Cooperative Strategy
Thirty years ago, few managers would have considered a cooperative strategy other than as a means to enter a country where local law required joint ventures with local companies for entry into the market. A structural hierarchy and the use of top-down authority were seen as the only way to organize in most firms. This led to firms doing things that they needed to have done but at which they were not very good.
One of the themes in corporate strategy today is consideration of the proper boundaries of a firm. The reasoning is similar to that used in outsourcing. Outsourcing is a great example of how some activities can be done by others on behalf of a firm, and be done better, or at lower cost, or both.
Cooperative strategy presents a firm with a make-or-buy type of decision. If it is easier, cheaper, quicker, or more effective for successful market competition to have an important part of a product or service offering come from an alliance partner, then it is in the firm’s interest to make such an alliance work rather than trying to do that activity internally.
Consider the example of international passenger airlines. It is easy to see that it would be very costly and administratively difficult for any one of the three US carriers to develop and run a worldwide airline. It should be noted that two airlines of the past, Pan American World Airways (Pan Am) and Trans World Airlines (TWA), tried to do just that. For those two, the travel demands of the public were far less than they are today. Further, they held special sabotage, or pass through rights, that helped them outside of the United States. Still, both of these airlines failed in spite of a growing market for international air travel.
Alliances – Vertical and Horizontal
Strategic alliances can be seen as either business-level or corporate-level actions. In some ways, the distinction is not always clear. However it is viewed, the alliance needs to pass the better-off test we have discussed every week. Passing the test means that the firm is better off in its ability to earn returns for shareholders because it is in an alliance than it would have been without the alliance. Remember that in an alliance, the partners also share in some of the gains. Thus, the share of the gains that goes to each firm has to outweigh the costs and risks to each firm of establishing and managing the alliance.
A common type of alliance is the vertical alliance between a seller and a buyer. These are common in business transactions and are often found in the nature of long-term contracts and commitments of both parties. An example of this would-be Sony’s relationship as Dell’s monitor supplier for personal computers.
Suppose a customer orders a computer with a monitor on Dell’s website. Dell never sees the monitor, and Sony does not sell it to the customer. Instead, Sony “supplies” the monitor to Dell, meaning that the United Parcel Service (UPS) picks up the monitor at the Sony plant, picks up the computer at the Dell plant, matches the two, and delivers both to the customer. Only a tightly coordinated information system shared by Dell and Sony, with another link with UPS, makes this possible.
Another type of alliance is a horizontal alliance. Horizontal alliances are often found among potential competitors. The airline alliances are good examples of horizontal alliances. Clearly, the government is concerned about horizontal alliances reducing competition. But as the airlines example shows, this does not have to occur. Instead, competition can be raised to a higher level. This benefits consumers as well as firms.
Alliances – The Risks
It is important to remember that in any alliance the partner with whom the alliance is made is a firm interested in its own profit. That creates a natural tension within the alliance. Clearly, both (or all) firms in the alliance need to see cooperation as a win-win situation. If a firm does not see it that way, the chance for opportunistic behavior is high.
One way in which firms can protect themselves is through strong contracts with the alliance partners that set out obligations and limitations on behavior. Sometimes, however, it is hard to anticipate at the beginning of the alliance all the situations that could arise. So many items are left out of contracts.
The mere fact that an item is in the contract does not mean that it will be followed. Each partner needs to have a credible means of monitoring the behavior of the others to prevent opportunistic actions. And writing the detailed contract and monitoring partners impose costs on the firm. If these costs exceed the advantages, then the alliance will not make shareholders better off.
Increasingly, today, competitive advantage is based on intellectual property that a firm has developed with its core competencies. Exploiting intellectual property through strategic alliances has the benefit of being a fast way to enter markets around the world. But countries have different protection levels for intellectual property, with some being very weak.
Where weak protections exist for intellectual property, it may be difficult for a firm to enforce contractual claims in the local courts when breaches occur. Here, a joint venture, wherein the truly valuable knowledge is never disclosed to the partner, is often used. While this may not be optimal in terms of knowledge exploitation in general, it may be the best alternative for the firm.