Definition (Meaning) of Cooperative Strategy
Cooperative strategy is a type of strategy that firms use when they want to collaborate and thus, achieve their objectives.
Basic Understanding on Company Cooperation
Cooperation is a formal agreement between companies, or between companies and organizations (an organization is a broader term of a company).
The concept of cooperation relationships has long been based on the existence of an incentive for organizations to join forces and, in turn, achieve their joint objectives.
Cooperation between companies lies midway between pure market transactions (for organic growth) and mergers and acquisitions. Cooperation is applicable only when the companies participating in the partnership agreement still have their governance mechanisms and maintain their independence at a certain level.
Examples of Cooperative Strategy
Three firms use a cooperative strategy to apply technological innovations and produce a particular type of smartwatch. They combine each firms’ unique resources to develop this product that none of the firms could create by themselves.
A firm selling coffee products cooperates with another firm specialized in making ice cream. They launch a series of coffee-flavored ice cream products that contain actual coffee. The products are sold mostly in supermarkets.
Purposes of Cooperative Strategy
First and foremost, firms can use a cooperative strategy to create competitive advantage. This type of competitive advantage is usually called collaborative advantage (or competitive advantage of partnerships), to hints at the fact that this advantage is created because of the cooperation between firms.
For the partnership to create competitive advantage, there must be something idiosyncratic about the relationship. There are four specific ways firms can do this.
- Invest in relation-specific assets. Firms that follow this practice may realize productivity gains in the value chain. These gains can be recognized through lower total value chain costs, greater product differentiation, fewer defects, and faster product development cycles.
- Exchange knowledge, especially knowledge that results in joint learning. A production network with superior knowledge-transfer mechanisms among users, suppliers, and manufacturers usually enjoy more benefits than production networks with less effective knowledge-sharing routines.
- Combine complementary, but scarce, resources and capabilities. Complementary resources are resources that collectively create more value than the sum of those resources obtained from each partner. These resources are synergized in a way that is more valuable, rare, and difficult to imitate than they had been before they were combined.
- Lower transaction costs by hanging a more effective governance mechanism. This governance mechanism may come in two forms: (1) third-party enforcement of agreements and (2) self-enforcing agreements. In general, self-enforcing mechanisms are more effective than third-party enforcement mechanisms at minimizing transaction costs.
Firms could also use a cooperative strategy to create value for a customer that they likely could not create by themselves. Using a cooperative strategy, they can design, develop, and launch a product (good or service) into a specific market.
Firms can practice a cooperative strategy to create synergies. They do this by combining forces, which enables a more complete use of different types of assets possessed by each firm. Specifically, firms may pool or exchange their complementary assets with different qualities. The intense use of these assets will then trigger synergies. Note that complementary assets are assets that the investment in one of them increases the marginal returns in another.
Firms may consider using a cooperative strategy as a means to be more innovative, or to exploit innovations of the partners. Firms accomplish such tasks by combining their complementary assets. For example, an entrepreneurial venture seeks distribution capabilities from its partnership to introduce innovative products to the targeted market. A well-established corporation may use a cooperative strategy to gain access to new technological knowledge of another entrepreneurial startup.
Risk of Cooperative Strategy
One major risk that firms using a cooperative strategy must deal with is relational risk, such as opportunistic behaviors of their partners. To prevent such behaviors, firms may have to rely on the cooperative agreement. Having full awareness of what a partner wants in cooperation could mitigate the likelihood of the firm suffering from opportunistic behaviors.
Another major risk of a cooperative strategy is performance risk. Firms may misrepresent the resources they can bring to the cooperation or may not be able to make those resources available as of their agreement. This situation usually occurs when firms promise to bring intangible assets to the partnership, such as superior knowledge of local conditions.
Advantages and Disadvantages of Cooperation (vs. Non-Cooperation)
There are several advantages of cooperation in comparison to non-cooperation.
- Firms have an increased capacity without having to develop new resources.
- Firms can gain time relative to their competitors.
- Firms can maintain their flexibility at a certain level.
Disadvantages of cooperation are as follows:
- Firms may experience a reduction in strategic autonomy, at least in the area where they choose to cooperate with other firms.
- Firms may experience a deterioration in their overall performance in case cooperation leads to conflicts between the companies.
- Firms may lose their competitive advantages if other companies learn their technology and critical knowledge.
Network Cooperative Strategy
A network cooperative strategy is a cooperative strategy in which several firms cooperate to form multiple cooperation to achieve their shared objectives.
Some reasons firms use a network cooperative strategy are to (1) drive their growth, (2) differentiate themselves from competitors, (3) enter new markets, (4) create competitive advantage, and (5) be more innovative.
Another major reason for firms to consider cooperating in a network is that it can give firms access to their partners’ other partners. These multiple collaborations may have a big impact on firms as their shared resources and capabilities are expanded.
A limitation with using a network cooperative strategy is that firms may be locked into the cooperation and expected to help other firms. Excessive expectations may negatively affect the performance of the firm over time. Thus overall, it also affects the performance of the network.
Types of Cooperative Strategy
Strategic Alliance
The first type of cooperative strategy is a strategic alliance. A strategic alliance is an agreement between two or more independent firms or business units to jointly achieve their business objectives.
Firms create a strategic alliance to jointly develop, sell, and deliver goods and services (to their current markets and customers). They do these tasks by exchanging and sharing some of their resources and capabilities.
Firms can also use a strategic alliance to enter new markets and reach new customers. To do these tasks, they again rely on the exchange of their resources and capabilities.
Firms also join a strategic alliance as a foundation for new competitive advantage. They also do this by using additional resources and capabilities that are developed by combining their original resources and capabilities.
Collusion
The second type of cooperative strategy is collusion. Collusion is an agreement between two or more independent firms in an industry to reduce industry output and raise prices. Collusion strategy results in production below a fully competitive level, and prices above fully competitive pricing.
There are two types of collusion: (1) explicit collusion and (2) tacit collusion.
In explicit collusion, firms cooperate through direct negotiation and jointly agree about how much to produce and charge.
Certain countries consider explicit collusion to be illegal, such as the U.S and many developed economies.
For example, a large agricultural products firm conspires with its competitors to lower the sales volume and raise the price of food in the market. This explicit collusion strategy helps firms produce less and can sell their products at a higher price. In this situation, the strategy is considered illegal if conducted in the U.S.
In tacit collusion, firms cooperate indirectly through a set of signals. They observe the production and pricing decisions of their competitors to issue proper responses.
Even tacit collusion may be illegal.
For example, a large firm operating in the stream turbine industry publicly states to reduce their prices. Other competitors would pick up on the signal and adjust their prices accordingly. Thus, the two firms can enjoy stable profit margins over a long period. In the U.S, this situation would be considered illegal.
Resources
Further Reading
Related Concepts
References
- Hitt, M. A., Ireland, D. R., & Hoskisson, R. E. (2016). Strategic Management: Concepts: Competitiveness and Globalization (12th ed.). Cengage Learning.
- Wheelen, T. L. (2021). Strategic Management and Business Policy: Toward Global Sustainability 13th (thirteenth) edition Text Only. Prentice-Hall.