Why do firms use cross border strategic alliances

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Topic

Narration

1

Introduction

Welcome to Senior Seminar in Business Administration.

In this lesson we will discuss Cooperative Strategy.

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Objectives

Upon completion of this lesson, you will be able to:

Identify various levels and types of strategy in a firm.

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Supporting Topics

In order to achieve this objective, the following supporting topics will be covered:

Strategic alliances;

Cooperative strategies; and

Competitive risks.

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Strategic Alliances

Recognized as a viable engine of firm growth, cooperative strategy is a strategy in 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 that exceeds the cost of providing that value and to establish a favorable position relative to competition.

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 additional resources and capabilities as the foundation for new competitive advantages. To be certain, the reality today is that strategic alliances have become a cornerstone of many firms’ competitive strategy.

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Strategic Alliances, continued

The three major types of strategic alliances include joint venture, equity strategic alliance, and nonequity strategic alliance.

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 establishing long-term relationships and in transferring tacit knowledge. Because it can’t be codified, tacit, or implied, knowledge is learned through experiences such as those taking place when people from partner firms work together in a joint venture.

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.

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 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.

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Check Your Understanding

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Business-Level Cooperative Strategy

A firm uses a business-level cooperative strategy to grow and improve its performance in individual product markets. 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 that will lead to success in a specific product market.

The four business-level cooperative strategies are:

Complementary strategic alliances;

Competition response strategy;

Uncertainty-reducing strategy; and

Competition-reducing strategy.

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Business-Level Cooperative Strategy, continued

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 alliances. In a vertical complementary strategic alliance, firms share their resources and capabilities from different stages of the value chain to create a competitive advantage. A horizontal complementary strategic alliance is an alliance in which firms share some of their resources and capabilities from the same stage of the value chain to create a competitive advantage.

Competitors initiate competitive actions to attack rivals and launch competitive responses to their competitor’s actions. Strategic alliances can be used at the business level to respond to competitor’s 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.

Some firms use business-level strategic alliances to hedge against risk and uncertainty, especially in fast-cycle markets. Also, they are used where uncertainty exists, such as in entering new product markets or emerging economies. In other instances, firms form business-level strategic alliances to reduce the uncertainty associated with developing new products or establishing a technology standard.

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. 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.

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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.

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.

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.

Franchising is a corporate-level cooperative strategy in which a firm uses a franchise as a contractual relationship to describe and control the sharing of its resources and capabilities with partners.

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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. These alliances too are sometimes formed instead of mergers and acquisitions. Even though cross-border alliances can themselves be complex and hard to manage, they have the potential to help firms use their resources and capabilities to create value in locations outside their home market.

In general, cross-border alliances are more complex and risky than domestic strategic alliances. However, the fact that firms competing internationally tend to outperform domestic-only competitors suggests the importance of learning how to diversify into international markets.

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Network Cooperative Strategy

Increasingly, firms use several cooperative strategies. In addition to forming their own alliances with individual companies, a growing number of firms are joining forces in multiple networks. 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.

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Competitive Risks

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 seventy percent of them fail.

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.

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.

Another risk is a firm failing to make available to its partners the resources and capabilities that it committed to the cooperative strategy. This risk surfaces most commonly when firms form an international cooperative strategy.

A final risk is that one firm may make investments that are specific to the alliance while its partner does not.

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Summary

We have reached the end of this lesson. Let’s take a look at what we have covered.

First, we discussed strategic alliances. The three major types of strategic alliances include joint venture, equity strategic alliance, and nonequity strategic alliance.

Next, we went over cooperative strategies. These include business-level cooperative strategy, corporate-level cooperative strategy, international cooperative strategy, and network cooperative strategy.

We concluded the lesson with a discussion on competitive risks. These include opportunistic behaviors, competence misrepresentation, failing to make available resources and capabilities, and one firm making investments while its partner does not.

This completes this lesson.