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

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period of time than in fast-cycle market situations, but for a shorter period of time than

in slow-cycle markets.

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 relation-

ships. They have formed strategic alliances in Europe and Asia and are invested in ven-

tures 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.

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 per-

cent of the selling price.

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.

Firms competing in slow-cycle mar-

kets, 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 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

Table 9.1 Reasons for Strategic Alliances by Market Type

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market). Cooperative strategies can be helpful to firms transitioning from relatively shel-

tered markets to more competitive ones.

Fast-Cycle Markets

Fast-cycle markets are unstable, unpredict-

able, and complex; in a word, “hypercom-

petitive” (a concept that was discussed in

Chapter 5).

Combined, these conditions

virtually preclude establishing long-lasting

competitive advantages, forcing firms to

constantly seek sources of new competi-

tive advantages while creating value by

using current ones. “You are looking at the

future, when U.S. companies will be com-

peting 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.”

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.

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 con-

tributing 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 inter-

esting to see how the competition and cooperation between all of these firms evolve.

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,

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

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.

Mike Margol/PhotoEdit

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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.

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 alli-

ances have gained scale economies.

Business-Level Cooperative Strategy

A firm uses a business-level cooperative strategy to grow and improve its perfor-

mance 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.

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.

Vertical and horizontal are the two types of complementary strategic alli-

ances (see Figure 9.1).

Vertical Complementary Strategic Alliance

In a vertical complementary strategic alliance, firms share their resources and capabili-

ties from different stages of the value chain to create a competitive advantage (see

Figure 9.2).

Oftentimes, vertical complementary alliances are formed to adapt to envi-

ronmental changes;

sometimes the changes represent an opportunity for partnering

firms to innovate while adapting.

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 alli-

ances are more likely to increase, such as in the steelmaking industry.

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

• Complementary strategic alliances

• Vertical

• Horizontal

• Competition response strategy

• Uncertainty-reducing strategy

• Competition-reducing strategy

Figure 9.1 Business-Level Cooperative Strategies

A firm uses a business-

level cooperative

strategy to grow and

improve its performance

in individual product

markets.

Complementary strategic

alliances

are business-

level alliances in which

ﬁ rms share some of their

resources and capabilities

in complementary ways

to develop competitive

advantages.

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Chapter 9: Cooperative Strategy

Primary

Activities

Service

Marketing & Sales

Outbound Logistics

Operations

Inbound Logistics

Firm Infrastructure

Human Resource Management

Technological Development

Procurement

Support Activities

MARGIN

Buyer

Potential Competitors

Supplier

MARGIN

Figure 9.2 Vertical and Horizontal Complementary Strategic Alliances

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 produc-

ing firms such as Electronic Arts and Activision Blizzard, Inc.

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.

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

HOW COMPLEMENTARY

ALLIANCES ARE AFFECTED

BY THE GLOBAL

ECONOMIC DOWNTURN

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.

AP Photo/Shoun Hill

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.

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 pur-

suing 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.

The automotive manufacturing industry is one in which many horizontal comple-

mentary strategic alliances are formed. In fact, virtually all global automobile manu-

facturers 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 competi-

tion. 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

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.

Sources: M. Arnold, 2009, Private equity boost for Latin America, Financial Times, May 12, 6; L. C. Gunipero, R. V.

Handfield, & D. L. Johansen, 2008, Beyond buying: Supply chain managers used to have one main job: Purchasing stuff

cheaply, Wall Street Journal, March 10, R8; P. Lattman, 2009, Schwarzman’s Latin sojourn, Wall Street Journal, May 22,

C2; S. Pignal, 2009, Delhaize shrugs off Unilever clash, Financial Times, March 13, 18; C. Rohwedder, A. O. Patrick, &

T. W. Martin, 2009, Big grocers pulls Unilever items over pricing, Wall Street Journal, February 11, D1, B5l; K. Talley,

2009, Retailers, apparel firms tussle over tough deals, Wall Street Journal, February 11, B6.

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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.

Uncertainty-Reducing Strategy

Some firms use business-level strategic alliances to hedge against risk and uncertainty,

especially in fast-cycle markets.

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 bat-

teries. 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.

Competition-Reducing Strategy

Used to reduce competition, collusive strategies differ from strategic alliances in that col-

lusive 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.

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 com-

petitive 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 air-

lines 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.

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.

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 sug-

gests that joint ventures or cooperation between two firms can lead to less competition

in other markets in which both firms operate.

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.

Firms in these industries recognize that they are interdependent and that

their competitive actions and responses significantly affect competitors’ behavior toward

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Chapter 9: Cooperative Strategy

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.

Some believe that this high degree of concentration results in “prices for branded cere-

als that are well above [the] costs of production.”

The Wall Street Journal reported in

2008 that prices for breakfast cereals were among the easiest to inflate when there are

commodity shortages.

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.

In general, governments in free-market economies need to determine how rivals can

collaborate to increase their competitiveness without violating established regulations.

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.

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 ver-

tical ones, have the greatest probability of creating a sustainable competitive advantage.

Horizontal complementary alliances are sometimes difficult to maintain because they are

often between rivalrous competitors. In this instance, firms may feel a “push” toward and a

“pull” from alliances. Airline firms, for example, want to compete aggressively against oth-

ers serving their markets and target customers. However, the need to develop scale econo-

mies 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 uncer-

tainty 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,

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Part 2: Strategic Actions: Strategy Formulation

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 partici-

pating 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).

Firms use diversifying alliances and synergistic alliances to grow and improve per-

formance by diversifying their operations through a means other than a merger or an

acquisition.

When a firm seeks to diversify into markets in which the host nation’s

government prevents mergers and acquisitions, alliances become an especially appro-

priate option. Corporate-level strategic alliances are also attractive compared with

mergers and particularly acquisitions, because they require fewer resource commit-

ments

and permit greater flexibility in terms of efforts to diversify partners’ opera-

tions.

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 mar-

ket areas. The spread of high-speed wireless networks and devices with global position-

ing 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 met-

ropolitan 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.

Figure 9.3 Corporate-Level Cooperative Strategies

• Diversifying alliances

• Synergistic alliances

• Franchising

A ﬁ rm uses a corporate-

level cooperative

strategy

to help it

diversify in terms of

products offered or

markets served, or both.

diversifying strategic

alliance is a corporate-

level cooperative strategy

in which ﬁ rms share some

of their resources and

capabilities to diversify

into new product or

market areas.

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Chapter 9: Cooperative Strategy

It should be noted that highly diverse networks of alliances

can lead to poorer performance by partner firms.

However,

cooperative ventures are also used to reduce diversification in firms

that have overdiversified.

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.

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 cre-

ate synergy across multiple functions or multiple businesses between

partner firms. The most recent development for Disney’s media seg-

ment, 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.

This is an example of a synergistic diver-

sification alliance.

In recent years, there has been much more competitive interaction between hard-

ware and software firms. Cisco, traditionally a network telecommunications equip-

ment 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 seg-

ment, 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.

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).

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 trade-

marks in a given location for a specified period of time.”

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.

Research suggests that too much innovation

results in difficulties for replicating this success.

Franchising is a popular strategy. In the United States alone, more than 2,500 fran-

chise systems are located in more than 75 industries; and those operating franchising

outlets generate roughly one-third of all U.S. retail sales.

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.

As with diversifying and

synergistic strategic alliances, franchising is an alternative to pursuing growth through

mergers and acquisitions. McDonald’s, Hilton International, Marriott International,

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.

A synergistic strategic

alliance is a corporate-

level cooperative strategy

in which ﬁ rms share some

of their resources and

capabilities to create

economies of scope.

Franchising is a

corporate-level

cooperative strategy

in which a ﬁ rm (the

franchisor) uses a

franchise as a contractual

relationship to describe

and control the sharing

of its resources and

capabilities with partners

(the franchisees).

AP Photo/M. Spencer Green