Hitt M.A., Ireland R.D., Hoskisson R.E. Strategic Management: Competitiveness and Globalization: Concepts

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248

Part 2: Strategic Actions: Strategy Formulation

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83. A. Ojala, 2008, Entry in a psychically

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95. Zamiska, Ye, & O’Connell, Chinese

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97. M. Johnson, 2001, Learning from toys:

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98. U. Lichtenthaler & H. Ernst, 2007,

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102. H. K. Steensma, J. Q. Barden, C.

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103. N. Rahman, 2008, Resource and risk

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Chapter 8: International Strategy

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111. D. Li, L. Eden, M. A. Hitt, & R. D.

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124. K. F. Meyer, M. Wright, & S. Pruthi, 2009,

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125. Y. Park & B. Sternquist, 2008, The global

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127. D. L. Paul & R. B. Wooster, 2008, Strategic

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128. Meschi, Government corruption and

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129. J. Che & G. Facchini, 2009, Cultural

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130. A. C. Inkpen, 2008, Knowledge transfer

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B. Vissa, 2005, Are emerging economies

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134. M. F. Wiersma & H. P. Bowen, 2008,

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135. Dastidar, International corporate

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136. S. E. Christophe & H. Lee, 2005, What

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J. A. Doukas & L. H. P. Lang, 2003, Foreign

direct investment, diversification and firm

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137. H. Zou & M. B. Adams, 2009, Corporate

ownership, equity risk and returns in the

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138. A. Birnik & R. Moat, 2009, Mapping

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140. Shimizutani & Todo, What determines

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internationalization of professional service

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2005, Strategic leadership and executive

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143. H. L. Sirkin, J. W. Hemerling, &

A. K. Bhattacharya, 2009, Globality:

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M. A. Hitt, R. E. Hoskisson, & H. Kim,

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on innovation and firm performance in

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144. E. García-Canal & M. F. Guillén, 2009,

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J. Child, L. Chung, & H. Davies, 2003,

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zoom ahead as buyers concentrate on

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Studying this chapter should provide you with the strategic

management knowledge needed to:

1. Deﬁ ne cooperative strategies and explain why ﬁ rms use them.

2. Deﬁ ne 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 diversiﬁ ed

ﬁ rms.

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.

apter s

provi

e you wit

e strategi

ge nee

rative strategies and explain why ﬁ rms use them

iscuss three types o

strategic alliances

siness-

eve

cooperative strategies an

escri

e t

eir

e of corporate-level cooperative strate

ies in diversiﬁ ed

the importance of cross

border strategic alliances as an

CHAPTER 9

Cooperative

Strategy

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 ﬁ rm’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 ﬁ rm’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 deﬁ ned and discussed in this chapter), IBM ﬁ nds itself working with a variety of

ﬁ rms in order to deliver

products and services.

However, IBM has speciﬁ c

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

ﬁ ve 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 ﬁ rm engaged in materials science,

to develop materials and processes for circuitry

necessary to advance futuristic semiconductors.

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 ﬁ rm 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).

USING COOPERATIVE

STRATEGIES AT IBM

Alessandro Della Bella/Keystone/Landor

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.

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Part 2: Strategic Actions: Strategy Formulation

However, other ﬁ rms 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 signiﬁ cant 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) ﬁ nding

partners in areas outside existing competencies; and ﬁ nally, that companies can shape their

alliance networks by conscious actions. Other ﬁ rms 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 ﬁ rm Fujitsu. These two ﬁ rms are traditionally

hardware ﬁ rms 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 ﬁ rm 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.

Sources: R. Agarwal & C. E. Helfat, 2009, Strategic renewal of organizations, Organization Science, 20(2):

281–293; W. M. Bulkeley, 2009, Corporate news: IBM buoyed by its balance of business, Wall Street Journal,

April 20, B3; W. M. Bulkeley, 2009, IBM results are clouded by Oracle’s deal for Sun, Wall Street Journal, April

21, B1; S. Hamm, 2009, Big blue goes into analysis, BusinessWeek, April 27, 16; J. Menn, 2009, IBM focuses on

software and services to meet targets, Financial Times, April 21, 19; J. M. O’Brien, 2009, IBM’s grand plan to

save the planet, Fortune, May 4, 84–91; 2009, IBM completes acquisition of ILOG, 2009 Journal OR-MS Today,

36(1): 60; W. M. Bulkeley, 2008, Business technology, A service rival looms for IBM; H-P deal for EDS to pose

challenge for big blue unit, Wall Street Journal, May 20, B6; K. Dittrich, G. Duysters, & A.-P. de Man, 2007,

Strategic repositioning by means of alliance networks: The case of IBM, Research Policy, 36: 1496–1511;

S. Hamm, 2007, Radical collaboration: Lessons from IBM’s innovation factory, BusinessWeek, September 10, 16.

As noted in the Opening Case, firms use three means to grow and improve their

performance—internal development, mergers and acquisitions, and cooperation. In each

of these cases, the firm seeks to use its resources in ways that will create the greatest

amount of value for stakeholders.

Recognized as a viable engine of firm growth,

a cooperative strategy is a means

by which firms work together to achieve a shared objective.

Thus, cooperating with

other firms is another strategy firms use to create value for a customer at a lower cost

than it would to do it by the firm itself and thereby establish a favorable position relative

to competition.

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 cus-

tomer 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.

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.

The objectives IBM and its various partners seek by working together high-

light 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.

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Part 2: Strategic Actions: Strategy Formulation

A cooperative strategy

is a strategy in which ﬁ rms

work together to achieve a

shared objective.

255

Chapter 9: Cooperative Strategy

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 chap-

ter. In a collusive strategy, two or more firms cooperate to increase prices above the fully

competitive level.

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.

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.

Strategic alliances allow firms to leverage

their existing resources and capabilities while working with partners to develop addi-

tional resources and capabilities as the foundation for new competitive advantages.

be certain, the reality today is that “strategic alliances have become a cornerstone of many

firms’ competitive strategy.”

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.”

His com-

ment 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.

A competitive advantage developed through a cooperative strategy often is called

a collaborative or relational advantage.

As previously discussed, particularly in

Chapter 4, competitive advantages enhance the firm’s marketplace success. Rapid tech-

nological 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.

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.

For all cooperative arrangements, including those we are

describing here, success is more likely when partners behave cooperatively. Actively solv-

ing 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.

A strategic alliance is

a cooperative strategy

in which firms combine

some of their resources

and capabilities to

create a competitive

advantage.

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Part 2: Strategic Actions: Strategy Formulation

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,

are effective in estab-

lishing 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.

As dis-

cussed in Chapter 3, tacit knowledge is an important source of competitive advantage

for many firms.

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.

Overall, evidence suggests that a joint venture may be the opti-

mal 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.

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 differ-

ent 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.

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 capi-

tal 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 relation-

ship may move towards combining Mitsubishi’s and Morgan Stanley Japan’s Securities

Corporation into a single entity in Japan.

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.

In this type of alliance, firms do not establish a sepa-

rate 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.

The relative informality and lower com-

mitment levels characterizing nonequity strategic alliances make them unsuitable for

complex projects where success requires effective transfers of tacit knowledge between

partners.

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.

Typically, outsourcing commitments are specified in the

form of a nonequity strategic alliance. (Discussed in Chapter 3, outsourcing is the pur-

chase of a value-creating primary or support activity from another firm.) Dell Inc. and

A joint venture is a

strategic alliance in which

two or more ﬁ rms create

a legally independent

company to share some

of their resources and

capabilities to develop a

competitive advantage.

An equity strategic

alliance is an alliance in

which two or more ﬁ rms

own different percentages

of the company they have

formed by combining

some of their resources

and capabilities to create

a competitive advantage.

A nonequity strategic

alliance

is an alliance in

which two or more ﬁ rms

develop a contractual

relationship to share some

of their unique resources

and capabilities to create

a competitive advantage.

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Chapter 9: Cooperative Strategy

most other computer firms outsource most or all of their production of laptop comput-

ers 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.

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 edu-

cational institutions. In fact, many firms are cooperating with educational institutions

to help commercialize ideas coming from basic research at universities.

In for-profit

organizations, many executives believe that strategic alliances are central to their firm’s

success.

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”

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.

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 perfor-

mance objectives.

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.

The effects of the greater use of cooperative strategies—particularly in the form of strate-

gic 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.

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.

In summary, we can note that firms form strategic alliances to reduce competition,

enhance their competitive capabilities, gain access to resources, take advantage of oppor-

tunities, build strategic flexibility, and innovate. To achieve these objectives, they must

select the right partners and develop trust.

Thus, firms attempt to develop a network

portfolio of alliances in which they create social capital that affords them flexibility.

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).

The individually unique competitive conditions of slow-cycle, fast-cycle, and

standard-cycle markets

find firms using cooperative strategies to achieve slightly differ-

ent 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 monopolis-

tic 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