Cooperative Strategies

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Structure of the Session:

Course Outline An overview

Topic: Cooperative Strategy Different levels of Cooperative Strategy

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Cooperative Strategy:

Firms work together to achieve a desirable outcome / a shared outcome

This is a cooperative strategy

Aimed to create relational or collaborative advantage

An example IBM (the opening case)

Having a cooperative relationship via strategic alliances..

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Cooperative Strategy:

What is a strategic alliance?

An important way of improving competitiveness

In a way, it is a form of partnership (for example, joint venture)

We can define it as ..a cooperative strategy in which firms combine some

of their resources and capabilities to create a competitive advantage

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Cooperative Strategy:

Reasons for Making Strategic Alliances:

Some data to justify this In large firms, 25% and more sales revenue is a
result of strategic alliances

The trend is such that it is more like alliance versus alliance rather than firm versus
firm

Example: An example can be ICICI Prudential versus Bajaj Allianz

Need to create social capital and leverage from it This is dependent on

reciprocity

Important way to assess whether a given strategic alliance can be converted

into merger or acquisition Strategic alliances can be taken as testing process

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Cooperative Strategy:

Market Type and Reasons for Making Strategic Alliances:

1) Slow-cycle markets Fear of losing competitive advantage is largely less.

Imitation is costly and time-consuming. An example can be infrastructure
sector, that is, railroads

Strategic alliances in these markets ensure that access to new and restricted markets
are made possible

2) Fast-cycle markets Imitation can be rampant and there is a fear of losing

competitiveness. The market is hypercompetitive. An example can be online
media platform

Strategic alliances in these markets ensure that changes are made quickly

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Cooperative Strategy:

Market Type and Reasons for Making Strategic Alliances:

3) Standard-cycle markets Imitation is relatively protected. Business

sustainability is longer than fast-cycle markets but shorter than slow-cycle
markets. An example can be airlines

Strategic alliances in these markets ensure that market power and economies of
scale are achieved

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Cooperative Strategy:

What is a strategic alliance?

Some examples from the insurance industry..

ICICI Prudential Life Insurance Company Ltd. A strategic alliance between

ICICI Bank and Prudential Plc (UK based firm)

Types of Strategic Alliance:

1) Joint Venture
2) Equity Strategic Alliance
3) Nonequity Strategic Alliance

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Cooperative Strategy:

Types of Strategic Alliance:

1) Joint Venture

Two or more firms get together to create a legally independent company

Why create a joint venture?

To create synergies Difficult to achieve goals and objective by applying
individual resources and capabilities

Substantial competitive advantage through a joint effort

There might be an urge to enter risky / uncertain markets

Examples: Maruti Suzuki

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Cooperative Strategy:

Types of Strategic Alliance:

2) Equity Strategic Alliance

Two or more firms own different percentages of the company Foreign Direct
Investment can be a type of equity strategic alliance

Examples: Mitsubishi UFJ Financial Group and Morgan Stanley

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Cooperative Strategy:

Types of Strategic Alliance:

3) Nonequity Strategic Alliance

No legal independent company is created - Kind of an informal arrangement

There is no equity position in this kind of alliance Legally abiding

commitments are few

Examples: Outsourcing can be a kind of nonequity strategic alliance

Other examples include: Licensing, distribution and supply arrangements

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Cooperative Strategy:

Types of Cooperative Strategies:

1) Business-level cooperative strategy

2) Corporate-level cooperative strategy

3) International-level cooperative strategy

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Cooperative Strategy:

Types of Cooperative Strategies:

1) Business-level cooperative strategy

Ways to improve competitiveness in some product markets using cooperative

strategies like:

a) Complementary strategic alliances (vertical and horizontal)

b) Competition response strategy Self-reading

c) Uncertainty-reducing strategy Self-reading

d) Competition-reducing strategy

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Cooperative Strategy:

Types of Cooperative Strategies:

1) Business-level cooperative strategy

a) Complementary strategic alliances (vertical and horizontal) Shared

resources and capabilities are used in complementary ways to achieve the
desired goal

Vertical complementary strategic alliance An example can be different stages

of a value chain

Horizontal complementary strategic alliance An example can be strategic

alliance of companies in the same business (Renault-Nissan alliance)

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Cooperative Strategy:

Types of Cooperative Strategies:

1) Business-level cooperative strategy

d) Competition-reducing strategy

These kind of strategies are known as collusive strategies Their legality is

questionable

Two types of collusive strategies:

i) Explicit collusion

ii) Tacit collusion

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Cooperative Strategy:

Types of Cooperative Strategies:

1) Business-level cooperative strategy

d) Competition-reducing strategy

i) Explicit collusion An explicit negotiation between two or more

firms for price and scale of production

Example: A global conspiracy to fix air freight prices between Cargolux

Airlines, Nippon Cargo Airlines and Asiana Airlines

This is hard to prove It might be the case that the firms are following a
leader as far as pricing is concerned

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Cooperative Strategy:

Types of Cooperative Strategies:

1) Business-level cooperative strategy

d) Competition-reducing strategy

ii) Tacit / Implicit collusion A possibility in highly concentrated

industries

Prices remain well above the cost of production and have a likelihood
to inflate in times of shortages

Example: US cereal market dominated by four firms namely Kelloggs,

General Mills, Post and Quaker

These dominant firms exhibit mutual forbearance

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Cooperative Strategy:

Types of Cooperative Strategies:

2) Corporate-level cooperative strategy

Different types of corporate-level cooperative strategies are:

a) Diversifying Strategic Alliance

b) Synergistic Strategic Alliance

c) Franchising

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Cooperative Strategy:

Types of Cooperative Strategies:

2) Corporate-level cooperative strategy

a) Diversifying Strategic Alliance

Can be used for diversifying into new products or new markets

Example: Fujitsus strategic alliance with Advanced Micro Devices An issue of

financial burden?

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Cooperative Strategy:

Types of Cooperative Strategies:

2) Corporate-level cooperative strategy

b) Synergistic Strategic Alliance

Strategic alliances used to create synergy between partners in number of areas

How not to affect synergies between different partners?

Example: Ciscos move into services without affecting its partners IBM and HP

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Cooperative Strategy:

Types of Cooperative Strategies:

2) Corporate-level cooperative strategy

c) Franchising

A contractual relationship between the franchisor and the franchisee Sharing

of resources and capabilities depends upon the contractual arrangements

The relationship is between two legally independent companies

A good strategy in fragmented markets like retail An example from Indian

context can be Amul and Vadilal

Franchising leads to consolidation of businesses

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Cooperative Strategy:

Types of Cooperative Strategies:

3) International cooperative strategy

A cross-border strategic alliance

Example: IMG (International Management Group) Worldwide having international

joint ventures with global broadcasting companies to grow its sports entertainment
business

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Cooperative Strategy:

Network Cooperative Strategy:

As the name suggests, several firms get together to create multiple

partnerships

Example: Clustered firms can be a good example of this

Silicon Valley, Singapores Biopolis (bio-medical sciences) and Fusionopolis (physical
sciences and engineering)

Japanese Keiretsus and Chinese Guanxi

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Cooperative Strategy:

Network Cooperative Strategy:

Large firms can get access to new innovations and small firms get more credibility

Two types of alliance networks:

Stable alliance network created in stable and mature industries

Dynamic alliance network created in industries where quick innovations are

required

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Risks with Cooperative Strategy:

Termed as marriage of convenience Issues with taking it for a longer duration

Data suggests that 50% of cooperative strategies fail

Chances of opportunistic behaviour from partners

Example: TNK BP Alliance An alliance between British Petroleum and Russian tycoons

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How to manage cooperative strategies?

Two ways of management can be:

Cost minimisation Formal contracts, ways to control opportunistic behaviour,

reduce costs linked with cooperative strategies, behaviour is controlled and
monitored

Opportunity maximisation Maximise value within a partnership, informal contracts

and less controlled behaviour, objective is to get hold of new / unexpected
opportunities

The way to manage a cooperative strategy is not mutually exclusive hence both of the
above can be used in combination

Note:Trust is vital and vulnerabilities of a firm should not be exploited. Trust within a
partnership can be a strong capability VRIN framework

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