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Chapter 6

Supporting the Business-Level Strategy: Competitive and Cooperative Moves

L E A R N I N G O B J E C T I V E S

After reading this chapter, you should be able to understand and articulate answers to the following

questions:

1. What different competitive moves are commonly used by firms?

2. When and how do firms respond to the competitive actions taken by their rivals?

3. What moves can firms make to cooperate with other firms and create mutual benefits?

Can Merck Stay Healthy?

On June 7, 2011, pharmaceutical giant Merck & Company Inc. announced the formation of a strategic

alliance with Roche Holding AG, a smaller pharmaceutical firm that is known for excellence in medical

testing. The firms planned to work together to create tests that could identify cancer patients who might

benefit from cancer drugs that Merck had under development. [1]

This was the second alliance formed between the companies in less than a month. On May 16, 2011, the

US Food and Drug Administration approved a drug called Victrelis that Merck had developed to treat

hepatitis C. Merck and Roche agreed to promote Victrelis together. This surprised industry experts

because Merck and Roche had offered competing treatments for hepatitis C in the past. The Merck/Roche

alliance was expected to help Victrelis compete for market share with a new treatment called Incivek that

was developed by a team of two other pharmaceutical firms: Vertex and Johnson & Johnson.

Experts predicted that Victrelis’s wholesale price of $1,100 for a week’s supply could create $1 billion of

annual revenue. This could be an important financial boost to Merck, although the company was already

enormous. Merck’s total of $46 billion in sales in 2010 included approximately $5.0 billion in revenues

from asthma treatment Singulair, $3.3 billion for two closely related diabetes drugs, $2.1 billion for two

closely related blood pressure drugs, and $1.1 billion for an HIV/AIDS treatment.

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Despite these impressive numbers, concerns about Merck had reduced the price of the firm’s stock from

nearly $60 per share at the start of 2008 to about $36 per share by June 2011. A big challenge for Merck

is that once the patent on a drug expires, its profits related to that drug plummet because generic

drugmakers can start selling the drug. The patent on Singulair is set to expire in the summer of 2012, for

example, and a sharp decline in the massive revenues that Singulair brings into Merck seemed

inevitable. [2]

A major step in the growth of Merck was the 2009 acquisition of drugmaker Schering-Plough. By 2011,

Merck ranked fifty-third on the Fortune 500 list of America’s largest companies. Rivals Pfizer (thirty-first)

and Johnson & Johnson (fortieth) still remained much bigger than Merck, however. Important questions

also loomed large. Would the competitive and cooperative moves made by Merck’s executives keep the

firm healthy? Or would expiring patents, fearsome rivals, and other challenges undermine Merck’s

vitality?

Friedrich Jacob Merck had no idea that he was setting the stage for such immense stakes when he took

the first steps toward the creation of Merck. He purchased a humble pharmacy in Darmstadt, Germany, in

1688. In 1827, the venture moved into the creation of drugs when Heinrich Emanuel Merck, a descendant

of Friedrich, created a factory in Darmstadt in 1827. The modern version of Merck was incorporated in

1891. More than three hundred years after its beginnings, Merck now has approximately ninety-four

thousand employees.

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Merck’s origins can be traced back more than three centuries to Friedrich Jacob Merck’s purchase

of this pharmacy in 1688.

Image courtesy of

Wikimedia,http://upload.wikimedia.org/wikipedia/commons/e/eb/ENGEL_APHOTHEKE.png.

For executives leading firms such as Merck, selecting a generic strategy is a key aspect of business-level

strategy, but other choices are very important too. In their ongoing battle to make their firms more

successful, executives must make decisions about what competitive moves to make, how to respond to

rivals’ competitive moves, and what cooperative moves to make. This chapter discusses some of the more

powerful and interesting options. As our opening vignette on Merck illustrates, often another company,

such as Roche, will be a potential ally in some instances and a potential rival in others.

[1] Stynes, T. 2011, June 7. Merck, Roche focus on tests for cancer treatments. Wall Street Journal. Retrieved from

online.wsj.com/article/SB100014240527023044323045 76371491785709756.html?mod=googlenews_wsj

[2] Statistics drawn from Standard & Poor’s stock report on Merck.

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6.1 Making Competitive Moves

Figure 6.1 Making Competitive Moves

Image courtesy of 663highland, http://en.wikipedia.org/wiki/File:Enchoen27n3200.jpg

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L E A R N I N G O B J E C T I V E S

1. Understand the advantages and disadvantages of being a first mover.

2. Know how disruptive innovations can change industries.

3. Describe two ways that using foothold can benefit firms.

4. Explain how firms can win without fighting using a blue ocean strategy.

5. Describe the creative process of bricolage.

Being a First Mover: Advantages and Disadvantages

A famous cliché contends that “the early bird gets the worm.” Applied to the business world, the cliché

suggests that certain benefits are available to a first mover into a market that will not be available to later

entrants (Figure 6.1 "Making Competitive Moves"). A first-mover advantage exists when making the

initial move into a market allows a firm to establish a dominant position that other firms struggle to

overcome. For example, Apple’s creation of a user-friendly, small computer in the early 1980s helped

fuel a reputation for creativity and innovation that persists today. Kentucky Fried Chicken (KFC)

was able to develop a strong bond with Chinese officials by being the first Western restaurant chain

to enter China. Today, KFC is the leading Western fast-food chain in this rapidly growing market.

Genentech’s early development of biotechnology allowed it to overcome many of the

pharmaceutical industry’s traditional entry barriers (such as financial capital and distribution networks)

and become a profitable firm. Decisions to be first movers helped all three firms to be successful in their

respective industries. [1]

On the other hand, a first mover cannot be sure that customers will embrace its offering, making a first

move inherently risky. Apple’s attempt to pioneer the personal digital assistant market, through its

Newton, was a financial disaster. The first mover also bears the costs of developing the product and

educating customers. Others may learn from the first mover’s successes and failures, allowing them to

cheaply copy or improve the product. In creating the Palm Pilot, for example, 3Com was able to build on

Apple’s earlier mistakes. Matsushita often refines consumer electronic products, such as compact disc

players and projection televisions, after Sony or another first mover establishes demand. In many

industries, knowledge diffusion and public-information requirements make such imitation increasingly

easy.

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One caution is that first movers must be willing to commit sufficient resources to follow through on their

pioneering efforts. RCA and Westinghouse were the first firms to develop active-matrix LCD display

technology, but their executives did not provide the resources needed to sustain the products spawned by

this technology. Today, these firms are not even players in this important business segment that supplies

screens for notebook computers, camcorders, medical instruments, and many other products.

To date, the evidence is mixed regarding whether being a first mover leads to success. One research study

of 1,226 businesses over a fifty-five-year period found that first movers typically enjoy an advantage over

rivals for about a decade, but other studies have suggested that first moving offers little or no advantages.

Perhaps the best question that executives can ask themselves when deciding whether to be a first mover

is, how likely is this move to provide my firm with a sustainable competitive advantage? First moves that

build on strategic resources such as patented technology are difficult for rivals to imitate and thus are

likely to succeed. For example, Pfizer enjoyed a monopoly in the erectile dysfunction market for five years

with its patented drug Viagra before two rival products (Cialis and Levitra) were developed by other

pharmaceutical firms. Despite facing stiff competition, Viagra continues to raise about $1.9 billion in sales

for Pfizer annually. [2]

In contrast, E-Trade Group’s creation in 2003 of the portable mortgage seemed doomed to fail because it

did not leverage strategic resources. This innovation allowed customers to keep an existing mortgage

when they move to a new home. Bigger banks could easily copy the portable mortgage if it gained

customer acceptance, undermining E-Trade’s ability to profit from its first move.

Disruptive Innovation

Some firms have the opportunity to shake up their industry by introducing a disruptive innovation—an

innovation that conflicts with, and threatens to replace, traditional approaches to competing within an

industry. The iPad has proved to be a disruptive innovation since its introduction by Apple in 2010.

Many individuals quickly abandoned clunky laptop computers in favor of the sleek tablet format offered

by the iPad. And as a first mover, Apple was able to claim a large share of the market.

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The iPad story is unusual, however. Most disruptive innovations are not overnight sensations. Typically, a

small group of customers embrace a disruptive innovation as early adopters and then a critical mass of

customers builds over time. An example is digital cameras. Few photographers embraced digital cameras

initially because they took pictures slowly and offered poor picture quality relative to traditional film

cameras. As digital cameras have improved, however, they have gradually won over almost everyone that

takes pictures. Executives who are deciding whether to pursue a disruptive innovation must first make

sure that their firm can sustain itself during an initial period of slow growth.

Footholds

In warfare, many armies establish small positions in geographic territories that they have not occupied

previously. These footholds provide value in at least two ways. First, owning a

foothold can dissuade other armies from attacking in the region. Second, owning a foothold gives an army

a quick strike capability in a territory if the army needs to expand its reach.

Similarly, some organizations find it valuable to establish footholds in certain markets. Within the context

of business, a foothold is a small position that a firm intentionally establishes within a market in which it

does not yet compete.[3] Swedish furniture seller IKEA is a firm that relies on footholds. When IKEA enters

a new country, it opens just one store. This store is then used as a showcase to establish IKEA’s brand.

Once IKEA gains brand recognition in a country, more stores are established. [4]

Pharmaceutical giants such as Merck often obtain footholds in emerging areas of medicine. In December

2010, for example, Merck purchased SmartCells Inc., a company that was developing a possible new

treatment for diabetes. In May 2011, Merck acquired an equity stake in BeiGene Ltd., a Chinese firm that

was developing novel cancer treatments and detection methods. Competitive moves such as these offer

Merck relatively low-cost platforms from which it can expand if clinical studies reveal that the treatments

are effective.

Blue Ocean Strategy

It is best to win without fighting.

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Sun-Tzu, The Art of War

A blue ocean strategy involves creating a new, untapped market rather than competing with rivals in an

existing market. [5] This strategy follows the approach recommended by the ancient master of strategy

Sun-Tzu in the quote above. Instead of trying to outmaneuver its competition, a firm using a blue ocean

strategy tries to make the competition irrelevant. Baseball legend Wee Willie Keeler offered a similar idea

when asked how to become a better hitter: “Hit ’em where they ain’t.” In other words, hit the baseball where

there are no fielders rather than trying to overwhelm the fielders with a ball hit directly at them.

Nintendo openly acknowledges following a blue ocean strategy in its efforts to invent new markets. In

2006, Perrin Kaplan, Nintendo’s vice president of marketing and corporate affairs for Nintendo of

America noted in an interview, “We’re making games that are expanding our base of consumers in Japan

and America. Yes, those who’ve always played games are still playing, but we’ve got people who’ve never

played to start loving it with titles like Nintendogs, Animal Crossing and Brain Games. These games are

blue ocean in action.” [6] Other examples of companies creating new markets include FedEx’s invention of

the fast-shipping business and eBay’s invention of online auctions.

Bricolage

Bricolage is a concept that is borrowed from the arts and that, like blue ocean strategy, stresses moves that

create new markets. Bricolage means using whatever materials and resources happen to be available as

the inputs into a creative process. A good example is offered by one of the greatest inventions in the

history of civilization: the printing press. As noted in the Wall Street Journal, “The printing press is a

classic combinatorial innovation. Each of its key elements—the movable type, the ink, the paper and the

press itself—had been developed separately well before Johannes Gutenberg printed his first Bible in the

15th century. Movable type, for instance, had been independently conceived by a Chinese blacksmith

named Pi Sheng four centuries earlier. The press itself was adapted from a screw press that was being

used in Germany for the mass production of wine.” [7] Gutenberg took materials that others had created

and used them in a unique and productive way.

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Executives apply the concept of bricolage when they combine ideas from existing businesses to create a

new business. Think miniature golf is boring? Not when you play at one of Monster Mini Golf’s more than

twenty-five locations. This company couples a miniature golf course with the thrills of a haunted house. In

April 2011, Monster Mini Golf announced plans to partner with the rock band KISS to create a “custom-

designed, frightfully fun course [that] will feature animated KISS and monster props lurking in all 18

fairways” in Las Vegas. [8]

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Braveheart meets heavy metal when TURISAS takes the stage.

Image courtesy of Cecil, http://en.wikipedia.org/wiki/File:Turisas_-_Jalometalli_2008_-

_02.JPG.

Many an expectant mother has lamented the unflattering nature of maternity clothes and the boring

stores that sell them. Coming to the rescue is Belly Couture, a boutique in Lubbock, Texas, that combines

stylish fashion and maternity clothes. The store’s clever slogan—“Motherhood is haute”—reflects the

unique niche it fills through bricolage. A wilder example is TURISAS, a Finnish rock band that has created

a niche for itself by combining heavy metal music with the imagery and costumes of Vikings. The band’s

website describes their effort at bricolage as “inspirational cinematic battle metal brilliance.” [9]No one

ever claimed that rock musicians are humble.

Strategy at the Movies

Love and Other Drugs

Competitive moves are chosen within executive suites, but they are implemented by frontline employees.

Organizational success thus depends just as much on workers such as salespeople excelling in their roles

as it does on executives’ ability to master strategy. A good illustration is provided in the 2010 film Love

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and Other Drugs, which was based on the nonfiction book Hard Sell: The Evolution of a Viagra

Salesman.

As a new sales representative for drug giant Pfizer, Jamie Randall believed that the best way to increase

sales of Pfizer’s antidepressant Zoloft in his territory was to convince highly respected physician Dr.

Knight to prescribe Zoloft rather than the good doctor’s existing preference, Ely Lilly’s drug Prozac. Once

Dr. Knight began prescribing Zoloft, thought Randall, many other physicians in the area would follow

suit.

This straightforward plan proved more difficult to execute than Randall suspected. Sales reps from Ely

Lilly and other pharmaceutical firms aggressively pushed their firm’s products, such as by providing all-

expenses-paid trips to Hawaii for nurses in Dr. Knight’s office. Prozac salesman Trey Hannigan went so

far as to beat up Randall after finding out that Randall had stolen and destroyed Prozac samples. While

assault is an extreme measure to defend a sales territory, the actions of Hannigan and the other

salespeople depicted in Love and Other Drugs reflect the challenges that frontline employees face when

implementing executives’ strategic decisions about competitive moves.

Image courtesy of Marco, http://www.flickr.com/photos/zi1217/5528068221.

K E Y T A K E A W A Y

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Firms can take advantage of a number of competitive moves to shake up or otherwise get ahead in an

ever-changing business environment. E X E R C I S E S

1. Find a key trend from the general environment and develop a blue ocean strategy that might capitalize on

that trend.

2. Provide an example of a product that, if invented, would work as a disruptive innovation. How

widespread would be the appeal of this product?

3. How would you propose to develop a new foothold if your goal was to compete in the fashion industry?

4. Develop a new good or service applying the concept of bricolage. In other words, select two existing

businesses and describe the experience that would be created by combining those two businesses.

[1] This section draws from Ketchen, D. J., Snow, C., & Street, V. 2004. Improving firm performance by matching

strategic decision making processes to competitive dynamics.Academy of Management Executive, 19(4), 29–43.

[2] Figures from Standard & Poor’s stock report on Pfizer.

[3] Upson, J., Ketchen, D. J., Connelly, B., & Ranft, A. Forthcoming. Competitor analysis and foothold

moves. Academy of Management Journal.

[4] Hambrick, D. C., & Fredrickson, J. W. 2005. Are you sure you have a strategy? Academy of Management

Executive, 19, 51–62.

[5] Kim, W. C., & Mauborgne, R. 2004, October. Blue ocean strategy. Harvard Business Review, 76–85.

[6] Rosmarin, R. 2006, February 7. Nintendo’s new look. Forbes.com. Retrieved

fromhttp://www.forbes.com/2006/02/07/xbox-ps3-revolution-cx_rr_0207nintendo.html

[7] Johnson, S. The genius of the tinkerer. Wall Street Journal. Retrieved from

http://online.wsj.com/article/SB10001424052748703989304575503730101860838.html

[8] KISS Mini Golf to rock Las Vegas this fall [Press release]. 2011, April 28. Monster Mini Golf website. Retrieved

from http://www.monsterminigolf.com/mmgkiss.html

[9] http://www.turisas.com/site/biography/

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6.2 Responding to Competitors’ Moves

L E A R N I N G O B J E C T I V E S

1. Know the three factors that determine the likelihood of a competitor response.

2. Understand the importance of speed in competitive response.

3. Describe how mutual forbearance can be beneficial for firms engaged in multipoint competition.

4. Explain two ways firms can respond to disruptive innovations.

5. Understand the importance of fighting brands as a competitive response.

In addition to choosing what moves their firm will make, executives also have to decide whether to

respond to moves made by rivals. Figuring out how to react, if at all, to a competitor’s move

ranks among the most challenging decisions that executives must make. Research indicates

that three factors determine the likelihood that a firm will respond to a competitive move:

awareness, motivation, and capability. These three factors together determine

the level of competition tension that exists between rivals.

An analysis of the “razor wars” illustrates the roles that these factors play. [1]Consider Schick’s

attempt to grow in the razor-system market with its introduction of the Quattro. This move was

widely publicized and supported by a $120 million advertising budget. Therefore, its main

competitor, Gillette, was well aware of the move. Gillette’s motivation to respond was also high.

Shaving products are a vital market for Gillette, and Schick has become an increasingly formidable

competitor since its acquisition by Energizer. Finally, Gillette was very capable of responding, given

its vast resources and its dominant role in the industry. Because all three factors were high, a strong

response was likely. Indeed, Gillette made a preemptive strike with the introduction of the Sensor 3

and Venus Devine a month before the Schick Quattro’s projected introduction.

Although examining a firm’s awareness, motivation, and capability is important, the results of a

series of moves and countermoves are often difficult to predict and miscalculations can be costly. The

poor response by Kmart and other retailers to Walmart’s growth in the late 1970s illustrates this

point. In discussing Kmart’s parent corporation (Kresge), a stock analyst at that time wrote, “While

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we don’t expect Kresge to stage any massive invasion of Walmart’s existing territory, Kresge could

logically act to contain Walmart’s geographical expansion.…Assuming some containment policy on

Kresge’s part, Walmart could run into serious problems in the next few years.” Kmart executives also

received but ignored early internal warnings about Walmart. A former member of Kmart’s board of

directors lamented, “I tried to advise the company’s management of just what a serious threat I

thought [Sam Walton, founder of Walmart] was. But it wasn’t until fairly recently that they took him

seriously.” While the threat of Walmart growth was apparent to some observers, Kmart executives

failed to respond. Competition with Walmart later drove Kmart into bankruptcy.

Speed Kills

Executives in many markets must cope with a rapid-fire barrage of attacks from rivals, such as head-to-

head advertising campaigns, price cuts, and attempts to grab key customers. If a firm is going to respond

to a competitor’s move, doing so quickly is important. If there is a long delay between an attack and a

response, this generally provides the attacker with an edge. For example, PepsiCo made the mistake of

waiting fifteen months to copy Coca-Cola’s May 2002 introduction of Vanilla Coke. In the interim, Vanilla

Coke carved out a significant market niche; 29 percent of US households had purchased the beverage by

August 2003, and 90 million cases had been sold.

In contrast, fast responses tend to prevent such an edge. Pepsi’s spring 2004 announcement of a

midcalorie cola introduction was quickly followed by a similar announcement by Coke, signaling that

Coke would not allow this niche to be dominated by its longtime rival. Thus, as former General Electric

CEO Jack Welch noted in his autobiography, success in most competitive rivalries “is less a function of

grandiose predictions than it is a result of being able to respond rapidly to real changes as they occur.

That’s why strategy has to be dynamic and anticipatory.”

So…We Meet Again

Multipoint competition adds complexity to decisions about whether to respond to a rival’s moves.

With multipoint competition, a firm faces the same rival in more than one market. Cigarette makers R. J.

Reynolds (RJR) and Philip Morris, for example, square off not only in the United States but also in many

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countries around the world. When a firm has one or more multipoint competitors, executives must realize

that a competitive move in a market can have effects not only within that market but also within others. In

the early 1990s, RJR started using lower-priced cigarette brands in the United States to gain customers.

Philip Morris responded in two ways. The first response was cutting prices in the United States to protect

its market share. This started a price war that ultimately hurt both companies. Second, Philip Morris

started building market share in Eastern Europe where RJR had been establishing a strong position. This

combination of moves forced RJR to protect its market share in the United States and neglect Eastern

Europe.

If rivals are able to establish mutual forbearance, then multipoint competition can help them be

successful. Mutual forbearance occurs when rivals do not act aggressively because each recognizes that

the other can retaliate in multiple markets. In the late 1990s, Southwest Airlines and United Airlines

competed in some but not all markets. United announced plans to form a new division that would move

into some of Southwest’s other routes. Southwest CEO Herb Kelleher publicly threatened to retaliate in

several shared markets. United then backed down, and Southwest had no reason to attack. The result was

better performance for both firms. Similarly, in hindsight, both RJR and Philip Morris probably would

have been more profitable had RJR not tried to steal market share in the first place. Thus recognizing and

acting on potential forbearance can lead to better performance through firms not competing away their

profits, while failure to do so can be costly.

Responding to a Disruptive Innovation

When a rival introduces a disruptive innovation that conflicts with the industry’s current competitive

practices, such as the emergence of online stock trading in the late 1990s, executives choose from among

three main responses. First, executives may believe that the innovation will not replace established

offerings entirely and thus may choose to focus on their traditional modes of business while ignoring the

disruption. For example, many traditional bookstores such as Barnes & Noble did not consider book sales

on Amazon to be a competitive threat until Amazon began to take market share from them. Second, a firm

can counter the challenge by attacking along a different dimension. For example, Apple responded to the

direct sales of cheap computers by Dell and Gateway by adding power and versatility to its products. The

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third possible response is to simply match the competitor’s move. Merrill Lynch, for example, confronted

online trading by forming its own Internet-based unit. Here the firm risks cannibalizing its traditional

business, but executives may find that their response attracts an entirely new segment of customers.

Fighting Brands: Get Ready to Rumble

A firm’s success can be undermined when a competitor tries to lure away its customers by charging lower

prices for its goods or services. Such a scenario is especially scary if the quality of the competitor’s

offerings is reasonably comparable to the firm’s. One possible response would be for the firm to lower its

prices to prevent customers from abandoning it. This can be effective in the short term, but it creates a

long-term problem. Specifically, the firm will have trouble increasing its prices back to their original level

in the future because charging lower prices for a time will devalue the firm’s brand and make customers

question why they should accept price increases.

The creation of a fighting brand is a move that can prevent this problem. Afighting brand is a lower-end

brand that a firm introduces to try to protect the firm’s market share without damaging the firm’s existing

brands. In the late 1980s, General Motors (GM) was troubled by the extent to which the sales of small,

inexpensive Japanese cars were growing in the United States. GM wanted to recapture lost sales, but it did

not want to harm its existing brands, such as Chevrolet, Buick, and Cadillac, by putting their names on

low-end cars. GM’s solution was to sell small, inexpensive cars under a new brand: Geo.

Interestingly, several of Geo’s models were produced in joint ventures between GM and the same

Japanese automakers that the Geo brand was created to fight. A sedan called the Prizm was built side by

side with the Toyota Corolla by the New United Motor Manufacturing Incorporated (NUMMI), a factory

co-owned by GM and Toyota. The two cars were virtually identical except for minor cosmetic differences.

A smaller car (the Metro) and a compact sport utility vehicle (the Tracker) were produced by a joint

venture between GM and Suzuki. By 1998, the US car market revolved around higher-quality vehicles, and

the low-end Geo brand was discontinued.

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The Geo brand was known for its low price and good gas mileage, not for its styling.

Image courtesy of Bull-

Doser,http://upload.wikimedia.org/wikipedia/commons/6/6a/Geo_Metro_Convertible.JPG.

Some fighting brands are rather short lived. Merck’s failed attempt to protect market share in Germany by

creating a fighting brand is an example. Zocor, a treatment for high cholesterol, was set to lose its German

patent in 2003. Merck tried to keep its high profit margin for Zocor intact until the patent expired as well

as preparing for the inevitable competition with generic drugmakers by creating a lower-priced brand,

Zocor MSD. Once the patent expired, however, the new brand was not priced low enough to keep

customers from switching to generics. Merck soon abandoned the Zocor MSD brand. [2]

Two major airlines experienced similar futility. In response to the growing success of discount airlines

such as Southwest, AirTran, Jet Blue, and Frontier, both United Airlines and Delta Airlines created

fighting brands. United launched Ted in 2004 and discontinued it in 2009. Delta’s Song had an even

shorter existence. It was started in 2003 and was ended in 2006. Southwest’s acquisition of AirTran in

2011 created a large airline that may make United and Delta lament that they were not able to make their

own discount brands successful.

Despite these missteps, the use of fighting brands is a time-tested competitive move. For example, very

successful fighting brands were launched forty years apart by Anheuser-Busch and Intel. After Anheuser-

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Busch increased the prices charged by its existing brands in the mid-1950s (Budweiser and Michelob),

smaller brewers started gaining market share. In response, Anheuser-Busch created a lower-priced brand:

Busch. The new brand won back the market share that had been lost and remains an important part of

Anheuser-Busch’s brand portfolio today. In the late 1990s, silicon chipmaker Advanced Micro Devices

started undercutting the prices charged by industry leader Intel. Intel responded by creating the Celeron

brand of silicon chips, a brand that has preserved Intel’s market share without undermining profits. Wise

strategic moves such as the creation of the Celeron brand help explain why Intel ranks thirty-second

on Fortune magazine’s list of the “World’s Most Admired Corporations.” Meanwhile, Anheuser-Busch is

the second most admired beverage firm, ranking behind Coca-Cola.

K E Y T A K E A W A Y

When threatened by the competitive actions of rivals, firms possess numerous ways to respond,

depending on the severity of the threat.

E X E R C I S E S

1. Why might local restaurants not be in the position to respond to large franchises or chains? What can

local restaurants do to avoid being ruined by chain restaurants?

2. If a new alternative fuel was found in the auto industry, what are two ways existing car manufacturers

might respond to this disruptive innovation?

3. How might a firm such as Apple computers use a fighting brand?

[1] Portions of this section are adapted from Ketchen, D. J., Snow, C., & Street, V. 2004. Improving firm

performance by matching strategic decision making processes to competitive dynamics. Academy of Management

Executive, 19(4) 29-43. Ibid.

[2] Ritson, M. 2009, October. Should you launch a fighter brand? Harvard Business Review, 65–81.

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6.3 Making Cooperative Moves

L E A R N I N G O B J E C T I V E S

1. Know the four types of cooperative moves.

2. Understand the benefits of taking quick and decisive action.

In addition to competitive moves, firms can benefit from cooperating with one another. Cooperative

moves such as forming joint ventures and strategic alliances may allow firms to enjoy successes that

might not otherwise be reached. This is because cooperation enables firms to share (rather than duplicate)

resources and to learn from one another’s strengths. Firms that enter cooperative relationships

take on risks, however, including the loss of ontrol over operations, possible transfer of valuable secrets

to other firms, and possibly being taken advantage of by partners.[1]

Joint Ventures

A joint venture is a cooperative arrangement that involves two or more organizations each contributing to

the creation of a new entity. The partners in a joint venture share decision-making authority, control of

the operation, and any profits that the joint venture earns.

Sometimes two firms create a joint venture to deal with a shared opportunity. In April 2011, a joint

venture was created between Merck and Sun Pharmaceutical Industries Ltd., an Indian pharmaceutical

company. The purpose of the joint venture is to create and sell generic drugs in developing countries. In a

press release, a top executive at Sun stressed that each side has important strengths to contribute: “This

joint venture reinforces [Sun’s] strategy of partnering to launch products using our highly innovative

delivery technologies around the world. Merck has an unrivalled reputation as a world leading,

innovative, research-driven pharmaceutical company.” [2] Both firms contributed executives to the new

organization, reflecting the shared decision making and control involved in joint ventures.

In other cases, a joint venture is designed to counter a shared threat. In 2007, brewers SABMiller and

Molson Coors Brewing Company created a joint venture called MillerCoors that combines the firms’ beer

operations in the United States. Miller and Coors found it useful to join their US forces to better compete

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against their giant rival Anheuser-Busch, but the two parent companies remain separate. The joint

venture controls a wide array of brands, including Miller Lite, Coors Light, Blue Moon Belgian White,

Coors Banquet, Foster’s, Henry Weinhard’s, Icehouse, Keystone Premium, Leinenkugel’s, Killian’s Irish

Red, Miller Genuine Draft, Miller High Life, Milwaukee’s Best, Molson Canadian, Peroni Nastro Azzurro,

Pilsner Urquell, and Red Dog. This diverse portfolio makes MillerCoors a more potent adversary for

Anheuser-Busch than either Miller or Coors would be alone.

Strategic Alliances

A strategic alliance is a cooperative arrangement between two or more organizations that does not involve

the creation of a new entity. In June 2011, for example, Twitter announced the formation of a strategic

alliance with Yahoo! Japan. The alliance involves relevant Tweets appearing within various functions

offered by Yahoo! Japan. [3] The alliance simply involves the two firms collaborating as opposed to

creating a new entity together.

The pharmaceutical industry is the location of many strategic alliances. In January 2011, for example, a

strategic alliance between Merck and PAREXEL International Corporation was announced. Within this

alliance, the two companies collaborate on biotechnology efforts known as biosimilars. This alliance could

be quite important to Merck because the global market for biosimilars has been predicted to rise from

$235 million in 2010 to $4.8 billion by 2015. [4]

Colocation

Colocation occurs when goods and services offered under different brands are located close to one

another. In many cities, for examples, theaters and art galleries are clustered together in one

neighborhood. Auto malls that contain several different car dealerships are found in many areas.

Restaurants and hotels are often located near on another too. By providing customers with a variety of

choices, a set of colocated firms can attract a bigger set of customers collectively than the sum that could

be attracted to individual locations. If a desired play is sold out, a restaurant overcrowded, or a hotel

overbooked, many customers simply patronize another firm in the area.

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Because of these benefits, savvy executives in some firms colocate their own brands. The industry that

Brinker International competes within is revealed by its stock ticker symbol: EAT. This firm often sites

outlets of the multiple restaurant chains it owns on the same street. Marriott’s Courtyard and Fairfield Inn

often sit side by side. Yum! Brands takes this clustering strategy one step further by locating more than

one of its brands—A&W, Long John Silver’s, Taco Bell, Kentucky Fried Chicken, and Pizza Hut—within a

single store.

Co-opetition

Although competition and cooperation are usually viewed as separate processes, the concept of co-

opetition highlights a complex interaction that is becoming increasingly popular in many industries. Ray

Noorda, the founder of software firm Novell, coined the term to refer to a blending of competition and

cooperation between two firms. As explained in this chapter’s opening vignette, for example, Merck and

Roche are rivals in some markets, but the firms are working together to develop tests to detect cancer and

to promote a hepatitis treatment. NEC (a Japanese electronics company) has three different relationships

with Hewlett-Packard Co.: customer, supplier, and competitor. Some units of each company work

cooperatively with the other company, while other units are direct competitors. NEC and Hewlett-Packard

could be described as “frienemies”—part friends and part enemies.

Toyota and General Motors provide a well-known example of co-opetition. In terms of cooperation,

Toyota and GM vehicles were produced side by side for many years at the jointly owned New United

Motor Manufacturing Incorporated (NUMMI) in Fremont, California. While Honda and Nissan used

wholly owned plants to begin producing cars in the United States, NUMMI offered Toyota a lower-risk

means of entering the US market. This entry mode was desirable to Toyota because its top executives were

not confident that Japanese-style management would work in the United States. Meanwhile, the venture

offered GM the chance to learn Japanese management and production techniques—skills that were later

used in GM’s facilities. NUMMI offered both companies economies of scale in manufacturing and the

chance to collaborate on automobile designs. Meanwhile, Toyota and GM compete for market share

around the world. In recent years, the firms have been the world’s two largest automakers, and they have

traded the top spot over time.

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In their book titled, not surprisingly, Co-opetition, A. M. Brandenberger and B. J. Nalebuff suggest that

cooperation is generally best suited for “creating a pie,” while competition is best suited for “dividing it

up.” [5] In other words, firms tend to cooperate in activities located far in the value chain from customers,

while competition generally occurs close to customers. The NUMMI example illustrates this tendency—

GM and Toyota worked together on design and manufacturing but worked separately on distribution,

sales, and marketing. Similarly, a research study focused on Scandinavian firms found that, in the mining

equipment industry, firms cooperated in material development, but they competed in product

development and marketing. In the brewing industry, firms worked together on the return of used bottles

but not in distribution. [6]

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Joseph Addison, an eighteenth-century poet, is often credited with coining the phrase “He who hesitates

is lost.” This proverb is especially meaningful in today’s business world. It is easy for executives to become

paralyzed by the dizzying array of competitive and cooperative moves available to them. Given the fast-

paced nature of most industries today, hesitation can lead to disaster. Some observers have suggested that

competition in many settings has transformed into hypercompetition, which involves very rapid and

unpredictable moves and countermoves that can undermine competitive advantages. Under such

conditions, it is often better to make a reasonable move quickly rather than hoping to uncover the perfect

move through extensive and time-consuming analysis.

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The importance of learning also contributes to the value of adopting a “get moving” mentality. This is

illustrated in Miroslav Holub’s poem “Brief Thoughts on Maps.” The discovery that one soldier had a map

gave the soldiers the confidence to start moving rather than continuing to hesitate and remaining lost.

Once they started moving, the soldiers could rely on their skill and training to learn what would work and

what would not. Similarly, success in business often depends on executives learning from a series of

competitive and cooperative moves, not on selecting ideal moves.

K E Y T A K E A W A Y

Cooperating with other firms is sometimes a more lucrative and beneficial approach than directly

attacking competing firms.

E X E R C I S E S

1. How could a family jewelry store use one of the cooperative moves mentioned in this section?? What

type of organization might be a good cooperative partner for a family jewelry store?

2. Why is it that “any old map will do” sometimes in relation to strategic actions?

[1] Portions of this section are adapted from Ketchen, D. J., Snow, C., & Street, V. 2004. Improving firm

performance by matching strategic decision making processes to competitive dynamics. Academy of Management

Executive, 19(4), 29-43. Ibid.

[2] Merck & Co., Inc., and Sun Pharma establish joint venture to develop and commercialize novel formulations

and combinations of medicines in emerging markets [Press release]. 2011, April 11. Merck website. Retrieved

fromhttp://www.merck.com/licensing/our-partnership/sun-partnership.html

[3] Rao, L. 2011, June 14. Twitter announces “strategic alliance” with Yahoo Japan [Blog post]. Techcrunch website.

Retrieved fromhttp://www.techcrunch.com/2011/06/14/twitter-announces-firehose-partnership-with-yahoo-

japan

[4] Global biosimilars market to reach US$4.8 billion by 2015, according to a new report by Global Industry

Analysts, Inc. [Press release]. 2011, February 15. PRWeb website. Retrieved

from http://www.prweb.com/releases/biosimilars/human_growth _hormone/prweb8131268.htm

[5] Brandenberger, A. M., & Nalebuff, B. J. 1996. Co-opetition. New York, NY: Doubleday.

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[6] Bengtsson, M., & Kock, S. 2000. “Coopetition” in business networks—to cooperate and compete

simultaneously. Industrial Marketing Management, 29(5), 411–426.

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6.4 Conclusion

This chapter explains competitive and cooperative moves that executives may choose from when

challenged by competitors. Executives may choose to act swiftly by being a first mover in their

market, and their firms may benefit if they are offering disruptive innovations to an industry.

Executives may also choose a more conservative route by establishing a foothold within an area that

can serve as a launching point or by avoiding existing competitors overall by using a blue ocean

strategy. When firms are on the receiving end of a competitive attack, they are likely to retaliate to

the extent that they possess awareness, motivation, and capability. While responding quickly is often

beneficial, mutual forbearance can also be an effective approach. When firms encounter a potentially

disruptive innovation, they might ignore the threat, confront it head on, or attack along a different

dimension. Executives may also react to competitive attacks by using fighting brands. Rather than

engaging in a head-to-head battle with competitors, executives may also choose to engage in a

cooperative strategy such as a joint venture, strategic alliance, colocation, or co-opetition. Regardless

of the decision executives make, in many cases any attempt to act on a viable road map will result in

progress that will get the firm moving in the right direction.

E X E R C I S E S

1. Divide your class into four or eight groups, depending on the size of the class. Each group should select a

different industry. Find examples of competitive and cooperative moves that you would recommend if

hired as a consultant for a firm in that industry.

2. What types of cooperative moves could your college or university use to partner with local, national, and

international businesses? What benefits and risks would be created by making these moves?