Strategy & Leadership

Emerald Article: Cooperative strategies Richard P. Nielsen

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To cite this document: Richard P. Nielsen, (1993),"Cooperative strategies", Strategy & Leadership, Vol. 14 Iss: 2 pp. 16 - 20 Permanent link to this document: http://dx.doi.org/10.1108/eb054137 Downloaded on: 11-04-2012 To copy this document: permissions@emeraldinsight.com This document has been downloaded 755 times.

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COOPERATIVE STRATEGIES
By Richard P. Nielsen

M
March Planning Review 1986

ICHAEL PORTER DISCUSSES three generic strategies for outperforming competitors in his influential book, Competitive Strategyoverall cost leadership, differentiation, and focus. While these strategies are familiar to planners, what may be less familiar but equally successful are strategies that stress cooperative mutual gain rather than strict competition. There are four types of generic cooperative mutual gain strategies: Trading different resources. Pooling similar resources and risks. Expanding total demand. Increasing the number of mutual gain players. TRADING DIFFERENT RESOURCES Trading different and complementary resources is becoming an increasingly common cooperative mutual gain strategy in the 1980s because of rapid technological change as well as continuously evolving market structures. What resources are being traded, why, and with what effects? Resource trading seems to be a significant element in the mutual success of the Lotus software company and IBM's PC jr. IBM initiated the trade strategy by offering to advertise Lotus 1-2-3 software nationally

if Lotus would permit IBM to use Lotus products in the same ads with its PC jr. products. Although IBM had software that was competing with Lotus prod ucts in a swiftly changing market, Lotus garnered the best reputation for high-quality spreadsheet business software applications. IBM, on the other hand, had vast resources available for national advertising. This trade helped both IBM and Lotus. Lotus received enormous free advertising and promotion of its products as both compatible with IBM machines and good for business applications. IBM was able to push promotion of the PC jr.'s capacity for handling the leading business application spreadsheet software. Trading different and complementary resources between former competitors can result in mutual gains for both firms. Most importantly, it can save a company the high cost of developing its own version of the resource. Even if a firm's product could achieve the quality of a potential partner's, it may well be that the partner's reputation is the crucial determining factor for success in the marketplace. Avoiding duplication can save money all around. Exchanging resources can give trading partners a leg up in competing with larger firms who have all the resources they need. It can also help avoid the kind of destructive rivalry in which firms spend so much on resource development they erode profits.

Richard P. Nielsen is Associate Professor at the Boston Colle School of Management in Chestnut Hill, Massachusetts. His previous appearance in Planning Review was his prizewinning article, "Alternative Managerial Responses to Ethica Dilemmas."

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In the process of trading different and comple mentary resources, trading firms develop an aware ness of their own and their partner's strengths and weaknesses. This is where it takes thoughtful up-tothe-minute negotiating skills to devise win-win trades with former competitors instead of the old win-lose tack. Trading also demands a certain amount of trust among partners in developing a new outlook that One of the most successful uses of this strategy is the Microelectronics and Computer Technology Corporation. MCC opened its doors in Austin, Texas, in September 1983, backed by its share holders and directors: Advanced Micro Devices, Allied Corporation, Boeing, BMC Industries, Control Data, DEC, Kodak, Gould, Harris Corporation, Lockheed Missiles and Space Company, Martin Marietta, Mostel Corporation, Motorola, National Semiconductor, NCR, RCA, Rockwell International, and Sperry. According to MCC's CEO, B. R. Inman, "The credit for the whole concept of MCC has to go to William Norris (the founder and CEO of Control Data), who believed that individual companies could not bring sufficient focus to bear to achieve break throughs, that we were not at a place in time where we'd gotten the quick return on capital in the information-handling industry, and that the R&D for the next series of gains was going to be substan tially more capital intensive. The four projects we're going to embark upon are the ones they [the member companies] ultimately concluded none of them could do by themselves." Not only do member companies invest money in the pooled R&D effort but they can and do also invest human resources. Importantly, it's not neces sary for all member companies to invest in or directly benefit from all projects. At MCC there are six shareholders in microelectronics packaging, six in software, nine in CAD/CAM, and six in advanced computer architecture. As with all mutual gain strategies, the pooling strategy can be used by many different types of organizationsnot just those in high tech. For example, the Station Program Cooperative is an organization funded by independently owned and operated nonprofit, state, and local governmentowned television stations. Together, these stations can produce programs with pooled financial resources that would be too expensive and/or too risky to undertake alone. Another example of this strategy is found in the running of many multiple-company office buildings. While many large company tenants could hire their own security and maintenance staffs, they often find it more convenient and less expensive to pool such human resources. Firms may adopt pooling strategies not only because they consider it too expensive and risky to spend the resources individually but also because they're trying to avoid destructive competition. While the individual members of the MCC pool might be able to invest in an expensive and risky

combats paranoia about whether one partner may be benefiting so much from a potential trade that it will turn around, break the partnership, and injure the other participants. A major plus is that firms trading resources can sometimes catapult an entire industry into a higher growth phase. Trading different resources can also revolutionize an industry. For example, in the subcompact segment of the global automobile market, U.S. firms are trading their names, marketing, financial, and political resources with Korean and Japanese firms in return for their small-car design and production resources. This version of the mutual gain trading strategy, which Peter Drucker calls "production sharing," is completely changing the structure of the industry. In the near future, it may not be possible for a U.S. firm to compete in the U.S. or global sub-compact market without East Asian partners. Similar shifts are taking place in various worldwide consumer electronics markets such as video cassette recorders. POOLING SIMILAR RESOURCES AND RISKS The second generic mutual gain strategy is to pool similar resources and risks in order to lower costs. Space can be shared; manufacturing facilities can be jointly owned; R&D expenditures can be pooled; security and maintenance personnel can be shared; and marketing resourceseven companiescan be jointly owned, particularly in foreign markets.

March Planning Review 1986

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"Generic mutual gain strategies are more additive than competitive ones."
R&D project individually, they're even more con cerned that escalating R&D expenditures could seriously threaten the long-term survival of them all. Another circumstance favoring a pooling strategy is when smaller firms need to pool resources with each other to compete against larger firms. Take the MCC example againone of the reasons for the member companies' banding together was to give themselves a running start against the industry giant, IBM. But even more important was their desire to compete more effectively against the Japanese firms backed by MITI, the Japanese Ministry of Inter national Trade and Industry. According to Inman, "MCC is a direct response to the Japanese success. The MITI model is similar to MCC except for one critical difference: funding for it comes from the Japanese government." In this industry and others, the evolving unit of competition appears to be at the country level rather than firm against firm. In order to compete effectively at the country level, many companies are going to have to adopt a mutual gain strategy of pooling some resources. EXPANDING TOTAL DEMAND Both the trading and pooling mutual gain strategies should benefit the cooperating firms. The main difference between these strategies and expanding total demand is breadth of outlook. The specific purpose of the expand strategy is to increase primary demandto expand whole industries. A common example of the expand strategy is industry-level advertising. Instead of just advertising your own brand, you can advertise for the whole category. Take the American Sheep Producers Councilfor years it has promoted lamb consump tion, not particular brands of lamb. According to the Council, "Our efforts are directed at all levels of the distribution systemwe attempt simultaneously to stimulate demand at the consumer level as well as to assure that the lamb will be available in the supermarket meat department when the consumer goes looking for it." The expand strategy can be implemented jointly by a group of firms, such as the Sheep Producers Council, but it can also be adopted unilaterally. For instance, in 1984 Alcan spent its own resources on a national advertising campaign advocating the pur chase of beverages in cans. The expand strategy for increasing primary demand can also be implemented with functional elements beyond advertising. A good case is the Matsushita Company in Japanthey invented the VHS format for videotape recorders. In order to stimulate total world demand, Matsushita made its technology available to many competitors. Contrast this with Sony's strictly competitive strategy, which restricts the use of its BETA-format VCR technology. There's an even broader avenue for implementing the expand strategyinternational political negotia tion. It is now common practice for American firms to negotiate in industry groups with the U.S. and foreign governments to attempt to increase effective total demand for U.S. products in such markets as China, Japan, and the EEC. Unilateral and multilateral tactics can benefit firms in a number of circumstances. A common one is the mature stage of an industry life cycle. If demand for lamb is stagnating, an advertising campaign directed at stimulating a generic demand for the product can help reshape the demand curve toward more growth. Similar mutual gain effects can be produced at earlier stages of the marketing life cycle. Take the biotechnology industry association's efforts to keep the FDA and the pharmacology and chemical indus tries better informed about the potential benefits of biotechnology in order to speed up the fast-growth stage of the industry's life cycle. Using a mutual gain strategy to maintain growth rates can also be effective in the development stages of an industry life cycle. For example, various pharmacology companiesboth unilaterally and multilaterallyare constantly encouraging Congress and the FDA to modernize and streamline their

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administrative procedures for evaluating and ap proving new pharmaceutical products. INCREASING MUTUAL GAIN PLAYERS This strategy is aimed at increasing the number of firms participating in any of these mutual gain endeavors. All participating firms can benefit from yet another partner trading a different resource or pooling similar resources since this reduces costs for all the participating firms. The more firms con tributing toward expanding primary demand the better the sales for everyone in the industry. If more can companies were to join Alcan's national advertising campaign, as was the case with the Sheep Producers, then more resources could be brought to bear on the basic issueincreasing primary demand for canswith more benefit for all. And the more firms anteing up, the less such a campaign would cost each of them. If MCC had even more firms pooling research and development resources, they could undertake more R&D projects, while continuing to reduce the contributions required from each participant. If the number of firms in the U.S.-East Asian auto resource trading partnership were expanded to include Euro pean EEC partners, then perhaps all participants could benefit even more through easier access to the EEC market. In an expanding market, increasing the number of partnering firms can be good for two reasons. If the market is expanding, more resources than the original partners have available may be needed to keep pace with the growth. This is why MCC recruited additional membersso they could fund four R&.D projects rather than just one. The second reason for including additional part ners in an expanding market is to prevent outside firms from restricting the growth of markets from which they feel excluded. This seems to underlie the EEC's periodic threats to impose restrictions against Japanese and U.S. firms if European competitors are not offered a larger piece of the office and factory automation markets. Expanding the number of partnering firms may also be desirable in stagnant or declining markets. Take the Japanese shipbuilding industryin order to build a political coalition for gradual reinvestment away from shipbuilding into higher growth industries, it was necessary to include all the shipbuilding firms to avoid catastrophic price cutting that would hinder the process. COMPATIBILITY OF MUTUAL GAIN STRATEGIES Unlike Porter's generic competitive strategies, combining mutual gain strategies does not necessarily mean that any one of the generic approaches is weakened or made ineffective. In fact, the reverse is usually the case. Generic mutual gain strategies are more additive than competitive ones. For example, trading different resources can reduce costs for the trading firms, and pooling resources can further reduce costs. Nor do trading and pooling preclude one another or inhibit efforts to increase primary demand. Quite the contrary. The resources you save through trading and/or pooling can be used to increase primary demand. And again, the more partners you have, the more costs are reduced, and the more resources are freed up for pursuing primary goals. RISKS OF MUTUAL GAIN STRATEGIES Basically, there are two areas of risk in pursuing generic mutual gain strategies. First, a firm may not be able to attain or sustain the strategy. Second, the value of the advantage provided by the mutual gain strategy might erode as the industry evolves. Firms have to examine such risk and make informed choices. Risks of trading different resources: A firm that cannot attract or sustain a trade of different resources can be in serious difficulty. If the traded resource is very expensive to develop on one's ownsuch as a new manufacturing technology then there can be significant and unexpected cost increases. If the resource is crucial but time consumingsuch as establishing a market reputation for reliabilitythen a firm dependent on someone else's name and reputation could be in serious difficulties if it unexpectedly has to compete under its own name. The receiving firm also relies on its partner to maintain the state-of-the-art quality of the resource being traded. If the partner fails to do this, the competitive position of both firms can be hurt. Problems with pooling similar resources and risks: Here the risks lie in the fit between the pooling firms. If two firms think they can share manufacturing facilities or salespeople in a foreign market, but the sales and manufacturing people don't know how to pull this off, then both firms could suffer. Also, industries evolve differently for different firms, and the fit may become increasingly difficult to maintain over time. This could hurt

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pooling parties facing competitors who can develop their own resources quickly enough to meet shifting market demands. Risks of expanding primary demand: Ex panding primary demand can transform a zero-sum competitive situtation into a positive one. It happened twice in the auto industry: once when demand shifted from basic family transportation to include styling, and again when demand shifted from one car per family to two. However, not all competitive situations can be transformed from zero to positive sum. Even the best mutual efforts to expand demand for railroad passenger trains in all areas of the U.S. would probably be unsuccessful in the face of strong consumer preferences for automobile transportation. In such cases, resources can sometimes be better spent on repositioning firms in different or related industries where primary demand is increasing and mutual gain strategies are not needed. Risks of expanding number of players: As long as total benefits for all cooperating firms increase faster than the division of benefits brought about by adding new players, risks are reduced. However, if new players cause a decline in absolute individual benefits, then there are serious risks for the partners. Not only will the firms whose benefits are declining be worse off, but there's increased risk of the mutual gain coalition breaking up and destroy ing the base for the mutual gains. Adding new players can also make it more difficult to achieve consensus agreements as environmental forces evolve. REDUCING RISKS OF MUTUAL GAIN STRATEGIES If the advantages of a mutual gain strategy are considered attractive enough and the risks worth taking, a firm can green light the strategy. However, if the risks are serious enough to cause considerable hesitation, then there are two additional approaches a firm can takeminimize risks, or balance off mutual gain and competitive strategies. Let's consider a few of the many ways to reduce the risks of mutual gain strategies. Say you're worried that your trading partner may not be maintaining the state of the art. There are two ways to reduce this risk. One is to negotiate an agreement with a flexible time horizon that permits substitution if state-of-the-art quality cannot be regained in a limited time by the trading partner. In addition, partnering firms can share environmental scanning resources for monitoring likely changes, as IBM and Intel do about advances in chip technology.

You can also balance a mutual gain strategy with a competitive strategy. In the automobile industry, while GM and Toyota are cooperating in building small cars for the U.S. market, they're also separately marketing their own small cars. Similarly, while IBM and Lotus are cooperating on the joint advertising of Lotus 1-2-3 and the PC jr., both are also individually marketing their own software. As we all know, there are risks associated with competitive strategies. In an increasingly volatile business environment, it might be wise for a firm with a strictly competitive outlook to at least con sider generic mutual gain strategies as a way of balancing out those risks.

ADDITIONAL READING

Drucker, Peter F., Managing in Turbulent Times. New York: Harper & Row, 1980. "Euro-Japanese Trade," The Economist, December 15, 1984. Fischetti, Mark A., "Tomorrow's ComputersThe Quest," IEEE Spectrum, November, 1983. Greyser, Stephen A., Cases in Advertising and Communications Management. Englewood Cliffs, N.J.: Prentice-Hall, 1972. Kraar, Louis, "Detroit's New Asian Car Strategy," Fortune, December 10, 1984; "The All-American Small Car Is Fading," Business Week, March 12, 1984.

Microelectronics and Computer Technology Corporatio Austin, Texas: MCC, 1984. Nielsen, Richard P., "Industrial Policy: Balancing Total System Growth with Special Interests Pro tection," Long Range Planning, 17, 3. Nielsen, Richard P., "Should a Country Move Toward International Strategic Market Planning?" California Management Review, 25, 2, January, 1983. Porter, Michael E., Competitive Strategy. New York: The Free Press, 1980. Public Television Development & Marketing Initiatives Revenue. Washington, D.C.: Public Broadcasting Service, June, 1982; "How PBS Is Planning to Stay on the Air," Business Week, March 15, 1982. "Why Investors Are Losing Their Biotechnology Bug," The Economist, December 8, 1984; "Splicing Together a Regulatory Body for Biotechnology," Business Week, January 14, 1985.

March Planning Review 1986