Ltd. equally own the joint venture Fujitsu Siemens Computers. Although the joint venture has been losing money, Fujitsu has decided that it wants to increase its market share from 4 to 10 percent, so it is taking over the joint venture. The new entity will be called Fujitsu Technology Solutions.22 Overall, evidence suggests that a joint venture may be the optimal type of cooperative arrangement when firms need to combine their resources and capabilities to create a competitive advantage that is substantially different from any they possess individually and when the partners intend to enter highly uncertain markets.23 These conditions influenced the two independent companies' decision to form Fujitsu Siemens Computers.

An equity strategic alliance is an alliance in which two or more firms own different percentages of the company they have formed by combining some of their resources and capabilities to create a competitive advantage. Many foreign direct investments, such as those made by Japanese and U.S. companies in China, are completed through equity strategic alliances.24

Interestingly, as many banks have suffered poor results in the United States, foreign banks have been creating equity alliances to provide U.S. banks with the necessary capital to survive and expand. For instance, 21 percent of Morgan Stanley's ownership was sold to Mitsubishi UFJ Financial Group in 2008. As a result, Nobuyuki Hirano, a senior executive for Mitsubishi, took a seat on the board of directors of Morgan Stanley. This will enhance Mitsubishi's understanding of Morgan Stanley's U.S. strategy. The relationship may move towards combining Mitsubishi's and Morgan Stanley Japan's Securities Corporation into a single entity in Japan.25

A nonequity strategic alliance is an 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.26 In this type of alliance, firms do not establish a separate independent company and therefore do not take equity positions. For this reason, nonequity strategic alliances are less formal and demand fewer partner commitments than do joint ventures and equity strategic alliances, though research evidence indicates that they create value for the firms involved.27 The relative informality and lower commitment levels characterizing nonequity strategic alliances make them unsuitable for complex projects where success requires effective transfers of tacit knowledge between partners.28

Forms of nonequity strategic alliances include licensing agreements, distribution agreements, and supply contracts. Hewlett-Packard (HP), which actively “partners to create new markets … and new business models,” licenses some of its intellectual property through strategic alliances.29 Typically, outsourcing commitments are specified in the form of a nonequity strategic alliance. (Discussed in Chapter 3, outsourcing is the purchase of a value-creating primary or support activity from another firm.) Dell Inc. and most other computer firms outsource most or all of their production of laptop computers and often form nonequity strategic alliances to detail the nature of the relationship with firms to whom they outsource. Interestingly, many of these firms that outsource introduce modularity that prevents the contracting partner or outsourcee from gaining too much knowledge or from sharing certain aspects of the business the outsourcing firm does not want revealed.30

Reasons Firms Develop Strategic Alliances

As our discussion to this point implies, cooperative strategies are an integral part of the competitive landscape and are quite important to many companies and even to educational institutions. In fact, many firms are cooperating with educational institutions to help commercialize ideas coming from basic research at universities.31 In for-profit organizations, many executives believe that strategic alliances are central to their firm's success.32 One executive's position that “you have to partner today or you will miss the next wave … and that … you cannot possibly acquire the technology fast enough, so partnering is essential.33 highlights this belief.

Among other benefits, strategic alliances allow partners to create value that they couldn't develop by acting independently and to enter markets more quickly and with greater market penetration possibilities.34 Moreover, most (if not all) firms lack the full set of resources and capabilities needed to reach their objectives, which indicates that partnering with others will increase the probability of reaching firm-specific performance objectives.35 Dow Jones & Co., the publisher of Wall Street Journal and owned by News Corp., is forming a joint venture with SBI Holdings Inc. to create a Japanese edition of the Wall Street Journal's Web site. It will primarily feature Japanese translations of news articles, videos, multimedia print, and other features of online editions of the Wall Street Journal. In particular this venture will develop mobile products and services in conjunction with the Web site. This is the second news Web site launched by Dow Jones in Asia; the first was launched in China in 2002.36

The effects of the greater use of cooperative strategies—particularly in the form of strategic alliances—are noticeable. In large firms, for example, alliances can account for 25 percent or more of sales revenue. Many executives believe that alliances are a prime vehicle for firm growth. 37 In some industries, alliance versus alliance is becoming more prominent than firm versus firm as a point of competition. In the global airline industry, for example, competition is increasingly between large alliances rather than between airlines. 38

In summary, we can note that firms form strategic alliances to reduce competition, enhance their competitive capabilities, gain access to resources, take advantage of opportunities, build strategic flexibility, and innovate. To achieve these objectives, they must select the right partners and develop trust. 39 Thus, firms attempt to develop a network portfolio of alliances in which they create social capital that affords them flexibility. 40 Because of the social capital, they can call on their partners for help when needed. Of course, social capital means reciprocity exists: Partners can ask them for help as well (and they are expected to provide it). 41

The individually unique competitive conditions of slow-cycle, fast-cycle, and standard-cycle market.42 find firms using cooperative strategies to achieve slightly different objectives (see Table 9.1 ). We discussed these three market types in Chapter 5 while examining competitive rivalry and competitive dynamics. Slow-cycle markets are markets where the firm's competitive advantages are shielded from imitation for relatively long periods of time and where imitation is costly. These markets are close to monopolistic conditions. Railroads and, historically, telecommunications, utilities, and financial services are examples of industries characterized as slow-cycle markets. In fast-cycle markets, the firm's competitive advantages are not shielded from imitation, preventing their long-term sustainability. Competitive advantages are moderately shielded from imitation in standard-cycle markets, typically allowing them to be sustained for a longer period of time than in fast-cycle market situations, but for a shorter period of time than in slow-cycle markets.

Table 9.1 Reasons for Strategic Alliances by Market Type

Market	Reason
Slow-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 uncertainty
Standard-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

Slow-Cycle Markets

Firms in slow-cycle markets often use strategic alliances to enter restricted markets or to establish franchises in new markets. For example, because of consolidating acquisitions that have occurred over the last dozen or so years, the American steel industry has only two remaining major players: U.S. Steel and Nucor. To improve their ability to compete successfully in the global steel market, these companies are forming cooperative relationships. They have formed strategic alliances in Europe and Asia and are invested in ventures in South America and Australia. Most recently Nucor has established a 50/50 joint venture with Duferco Group's subsidiary Duferdofin to produce steel joists and beams in Italy and then to distribute these products in Europe and North Africa. Duferco has been seeking alliances with major players in order to continue operating on a global basis. 43 Simultaneously however, companies around the world, especially in China, are forming or expanding alliances in order to establish supply sources that are important for steel-making, in particular coal and iron ore. In 2008 Sinosteel Corp., a Chinese state-owned steelmaker, boosted its ownership in Midwest Corp. to 44 percent. Midwest Corp. is an Australian iron ore producer. The reason for this is that the raw materials account for 50 percent of the selling price where as a decade ago iron ore accounted for about 15 percent of the selling price. 44 Although 2009 commodity prices were depressed due to the economic downturn, it is expected that commodity prices will go higher as the economy improves and the partnering and joint venturing pace will increase.

The truth of the matter is that slow-cycle markets are becoming rare in the twenty-first century competitive landscape for several reasons, including the privatization of industries and economies, the rapid expansion of the Internet's capabilities for the quick dissemination of information, and the speed with which advancing technologies make quickly imitating even complex products possible. 45 Firms competing in slow-cycle markets, including steel manufacturers, should recognize the future likelihood that they'll encounter situations in which their competitive advantages become partially sustainable (in the instance of a standard-cycle market) or unsustainable (in the case of a fast-cycle market). Cooperative strategies can be helpful to firms transitioning from relatively sheltered markets to more competitive ones. 46

Fast-Cycle Markets

Fast-cycle markets are unstable, unpredictable, and complex; in a word, “hypercompetitive” (a concept that was discussed in Chapter 5 ). 47 Combined, these conditions virtually preclude establishing long-lasting competitive advantages, forcing firms to constantly seek sources of new competitive advantages while creating value by using current ones. “You are looking at the future, when U.S. companies will be competing not only with European, Japanese, South Korean and Chinese companies but also with highly competitive companies from every corner of the world: Argentina, Brazil, Chile, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Poland, Russia, Thailand, Turkey, Vietnam and places you'd never expect.” 48 Alliances between firms with current excess resources and capabilities and those with promising capabilities help companies compete in fast-cycle markets to effectively transition from the present to the future and to gain rapid entry into new markets. As such a “collaboration mindset” is paramount. 49

The rapidly evolving media landscape lead competitors ABC, FOX, and NBC Universal to be cooperative in the development and launch of Hulu.com where many of their top rated shows can be watched online.

The entertainment business is fast becoming a new digital marketplace as television content is now available on the Web. This has led the entertainment business into a fast-cycle market where collaboration is important not only to succeed but to survive. Many of the firms that have digital video content have also sought to make a profit through digital music and have had difficulties in extracting profits from their earlier ventures. In 2007 GE's NBC Universal and News Corp.'s FOX formed a new website named http://www.Hulu.com. Walt Disney Corporation in 2009 became a third partner contributing content and capital in this joint venture along with an investment stake held by private equity firm Providence Equity Partners. Thus this Web site will be co-owned by direct competitors. ABC (owned by Disney) will shift much of its content to the Hulu site and viewers will be able to stream ABC TV shows such as Lost and Grey's Anatomy. CBS will be the only major network not participating in the Hulu venture with NBC Universal, FOX, and ABC. As digital video content moves onto the Web, it will be interesting to see how the competition and cooperation between all of these firms evolve.50

Standard-Cycle Markets

In standard-cycle markets, alliances are more likely to be made by partners with complementary resources and capabilities. Even though airline alliances were originally set up to increase revenue,51 airlines have realized that they can also be used to reduce costs. SkyTeam (chaired by Delta and Air France) developed an internal Web site to speed up joint purchasing and to swap tips on pricing. Managers at Oneworld (American Airlines and British Airways) say the alliance's members have already saved more than $200 million through joint purchasing, and Star Alliance (United and Lufthansa) estimates that its member airlines save up to 25 percent on joint orders.

Given the geographic areas where markets are growing, these global alliances are adding partners from Asia. In recent years, China Southern Airlines joined the SkyTeam alliance, Air China and Shanghai Airlines were added to the Star Alliance, and Dragonair joined as an affiliate of Oneworld. One of the competitive difficulties with the airline alliances is that major partners often switch between airlines. For instance, Continental Airlines, which was part of SkyTeam, recently switched to the Star Alliance with United Airlines, Air Canada, and Lufthansa. Although this move has been approved by the U.S. Department of Transportation, it still lacks approval from the European Union regulators.52 The fact that Oneworld, SkyTeam, and Star Alliance account for more than 60 percent of the world's airline capacity suggests that firms participating in these alliances have gained scale economies.

Business-Level Cooperative Strategy

A firm uses a business-level cooperative strategy to grow and improve its performance in individual product markets. As discussed in Chapter 4, business-level strategy details what the firm intends to do to gain a competitive advantage in specific product markets. Thus, the firm forms a business-level cooperative strategy when it believes that combining its resources and capabilities with those of one or more partners will create competitive advantages that it can't create by itself and will lead to success in a specific product market. The four business-level cooperative strategies are listed in Figure 9.1.

A firm uses a business-level cooperative strategy to grow and improve its performance in individual product markets.

Complementary Strategic Alliances

Complementary strategic alliances are business-level alliances in which firms share some of their resources and capabilities in complementary ways to develop competitive advantages. 53 Vertical and horizontal are the two types of complementary strategic alliances (see Figure 9.1 ).

Complementary strategic alliances are businesslevel alliances in which firms share some of their resources and capabilities in complementary ways to develop competitive advantages.

Vertical Complementary Strategic Alliance

In a vertical complementary strategic alliance, firms share their resources and capabilities from different stages of the value chain to create a competitive advantage (see Figure 9.2 ). 54 Oftentimes, vertical complementary alliances are formed to adapt to environmental changes. 55 sometimes the changes represent an opportunity for partnering firms to innovate while adapting. 56

The Strategic Focus on complementary alliances discusses what is happening with vertical alliances given the downturn in the world economy. In particular, it points out that economic pressures are creating stress in the vertical alliance relationships between buyers and suppliers in the grocery and apparel retail industry supply chains. However, in other industries it is leading to new partnerships where complementary strategic alliances are more likely to increase, such as in the steelmaking industry.

Figure 9.1 Business-Level Cooperative Strategies

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Another example of a vertical complementary alliance is Nintendo and its need for additional software and games for its Wii game console. To fulfill this need Nintendo has developed a partnership with Electronic Arts. Through this partnership, it will release two sports games prior to the release of its brand new hardware: Tiger Woods PGA Tour 10 and Grand Slam Tennis. Nintendo is allowing these games to be sold even before it releases more of its own games. Previously, Nintendo trailed other game platforms in its production of new releases because it stressed its own games over those of other game software producers and would not release its hardware details to them in advance. It has changed its policy to encourage more vertical relationships with game software producing firms such as Electronic Arts and Activision Blizzard, Inc.57

Figure 9.2 Vertical and Horizontal Complementary Strategic Alliances

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Strategic Focus

HOW COMPLEMENTARY ALLIANCES ARE AFFECTED BY THE GLOBAL ECONOMIC DOWNTURN

Supply chain management principles have changed over the last decade as suppliers have sought to work more closely with buyers. Traditionally a company's purchasing office dealt with a relatively small group of suppliers and had the overall goal of obtaining as many price cuts as possible. This changed, however, because as globalization and outsourcing increased the supply chain decision-making process involved a greater network of partners around the world. This drove companies to collaborate with suppliers and develop stronger relationships to reduce waste and develop products more quickly. As such, supply chain managers have had to shoulder a lot more responsibility, which has required much more emphasis on collaborative skills.

In the economic downturn, however, many of these collaborative relationships and partnerships—which are complementary by nature, especially in the vertical supply chain—have been strained. Large retailers have been squeezing their vendors in order to survive the requirement for heavy sales promotions and lower prices to sell their apparel products. This strategy has affected firms like Liz Claiborne, Phillips-Van Heusen, and Jones Apparel Group. Because large stores such as Macy's have many vendors to choose from, they have power to force price cuts from their suppliers. Macy's has power over Liz Claiborne because it buys in large volume. However, this has strained their relationship because both companies “require long-term, healthy partners to operate efficiently.” Hartmarx Corp., a men's clothing producer whose main customers are Dillard's, Nordstrom, and Bloomingdale's (owned by Macy's), has been forced to file for

Chapter 11 bankruptcy court protection due to the pressure. On the other hand, JCPenney has had long-term relationships with its vendors and its spokesperson noted, “We don't view ‘squeezing’ of vendors to protect our bottom line as a viable long-term strategy.”

Similar events are happening in the grocery industry. For example, Unilever has been trying to stop its price margins from shrinking by forcing price increases on retailers such as the Belgian supermarket chain Delhaize Group SA. Delhaize operates the Food Lion chain and other grocery stores in the United States. In 2008, Unilever pushed worldwide price increases of more than 9 percent. Because of the price increases forced on Delhaize, it banished products by Unilever such as Dove soap and Axe deodorant from its U.S. stores. At the same time, commodity prices dropped and British retailer Tesco PLC urged suppliers to pass onto stores the recent drops in prices for commodities and oil that are used to produce food products. In response, firms like Wal-Mart (Great Value) have started to freshen up their in-house brands. As such, when large food producers such as Unilever do not respond appropriately, Wal-Mart can cut back on stocking national brands.

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Shoppers at Food Lion found Axe and other Unilever products off the shelves as Delhaize, operator of the supermarket, responded to price increases passed on from the manufacturer.

While the downturn has put stress on some vertical alliances as previously noted, it has also created opportunities for new partnerships in other areas. For example, many private equity firms have experienced a significant decrease in the amount of funds invested in the United States. Blackstone Group has formed global joint ventures to increase its fund supply. It has formed a joint venture with Bank Larrain Vial in Latin America and Och-Ziff Capital Management. In Latin America in particular there is a large opportunity in Chile, where private pension funds hold $82 billion in assets due to a pioneering program that places 12.3 percent of all payroll into private pension accounts. This complementary alliance would most likely not have occurred if the economy did not turn for the worse. Blackstone Group will also help diversify pension funds by investing in private equity and hedge funds. South and Central America have almost $200 billion in assets under management, which is comparable to the California Public Employees Retirement System (CalPERS). This is a significant opportunity for private equity funds such as the Blackstone Group to increase their supply of capital.

Horizontal Complementary Strategic Alliance

A horizontal complementary strategic alliance is an alliance in which firms share some of their resources and capabilities from the same stage (or stages) of the value chain to create a competitive advantage (see Figure 9.2). Commonly, firms use complementary strategic alliances to focus on joint long-term product development and distribution opportu-nities.58 As previously noted in the example regarding www.Hulu.com, GE's Universal Pictures, Disney's ABC, and News Corp's FOX Video Production have formed a joint Web site to distribute video content. Recently, pharmaceutical companies have been pursuing horizontal alliances as well. As healthcare reform takes place in the United States, large pharmaceutical firms are seeking relationships with generic drug producers. For example, Pfizer has reached marketing agreements with two Indian makers of generic drugs: Aurobindo Pharma Ltd. and Claris Lifesciences Ltd. These two firms produce and sell 60 and 15 off-patent drugs and injectables, respectively. Similarly, Novartis AG is acquiring Ebewe Pharma, an Austrian drugmaker, which will partner with the Novartis generic drug subsidiary, Sandoz. These moves are targeted to tap into the growing generic drug market, which was $3.5 billion in 2008 and is expected to be $9 billion by 2015.59

The automotive manufacturing industry is one in which many horizontal complementary strategic alliances are formed. In fact, virtually all global automobile manufacturers use cooperative strategies to form scores of cooperative relationships. The Renault-Nissan alliance, signed in March 1999, is a prominent example of a horizontal complementary strategic alliance. Thought to be successful, the challenge is to integrate the partners' operations to create value while maintaining their unique cultures.

Competition Response Strategy

As discussed in Chapter 5, competitors initiate competitive actions to attack rivals and launch competitive responses to their competitors' actions. Strategic alliances can be used at the business level to respond to competitors' attacks. Because they can be difficult to reverse and expensive to operate, strategic alliances are primarily formed to take strategic rather than tactical actions and to respond to competitors' actions in a like manner.

Many complementary horizontal alliances are created in response to heavy competition. For instance, digital music producers have been trying to extract more value from their products beyond what they can collect through middle-men such as Apple's iTunes distribution outlet. Many music producers have sought to develop their own distribution outlets through joint partnership, in response to Apple's success, such as Blue Matter Press, Jimmy and Doug's Farmclub, and eMusic, but most have failed. Now many of them are seeking online advertisements through Web sites that distribute music and video. For instance, Warner Music has invested in LaLa Media and a startup company called imeem, Inc. because MySpace Music, a joint venture among four major labels and News Corp., was not generating enough advertising revenue. In response to the focus on advertising, Universal Music, a division of Vivendi SA, through a joint venture with Google has created a new online site for music videos called VEVO. Most of these actions are attempts to bolster revenue because digital music downloads are increasing, but not quickly enough to offset the steep decline in CD sales.60

Uncertainty-Reducing Strategy

Some firms use business-level strategic alliances to hedge against risk and uncertainty, especially in fast-cycle markets.61 These strategies are also used where uncertainty exists, such as in entering new product markets or emerging economies.

As large global auto firms manufacture more hybrid vehicles, there is insufficient capacity in the battery industry to meet future demand. Volkswagen AG is partnering with China's BYD Co. to produce hybrid and electric vehicles powered by lithium batteries. BYD is the one of the world's largest cell phone battery producers and is also a fledgling auto producer as it moves to launch a plug-in car before more established rival firms. Volkswagen has also made agreements with Samuel Electric and Toshiba Corp. of Japan to reduce the uncertainty about the insufficient capacity for lithium-ion batteries used in hybrid vehicles.62

Competition-Reducing Strategy

Used to reduce competition, collusive strategies differ from strategic alliances in that collusive strategies are often an illegal type of cooperative strategy. Two types of collusive strategies are explicit collusion and tacit collusion.

When two or more firms negotiate directly with the intention of jointly agreeing about the amount to produce and the price of the products that are produced, explicit collusion exists.63 Explicit collusion strategies are illegal in the United States and most developed economies (except in regulated industries).

Firms that use explicit collusion strategies may find others challenging their competitive actions. In early 2009, for example, the U.S. Department of Justice joined forces with European officials to investigate alleged “price coordination” among three air cargo carriers. Luxembourg's Cargolux, Japan's Nippon Cargo Airlines, and Korea's Asiana Airlines plead guilty and paid criminal fines of $214 million for their role in a global conspiracy to fix prices on air freight. This investigation began in 2001 and prosecution began in 2006. Throughout the history of the investigation more than 15 air cargo airlines have been prosecuted and fined over $1.6 billion. The investigation continues in the air freight industry and is one of the world's biggest cartel probes by competition officials around the world.64 As this example suggests, any firm that may use explicit collusion as a strategy should recognize that competitors and regulatory bodies might challenge the acceptability of their competitive actions.

Tacit collusion exists when several firms in an industry indirectly coordinate their production and pricing decisions by observing each other's competitive actions and responses.65 Tacit collusion results in production output that is below fully competitive levels and above fully competitive prices. Unlike explicit collusion, firms engaging in tacit collusion do not directly negotiate output and pricing decisions. However, research suggests that joint ventures or cooperation between two firms can lead to less competition in other markets in which both firms operate.66

Tacit collusion tends to be used as a business-level, competition-reducing strategy in highly concentrated industries, such as airlines and breakfast cereals. Research in the airline industry suggests that tacit collusion reduces service quality and on-time per-formance.67 Firms in these industries recognize that they are interdependent and that their competitive actions and responses significantly affect competitors' behavior toward them. Understanding this interdependence and carefully observing competitors can lead to tacit collusion.

Four firms (Kellogg's, General Mills, Post, and Quaker) have accounted for as much as 80 percent of sales volume in the ready-to-eat segment of the U.S. cereal market.68 Some believe that this high degree of concentration results in “prices for branded cereals that are well above [the] costs of production.”69 The Wall Street Journal reported in 2008 that prices for breakfast cereals were among the easiest to inflate when there are commodity shortages.70 Prices above the competitive level in this industry suggest the possibility that the dominant firms use a tacit collusion cooperative strategy.

Discussed in Chapter 6, mutual forbearance is a form of tacit collusion in which firms do not take competitive actions against rivals they meet in multiple markets. Rivals learn a great deal about each other when engaging in multimarket competition, including how to deter the effects of their rival's competitive attacks and responses. Given what they know about each other as a competitor, firms choose not to engage in what could be destructive competitions in multiple product markets.71

In general, governments in free-market economies need to determine how rivals can collaborate to increase their competitiveness without violating established regulations.72 However, this task is challenging when evaluating collusive strategies, particularly tacit ones. For example, regulation of pharmaceutical and biotech firms who collaborate to meet global competition might lead to too much price fixing and, therefore, regulation is required to make sure that the balance is right, although sometimes the regulation gets in the way of efficient markets.73 Individual companies must analyze the effect of a competition-reducing strategy on their performance and competitiveness.

Assessment of Business-Level Cooperative Strategies

Firms use business-level strategies to develop competitive advantages that can contribute to successful positions and performance in individual product markets. To develop a competitive advantage using an alliance, the resources and capabilities that are integrated through the alliance must be valuable, rare, imperfectly imitable, and nonsubstitutable (see Chapter 3).

Evidence suggests that complementary business-level strategic alliances, especially vertical ones, have the greatest probability of creating a sustainable competitive advantage.74 Horizontal complementary alliances are sometimes difficult to maintain because they are often between rivalrous competitors. In this instance, firms may feel a “push” tgoward and a “pull” from alliances. Airline firms, for example, want to compete aggressively against others serving their markets and target customers. However, the need to develop scale economies and to share resources and capabilities (such as scheduling systems) dictates that alliances be formed so the firms can compete by using cooperative actions and responses while they simultaneously compete against one another through competitive actions and responses. As noted previously, this has led to many changes in the large airline alliances—for instance, with Continental recently aligning with United and Lufthansa rather than Delta and AirFrance-KLM.

The challenge in these instances is for each firm to find ways to create the greatest amount of value from both their competitive and cooperative actions. It seems that Nissan and Renault have learned how to achieve this balance.

Although strategic alliances designed to respond to competition and to reduce uncertainty can also create competitive advantages, these advantages often are more temporary than those developed through complementary (both vertical and horizontal) strategic alliances. The primary reason is that complementary alliances have a stronger focus on creating value than do competition-reducing and uncertainty-reducing alliances, which are formed to respond to competitors' actions or reduce uncertainty rather than to attack competitors.

Of the four business-level cooperative strategies, the competition-reducing strategy has the lowest probability of creating a sustainable competitive advantage. For example, research suggests that firms following a foreign direct investment strategy using alliances as a follow-the-leader imitation approach may not have strong strategic or learning goals. Thus, such investment could be attributable to tacit collusion among the participating firms rather than to forming a competitive advantage (which should be the core objective).

Corporate-Level Cooperative Strategy

A firm uses a corporate-level cooperative strategy to help it diversify in terms of products offered or markets served, or both. Diversifying alliances, synergistic alliances, and franchising are the most commonly used corporate-level cooperative strategies (see Figure 9.3).

A Arm uses a corporate-level cooperative strategy to help it diversify in terms of products offered or markets served, or both.

Firms use diversifying alliances and synergistic alliances to grow and improve performance by diversifying their operations through a means other than a merger or an acquisition.76 When a firm seeks to diversify into markets in which the host nation's government prevents mergers and acquisitions, alliances become an especially appropriate option. Corporate-level strategic alliances are also attractive compared with mergers and particularly acquisitions, because they require fewer resource commit-ment.77 and permit greater flexibility in terms of efforts to diversify partners' operations.78 An alliance can be used as a way to determine whether the partners might benefit from a future merger or acquisition between them. This “testing” process often characterizes alliances formed to combine firms' unique technological resources and capabilities.

Diversifying Strategic Alliance

A diversifying strategic alliance is a corporate-level cooperative strategy in which firms share some of their resources and capabilities to diversify into new product or market areas. The spread of high-speed wireless networks and devices with global positioning chips and the popularity of Web site applications running on Apple's iPhone and Research in Motion's BlackBerry (and other smartphones) shows that consumers are increasingly accessing mobile information. Equipped with this knowledge, Alcatel-Lucent is entering the market through mobile advertising, which will allow a cell phone carrier to alert customers about the location of a favorite store or the closest ATM. It is pursuing this diversification alliance with 1020 Placecast, a California-based developer of cell phone online ads associated with user locations. Hyatt, FedEx, and Avis are especially interested in using the service. The ads will also include a link to coupons or other promotions. Other mobile phone producers have started to sell mobile phone display ads in other metropolitan areas through Nokia Phones. These networks are trying to gain a share of the profits that would normally be out of their reach through revenue-sharing models with companies that are advertising as well as the ad-producing service companies.80

A diversifying strategic alliance is a corporate-level cooperative strategy in which firms share some of their resources and capabilities to diversify into new product or market areas.

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It should be noted that highly diverse networks of alliances can lead to poorer performance by partner firms.81 However, cooperative ventures are also used to reduce diversification in firms that have overdiversified.82 Japanese chipmakers Fujitsu, Mitsubishi Electric, Hitachi, NEC, and Toshiba have been using joint ventures to consolidate and then spin off diversified businesses that were performing poorly. For example, Fujitsu, realizing that memory chips were becoming a financial burden, dumped its flash memory business into a joint venture company controlled by Advanced Micro Devices. This alliance helped Fujitsu refocus on its core businesses.83

Synergistic Strategic Alliance

A synergistic strategic alliance is a corporate-level cooperative strategy in which firms share some of their resources and capabilities to create economies of scope. Similar to the business-level horizontal complementary strategic alliance, synergistic strategic alliances create synergy across multiple functions or multiple businesses between partner firms. The most recent development for Disney's media segment, and ABC in particular, is a partnership with Google's YouTube that will allow it to advertise its movies and products by showing short clips and selling ads.84 This is an example of a synergistic diversification alliance.

A synergistic strategic alliance is a corporate-level cooperative strategy in which firms share some of their resources and capabilities to create economies of scope.

In recent years, there has been much more competitive interaction between hardware and software firms. Cisco, traditionally a network telecommunications equipment manufacturer, is moving into computers—in particular, servers. After HP moved into selling network equipment, Cisco decided to move more fully into developing its server business. To drive its computer business Cisco needs to develop a service segment, although it is not trying to upset its historical partners, HP and IBM, which have large service businesses. Both IBM and HP have large service businesses. As such, Cisco developed partnership agreements with Accenture Ltd. and India-based Tata Consulting Services Ltd. to help market Cisco's products to businesses around the world. These were synergistic alliances to foster this diversification move by Cisco into services.85

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With apps like the Slacker personalized radio and hundreds of others available for the BlackBerry and iPhone, companies are already looking at these devices as a means of conveying personalized advertising as well.

Franchising

Franchising is a corporate-level cooperative strategy in which a firm (the franchisor) uses a franchise as a contractual relationship to describe and control the sharing of its resources and capabilities with partners (the franchisees).86 A franchise is a “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.”87 Success is often determined in these strategic alliances by how well the franchisor can replicate its success across multiple partners in a cost-effective way.88 Research suggests that too much innovation results in difficulties for replicating this success.89

Franchising is a popular strategy. In the United States alone, more than 2,500 franchise systems are located in more than 75 industries; and those operating franchising outlets generate roughly one-third of all U.S. retail sales.90 Already frequently used in developed nations, franchising is also expected to account for significant portions of growth in emerging economies in the twenty-first century.91 As with diversifying and synergistic strategic alliances, franchising is an alternative to pursuing growth through mergers and acquisitions. McDonald's, Hilton International, Marriott International, Mrs. Fields Cookies, Subway, and Ace Hardware are well-known examples of firms using the franchising corporate-level cooperative strategy.

Franchising is a particularly attractive strategy to use in fragmented industries, such as retailing, hotels and motels, and commercial printing. In fragmented industries, a large number of small and medium-sized firms compete as rivals; however, no firm or small set of firms has a dominant share, making it possible for a company to gain a large market share by consolidating independent companies through contractual relationships.

In the most successful franchising strategy, the partners (the franchisor and the franchisees) work closely together.92 A primary responsibility of the franchisor is to develop programs to transfer to the franchisees the knowledge and skills that are needed to successfully compete at the local level.93 In return, franchisees should provide feedback to the franchisor regarding how their units could become more effective and efficient.

Working cooperatively, the franchisor and its franchisees find ways to strengthen the core company's brand name, which is often the most important competitive advantage for franchisees operating in their local markets.95

Assessment of Corporate-Level Cooperative Strategies

Costs are incurred with each type of cooperative strategy.96 Compared with those at the business level, corporate-level cooperative strategies commonly are broader in scope and more complex, making them relatively more costly. Those forming and using cooperative strategies, especially corporate-level ones, should be aware of alliance costs and carefully monitor them.

In spite of these costs, firms can create competitive advantages and value when they effectively form and use corporate-level cooperative strategies.97 When successful alliance experiences are internalized, it is more likely that the strategy will attain the desired advantages. In other words, those involved with forming and using corporate-level cooperative strategies can also use them to develop useful knowledge about how to succeed in the future. To gain maximum value from this knowledge, firms should organize it and verify that it is always properly distributed to those involved with forming and using alliances.98

We explain in Chapter 6 that firms answer two questions to form a corporate-level strategy—in which businesses will the diversified firm compete and how will those businesses be managed? These questions are also answered as firms form corporate-level cooperative strategies. Thus, firms able to develop corporate-level cooperative strategies and manage them in ways that are valuable, rare, imperfectly imitable, and nonsubstitutable (see Chapter 3) develop a competitive advantage that is in addition to advantages gained through the activities of individual cooperative strategies. (Later in the chapter, we further describe alliance management as another potential competitive advantage.)

International Cooperative Strategy

A cross-border strategic alliance is an international cooperative strategy in which firms with headquarters in different nations decide to combine some of their resources and capabilities to create a competitive advantage. Taking place in virtually all industries, the number of cross-border alliances continues to increase.99 These alliances too are sometimes formed instead of mergers and acquisitions (which can be riskier).100 Even though cross-border alliances can themselves be complex and hard to manage,101 they have the potential to help firms use their resources and capabilities to create value in locations outside their home market.

IMG Worldwide, Inc. is one of the largest producers and distributors of sports entertainment in the world. It pursues its strategy through international joint ventures with other broadcasting firms. The events that it currently broadcasts include two tennis “Grand Slam” events, Wimbledon and the Australian Open. In an effort to expand into emerging economies, IMG recently signed a 20-year sporting event partnership with China Central Television, the main Chinese broadcasting organization. A national broadcast of this size could have an audience of 740 million viewers daily. The first two events that will be broadcast through this venture are the China Open Tennis Tournament in Beijing and the Chengdu Open Tennis Tournament in 2009. The top 50 women players in the world are expected to play in the China Open tournament. Through this strategic alliance, IMG will substantially broaden its international reach.102

Several reasons explain the increasing use of cross-border strategic alliances, including the fact that in general, multinational corporations outperform domestic-only firms.103 What takes place with a cross-border alliance is that a firm leverages core competencies that are the foundation of its domestic success in international markets.104 Nike provides an example as it leverages its core competence with celebrity marketing to expand globally with its diverse line of athletic goods and apparel. With a $2 billion celebrity endorsement budget, Nike has formed relationships with athletes who have global appeal. Tiger Woods, Michael Phelps, and LeBron James are recent endorsers, while seven-time Tour de France winner Lance Armstrong, Michael Jordan, and Magic Johnson are historic examples of these types of individuals. In addition, Nike has endorsement relationships with star athletes and organizations outside the United States, such as Brazilian soccer star Ronaldo and Manchester United, the world's most popular soccer team.105 Coupling these alliances with Nike's powerful global brand name helps the firm apply its marketing competencies in foreign markets. However, the downturn in the economy is causing problems such that even these relationships are not protecting sales declines.106

Limited domestic growth opportunities and foreign government economic policies are additional reasons firms use cross-border alliances. As discussed in Chapter 8, local ownership is an important national policy objective in some nations. In India and China, for example, governmental policies reflect a strong preference to license local companies. Thus, in some countries, the full range of entry mode choices that we described in Chapter 8 may not be available to firms seeking to diversify internationally. Indeed, investment by foreign firms in these instances may be allowed only through a partnership with a local firm, such as in a cross-border alliance. Especially important, strategic alliances with local partners can help firms overcome certain liabilities of moving into a foreign country, such as lack of knowledge of the local culture or institutional norms.107 A cross-border strategic alliance can also be helpful to foreign partners from an operational perspective, because the local partner has significantly more information about factors contributing to competitive success such as local markets, sources of capital, legal procedures, and politics.108 Interestingly, recent research suggests that firms with foreign operations have longer survival rates than domestic-only firms, although this is reduced if there are competition problems between foreign subsidiaries.109

In general, cross-border alliances are more complex and risky than domestic strategic alliances, especially in emerging economies.110 However, the fact that firms competing internationally tend to outperform domestic-only competitors suggests the importance of learning how to diversify into international markets. Compared with mergers and acquisitions, cross-border alliances may be a better way to learn this process, especially in the early stages of the firms' geographic diversification efforts. Starbucks is a case in point.

When Starbucks sought overseas expansion, it wanted to do so quickly as a means of supporting its strong orientation to continuous growth. Thus, it agreed to a complex series of joint ventures in many countries in the interest of speed. While the company receives a percentage of the revenues and profits as well as licensing fees for supplying its coffee, controlling costs abroad is more difficult than in the United States. Starbucks is learning from the results achieved from the collaborative relationships it initially established. In light of what it has learned, the firm continues to collaborate with others in different countries including China. At Starbuck's 10-year anniversary mark in China, one analyst noted that “China, conventionally a coffee exporter, may become a net importer in 2009 with demand outpacing supply, as Starbucks Coffee Co. and other coffee chains mushroom around the country.”111 Among other actions, Starbucks is taking larger equity positions in some of the joint ventures with which it is now involved in different countries (such as China).

Network Cooperative Strategy

In addition to forming their own alliances with individual companies, a growing number of firms are joining forces in multiple networks.112 A network cooperative strategy is a cooperative strategy wherein several firms agree to form multiple partnerships to achieve shared objectives. As noted, Cisco has multiple cooperative arrangements with IBM and HP, and with service providers Accenture Ltd. and Tata Consulting Services Ltd. Demonstrating the complexity of network cooperative strategies is the fact that Cisco has a set of unique collaborations with both IBM and HP, but is also competing with them as they move into servers. The fact is that the number of network cooperative strategies being formed today continues to increase as firms seek to find the best ways to create value by offering multiple goods and services in multiple geographic (domestic and international) locations.

A network cooperative strategy is a cooperative strategy wherein several firms agree to form multiple partnerships to achieve shared objectives.

A network cooperative strategy is particularly effective when it is formed by geographically clustered firms,113 as in California's Silicon Valley (where “the culture of Silicon Valley encourages collaborative webs”114) and Singapore's Biopolis (in the bio-medical sciences) and the new fusionopolis (collaborations in “physical sciences and engineering to tackle global science and technology challenges”).

Effective social relationships and interactions among partners while sharing their resources and capabilities make it more likely that a network cooperative strategy will be successful,116 as does having a productive strategic center firm (we discuss strategic center firms in detail in Chapter 11). Firms involved in networks gain information and knowledge from multiple sources. They can use these heterogeneous knowledge sets to produce more and better innovation. As a result, firms involved in networks of alliances tend to be more innovative.117 However, there are disadvantages to participating in networks as a firm can be locked into its partnerships, precluding the development of alliances with others. In certain types of networks, such as Japanese keiretsus, firms in the network are expected to help other firms in the network whenever they need aid. Such expectations can become a burden and reduce the focal firm's performance over time.118

Alliance Network Types

An important advantage of a network cooperative strategy is that firms gain access to their partners' other partners. Having access to multiple collaborations increases the likelihood that additional competitive advantages will be formed as the set of shared resources and capabilities expands.119 In turn, being able to develop new capabilities further stimulates product innovations that are critical to strategic competitiveness in the global economy.120

The set of strategic alliance partnerships resulting from the use of a network cooperative strategy is commonly called an alliance network. The alliance networks that companies develop vary by industry conditions. A stable alliance network is formed in mature industries where demand is relatively constant and predictable. Through a stable alliance network, firms try to extend their competitive advantages to other settings while continuing to profit from operations in their core, relatively mature industry. Thus, stable networks are built primarily to exploit the economies (scale and/or scope) that exist between the partners such as in the airline industry.121 Dynamic alliance networks are used in industries characterized by frequent product innovations and short product life cycles.122 For instance, the pace of innovation in the information technology (IT) industry (as well as other industries that are characterized by fast-cycle markets) is too fast for any one company to be successful across time if it only competes independently. Another example is the movie industry, which has a lot of collaborative ventures and networked firms to produce and distribute movies.123 In dynamic alliance networks, partners typically explore new ideas and possibilities with the potential to lead to product innovations, entries to new markets, and the development of new markets.124 Often, large firms in such industries as software and pharmaceuticals create networks of relationships with smaller entrepreneurial startup firms in their search for innovation-based outcomes.125 An important outcome for small firms successfully partnering with larger firms in an alliance network is the credibility they build by being associated with their larger collaborators.126

Competitive Risks with Cooperative Strategies

Stated simply, many cooperative strategies fail. In fact, evidence shows that two-thirds of cooperative strategies have serious problems in their first two years and that as many as 50 percent of them fail. This failure rate suggests that even when the partnership has potential complementarities and synergies, alliance success is elusive.127 Although failure is undesirable, it can be a valuable learning experience, meaning that firms should carefully study a cooperative strategy's failure to gain insights with respect to how to form and manage future cooperative arrangements.128 We show prominent cooperative strategy risks in Figure 9.4.

Figure 9.4 Managing Competitive Risks in Cooperative Strategies

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One cooperative strategy risk 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.129 Full awareness of what a partner wants in a cooperative strategy reduces the likelihood that a firm will suffer from another's opportunistic actions.130 The Strategic Focus on TNK-BP, a 50/50 joint venture between three Russian oil tycoons and British Petroleum, demonstrates potential opportunistic actions by parties involved and some of the potential risks of joint ventures, especially in an emerging economy like Russia.

Some cooperative strategies fail when it is discovered that a firm has misrepresented the competencies it can bring to the partnership. The risk of competence misrepresentation 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. An effective way to deal with this risk may be to ask the partner to provide evidence that it does possess the resources and capabilities (even when they are largely intangible) it will share in the cooperative strategy.131

Another risk is a firm failing to make available to its partners the resources and capabilities (such as the most sophisticated technologies) that it committed to the cooperative strategy. For example, in the Strategic Focus, TNK-BP did not meet agreed-upon targets and this put them in a situation of weakness relative to both its powerful partners and the Russian government. This risk surfaces most commonly when firms form an international cooperative strategy, especially in emerging economies.132 In these instances, different cultures and languages can cause misinterpretations of contractual terms or trust-based expectations.

A final risk is that one 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. This is certainly an issue in the TNK-BP alliance in which BP is continuing to make investments, although it is losing control in managing those investments.

Managing Cooperative Strategies

Although cooperative strategies are an important means of firm growth and enhanced performance, managing these strategies is challenging. However, learning how to effectively manage cooperative strategies is important such that it can be a source of competitive advantage.133 Because the ability to effectively manage cooperative strategies is unevenly distributed across organizations in general, assigning managerial responsibility for a firm's cooperative strategies to a high-level executive or to a team improves the likelihood that the strategies will be well managed.

Those responsible for managing the firm's set of cooperative strategies should take the actions necessary to coordinate activities, categorize knowledge learned from previous experiences, and make certain that what the firm knows about how to effectively form and use cooperative strategies is in the hands of the right people at the right time. Firms must also learn how to manage both the tangible and intangible assets (such as knowledge) that are involved with a cooperative arrangement. Too often, partners concentrate on managing tangible assets at the expense of taking action to also manage a cooperative relationship's intangible assets.134

Strategic Focus

TROUBLES IN THE RUSSIAN OIL JOINT VENTURE, TNK-BP

The situation in 2009 with the joint venture that British Petroleum (BP) formed in 2003 with three Russian oil tycoons, Mikhail Fridman, Viktor Vekselberg, and Leonard Blavatnik, demonstrates opportunistic behavior as well as political risks. These three oil oligarchs own 50 percent of the venture labeled TNK-BP, and BP owns the remaining 50 percent. The venture gave a Western company unprecedented access to vital Russian oil and gas resources. However, the Kremlin is becoming increasingly involved in the nation's energy production activities and it has claimed that TNK-BP failed to fulfill all terms of its license regarding a particular oil field (the Kovykta field). This claim threatens the joint venture's viability. Part of the problem is that members of the Kremlin feel uncomfortable with the Russian tycoons having control of the state-owned assets and are even more uncomfortable with the fact that BP officials head the joint venture. It has been speculated that Gazprom, the state-run gas giant, may join the venture as a partner to improve the production deficit in the main oil field. If Gazprom does indeed become part owner, it is questionable what it will compensate BP for its ownership position. Over the years, BP has tried to develop a good relationship with the Russian government and demonstrate its commitment by investing billions of dollars. BP has also invested in other Russian ventures to drill in other oil fields, for instance, as a minority stakeholder with Rosneft.

This situation culminated with a battle over who would run TNK-BP, the third largest oil operation in Russia with 17 percent of Russia's reserves. The Russian shareholders charged that BP was running TNK-BP as a BP subsidiary and thereby depressing its values. BP officials considered the conflict as an attempt at “corporate raiding,” accusing the rich Russian partners of hardball tactics. For example, Robert Dudley, the nominated chief executive of TNK-BP, was unable to get a visa and subsequently was banned by Russian courts from serving as CEO. BP officials suspected that this “paper-work problem” was orchestrated by Russian shareholders. $C:\Users\MARTIN BASILIO\Desktop\1111505187_0097.jpg$ The fate of the second biggest foreign investment company in Russia and one of the world's biggest oil companies, TNK-BP, hangs in the balance amid signs of a shifting mood in the Kremlin.

Fridman, one of the Russian owners, was appointed as the interim CEO, and all officials agreed to hire a new CEO that must be fluent in Russian and have business experience in Russia. New members were appointed to help keep the peace on the board, including former German Chancellor Gerhard Schroder. Not only did Dudley leave from the BP side, but the chief financial officer also felt pressure and resigned and left Russia. Thus, the bottom line appears to be that BP is conceding overall control to the Russians, but it is at least maintaining its 50 percent ownership position. Although BP has realized a positive return on its investment, it faces continued risk because of the organization's power structure and it will likely be under the control of the Russian tycoons, who are also subject to influence by government policy. As this example shows, firms that are pursuing international joint ventures need to be concerned about the opportunistic behavior of their partners as well as the political risks involved. Interestingly, other firms have had less control than BP in Russian joint ventures and in fact have lost their ownership positions through pressure by the Russian partners. In this light BP has done better than others, but risks obviously remain.

Two primary approaches are used to manage cooperative strategies—cost minimization and opportunity maximization135 (see Figure 9.4). In the cost minimization management approach, the firm develops formal contracts with its partners. These contracts specify how the cooperative strategy is to be monitored and how partner behavior is to be controlled. The TNK-BP joint venture discussed previously is managed through contractual agreements. The goal of the cost-minimization approach is to minimize the cooperative strategy's cost and to prevent opportunistic behavior by a partner. The focus of the second managerial approach—opportunity maximization—is on maximizing a partnership's value-creation opportunities. In this case, partners are prepared to take advantage of unexpected opportunities to learn from each other and to explore additional marketplace possibilities. Less formal contracts, with fewer constraints on partners' behaviors, make it possible for partners to explore how their resources and capabilities can be shared in multiple value-creating ways.

Firms can successfully use both approaches to manage cooperative strategies. However, the costs to monitor the cooperative strategy are greater with cost minimization, in that writing detailed contracts and using extensive monitoring mechanisms is expensive, even though the approach is intended to reduce alliance costs. Although monitoring systems may prevent partners from acting in their own best interests, they also often preclude positive responses to new opportunities that surface to use the alliance's competitive advantages. Thus, formal contracts and extensive monitoring systems tend to stifle partners' efforts to gain maximum value from their participation in a cooperative strategy and require significant resources to be put into place and used.136

The relative lack of detail and formality that is a part of the contract developed by firms using the second management approach of opportunity maximization means that firms need to trust each other to act in the partnership's best interests. The psychological state of

trust in the context of cooperative arrangements is “the expectation held by one firm that another will not exploit its vulnerabilities when faced with the opportunity to do so.”137 When partners trust each other, there is less need to write detailed formal contracts to specify each firm's alliance behaviors,138 and the cooperative relationship tends to be more stable.139 On a relative basis, trust tends to be more difficult to establish in international cooperative strategies compared with domestic ones. Differences in trade policies, cultures, laws, and politics that are part of cross-border alliances account for the increased difficulty. When trust exists, monitoring costs are reduced and opportunities to create value are maximized. Essentially, in these cases, the firms have built social capital.140 According to company officials, the alliance between Renault and Nissan is built on “mutual trust between the two partners … together with operating and confidentiality rules.”141

Research showing that trust between partners increases the likelihood of alliance success seems to highlight the benefits of the opportunity-maximization approach to managing cooperative strategies. Trust may also be the most efficient way to influence and control alliance partners' behaviors. Research indicates that trust can be a capability that is valuable, rare, imperfectly imitable, and often nonsubstitutable.142 Thus, firms known to be trustworthy can have a competitive advantage in terms of how they develop and use cooperative strategies.143 One reason is that it is impossible to specify all operational details of a cooperative strategy in a formal contract. Confidence that its partner can be trusted reduces the firm's concern about the inability to contractually control all alliance details.

SUMMARY

· • A cooperative strategy is one such that firms work together to achieve a shared objective. Strategic alliances, where firms combine some of their resources and capabilities to create a competitive advantage, are the primary form of cooperative strategies. Joint ventures (where firms create and own equal shares of a new venture that is intended to develop competitive advantages), equity strategic alliances (where firms own different shares of a newly created venture), and nonequity strategic alliances (where firms cooperate through a contractual relationship) are the three basic types of strategic alliances. Outsourcing, discussed in Chapter 3 , commonly occurs as firms form nonequity strategic alliances.

· • Collusive strategies are the second type of cooperative strategies (with strategic alliances being the other). In many economies, explicit collusive strategies are illegal unless sanctioned by government policies. Increasing globalization has led to fewer government-sanctioned situations of explicit collusion. Tacit collusion, also called mutual forbearance, is a cooperative strategy through which firms tacitly cooperate to reduce industry output below the potential competitive output level, thereby raising prices above the competitive level.

· • The reasons firms use cooperative strategies vary by slow-cycle, fast-cycle, and standard-cycle market conditions. To enter restricted markets (slow cycle), to move quickly from one competitive advantage to another (fast cycle), and to gain market power (standard cycle) are among the reasons why firms choose to use cooperative strategies.

· • Four business-level cooperative strategies are used to help the firm improve its performance in individual product markets. (1) Through vertical and horizontal complementary alliances, companies combine their resources and capabilities to create value in different parts (vertical) or the same parts (horizontal) of the value chain. (2) Competition-responding strategies are formed to respond to competitors' actions, especially strategic ones. (3) Competition-reducing strategies are used to avoid excessive competition while the firm marshals its resources and capabilities to improve its competitiveness. (4) Uncertainty-reducing strategies are used to hedge against the risks created by the conditions of uncertain competitive environments (such as new product markets). Complementary alliances have the highest probability of yielding a sustainable competitive advantage; competition-reducing alliances have the lowest probability.

· • Firms use corporate-level cooperative strategies to engage in product and/or geographic diversification. Through diversifying strategic alliances, firms agree to share some of their resources and capabilities to enter new markets or produce new products. Synergistic alliances are ones where firms share resources and capabilities to develop economies of scope. This alliance is similar to the businesslevel horizontal complementary alliance where firms try to develop operational synergy, except that synergistic alliances are used to develop synergy at the corporate level. Franchising is a corporate-level cooperative strategy where the franchisor uses a franchise as a contractual relationship to specify how resources and capabilities will be shared with franchisees.

· • As an international cooperative strategy, a cross-border alliance is used for several reasons, including the performance superiority of firms competing in markets outside their domestic market and governmental restrictions on growth through mergers and acquisitions. Commonly, cross-border alliances are riskier than their domestic counterparts, particularly when partners aren't fully aware of each other's purpose for participating in the partnership.

· • In a network cooperative strategy, several firms agree to form multiple partnerships to achieve shared objectives. A primary benefit of a network cooperative strategy is the firm's opportunity to gain access “to its partner's other partnerships.” When this happens, the probability greatly increases that partners will find unique ways to share their resources and capabilities to form competitive advantages. Network cooperative strategies are used to form either a stable alliance network or a dynamic alliance network. Used in mature industries, partners use stable networks to extend competitive advantages into new areas. In rapidly changing environments where frequent product innovations occur, dynamic networks are primarily used as a tool of innovation.

· • Cooperative strategies aren't risk free. If a contract is not developed appropriately, or if a partner misrepresents its competencies or fails to make them available, failure is likely. Furthermore, a firm may be held hostage through asset-specific investments made in conjunction with a partner, which may be exploited.

· • Trust is an increasingly important aspect of successful cooperative strategies. Firms recognize the value of partnering with companies known for their trustworthiness. When trust exists, a cooperative strategy is managed to maximize the pursuit of opportunities between partners. Without trust, formal contracts and extensive monitoring systems are used to manage cooperative strategies. In this case, the interest is to minimize costs rather than to maximize opportunities by participating in a cooperative strategy.