Cooperation among firms
18 important questions on Cooperation among firms
Hybrids exist in many different types. What does hybrid mean in practice?
What are two characteristics of hybrids? And give an example.
•Hybrids combine market-like governance elements with hierarchy-like governance elements.
•Hybrids are governance structures in which firms cooperate while preserving their autonomy in most business decisions (such as strategic decision-making and daily operations)
example: Long-term contract between the supplier of car parts and the car manufacturer
What are the 12 forms of business collaboration?
- Vertical integration
- Joint ventures
- Equity investments
- cooperatives
- R&D consortia
- Strategic alliances
- Cartels
- Franchising
- Licensing
- Subcontractor networks
- Industry standards groups
- Spot market
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What are 5 examples of different types of hybrids, including examples of businesses.
- Joint venture: FrieslandCampina and Huishan Dairy
- Cooperative: FriedlandCampina Dairy Cooperative
- Partnership; accountants, consultants, lawyers
- Long-term buyer-seller relationship (=strategic alliance); Bakker Barendrecht + Albert Heijn
- Franchising agreement; McDonalds
Why do firms want to collaborate?
What are 7 economic reasons for cooperation?
- Achieving economies of scale
- Strengthening bargaining power
- Sharing risk (market risk; innovation risk)
- Blocking competitors
- Vertical quasi-integration: linking complementary resources of partners in a value chain
- Overcoming trade or investment barriers (e.g. Foreign market entry)
- access to complementary resources (knowledge, equipment, patents).
Collaboration brings benefits, but also costs. What are the 5 costs / risks of collaboration?
- Dependency / loss of flexibility
- Operational and strategic costs
- Foregone alternatives / opportunity costs
- Potential loss of competitiveness (if unique resources are shared)
- Risk of opportunistic behaviour
What are the 6 key characteristics of cooperatives?
- Traditionally strong in agriculture and finance
- Increasingly used among ZZP's, in health care and in energy production/distribution
- Association of members (persons or firms)
- Joint ownership of the cooperative enterprise
- Democratic decision-making
- Low cost of exit and entry
What are four types of cooperatives (on the basis of who are the member)?
- Worker cooperatives (e.g. In home care)
- Producer cooperatives (e.g. In agriculture)
- Consumer cooperatives (e.g. In retail, finance)
- Multistakeholder cooperatives (e.g. In regional development)
What are six economic explanations for existence of agricultural cooperatives?
- Achieving economies of scale in product handling
- Strengthening bargaining power of farmers
- Sharing risk (e.g. Insurance)
- Sharing resources (e.g. Machinery)
- Value chain intergration
- Gaining access to low cost / good quality inputs, low cost credit, market information, water, new markets, etc.
What are franchising structures?
What are the two things that explains the choice for a franchising structure?
- Transaction cost reduction explanation: franchising is a more efficient governance structure than market or hierarchy.
- Resource scarcity explanation: a firm that has developed a highly successful formula is faced with resource constraints (capital and managers) when expanding rapidly
How does franchising work? Name 5 things.
- Franchisor provides assets and services such as; brand and formula, co-financing investments, training of the franchisee personnnel
- Franchisee pays a fee: a royalty for the use of the brand/formula plus a fee for the services.
- Length of the partnership: usually > 5 years up to 30 years
- very popular in retail
- However, often conflicts between franchisors and francisees.
What are the three things in which franchise structures and cooperatives are similar?
- One central firm and many local firms
- Local firms are autonomous
- Making use of economies of scale at the central firm and of entrepreneurship at the local firm
What are the main differences between franchise and cooperative?
What is a strategic alliance / long-term buyer-seller relationship?
What are the advantages of a long-term contract? Name 4.
- Benefit of future cooperation outweights any short-term gain from opportunistic behaviour
- Credible commitments lead to willingness to invest in specific assets
- Opportunities for reputational and social mechanisms to develop
- Enhanced flexibility and adaptiveness
What are the three reasons why we would consider joint venture as the preferred mode of organizing?
- There is a business opportunity that requires resources from two existing companies, A and B.
- It is difficult or even impossible to trade these resources (e.g. Because of intangible assets)
- Buying of company A by company B (or A buying B) requires too much redundant resources (or is not allowed under competition law)
If condition 2 is not met, a market governance structure may be possible
If condition 1 and 2 are met but not condition 2, a merger or acquisition is a better solution.
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