CH-9 Cooperative Strategy – Strategic Management: Concepts and Cases: Competitiveness and Globalization : Exam Guide

Chapter 9 Cooperative Strategy True/False 1. A cooperative strategy is a means by which firms work together to achieve a shared objective. A. True B. False Answer: True 2. According to the Chapter 9 Opening Case, in addition to their corporate-level alliance, Renault and Nissan have each formed vertical complementary strategic alliances with other companies. A. True B. False Answer: False 3. Strategic alliances are cooperative strategies between firms that combine their resources and capabilities to create a competitive advantage. A. True B. False Answer: True 4. Although growing in popularity with small and medium-sized firms because they can gain economies of scale, large companies tend to avoid strategic alliances. A. True B. False Answer: False 5. Strategic alliances have become the cornerstone of many firms' competitive strategy, particularly large global competitors. A. True B. False Answer: True 6. If a large Asian cosmetics firm was to engage in a 50–50 partnership with a large American chemical company to form a new company focused on creating advanced skin care products, this would be considered a joint venture. A. True B. False Answer: True 7. One area in which joint ventures are effective is the transfer of tacit knowledge as illustrated in the Chevron/China National Petroleum joint venture. A. True B. False Answer: True 8. Nonequity strategic alliances exist when two or more firms join together to create an independent firm. A. True B. False Answer: False 9. Nonequity strategic alliances are formed when one partner owns a much larger (or inequitable) share of the joint venture than do the remaining partner(s). A. True B. False Answer: False 10. Cooperation in slow-cycle markets is extremely rare because these industries are declining. A. True B. False Answer: False 11. Firms in slow-cycle markets can use alliances to enter restricted markets or to establish franchises in new markets. A. True B. False Answer: True 12. The joint venture among BuzzFeed, CNN, and YouTube was formed to develop new sources of competitive advantages in the fast-cycle entertainment business. A. True B. False Answer: True 13. Acquisitions are the most common cooperative strategy used in standard-cycle markets. A. True B. False Answer: False 14. Firms in standard-cycle markets seek to gain economies of scale through cooperative alliances. A. True B. False Answer: True 15. In a vertical complementary alliance, firms share some of their resources and capabilities from the same stage of the value chain to create a competitive advantage. A. True B. False Answer: False 16. Horizontal complementary strategic alliances are designed so that each partner realizes equal benefits from equal investments in the alliance. A. True B. False Answer: False 17. A cooperative agreement between a hotel chain and a casino operator would be viewed as a horizontal complementary strategic alliance because as separate entities, the two firms would compete for the same customer. A. True B. False Answer: False 18. Using business-level strategic alliances to hedge against risk and uncertainty is most common in the slow-cycle markets. A. True B. False Answer: False 19. Collusion is a form of cooperative strategy. A. True B. False Answer: True 20. Tacit collusion is not explicitly illegal in the United States even though it results in higher prices for consumers. A. True B. False Answer: True 21. Tacit collusion tends to be least used as a business-level, competition-reducing strategy in highly concentrated industries such as airlines and breakfast cereals even though it results in higher prices for consumers. A. True B. False Answer: False 22. Research in the airline industry suggests that tacit collusion reduces service quality and on-time performance. A. True B. False Answer: True 23. Mutual forbearance is a form of explicit collusion between firms in which competitors avoid attacking rivals they meet in multiple markets. A. True B. False Answer: False 24. Although governments in free-market economies allow rivals to collaborate to improve competitiveness, the challenge is to make sure the alliance does not lead to price fixing. A. True B. False Answer: True 25. Horizontal business-level strategic alliances have greater probability of creating sustainable competitive advantage than do vertical business-level strategic alliances. A. True B. False Answer: False 26. Of the four business-level cooperative strategies, the competition-reducing strategy has the lowest probability of creating a sustainable advantage. A. True B. False Answer: True 27. The advantages of alliances designed to respond to competition and to reduce uncertainty are more temporary than those developed through complementary alliances, such as vertical and horizontal strategic alliances. A. True B. False Answer: True 28. An alliance can be used to test whether the partners would benefit from a future merger. A. True B. False Answer: True 29. Because of U.S. legal restrictions concerning large foreign acquisitions, American firms can only enter into diversifying alliances with other U.S. firms. A. True B. False Answer: False 30. Synergistic strategic alliances such as the Renault-Nissan alliance discussed in the Opening Case focus on economies of scope by sharing their resources and capabilities to develop manufacturing platforms that can be used to Renault or Nissan cars. A. True B. False Answer: True 31. Franchising is most attractive in concentrated industries. A. True B. False Answer: False 32. Franchising is an alternative to pursuing growth through mergers and acquisitions. A. True B. False Answer: True 33. The primary responsibility of the franchiser is to transfer capital to the franchisee. A. True B. False Answer: False 34. The probability of alliance success is increased when partnering firms internalize successful alliance experiences. A. True B. False Answer: True 35. A firm creates a competitive advantage when it develops and manages corporate-level cooperative strategies in a way that is valuable, rare, imperfectly imitable, and non-substitutable. A. True B. False Answer: True 36. Firms consider entering international alliances because multinational firms outperform firms operating only in their home markets. A. True B. False Answer: True 37. International strategic alliances are less risky than domestic strategic alliances because of diversification across countries. A. True B. False Answer: False 38. When a firm is in the early stages of geographic diversification, cross-border alliances may be a good learning step before other forms of international expansion. A. True B. False Answer: True 39. A network strategy involves a series of horizontal acquisitions by firms that are committed to dominating a particular industry. A. True B. False Answer: False 40. Network cooperative strategies among Silicon Valley firms have been successful, in part, because they are geographically close together. A. True B. False Answer: True 41. A stable alliance network is used in industries characterized by frequent product innovations and short product life cycles. A. True B. False Answer: False 42. A major risk of a network cooperative strategy is that firms gain access to their partner's partners thus exposing their proprietary processes to loss or theft. A. True B. False Answer: False 43. Some cooperative strategies fail when it is discovered that a firm has misrepresented the competencies it can bring to the partnership. A. True B. False Answer: True 44. Failure of a partner to contribute needed resources and capabilities to a cooperative venture is a particular risk in international ventures especially in emerging economies. A. True B. False Answer: True 45. Only about 50 percent of cooperative strategies succeed. A. True B. False Answer: True 46. The cost minimization approach of managing alliances is more expensive to put into place and to use than is the opportunity maximization management approach. A. True B. False Answer: True 47. In the cost minimization approach to managing competitive strategies, the relationship between the firms is based on trust of the other partner. A. True B. False Answer: False 48. The alliance between BP Plc and OAO Rosneft to extract oil from Russia's Arctic Ocean was managed using contracts, i.e., the cost minimization approach. A. True B. False Answer: True 49. The Renault Nissan approach to managing its collaboration involves less reliance on contracts and more reliance on trust, respect, and transparency (i.e., the opportunity-maximization approach to managing cooperative strategies). A. True B. False Answer: True 50. Close monitoring, formal contracts, and constant vigilance against opportunism increase the probability of alliance success. A. True B. False Answer: False 51. High levels of trust allow less formal contracts to govern the relationship between alliance partners and increases the likelihood of alliance success. A. True B. False Answer: True Multiple Choice 52. The Renault Nissan alliance (Chapter 9 Opening Case) is an example of a _____ created to gain economies of scope by sharing resources and capabilities. A. diversifying strategic alliance B. vertical complementary alliance C. synergistic strategic alliance D. nonequity-based horizontal complementary alliance Answer: C 53. Within the Renault Nissan alliance (Chapter 9 Opening Case), both Renault and Nissan have each formed _________ strategic alliances at the business-unit level with other companies. A. vertical complementary B. horizontal complementary C. synergistic D. diversifying Answer: B 54. A cooperative strategy A. is an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage. B. is a strategy in which firms work together to achieve a shared objective. C. is an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets. D. specifies actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets. Answer: B 55. A strategy in which firms work together to achieve a shared objective is a A. functional-level strategy. B. business-level strategy. C. corporate-level strategy. D. cooperative strategy. Answer: D 56. When using cooperative strategies, firms most frequently develop strategic alliances that A. enhance the firm's reputation in the marketplace. B. are long-lived. C. will reduce the firm's political risk. D. create a competitive advantage. Answer: D 57. The use of strategic alliances A. is unlikely to yield success if partnering firms are headquartered in the same country. B. may be too restrictive to facilitate entry into new markets. C. usually increases the investment necessary to introduce new products. D. is more frequent than other types of cooperative strategies. Answer: D 58. In a(n) _______, two or more firms create a legally independent company to share some of their resources and capabilities to develop a competitive advantage. A. equality-based strategic alliance B. non-equity strategic alliance C. joint venture D. equity strategic alliance Answer: C 59. A competitive advantage that is developed through a cooperative strategy is called a collaborative or a(n) _______ advantage. A. economic B. collusive C. alliance D. relational Answer: D 60. Which type of strategic alliance is best at passing tacit knowledge between firms? A. primary cooperative strategic alliances B. joint ventures C. equity strategic alliances D. nonequity strategic alliances Answer: B 61. Moon Flower cosmetics company executives are aware that their Asian customer base is interested in advanced skin care treatments beyond Moon Flower's traditional herbal and organic compounds. Moon Flower and a large American chemical company are in discussions to create a 50–50 partnership in a new firm, which would create skin care treatments based on innovative chemical formulations that would be marketed both in Asia and in the United States. Beyond being a cross-border alliance, this partnership can be called a(n) A. nonequity strategic alliance. B. joint venture. C. horizontal complementary alliance. D. equity strategic alliance. Answer: B 62. Fujitsu Siemens Computers is a legally independent company of which Fujitsu and Siemens each own 50 percent. This collaboration is an example of a _________ , which is effective at transferring A. nonequity strategic alliance; explicit knowledge. B. joint venture; tacit knowledge. C. joint venture; explicit knowledge. D. equity strategic alliance; tacit knowledge. Answer: B 63. Hewlett-Packard licenses some of its intellectual property through strategic alliances. Which of the following is correct about this relationship? A. This is a joint venture because in licensing arrangements, a new company is created. B. This is an equity strategic alliance because licensing does not involve the creation of a new company, but does involve an equity commitment. C. The firms risk charges of collusion because most licensing relationships between competitors involve explicit collusion. D. This is a nonequity strategic alliance with Hewlett-Packard leveraging its unique capabilities. Answer: D 64. BPM Corp. is a manufacturer of radar systems for regional-sized jet aircraft. The company has announced plans to enter into a joint venture with J3 Composites, a producer of advanced composite materials. The announced venture will produce a new, combined product consisting of the radar unit and protective composite cover. Which of the following ownership arrangements would be most typical for a joint venture? A. BPM will own more than 50 percent of the venture and a new company will be formed. B. J3 will own more than 50 percent of the venture and a new company will be formed. C. BPM and J3 will both own 50 percent of the venture and a new company will be formed. D. BPM and J3 will both own 50 percent of the venture but no new company will be formed. Answer: C 65. A strategic alliance in which the partners own different percentages of the new company they have formed is called a(n) A. equity strategic alliance. B. joint venture. C. nonequity strategic alliance. D. cooperative arrangement. Answer: A 66. Meredith Inc. is a manufacturer of art supplies. The company has announced plans to enter into an equity strategic alliance with JaZz Paper to develop a line of specialty papers for use with a line of specialty paints Meredith manufactures. Which of the following would be the accurate interpretation of this announcement? A. Meredith will own a majority equity stake in the new venture. B. JaZz will own a majority equity stake in the new venture. C. Meredith or JaZz will own an equal equity stake in the new venture. D. Either Meredith or JaZz will own a majority equity stake, but we do not know which one based on the announcement. Answer: D 67. Japanese telecom NTT DoCoMo Inc. and Chinese Internet search operator Baidu Inc. established an alliance to distribute games and other mobile-phone content. Baidu will own 80 percent of this collaboration with DoCoMo holding the remaining 20 percent. This collaborative arrangement is an example of a(n) A. joint venture. B. network strategy. C. equity strategic alliance. D. nonequity strategic alliance. Answer: C 68. A nonequity strategic alliance exists when A. two firms join together to create a new company. B. two or more firms have a contractual relationship to share resources and capabilities. C. two partners in an alliance own unequal shares in the combined entity. D. the partners agree to sell bonds instead of stock in order to finance a new venture. Answer: B 69. Burgess Corp. manufactures a line of heavy construction equipment. The company has announced a contractual relationship with FS Electronics whereby FS will supply Burgess with advanced GPS navigation and guidance systems. These systems will be an option on all bulldozers, dump trucks, and road graders Burgess produces. What type of alliance is this? A. joint venture B. equity strategic alliance C. nonequity strategic alliance D. competition reduction alliance Answer: C 70. Firms participate in strategic alliances for all the following reasons EXCEPT to A. create value that they could not develop by acting independently. B. enter competitive markets more quickly. C. gain access to resources. D. retain tight control over intangible core competencies. Answer: D 71. The global airline industry is one in which A. national political interests prevent airlines from making international alliances. B. the fast-cycle nature of the industry mandates heavy use of alliances. C. most alliances tend to be vertical complementary. D. alliance versus alliance competition dominates firm versus firm competition. Answer: D 72. U.S. Steel and Nucor (the two remaining major players in the U.S. steel industry) have been forming alliances as a means to enter markets in Europe and Asia. The steel industry is an example of a _________ typically use alliances to gain market access. A. fast-cycle B. standard-cycle C. slow-cycle D. intermediate-cycle market in which firms Answer: C 73. A relatively young firm has developed a method of transferring photographic images of surface textures onto any type of hard surface. This potentially has a huge market in the home-decorating field as well as any hard surface that is typically painted, such as car bodies. The type of alliance partner this firm would be searching for would be one with A. low-cost labor production facilities in another country. B. similar products who could help the firm establish economies of scale. C. access to franchises in new markets. D. excess resources for investing. Answer: D 74. The alliance between Nokia and Microsoft calls for Nokia to transition its smartphone portfolio to Microsoft's Windows phone platform. This is an example of using an alliance in a ______ to speed up development of new products and services. A. slow-cycle market B. medium-cycle market C. standard-cycle market D. fast-cycle market Answer: D 75. A state-wide alliance of independent hospitals has formed in order to do group purchasing of medical supplies. Group purchasing allows the hospital alliance to negotiate lower prices with suppliers because of the large quantity of materials ordered. This is an example of the advantage of _________ resulting from an alliance. A. explicit collusion B. economies of scale C. opportunistic behavior D. distribution opportunities Answer: B 76. Firms in a standard-cycle market may form alliances in order to A. take advantage of opportunities in emerging market countries. B. more quickly distribute new products. C. capture economies of scale. D. share risky R&D investments. Answer: C 77. Firms in _________ markets cooperate to pool resources and gain market power. A. slow-cycle B. standard-cycle C. fast-cycle D. hyper-cycle Answer: B 78. The two types of complementary strategic alliances are A. vertical and horizontal. B. macro and micro. C. outsourcing and insourcing. D. network and complementary. Answer: A 79. All of the following are business-level cooperative strategic alliances EXCEPT A. synergistic strategic alliances. B. uncertainty reduction strategic alliances. C. complementary strategic alliances. D. competition response strategic alliances. Answer: A 80. A manufacturer of specialty jams and jellies has decided to ally itself with an orchard and vineyard growing rare strains of fruit. This is a(n) _________ strategy. A. vertical complementary B. horizontal complementary C. uncertainty reduction D. network Answer: A 81. _________ are LEAST likely to involve potential or current competitors. A. Mutual forbearance strategies B. Tacit collusion strategies C. Horizontal complementary strategic alliances D. Vertical complementary strategic alliances Answer: D 82. Smith Commercial Lighting, Inc., which sells lighting for factories and businesses, has entered into an alliance with Revelation Lighting, Inc., a retailer of home decor lighting, in order to expand into the trend of using industrial-type lighting in non-traditional style homes. Smith has invested 40 percent and Revelation has invested 60 percent into the new operation. This is an example of a(n) A. joint venture. B. nonequity alliance. C. horizontal complementary strategic alliance. D. vertical complementary strategic alliance. Answer: C 83. Reduction of competition can be accomplished through all of the following EXCEPT A. predatory alliances. B. explicit collusion. C. tacit collusion. D. mutual forbearance. Answer: A 84. The three main luxury hotels in a major tourist destination keep very close track of their competitors' room pricing, restaurant offerings, tour packages, and special services, such as airport transportation and spa privileges. When one hotel makes adjustments in prices or offerings, the other hotels follow suit. It is possible that these hotels are A. engaging in tacit collusion. B. following uncertainty reducing strategies. C. monitoring business competitors for opportunistic behaviors. D. following a competitive response strategy. Answer: A 85. Mutual forbearance is A. illegal in the United States. B. a type of competition-reducing strategy. C. a variety of risk-sharing by firms in highly fragmented industries. D. exercised when alliance partners refrain from opportunistic behaviors. Answer: B 86. The fact that the prices consumers pay for branded breakfast cereals are above the prices that would exist if there were true competition suggests that the cereal manufacturers are engaging in A. excessive cooperation. B. joint ventures. C. tacit collusion. D. horizontal strategic alliances. Answer: C 87. In the United States, cooperative strategies to reduce competition may result in _________ if they are explicit. A. increased tax liabilities B. litigation C. government takeover of the firms D. dissolution of the firm Answer: B 88. In free-market economies, __________ must decide how rivals can collaborate with their competitors without violating established regulations. A. the invisible hand B. the government C. consumers D. the business community Answer: B 89. The risks of being accused of collusion are MOST likely under what type of alliance? A. equity-based vertical complementary alliance B. equity-based horizontal complementary alliance C. nonequity-based vertical complementary alliance D. nonequity-based horizontal complementary alliance Answer: D 90. Why are alliances in the airline industry unstable? A. Unstable industries make for unstable alliances. B. The potential for firms to take opportunistic actions is too widespread. C. The industry is declining and profits are not sufficient to divide among alliance partners. D. The alliances require cooperation among firms that must also compete with one another. Answer: D 91. A _________ cooperative strategy helps the firm diversify in terms of products offered, markets served, or both. A. corporate-level B. business-level C. national-level D. industry-level Answer: A 92. Of the various business-level strategic alliances, _______ alliances have the most probability of creating sustainable competitive advantage, and _______ have the lowest. A. horizontal complementary; vertical complementary B. vertical complementary; competition reducing C. competition reducing; horizontal complementary D. uncertainty reducing; competition reducing Answer: B 93. _________ strategic alliances have stronger focus on value creation than do _________ alliances. A. competition reducing; complementary B. complementary; competition reducing C. uncertainty reducing; complementary D. collusive; uncertainty reducing Answer: B 94. For the purpose of diversification, a corporate-level cooperative strategy may be preferable to a merger or acquisition for all the following reasons EXCEPT A. a host nation may forbid a merger or acquisition. B. opportunistic behaviors are less likely. C. cooperative strategies require fewer resources. D. cooperative strategies allow greater flexibility in diversifying the firm's portfolio. Answer: B 95. The cooperation between Fiat and Chrysler to produce a Fiat-designed car in Chrysler's Illinois factory is a(n) _________ alliance because it allows the firms to share resources and capabilities across multiple functions. A. synergistic B. opportunistic C. horizontal D. diversifying Answer: A 96. Firms entering into synergistic strategic alliances expect to attain A. technological complexity. B. economies of scope. C. monopolistic market power. D. learning curve efficiencies. Answer: B 97. The Renault Nissan alliance discussed in the Opening Case is an example of a ______ in that the firms seek to create economies of scope by sharing their resources and capabilities to develop manufacturing platforms that can be used to produce cars that will be either a Renault or a Nissan. A. joint venture B. synergistic alliance C. horizontal complementary alliance D. dynamic alliance network Answer: B 98. A __________ is a strategy in which firms share some of their resources and capabilities to create economies of scope and is similar to the business-level horizontal complementary alliance. A. joint venture B. synergistic strategic alliance C. diversifying strategic alliance D. dynamic alliance network Answer: B 99. The primary responsibility of the franchisor, such as McDonald's or Hilton International is to A. learn about the brand and technology from the franchisee. B. test the franchisee for potential future acquisition. C. transfer to the franchisee knowledge and skills needed to compete at the local level. D. provide feedback to the franchisee regarding how the franchisor could become more effective and efficient. Answer: C 100. Which of the following statements is FALSE? A. Franchising is most appropriate in fragmented industries. B. Franchising provides corporate growth with less risk than do mergers and acquisitions. C. Successful franchising allows transfer of knowledge and skills from the franchisor to the franchisee. D. Franchising agreements require more trust between firms than do other cooperative strategies. Answer: D 101. In the franchising strategy, the most important competitive advantage for the franchisee is the franchisor's A. brand name. B. capital resources. C. access to a consolidated market. D. geographic locations. Answer: A 102. A businessperson in Atlanta who wishes to develop a luxury pet kennel approaches the owner of the highly successful Pet Resort and Day Spa in Houston to see if the owner is interesting in franchising the Pet Resort brand. The Atlanta businessperson's goal is to A. get venture capital from Pet Resort. B. gain access to Pet Resort's tacit knowledge. C. collude with Pet Resort to diminish competition in the kennel industry in Atlanta. D. join in a vertical complementary alliance with Pet Resort. Answer: B 103. McDonald's, Hilton International, and Subway all heavily rely on the _________ strategy. A. transnational B. network cooperative C. cross-border alliances D. franchising cooperative Answer: D 104. FrameCo, a maker of commercial greenhouses, has just extricated itself from a failing cooperative alliance with another firm. The expected synergies never were achieved, and FrameCo lost most of its investment. The top management of FrameCo should A. avoid future cooperative alliances because they lack the skills needed to manage them successfully. B. enter into future cooperative alliances only if the alliance is closely monitored by a third party to prevent opportunistic behavior by the alliance partner. C. realize that most cooperative alliances fail and that it should ally itself only with an experienced alliance partner in the future. D. internalize the knowledge about the successes and failures of this alliance so FrameCo can learn from the experience. Answer: D 105. The collaboration between Volvo Aero (a subsidiary of Sweden's AB Volvo) and U.S.-based Pratt & Whitney to produce a new jet engine would be characterized as a(n) A. collusive tactic. B. merger. C. cross-border strategic alliance. D. international acquisition. Answer: C 106. Legitimately, a firm may pursue an international strategic alliance for all of the following reasons EXCEPT A. to enhance the compensation packages of top managers. B. to leverage core competencies in new markets. C. to operate within government restrictions in the local country. D. to escape limited domestic growth opportunities. Answer: A 107. In some countries, the only legal way for foreign firms to invest in the country is through A. acquisitions. B. mergers. C. greenfield ventures. D. strategic alliance with a local firm. Answer: D 108. In a cross-border alliance, the local partner is often a useful source of information about A. sources of capital. B. the strengths of the foreign firm's technology. C. market synergies. D. long-term planning. Answer: A 109. In general, cross-border alliances are more _________ and _____ than domestic alliances, especially in emerging markets. A. uncertainty reducing; diversifying B. complex; risky C. highly leveraged; tightly monitored D. flexible; trust-based Answer: B 110. Stable alliance networks will most often A. be used to enhance a firm's internal operations. B. appear in mature industries where demand is relatively constant and predictable. C. emerge in industries with short product life cycles. D. emerge in declining industries as a way to increase process innovations. Answer: B 111. Dynamic alliance networks work best in industries A. characterized by frequent product innovations and short product life cycles. B. that are mature and stable in nature. C. where the coordination of product and global diversity is critical. D. that are characterized by predictable market cycles and demand. Answer: A 112. Which of the following statements is TRUE? A. Most cooperative strategies are successful if the basic agreements are well written and include appropriate monitoring strategies. B. As many as 50 percent of cooperative strategies fail. C. Opportunistic behaviors are usually focused on gaining the use of the partner's manufacturing and financial resources. D. Problems with international cooperative strategies usually concern financial-system differences between the partners. Answer: B 113. Which of the following is NOT a risk for firms engaged in cooperative strategies? A. misrepresentation of a partner's competencies B. partner acts opportunistically C. insufficient variation in firms' core competencies D. failure of partners to make complementary resources available to the partnership Answer: C 114. Greentech, Inc., is a bioengineering firm specializing in food crops. It is considering a cooperative alliance with an Asian agribusiness firm, AsiaFoods, to jointly produce improved crops for the Asian market. The risks that Greentech should consider before entering this alliance include all of the following EXCEPT: A. Has AsiaFoods accurately represented its competencies? B. Will AsiaFoods make alliance-specific investments? C. Can Greentech expect opportunistic behavior from AsiaFoods? D. Will Greentech be able to use a cost-minimization management strategy in the AsiaFoods alliance? Answer: D 115. Amylin Pharmaceuticals has an alliance with Eli Lilly & Co. to produce diabetes drugs. Lilly, however, recently signed an alliance agreement with another company to also produce diabetes drugs. As a result, Amylin sued Lilly for breech of the alliance agreement. Which of the following risks of cooperative strategies discussed in the chapter is most likely occurring here? A. having a true perception of the partner's trustworthiness B. failing to make available to its partners the resources and capabilities that it committed to the cooperative strategy C. the partner misrepresenting competencies it can bring to the partnership D. opportunistic behavior Answer: D 116. DDD Partners, a U.S. business consulting firm is considering a cooperative alliance with an Indian business consulting firm that has a wide practice in the Middle East and Asia. DDD has some European clients, but it sees the Middle East and Asia as growth opportunities. It hopes to learn how to navigate the different cultures and business practices in this part of the world from its alliance with the Indian firm. DDD's greatest risk here is that the Indian firm will A. insist on excessively close monitoring of DDD's actions. B. gain access to DDD's core competencies and use them to become a future competitor. C. not fully share its intangible resources. D. not make equivalent investments to the alliance as does DDD. Answer: C 117. In practice, the cost minimization strategy can be more expensive than the opportunity maximization strategy. Which of the following is a way in which the cost minimization strategy is less expensive than the opportunity minimization strategy? A. the loss of unexpected opportunities B. the cost of extensive monitoring mechanisms C. the costs of writing detailed contracts D. the prevention of opportunistic behavior by the partner(s) Answer: D 118. The two basic approaches to successfully manage cooperative strategic alliances involve _________ and _________. A. cost minimization; opportunity maximization B. monitoring systems; multiple management approaches C. contractual systems; financial systems D. equity approaches; nonequity approaches Answer: A 119. Offshore Oil Exploration Partners (OOEP) has entered into a cooperative strategy with Malay Petroleum. The resulting documents are long, formal, and detailed. They specify detailed responsibilities of each partner and include methods of monitoring accounting and technical procedures. OOEP and Malay Petroleum are using the ______ management approach. A. cost minimization B. trust but verify C. opportunity maximization D. pragmatic realism Answer: A 120. The Microsoft/Nokia alliance that had hundreds of pages to specify each partner's responsibilities would be closest to the ________ approach to managing cooperative ventures. In contrast, the Renault/Nissan alliance (Chapter 9 Opening Case) was based on trust, respect, and transparency and is an example of the ________ approach to managing cooperative ventures. A. cost minimization; opportunity maximization B. opportunity maximization; cost minimization C. cost maximization; opportunity minimization D. bureaucratic; organic Answer: A 121. One disadvantage of developing effective monitoring systems to manage a strategic alliance is that A. firms will have to accept greater risks. B. trust will be eroded. C. spontaneous opportunities are minimized. D. power coalitions will still develop. Answer: C 122. In managing cooperative strategies, research indicates that ______ can be a capability that is valuable, rare, imperfectly imitable, and often non-substitutable giving these firms a competitive advantage. A. extensive capitalization B. stability C. trustworthiness D. Internet competency Answer: C 123. To increase the likelihood of success between partners assuming that trust exists, _______ approach(es) should be used to manage cooperative strategies. A. the cost minimization B. the opportunity maximization C. both the cost minimization and opportunity maximization D. None of the these options are correct. Answer: B 124. The opportunity maximization approach is more difficult to establish in international relationships than in domestic relationships because of differences in all EXCEPT A. laws. B. culture. C. trade policies. D. technology. Answer: D Essay 125. Identify and define the different types of strategic alliances. Answer: Strategic alliances are cooperative strategies between firms whereby resources and capabilities are combined to create a competitive advantage. All strategic alliances require firms to exchange and share resources and capabilities to co-develop or distribute goods or services. The three basic types of strategic alliances are: (1) joint ventures, where a legally independent company is created by at least two other firms, with each firm usually owning an equal percentage of the new company; 2) equity strategic alliances, whereby partners own different percentages of equity in the new company they have formed; and (3) nonequity strategic alliances, which are contractual relationships between firms to share some of their resources and capabilities. The firms do not establish a separate organization, nor do they take an equity position. Because of this, nonequity strategic alliances are less formal and demand fewer partner commitments than joint ventures and equity strategic alliances. Typical forms are licensing agreements, distribution agreements, and supply contracts. 126. Explain the rationales for a cooperative strategy under each of the three types of basic market situations (i.e., slow, standard, and fast cycles). Answer: In slow-cycle markets (markets that are near-monopolies), firms cooperate with others to gain entry into restricted markets or to establish franchises in new markets. Slow-cycle markets are rare and diminishing. Cooperative strategies can help firms in (presently) slow-cycle markets make the transition from this relatively sheltered existence to a more competitive environment. In standard-cycle markets (which are often large and oriented toward economies of scale), firms try to gain access to partners with complementary resources and capabilities. Through the alliance, the firms try to increase economies of scale and market power. In fast-cycle markets (characterized by instability, unpredictability, and complexity), sustained competitive advantages are rare, so firms must constantly seek new sources of competitive advantage. In fast-cycle markets, alliances between firms with excess resources and capabilities and firms with promising capabilities who lack resources help both firms to rapidly enter new markets. 127. Identify the four types of business-level cooperative strategies and the advantages and disadvantages of each. Answer: Through vertical and horizontal complementary alliances, companies combine their resources and capabilities in ways that create value. Vertical complementary strategic alliances result when firms creating value in different parts of the value chain combine their assets to create a competitive advantage. Vertical complementary strategies have the greatest probability of being successful compared with other types of cooperative strategies. But firms using this type of alliance need to be wise in how much technology they share with their partners. Vertical complementary alliances rely heavily on trust between partners to succeed. Horizontal complementary strategic alliances are developed when firms in the same stage of the value chain combine their assets to create additional value. Usually they are formed to improve long-term product development and distribution opportunities. Horizontal complementary strategies can be unstable because they often join highly rivalrous competitors. In addition, even though partners may make similar investments, they rarely benefit equally from the alliance. The competition response strategy involves alliances formed to react to competitors' actions. Usually they respond to strategic, rather than tactical, actions because the alliances are difficult to reverse and expensive to operate. The uncertainty-reducing strategy is used to hedge against risk and uncertainty, such as when entering new product markets or in emerging economies. Both of these strategies are less effective in the long-run than the complementary alliances that are focused on creating value. Competition reducing (collusive) strategies are often illegal. There are two types of collusive competition reducing strategies: explicit collusion and tacit collusion. Explicit collusion exists when firms directly negotiate production output and pricing agreements to reduce competition. These are illegal in the United States and in most developed economies. 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. Both types of collusion result in lower production levels and higher prices for consumers. 128. Identify the three types of corporate-level cooperative strategies. Answer: A diversifying strategic alliance allows firms to share some of their resources and capabilities to diversify into new product or market areas. A synergistic strategic alliance allows firms to share some of their resources and capabilities to create economies of scope. These alliances create synergy across multiple functions or multiple businesses between partner firms. Franchising is a strategy in which the franchisor uses a contractual relationship to describe and control the sharing of its resources and capabilities with franchisees. A franchise is a contract between two independent organizations whereby the franchisor grants the right to the franchisee to sell the franchisor's product or do business under its trademarks in a given location for a specified period of time. 129. Why are cooperative strategies often used when firms pursue international strategies? What are the advantages and disadvantages of international cooperative strategies? Answer: A cross-border strategic alliance is an international cooperative strategy in which firms headquartered in different nations combine some of their resources and capabilities to create a competitive advantage. The typical reasons follow: 1) In general, multinational firms outperform firms operating only on a domestic basis. Firms may be able to leverage core competencies developed domestically in other countries. 2) Limited domestic growth opportunities push firms into international expansion. 3) Some governments require local ownership in order for foreign firms to invest in businesses in their countries, which requires foreign firms to ally with local firms. 4) Local partners often have significantly more information about factors contributing to competitive success such as local markets, sources of capital, legal procedures, and politics, which makes an alliance useful for a foreign firm. 5) Cross- border alliances can help firms transform themselves or better use their competitive advantages surfacing in the global economy. On the negative side, cross-border alliances are more complex and risky than domestic strategic alliances. 130. Identify and define the two different types of network strategies. Answer: A network cooperative strategy is a cooperative strategy wherein several firms form multiple partnerships to achieve shared objectives. Stable alliance networks (primarily found in mature industries) usually involve exploitation of economies of scale or scope. In this type of network, the firms try to extend their competitive advantages to other settings while continuing to profit from operations in their core industries. Dynamic alliance networks (witnessed mainly in rapidly changing industries) are used to help a firm keep up when technologies shift rapidly by stimulating product innovation and successful market entries. Dynamic alliance networks explore new ideas and typically generate frequent product innovations with short product life cycles. 131. Identify the competitive risks associated with cooperative strategies. Answer: Cooperative strategies are not risk-free strategy choices; as many as 70 percent fail. If a contract is not developed appropriately and fails to avert opportunistic behavior, or if a potential partner firm misrepresents its competencies or fails to make available promised complementary resources, failure is likely. Furthermore, a firm may make investments that are specific to the alliance while the partner does not. This puts the investing firm at a disadvantage in terms of return on investment. The core of many failures is the lack of trustworthiness of the partner(s) who act opportunistically. 132. Describe the two strategic management approaches to managing alliances. Answer: The ability to effectively manage competitive strategies can be one of a firm's core competencies. There are two basic approaches to managing competitive alliances. Cost minimization leads firms to develop protective formal contracts and effective monitoring systems to manage alliances. Its focus is to prevent opportunistic behavior by the partner(s). Opportunity maximization is intended to maximize value creation opportunities. It is less formal and places fewer constraints on partner behaviors. But, identifying trustworthy partners is the key to this second approach. If (well-founded) trust is present, monitoring costs are lowered and opportunities will be maximized. Trust is more difficult to establish between international partners. Ironically, the cost minimization approach is more expensive to implement and to use than the opportunity maximization approach. Subjective Short Answer Case Scenario 1: Norning International Norning International (NI) states that both its past successes and future growth strategies are based on an evolving network of wholly owned businesses and joint ventures around its core competency in glass making. Through their alliances and owned divisions they compete in four global business sectors: Specialty Glass and Materials (including materials for HDTV and LCD displays), Consumer Housewares (including microwavable dishware), Laboratory Sciences Products and Services (test tubes, testing equipment, and drug trials testing), and Communications (fiber optics and related technologies). Per the company's annual report, "binding all four sectors together is the glue of a commitment to leading edge glass making technologies, shared resources, and dedication to total quality." Each sector is composed of divisions, subsidiaries, and alliances. However, the central role played by alliances is demonstrated by the fact that the combined revenue of its 30-some alliances is more than double that of NI on its own. Most of the alliances provide NI with access to particular geographic markets, industries, or channels, although an increasing number of alliances involve both market access and technological development. 133. (Refer to Case Scenario 1). Why would a company like NI place such emphasis on alliances as a growth vehicle? Answer: The best answers will observe that simultaneously increasing technological intensity while developing a more powerful market presence is likely to demand access to research, manufacturing, and marketing resources that are substantially in excess of those that exist (or can be developed quickly) in one company. It is also unlikely that NI has a monopoly on leading edge glass-making technology, and that partnerships may give it access to technologies even more advanced than those it currently possesses. Moreover, if NI is able to retain its focus and leading edge expertise in advanced glass-making technologies, while at the same time realize repeated successes and technological breakthroughs via alliances, then its ability to partner and manage multiple alliances may truly become a strategic asset. 134. (Refer to Case Scenario 1). What risks arise from a strategy based on such a "network of alliances"? Answer: The best answers will start by noting that NI's historic success (via its core competency in glass making) is likely to have been based in a strong commitment to basic research and development. Multiple partnerships, in and of themselves, can lead to the dilution of management's attention and investment in this core, or lead to a less well defined core. Given that such basic R&D is the "glue" holding NI together, such dilution may make that glue at the hub of its strategy wheel come unstuck. Exacerbating this threat is the possibility that NI's fascination with alliances may become a crutch where alliances displace its internal strengths and become an end in and of themselves. Alliance partners are also a threat to the extent they are able to learn more from NI about its technologies, and eventually undermine or leapfrog NI technological competitive advantages. 135. (Refer to Case Scenario 1). NI appears to be managing a large number of alliances. What criteria should it use to exit particular alliances? Answer: The best answers will develop a set of company rules of thumb for exiting alliances, and even some of NI's owned businesses. For instance, given the fundamental role played by the need to emphasize basic R&D in advanced glass-making technologies, students may first start by observing that NI should likely exit those businesses that are highly service-based (like some of its laboratory services businesses), or do not require leading edge glass-making expertise (like consumer glass-based products), since neither of these businesses require or contribute to NI's understanding of new glass-making technologies. Consequently, NI should exit the alliances related to those particular segments because they don't help to reinvigorate its technological core. Beyond this rule of thumb, students may then push NI to exit those alliances where there is the least opportunity to learn from its partners, and again reinvigorate and further enhance its core in advanced glass making. 136. (Refer to Case Scenario 1). Norning International (NI) is following a network cooperative strategy. This strategy should work best in linking together geographically disperse markets where no one form serves as the leader of the network. Answer: False Case Scenario 2: ERP Inc ERP, Inc., (ERPI) is a leading provider of enterprise integration software (EIS). EIS essentially allows a firm to connect and integrate processes across all aspects of its business. To fuel its dramatic growth, ERPI has focused its organization entirely on product development (software programming for a suite of EIS products) and selling (making the sale and then moving onto a new target) while outsourcing the installation and consulting aspects to the world's largest accounting firms. This also makes ERPI basically a "product company," whereas most competitors like Oracle and PeopleSoft in its market space operate as "solutions companies." One benefit of this focused strategy is that ERPI's product is generally recognized as being 200 percent to 300 percent better than competitors' software, and thus adopters are thus likely to have a 1- to 2-year advantage. In further contrast to the competition, ERPI has used its partnerships with the accounting firms to deliver a turn-key solution, and has focused this solution on a market comprised of the world's largest, global manufacturers and consumer product companies. The accounting firms, in turn, coordinate a comprehensive collection of hardware, operating systems, and complementary software firms. Installation and related consulting for EIS typically cost between $100 and $200 million, with the ERPI software component accounting for only about 20 percent of the installed cost (the remaining 80 percent is spent on the actual installation, not counting the value of the customer's time). To incentivize the accounting firms to help sell its product (since, at least initially, the accounting firms had better reputations and controlled access to the target customers), ERPI told its partners that it will never enter the installations and consulting side of the business (aside from installation and consulting that ERPI does as part of its software support). Dangling such a large carrot in front of the accounting firms provided the continuing benefit of encouraging their continued support of ERPI with their customers. 137. (Refer to Case Scenario 2). Given that software systems like EIS are very complex, and quality is largely a function of the related installation and consulting processes, how can ERPI control quality and ultimately protect the reputation of its product (and its name) when it has ultimately outsourced installation to its partners? Answer: The best answers will include a menu of actions that ERPI can take, starting first with the observation that ERPI is being very generous to the accounting firms and that such firms stand to lose considerable revenues if they are not involved in EIS-related installations and consulting. From that base, students should begin talk about the challenge of building open communications, trust, competency, and accountability with the partners. The first step, a detailed operating contract, will set the groundwork for open communications. It should spell out the quality expectations of the partner as well as the conditions upon which ERPI has the right to terminate the partner's representation. On the trust side, ERPI can give its partners inside information on its technological breakthroughs so they can keep abreast and have a competitive advantage regarding innovations in the pipeline. They should also adhere to their promise that they will not encroach on the installation and consulting business side for the target firms (world's largest, global manufacturers, and consumer product companies). In terms of competency, ERPI can provide initial training and certification of partner consultants; they can then provide ongoing continuing education for both the consultants and the clients as a service (not a profit center). The accountability side is also well served by the certification, since noncertified consultants cannot represent ERPI software. A second control would be a quality audit function on each installation (feasible, since the installations are both huge and relatively few), and cancel the partners' right to install ERPI products if they fail the audits. 138. (Refer to Case Scenario 2). After managing this network of alliances for several years, what new strategic assets has ERPI developed? Answer: This is a challenging question for students because it forces them to take a more dynamic perspective of potentially valuable resources that companies and their customers create together, but that the company itself can exploit (a perfect example of a co-specialized asset). The best answers will begin by observing that ERPI has focused historically on transactions (making the sale), instead of relationships (lifetime value of a customer beyond the first sale). Shifting attention to ERPI installations as relationships suggests that the company now has a customer list to die for—this list is especially valuable since (1) the target companies have invested upward of $200 million in ERPI proprietary systems and, (2) once installed, given the pervasive nature of EIS systems, those target firms are unlikely to simply switch to another system. 139. (Refer to Case Scenario 2). Imagine that ERPI has saturated the large-firm market for its products, competitors are undermining its technological advantage, and ERPI needs to look to new markets for revenue. Its CEO has suggested that it start selling its software down-market to middle-market companies, and at the same time enter the consulting and installation side of the business for this target market. What are the risks and opportunities of such a strategy? Answer: The best answers will start by pointing out that ERPI's prior competitive advantage has relied on a high degree of trust with its partners, particularly its agreement not to encroach on the accounting firms' lucrative installation and consulting practices. To the extent the large accounting firms serve middle market firms, this violation of trust may undermine the strength of ERPI's core business market position. A secondary risk is, by converting a cost center (software support and service) to a profit center, ERPI is actually diversifying into a new set of industries (installation and consulting), and it will now face a slew of competent, defensive competitors who have long occupied these market spaces. In terms of opportunities, it is reasonable to assert that the large accounting firms have typically not played a large role in the middle market, and have even had difficulty entering those markets when they tried. ERPI could position its strategy in cooperation with the large accounting firms to jointly enter and dominate the markets composed of the largest middle-market firms. 140. (Refer to Case Scenario 2). The approach used to manage the ERPI network of alliances is closest to an opportunity-maximization approach, which makes it possible which for the partners to explore how their resources and capabilities can be shared in multiple value-creating ways. Answer: True. The relationship among the alliance partners is based on trust (exemplified by ERPI's promise not to enter the installation and consulting aspects of the business) rather than contracts. Case Scenario 3: Bunnywac. Bunnywac is a global producer and seller of batteries for consumer electronics products (radios, flashlights, toys, etc.), and competes primarily with its larger rivals by providing battery products equal in performance at a lower price. The worldwide battery industry suffers from issues of overcapacity and commoditization, brand segmentation and proliferation, the growing strength of global retailers, and the low-cost threat of new entrants from Asia. Thus, the ability to provide dependable batteries at a very low cost is essential to survival in this industry. Bunnywac has grown quickly into one of the leading players in the battery industry primary through horizontal acquisitions financed by a recent successful IPO, and is now counted among the top four companies in North and Latin America. Its presence in Europe and Latin America is negligible. While its market presence and brand is generally strong and market share is growing, Bunnywac has entered into an alliance to obtain the core technologies of its batteries. Bunnywac does not actually own the technology that makes its batteries work. This approach has provided Bunnywac a cost advantage since it has not had to invest in basic R&D and has very little R&D infrastructure. This technology is licensed from Mats (which has 200 engineers dedicated to moving the technology forward), one of Japan's largest technology-based holding companies (like Sharp or Canon). Mats also sells batteries under the Pandemonium brand and commands over 50 percent of the market share of Asian countries. Mats' market share in other global markets is negligible and its efforts at growing its branded battery share in the North America, Latin America, and Europe has been severely frustrated in recent years. While Mats is very large compared to Bunnywac, the battery technology and battery business are relatively tiny relative to Mats' other technology-based businesses. Bunnywac's decade-long licensing agreement with Mats for the essential battery technology expires in 1 year; there are no obvious substitute providers of this technology. 141. (Refer to Case Scenario 3). What should be Bunnywac's primary concerns about its lapsing technology contract with Mats? Answer: The best discussions will draw out near and longer-term concerns for Bunnywac's prospects, as well as speculation as to Mats' long-term strategic intent. Near-term, Bunnywac needs to have access to a reasonably priced technology if it is to continue competing on a low-cost basis. Also, since it is a public company, the capital markets are likely to begin showing concern for Bunnywac's prospects if no replacement technologies are identified, which in turn will hamper the firm's ability to grow further through acquisition. Medium-term, if a new contract is negotiated, Bunnywac needs to be concerned with the price it will now pay, since Mats can be construed to be in the more advantageous bargaining position. If Bunnywac is determined to remain independent, then it should only pay such higher costs if it has a parallel near-term strategy of developing its own technological competencies (which are admittedly very hard and costly to develop) or another source for the technology at a lower price and on a long-term basis. Finally (and perhaps first!), Bunnywac needs to assess Mats' strategic intent with regard to Bunnywac. Does Mats view, and is hence positioning for, Bunnywac as (a) a valued-long term partner, (b) a potential future competitor, or (c) a near-term cheap acquisition target as a vehicle for gaining a quick foothold in the branded battery markets? 142. (Refer to Case Scenario 3). What should Bunnywac's strategy be with regard to the lapsing technology contract? Answer: Following the discussion of its concerns, the best answers will have several possible steps. The first step should be for Bunnywac to determine Mats' long-term strategic intent. Is Mats primarily interested in retaining the technology? Would they sell the technology outright? Is their primary intent to forward integrate into all global markets through their own or acquired brands? These answers determine whether or not Mats' intent is to see Bunnywac as a viable, independent avenue for its technologies, or simply as a potential future competitor, or something in between. For instance, if Mats sees Bunnywac as adding value in terms of brand and channel management capabilities, but is not interested in extending the technology alliance, then perhaps Bunnywac may actually consider negotiating its own sale to Mats while its value is still relatively high. 143. (Refer to Case Scenario 3). What type of business-level cooperative strategy is primarily exemplified by Bunnywac's technology licensing arrangement with Mats? A. vertical business-level complementary strategic alliance B. horizontal business-level complementary strategic alliance C. competition-reducing business-level strategic alliance D. competition response business-level strategic alliance Answer: A Vertical fits best since Bunnywac is accessing a basic technology, its raw materials per se, and then adding value to them through its production, marketing, distribution, and brand building. 144. (Refer to Case Scenario 3). The cooperative strategy in which Bunnywac licenses technology from Mats is common among technology-based firms and is an example of an equity alliance. Answer: False. The chapter gives licensing arrangements, distribution agreements, and supply contracts as examples of nonequity alliances. Licensing arrangements are common among technology-based companies such as Hewlett-Packard, which licenses its intellectual property to other firms. Test Bank for Strategic Management: Concepts and Cases: Competitiveness and Globalization Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson 9781285425177, 9780538753098, 9781133495239, 9780357033838, 9781305502208, 9781305502147