4.1.1 What Does Cooperation Mean?

In order to explain the idea of cooperation, we have to look at the smallest units of economic analysis: the transactions between individuals and/or companies. To carry out a transaction, individuals and companies can use markets. Pricing mechanisms efficiently direct resources to the uses where they are most value creating. But there are other ways of carrying out a transaction. Many transactions can be found within the boundaries of a firm, which is quite intriguing, if it is true that markets organise transactions efficiently. It was Ronald Coase who elucidated this mystery of the firm by asking the very simple question: Why do companies exist, if the pricing mechanisms of markets work so efficiently? Coase explained that using the markets for a transaction is associated with specific transaction costs. Similarly, carrying out a transaction within the boundaries of a firm also instigates transaction costs that differ from the costs of market transactions. He concluded that the appropriate mode for carrying out a transaction is determined by these different transaction costs. In consequence, an optimal organisational governance mode exists to carry out a transaction [2]. Decades later Oliver Williamson extended Coase’s work by introducing hybrids to the transaction costs calculus. Williamson analysed the advantages and disadvantages of using markets or hierarchies, respectively. He was able to explain that there are hybrid forms for carrying out a transaction between markets and hierarchies, that is, organisational modes that combine the advantages of markets and hierarchies. These hybrid forms of governance can be considered as a business cooperation of two companies [3–5].

In order to understand the conditions that lead to the emergence of cooperation we have to analyse these advantages of markets and hierarchies (i.e. a solution within the boundaries of the firm). Using the market for a transaction has two evident advantages. Firstly, by combining similar demands producers are able to realise much larger volumes in production and consequently will achieve much lower production costs due to economies of scale. This applies in particular to very general products or products that contain a significant share of the general parts. Secondly, owing to the pricing mechanisms, market participants have high‐powered incentives to improve their efficiency (process innovation) and to invent new products (product innovation) to escape temporarily from market pressure. These incentives will also lead to a company’s flexibility to swiftly adapt to environmental changes [4].

However, markets are not without disadvantages if specific investments are necessary to carry out a transaction. Consider, for example, a transaction where investments are necessary to carry out this transaction: for example, a chemical company has to invest in production facilities that can only be used to produce a specific type of catalyst that the company aims to sell in this transaction. Therefore, the company has to invest specifically in these facilities. This specificity refers to the transaction carried out with a specific transaction partner. The transaction partner will recognise its powerful position because after the (specific) investment in the facilities it is the only market participant for whom the newly built facilities can produce. In a complex and uncertain environment, the transaction partner will attempt to use its powerful position to renegotiate the terms of the transaction to increase profits from this transaction, for example, by renegotiating prices. The producer, which has to invest specifically, will anticipate this possible hold‐up and will try to reduce the risk by negotiating contracts that protect it from being exploited due to the specific investments. With increasing uncertainty and complexity of the transaction, the products and the environment, these contracts will become more and more complicated and expensive. The associated costs may turn the transaction into an unprofitable one and consequently the transaction cannot be carried out, to the detriment of both parties. In this situation, a hierarchical solution may be advantageous because no contracting is needed and there will be no contracting costs if the transaction is carried out within the boundaries of the firm [4, 6–8].

On the other hand, companies can exhibit some negative characteristics. Using the hierarchical governance mechanisms within the boundaries of the firm is usually subject to bureaucracy costs, longer decision procedures and organisational slackness. Although some companies try to overcome these problems by implementing “market mechanisms” within their organisation, these mechanisms typically do not perform as well as real markets and expose severe incentive problems (Figure 4.1).

To sum up, both governance modes (markets and hierarchies) have advantages and disadvantages that result in different transaction costs. On the one hand markets provide efficiency and high‐powered incentives, which lead to immediate reactions to market signals; on the other hand hierarchies are typically associated with superior control mechanisms. Therefore, the two governance mechanisms are characterised by:

• different costs for carrying out a transaction
• different systems for executing control
• different mechanisms to protect the company against hold‐up and exploitation
• and different risk structures.

Cooperation is an organisational option to combine these different characteristics, creating an efficient solution for carrying out a transaction. Typically, certain trade‐offs apply when using these hybrid types of organisation. If the management increases its control over the transaction in order protect itself against exploitation, it will lose some cost advantages (e.g., it reduces the economies of scale).

Now we will derive some basic characteristics of business cooperation. A business cooperation exhibits:

• The participation of at least two partner companies.
• A certain exchange intensity between the cooperating partners. Consequently, one‐off transactions will never qualify for a cooperation. The intensity refers to the frequency (quantity) and to the quality of the exchange. A more frequent transaction requires more contact and can be carried out better in a cooperation environment. The quality of the exchange refers to the involvement of the partners. It is determined by the complexity of the transaction, the amount of information exchange and the monitoring of the transaction.
• Some kind of formal (contractual) or informal stipulations for cooperation. This is an immediate consequence of the control requirements to protect the company against exploitation by the cooperation partner.
• Some involvement for parts of the processes of the partner companies. In some cases, a company’s processes have to be adapted to the cooperation requirements, in other cases it suffices to define cooperation needs and conditions in order to make the cooperation processes fit with the internal processes.

The phenomenon of business cooperation is described in many ways and one can find numerous synonyms in the literature dealing with cooperation: alliances, collaboration, partnerships, joint ventures, networks or supply chain relationships to name a few. Some of these synonyms describe specific types of cooperation (e.g. alliances or joint ventures), others are more general descriptions for the cooperation phenomenon. But all of these descriptions and synonyms share – to a different extent – the common characteristics elaborated here.

4.1.2 Why Is the Management of Cooperation Different?

From the preceding discussion it should have become evident that managing cooperation is part of a company’s management and it can be described as managing the boundaries of the firm, by using hierarchical solutions of integration (e.g. mergers and acquisition), market relations and cooperation as instruments for organising these boundaries. Cooperation management enriches the usual decision of “make or buy”, that is, of carrying out a transaction within the firm using hierarchy to govern the transaction or of carrying out a transaction in the market, with a multitude of new arrangements to carry out transactions, combining elements from these two governance mechanisms. This implies that cooperation management needs additional capabilities to identify the circumstances that require cooperation as an organisational solution and the ability to reasonably combine the governance elements from markets and hierarchies mentioned previously to develop new suitable cooperative solutions. Understanding these governance elements and sufficient knowledge of when and how they can be implemented are new management requirements. Management no longer just focuses on the management of the company’s (internal) processes, it is extended to organise the boundaries of the firm intelligently and understand the processes and needs beyond these boundaries, since they influence the company’s own business processes and value chain through these cooperative solutions. Moreover, monitoring the interfaces to the partner and deriving appropriate actions from the signals received at these interfaces is also an aspect of cooperation management.

But the management of cooperation is not only extending the way we organise and develop corporate value creation, it also changes the way we manage the processes of value creation. The fact that at least two participating companies join forces and cooperate in order to achieve common goals implies that the management no longer has complete control over processes that are carried out jointly. Management, thus, moves from “command and control” to new techniques that emphasise incentives for the partner. This move was brilliantly described by Thomas Malone who argues that companies have to move from management based on “command and control” to “coordinate and cultivate” types of management. Within the boundaries of a firm, management ideas can be implemented top‐down, that is, the management decides on certain activities that will be implemented by the employees. The management gives commands and controls the execution of these commands. Although this perspective is – for explanatory reasons – fairly extreme and admittedly many companies encourage the discussion of decisions, it should become clear that in the end the management bears the responsibility for its decision and will use its commanding power to execute the decisions. Moreover, the complete discretion implies that the management is able to collect all the information considered necessary to monitor and control the execution of its decision [9].

This changes completely when cooperation is part of the organisational solution. Since it is almost impossible to give commands to a cooperation partner to implement desired management actions, the management lacks a substantial part of its usual power to enforce the execution of its decision. In addition, the management does not dispose of unrestrained access to all parts of the value chain where it joins forces with a cooperation partner, because it needs the consent of the cooperation partner. This leads to new management challenges that have to be addressed through appropriate cooperation management:

• How to collect information that is necessary for management decisions but that is produced within a partner company?
• How to develop solutions jointly with the cooperation partner that do not violate the interests of the company and contribute to the company’s profits?
• How to implement such solutions jointly with other companies?

Nevertheless, implementation of management actions is also necessary in cooperative arrangements. On the one hand these actions pursue the individual interests of the cooperating company, but on the other the actions have to take into consideration the position of the partner company. This can be accomplished by taking into account the second part of Malone’s idea: management in cooperative arrangements move towards cultivating a positive and collaborative atmosphere that facilitates joint decision making and actions (e.g. providing adequate information to enable the cooperation partner to find solutions that suit the company’s own interests or creating negotiation solutions for acceptable management actions). Thus, the idea of “cultivating” means creating a positive environment for the cooperation, which induces the decisions and actions by the cooperation that are, at minimum, not in contrast with a company’s interests, and that at best coincide with its interest. This replaces the command component in managing through hierarchies.

In a similar way the actions of the cooperating partners have to be coordinated instead of being controlled. Coordination requires different management instruments that use the self‐interest of the cooperating partner to promote the achievement of the cooperation’s common goals by creating environments that guide the decisions and actions of the parties in an appropriate way. Such instruments could be “cooperative” transfer prices (i.e. prices for exchanging goods and services between the cooperation partners) setting adequate incentives for the partners or guidelines for the behaviour of the partner companies. A description of these instruments will be part of Section 4.5, which describes the cooperation management process.

4.2.1 Cost Advantages

Realising cost advantages through cooperation with other companies is driven by economies of scale (i.e. cost advantages obtained due to size, output or scale of operation). These economies of scale occur when the costs per unit of output decrease with increasing scale, while fixed costs, for example, large investments that are necessary to produce or develop a product, are spread out over more units of output. In the pharmaceutical industry, for example, the costs for the discovery and development of blockbuster drugs are enormous, forcing pharma companies to spread their research and development (R&D) expenditure across a greater volume of sales. As a result, total average costs decrease and production will be more profitable, and more units can be produced from these investments. These cost advantages make it worthwhile to analyse a company’s value chain, searching for parts that exhibit these economies of scale. Such parts of the value chain, where large investments are necessary, are candidates for cooperation. Through cooperation, the companies may decrease the investment costs (e.g. joint R&D) or they may increase the sales of products, that is, they increase the production volume while keeping the investments constant. Technically the cooperation can be implemented by establishing a new company that is jointly owned by the partners or by selling the production capacities of one partner (or both of the partners) to a new legal entity that is owned by the partners. Alternatively, the cooperation partners might use the production capacities of one of the partners, which could be used for the production for both cooperation partners. This is an especially appropriate option where one of the partners disposes of several production sites, of which one could be dedicated to the joint production.

Following these examples, business cooperation aimed at generating cost advantages are mainly found in production and in large‐scale R&D. Production also includes the provision of administrative services where cost reductions can be accomplished by cooperation. Networks that are used to provide services to customers are another area where cooperation may be suitable for cost reductions.

There are two main management challenges to cost‐advantage‐based cooperation. Firstly, the sub‐processes that are carried out jointly with a partner company have to be integrated into the processes of the cooperating companies, that is, standardisation of the products and/or the processes have to be negotiated between the partners. The challenge clearly increases with the complexity of the products and their production processes. Secondly, the contributions from the partners have to be negotiated. This can be difficult if the partners’ contributions are asymmetric. Then, complex valuation procedures have to quantify the mutual contributions in order to achieve a fair sharing of the burden and distribution of the profits.

4.2.2 Access to Resources, Know‐how and Technologies

Cooperation can be an option in order to achieve much quicker access to relevant (new) technologies or specific knowledge compared with generating these technologies or the know‐how internally within the company. In these cases, a company identifies significant deficits in its own know‐how or its own technology base that is necessary to create and commercialise products. There are three options to obtain these technologies: buying the technologies that are available on the market; in‐house development of the technologies or acquiring and integrating a company that can provide the technology (hierarchical solution); developing a cooperation to gain access to the technology. The hierarchical solution of developing the technology in‐house will often be time consuming and costly, especially if the company is inexperienced in the respective technology field. Acquiring a technology‐providing company can be very costly, particularly if the company is not a one‐technology firm and also sells other technologies and services. Thus, entering into a cooperation could open a route into the required technologies; see for example Box 4.1.

There are basically two types of business cooperations for accessing technologies or know‐how: companies could agree to exchange know‐how or technologies in a cooperation; or the technology is provided by one partner and is used by the other partner who pays a monetary compensation for its usage. Both types can be combined, for example if the mutual exchange of technologies or know‐how is asymmetric.

For the first type of cooperation, the main challenge is determining the value of the contributed technologies. It is frequently observed that the cooperating companies agree on some kind of exchange of their technology or strength of know‐how without carrying out protracted valuations of these strengths for the partner company.

The second type in particular seems to be hard to discern from a market transaction. The crucial distinguishing feature is the extent and intensity of exchange between the two companies. Providing complex technologies to the production line of a partner company frequently demands complicated adaptations of the technology, or the know‐how can be used within the partner company to further develop its products or production lines. Thus, the processes of providing and using the technology become interwoven, constituting a cooperative arrangement. The main challenge is, arguably, to integrate the interwoven and connected processes of the partnering companies.

4.2.3 Access to Markets

A similar cooperation objective is the access to markets, where market refers either to distinct local markets or to certain customer groups; see for example Box 4.2. The partner company has extensive knowledge of customer groups or is deeply rooted in a particular country and has extensive experience in operating in this market. A company can use cooperation to exploit these competences for its own sales, that is, entry into new markets in other countries or new customers. In some countries laws restrict the operation of foreign companies in that country and demand that foreign companies must have local partners for their operations abroad, for example, by forming a joint venture with a local partner. Here legal restrictions force companies to cooperate, if they intend to enter the market in such a country. Examples of this type of cooperation are mainly found at the sales and marketing level.

The mutual benefits of such a cooperation arise from the rather different demands and assets. One company is seeking access to the market and the partner company possesses the desired experience in operating in these markets and can provide the access to these customers. The main challenge is to provide the appropriate fit between the partner companies. Integrating a partner into the marketing and sales processes of a company implies that the partner has to meet pre‐defined standards for selling these goods or services. More complex products require a much deeper integration of the sales partner than just providing a new point of sale [12].

4.2.4 Time Advantages

Time advantages are a consequence of the two previous objectives for cooperation. If a company notices changes in a market and concludes that it has to adapt swiftly to these changes, or if it is operating in markets that are generally fast moving and consequently always require quick adjustments, establishing a cooperation to access new technologies or new markets can be a reasonable strategy in comparison with developing these technologies internally or investing in a sales force to access the new markets. Being unable to react in an appropriate timescale to these changes immediately implies losing market share, which leads to lower profits.

4.2.5 Distribution of Risks

Starting large projects (e.g. developing a new compound or a new drug) may result in a company having to take enormous risks. Cooperating with other companies in such a project means sharing the risks associated with the project, especially the risks of a project failure. Distributing the risk over several cooperating partners translates into a reduction of the risk costs, and therefore can be interpreted as a sub‐category of the cost advantages.

4.3.1 Horizontal, Vertical and Lateral Cooperation

Companies have different options for creating their cooperation along the value chain: horizontal, vertical and lateral cooperation. This differentiation focuses on the activities of the companies and has implications for the main management tasks for these types of cooperation.

• Horizontal cooperation: This type of cooperation occurs between companies operating in the same industry at the same stage of the value chain, for example, two chemical companies producing silicones that cooperate to produce a new polysiloxane. Owing to the fact that the companies combine their efforts for one specific part of the value chain (e.g. in production or marketing), horizontal cooperation frequently focuses on economies of scale and the associated cost advantages. In other cases, one company holds superior technologies or know‐how in one part of the value chain that a partner company is searching for. Then cost advantages might be an objective for the owner of this superior technology, but accessing this technology clearly is the objective of the partner company. Thus, their cooperation would be driven by different objectives. Such asymmetric horizontal cooperation is much harder to manage, since assigning the partners’ contribution becomes much more complicated. On the one hand, how much the production of the technology owning company benefits from the achievable economies of scale must be identified, and how these additional benefits can be assigned to the cooperating companies; on the other hand the partner company’s access to the superior production technology has to be assessed and the contribution to their profits has to be evaluated. A successful horizontal cooperation has to balance these two effects with the second effect usually outweighing the first, that is, the partner company benefits more from the cooperation than the technology owning firm. Two different solutions can be observed for coping with this asymmetry problem. Firstly, the asymmetric benefits can be compensated by payments by the net benefiter from the cooperation. Secondly, in a more complex operation the two companies agree on cooperating horizontally in two different parts of the value chain with opposite net benefits, so that they mutually compensate each other.
• Vertical cooperation: In a vertical cooperation two companies that operate in the same value chain enter into a cooperation involving two different adjacent steps of the value chain. The reason for cooperating vertically is either to gain access to technologies, know‐how and resources (backward cooperation) or access to markets (forward cooperation). Vertical relationships between companies are particularly exposed to the risks of specific investments. Cooperation is part of solving the problems caused by these risks. A pure market relationship could be easily exploited by the company that observes specific investments, which have to be made by the partner company in order to carry out the transaction. Cooperation provides mechanisms such as contracts, specific forms of ownership or new interwoven and overlapping forms of production that reduce the risk of hold‐up and thus allow vertical relationships in a hybrid organisation.
• Lateral cooperation: This type of cooperation refers to cooperating companies that operate in different value chains (e.g. different industries) and that are working together on similar steps of the value chain or on completely different steps. Again access is the predominant objective for this type of cooperation. It usually extends a company’s business beyond its current boundaries by providing access to completely new technologies, specialist know‐how or to completely new customer groups.

4.3.2 Types of Cooperation

To implement a cooperation, companies may choose from numerous different forms of institutionalisation. Some of these institutionalisations are characterised by their value chain positioning, others focus on the internal structure of the cooperation. The forms of institutionalisation presented as follows allow overlaps, for example, a cooperative is always a joint venture, some strategic alliances can also be interpreted as networks and virtual networks may show similarities with project cooperation.

4.3.3 Strategic Alliance

A strategic alliance is a horizontal cooperation of actual or potential competitors. Owing to its horizontal origin, the cooperation involves the same stage of the participating companies’ value chain. The horizontal nature means that the goal is usually to achieve economies of scale and the corresponding cost advantages. Sometimes companies agree to cooperate horizontally on two or more steps of the value chain. In such a case it is not only cost advantages but also access to a company’s superior know‐how or technology that could be a motive for cooperation. Strategic alliances can be observed in research and development, procurement activities, production and in sales; see for example Box 4.3.

Since a strategic alliance happens between two actual or potential competitors in the same industry, stabilisation of the cooperation is a main focus of the management. Cooperation with a competitor implies excluding some parts of the value chain from competition and thus forgoing an opportunity of getting an edge over the competitor. As a consequence, strategic alliances could reduce the leeway for differentiation in the market, so companies will carefully select parts of the value chain and the extent of the cooperation in order to protect their competitive advantage. Several criteria may help to identify suitable areas for cooperation. Firstly, sufficient similarities between the cooperating companies should exist to achieve the aimed for economies of scale, that is, jointly manufactured products should allow for standardisation or the companies have to implement these similarities in their processes and/or the interfaces between their own company and the jointly organised part of production. Secondly, since cooperation with a competitor could blur the differentiation between the companies from the customer perspective, a strategic alliance is easier to implement the further away the involved value chain steps are from the final customer. Thirdly, with only a few rare exceptions, a strategic alliance does not involve core competences of the cooperating companies, since these are decisive for differentiation in the market. This requires continuous observation and decisions on what the essential capabilities of a company are. Decades ago automotive producers would have (rightly) assumed the production of engines is one of their core capabilities that should not be shared with competitors. Today, we observe alliances of automotive manufacturers that produce engines together because this view has changed.

Owing to the highly sensitive relationship with a competitor, extensive efforts at stabilisation are required. Most strategic alliances have contractual fundaments clearly stating the extent of cooperation, the rules of the cooperation and a time line. A higher degree of stabilisation can be accomplished by establishing a joint venture, but not all strategic alliances are well suited for this stabilisation mechanism, since founding a new legal entity implicates the transfer of rights, assets and – possibly – staff to the joint venture, which is much more complex and burdensome.

4.3.4 Value Chain Cooperation

Value chain cooperation involves two or more companies operating in the same value chain, but for the purpose of the cooperation they contribute inputs from different steps of the value chain. Typical examples of value chain cooperation are outsourcing projects, which helps companies focus on certain parts of the value chain, while partner companies service other parts. Further widespread examples are partnership programmes in companies’ procurements, where one (larger) company standardises its vertical relationships to partner companies procuring pre‐products.

Owing to the value chain character of this cooperation its objective is mainly generating access to other companies’ superior technologies and specialised know‐how. In addition, these cooperating partners are providing similar services or products to several other customers and as a consequence are able to reap the benefits of economies of scale.

The main management challenge arises from the vertical relationship of a value chain cooperation, creating unilateral or mutual dependencies between the cooperating companies. These vertical dependencies are frequently related to specific investments, opening the way for exploitation that can seriously damage the success of the transaction; see for example Box 4.4. Value chain cooperation employs numerous instruments to cope with this dependency:

• Contracts can be used to protect the specific investment of one of the cooperation partners. Although a rather obvious solution, the specific formulation of the contents of the contract might lead to fairly voluminous stipulations, which prove to be costly.
• Organisational solutions can be used to reduce the asymmetric dependency in a value chain cooperation due to specific investments. Two examples illustrate possible solutions. Firstly, unilateral dependency can be turned to a mutual dependency by creating similar specific investments (or disinvestments) in the partner company. Establishing research and development know‐how in supplier companies in the automotive industry is such a mechanism. On the one hand the supplier has to invest specifically in order to carry out the transaction with the automotive producer; the automotive producer, on the other hand, has to prepare and specify relevant information and input for the supplier that it cannot use in a relationship with another supplying company. Secondly, in some cases the cooperating companies “overlap” each other. Since the supplying partner could refuse to invest in specific machines to manufacture the products for the receiving company, the receiving company could offer to buy the machines and locate them within a plant of the supplying company, which could use these machines, although it does not own them.
• In the later phases of a cooperation the accumulation of mutual trust and building a reputation of faithfulness and loyalty to the cooperation helps to further stabilise the cooperation.

4.3.5 Project Cooperation

A project cooperation connects multiple partners with specific competences for the realisation of a pre‐defined project. Because of the character of the project, the cooperation is usually limited in time. Such projects are, for instance, large construction projects, the organisation of large events, a (interdisciplinary) research project or a software development project. Since many partners are involved in a project cooperation, all of whom have to be coordinated in time and location, a project cooperation is headed by a governing body. This could be a specialised project leader or a large partner from the project cooperation, who takes responsibility for the project management.

A precondition for a project cooperation is a very exact project description, including a precise project objective, a time line, a detailed outline of required competences and services and inputs for the project. Since the partners contributing their competences to the project can be chosen freely according to the needs of the project, project cooperation is very flexible in the set‐up phase.

Management challenges stem from the flexible design of a project cooperation and its significant information asymmetries. The success of a project cooperation crucially depends on, firstly, the capabilities of the project head to develop the project description and planning, secondly, finding the appropriate partners and, thirdly, handling the problems arising from the information asymmetries between the project participants.

Finding the appropriate partners requires a clear description of the required competences, a method to evaluate possible partners and developing supplementary criteria, such as a corporate culture for providing a positive and stabilising cooperation atmosphere. (Detailed partner search mechanisms will be provided in Section 4.4.)

In order to cope with the information asymmetries in the operational phase of the cooperation, contractual stipulations are a necessary management instrument determining the services to be provided, quality standards, rights and duties and sanctions, and whether the output does not comply with the contracted services or violates the agreed quality standards. Unfortunately, attributing malfunctioning and insufficient performances to specific project participants is often difficult or impossible due to the information asymmetries and to the complementary character of some parts of the project. Thus, implementing information and communication structures that work well is a necessary instrument for managing a project cooperation. The project management has to identify information requirements (who is working together and who is doing subsequent work) and to establish appropriate information channels between these partners and to the project management in order to monitor the project’s progress and the performances of the participating companies.

4.3.6 Networks and Virtual Enterprises

Cooperation within networks is widespread and exhibits various forms and configurations, making a precise definition of networks difficult. In general, networks are characterised as rather loose cooperations having a low degree of formalisation that leads to high flexibility and adaptability to environmental changes; see for example Box 4.5. Typically, a network consists of numerous cooperation partners. The objectives of networks are similarly diverse. Some networks aim to achieve economies of scale by joining their businesses, other networks focus on linking different competences of partners. Nevertheless, some networks are more formalised. This is observed in networks in production or in development that have survived a longer period and that have successively increased their degree of formalisation. This formalisation can even lead to the establishment of a legal entity for the network, which increases the network’s stability but reduces the flexibility to adapt by changing the structure of the participating companies. A network type that is closely related to a project cooperation is a virtual enterprise. Virtual enterprises emerge from a base network of several companies. Appropriate companies with their special competences are selected for a project from the base network and form a cooperation (a virtual enterprise) tackling the different tasks that are allocated in this project. After the successful completion of the project, the virtual enterprise dissolves and network partners may start new virtual enterprises. Virtual enterprises can be distinguished from one‐off project cooperation by their repeated project activities, though the participants in the projects, that is, in the virtual enterprise, may differ from project to project. Because of this repetition, the participants in the base network agree to some rules on how they form these virtual enterprises, facilitating the set‐up of a project and thus decreasing the costs for a project cooperation.

One of the main challenges in network cooperation is to organise the coordination of the network. Again, different approaches can be observed for addressing this challenge. While most networks have implemented a separate network management to coordinate and supervise the network activities, others rely on defined rules and on joint decision making. The more formalised and stable a network cooperation is, the more it will implement a separate network management. Fairly loose and smaller networks often abstain from implementing such a management. This decision goes along with the transaction structure of the network. Formalised and stable networks are observed to have very frequent and intensive interactions, while in loose networks interaction intensity is rather low. Thus, the costs of establishing a separate network management would be quite high with respect to the interaction. However, joint decision making associated with higher negotiation and decision making costs may be preferable for the loose networks.

4.3.7 Cooperative

A cooperative is a special form of horizontal cooperation, characterised by its legally binding governance elements and mechanism. The objective is generally the achievement of cost advantages from economies of scale. It is frequently observed in procurement and sales activities of companies. The cooperating companies establish a new legal entity, the cooperative, where they allocate certain parts of their business. Again a precise knowledge of the company’s value chain facilitates this decision. This legal entity is subject to the stipulations of the law governing cooperatives, which varies in different countries. Some joint features that can be observed for most cooperatives are:

• There are a minimum number of members (usually three).
• The members maintain economic relationships with their cooperative; they consider the cooperative as a vehicle to improve their own business.
• Entry and exit to the cooperative is easy in comparison with other legal forms, such as a limited liability company or a joint stock company.
• Voting rights are on a per‐head basis and are not derived from the capital share of the member.

Typical management challenges in cooperatives have their origin in the structural features: the relatively large number of members and the heterogeneity of members that jointly own the cooperative present a management challenge. The management of the cooperative has to balance the joint interests of the members (i.e. the reason for establishing the cooperative), which materialises in the scale effects on a central level and the individual interests of every single member company. For instance, the cooperative and its members have to decide which parts of their joint value chain are executed within the member companies and which parts are the responsibilities of the cooperative. This would be easy to manage if the member companies were symmetrical and homogeneous (i.e. similar size, similar competences, similar strategies, etc.). But most cooperatives show somewhat heterogeneous member structures. These diverse companies deliver different contributions to the cooperative and have differing requirements for the services they expect from their cooperative. Thus, a differentiated member management taking into account these heterogeneous needs has to be implemented. But differentiation results in increasing costs through reduced economies of scale. The management therefore has to consider the decreased benefits because of the lower economies of scale, the costs of implementing differentiated solutions and the additional benefits that can be achieved within the member companies on a local level.

4.3.8 Joint Venture

A joint venture is actually not a stand‐alone cooperation type but a special institutionalisation that can also be part of the cooperation types mentioned previously. A cooperative, for instance, is always a joint venture and strategic alliances can be accompanied by establishing a joint venture. The cooperating partners found a new legal entity, the joint venture, as a vehicle for their cooperation, frequently taking the legal form of a limited liability company or joint stock company. All of the cooperating companies (with the exception of possible financing partners) maintain economic transactions with the joint venture, that is, they provide the capital for the company and are customers or suppliers of the joint venture. The founding of the joint venture is often accompanied by a framework agreement or a joint venture statute that determines the objective of the joint venture, the rights and duties of the cooperating partners (e.g. restrictions on the use of jointly manufactured goods) and the contributions of the partners (capital and physical assets provided to the new joint venture or assignment of staff).

4.4.1 The Management Process

The process for managing business cooperation develops five necessary management steps: firstly, the analysis of a company’s current competitive position; secondly, the derivation of cooperation options; thirdly, the preparation and institutionalisation; fourthly, the operational management of the cooperation; and fifthly, monitoring the success of the cooperation (Figure 4.2). Strategic positioning analyses a company’s strategic position and explains where and how cooperation might contribute to the improvement of the company’s competitiveness. If cooperation is considered to be a suitable solution, the company has to develop its cooperation capabilities and has to search for appropriate cooperating partners. In addition, it has to verify whether the cooperation complies with the competition law, since cooperation always restricts competition and is a concern for antitrust authorities. After the preparation, the institutionalisation of the cooperation has to be developed, namely, it has to be decided how flexible or stable the cooperation should be and how these requirements can be implemented. Moreover, the relationship of the cooperation partners and/or the relations between the cooperation partners and their joint venture has to be structured. After the establishment of the cooperation, the cooperation management focuses on operation of the cooperation. On the one hand the idea that the management moves to “coordinate and cultivate” management becomes relevant, on the other hand the quality of preparation and institutionalisation creates a framework for managing the cooperation operationally. All these steps apply the findings on cooperation from the previous discussions and adapt management methods to the specific conditions of cooperation [19, 20].

As mentioned in Section 4.1, cooperation is a type of governance that is positioned between market and hierarchical governance and therefore inherits selected characteristics of both types of governance. It combines stability from the hierarchical organisation from a firm with flexibility from the market governance. The management process adds to this mix of procedures that allows for stability and flexibility. In the final step of the management process, accomplishment of the cooperation’s objectives is monitored. According to the results of this evaluation, various options are available to the management. If the cooperation meets all objectives for all participants, it continues unchanged. But it may turn out that the expected results are not met, which can be caused by misconstructions in every step of the cooperation process. The nature and the extent of underperformance may indicate the origin of the problems in the cooperation and therefore suggest solutions for improving the cooperation performance. Minor problems in monitoring the joint processes or communicating with the partners will imply slight adaptations to the operational cooperation management. If the underperformance is identified to originate from ill‐devised rules for the cooperation, these rules have to be reformulated. The cooperation can continue with the same partner, but needs some significant and more complex changes in its framework. With these two types of adaptation the cooperation continues with identical partners and therefore it is stabilised. If the underperformance is caused by insufficient contributions from one of the partners or by malfunctioning processes that can be tracked back to one of the partners, a feedback loop leads back to the preparation of the cooperation and the partner selection. An option could be to dissolve the cooperation and start a cooperation with a new partner who displays a better fit or to readjust the fit criteria for the cooperation. Finally, the strategic situation of a participating company may change, demanding a reorientation of the company. As a consequence, discontinuing the cooperation and arranging a new cooperation or other corporate restructurings are the right solution [21]. Again, a cooperation is sufficiently flexible to allow for these options at comparably low costs.

4.4.2 Strategic Positioning

There are numerous instruments that help to structure the competitive position of a company. These instruments can be categorised in external market analysis and internal company analysis. The objectives described in Section 4.3 can be used to supplement the strategic analysis with cooperation recommendations that fit with the strategic challenges.

4.4.2.1 Market Analysis

There are multiple tools for analysing the market that a company is operating in. The most well‐known ones are the PEST analysis (or PESTEL analysis),¹ Porter’s Five Forces and the life cycle analysis. All of these tools focus on specific features of a market. In the following, we will focus on the PEST analysis since it is the most commonly used technique for market analysis in the context of business cooperation.

The PEST analysis attempts to offer a structured evaluation of all influencing factors in a company’s environment by distinguishing four different areas of relevant development: political, economic, socio‐cultural and technological development (Figure 4.3).

• Political development: This category addresses the rule‐making framework a company is operating in. Relevant issues to observe are economically important legislation like taxation, competition law, patent laws or special sector regulations such as the European Union regulation REACH (Registration, Evaluation, Authorisation and Restriction of Chemicals) in the case of the chemical industry. Moreover, government ownership of companies also influences the political development. The cooperation impact of these developments is fairly low. What are relevant are the competition law regulations and special stipulations governing the access to a country. Some countries demand the involvement of a local partner if a company intends to start a business in that country. This form of involvement is usually by founding a joint venture. Competition law may restrict the companies’ organisational decisions by prohibiting special forms of cooperation. Thus, political developments do not imply economic reasons for starting a cooperation, but they either restrict cooperation or make it legally necessary.
• Economic development: The economic development captures all economic indicators describing a local market. Some indicators can also be applied to customer‐segmented markets. These indicators are, for example, per capita GDP (gross domestic product) and per capita income, exchange rate variations, investment development, energy and labour costs, special local economic conditions, and so on. The analysis of the economic environment can help to identify rapidly growing local or regional markets and a cooperation can be employed to gain faster access to these markets. If a company collects price information (e.g. prices for oil, copper or iron) and anticipates price increases from its analysis, it may decide that substitutes or technologies which reduce the consumption of raw materials will become relevant to reduce the input costs. A cooperation can open the way to these desired technologies. In some rare cases a cooperation can be applied to protect a company’s access to rare but strategically important resources (e.g. rare earth metals).
• Socio‐cultural development: The socio‐cultural development attempts to analyse fairly soft developments like shifts in value and lifestyle or people’s attitudes (e.g. towards “green” issues or towards leisure), but demographic developments are also part of this development. The analysis of socio‐cultural development results in forecasts on new or changing demands and new products that could meet these new demands. Thus, it is a very customer‐centred view that is derived from the analysis. Cooperations can provide access to information on these customers and their new attitudes, they can help to get access to these customers (e.g. if their number is increasing and they become a profitable customer segment) or they can offer access to technologies that help to produce these products that satisfy the new demands (e.g. fuel efficient cars).
• Technological developments: Analysis of the technological developments considers the general technological developments such as R&D investments or government innovation policies and – on a micro level – new path‐breaking technological developments that are apt to improve or substitute the company’s products. In addition, the analysis aims to figure out what future technological developments could reasonably extend the company’s existing technologies. Cooperation can be a useful instrument to gain access to these new technologies, particularly if they are new developments that threaten to substitute the company’s established technologies. If the analysis outlines necessary technological developments, a company could ally with other similar minded companies to develop these technologies. This applies especially to the research and development of basic technologies and to very expensive technologies. Cooperating companies could achieve economies of scale and share the risk of the development.

In a similar way other strategic analysis tools like Porter’s Five Forces or the life cycle analysis can be extended by deriving the corresponding cooperation options. It is necessary to stress that cooperation can provide a solution, but this does not implicate that cooperation is the best solution. This decision depends on other developments and company characteristics. Thus, a further more detailed analysis is necessary.

4.4.3 Preparation

If the management has decided that cooperation could be a solution to one of its strategic challenges, the company has to prepare for the cooperation. Three questions have to be answered in this step of the cooperation management:

• Who are prospective cooperation partners?
• Is the cooperation subject to constraints from competition law?
• Which cooperation mode should be chosen?

The third question can be easily answered from earlier discussions in Section 4.4, so we will focus on the partner choice and the competition law implications for the cooperation.

4.4.3.1 Partner Choice

There is a generic three‐step procedure for structuring the partner choice. In step 1 (partner screening) a partner profile is developed. This partner profile is derived from the analysis of the strategic positioning. The profile will thus contain a description of the prospective partner’s position in the value chain, an outline of expected competences, technologies or know‐how the partner should have, depending on what has been identified in the strategic analysis. Moreover, a rough sketch of other partner characteristics like size, national origin, infrastructure requirements (e.g. requirements for information systems or certain technologies that have to be used by the partner) or partner’s strategy could be added to the profile. Since every cooperation aims for a mutual benefit, a similar profile should be developed for the company itself, so that their own contributions to a cooperation are clear. The result of this first step will be a rather long list of prospective partners fulfilling the characteristics given by the partner profile. Step 2 (analysis of prospective partners) will reduce the long list of prospective partners to a short list, by developing a detailed set of quantitative and qualitative criteria (e.g. for qualitative criteria – quality orientation, innovation orientation; for quantitative criteria– size requirements, financial performance). Elements of such a criteria catalogue will be introduced later. In step 3 (negotiation to select one partner) preliminary negotiations with prospective partners from the short list begin. In these negotiations the desired solutions are discussed and the offers from the company to the prospective partner company are negotiated. At the end of this process the partner for the cooperation will be selected [22].

The success of the partner search process is determined by conceiving a comprehensive partner profile that helps to find possible partners and to evaluate the partner’s fit to the company’s requirements. In order to structure the criteria for finding the appropriate partner, three dimensions of fit can be distinguished: strategic fit, fundamental fit and cultural fit [21].

Strategic fit

Strategic fit refers to three sub‐dimensions: objectives, strategies and timing. First, the objectives for joining the cooperation have to be compared. For a cooperation seeking economies of scale these objectives should be identical. In contrast, if access to technologies or markets is the predominant reason for a cooperation, reconciling the companies’ objectives may be more difficult. As outlined earlier, companies then offer complementary assets to generate a mutual benefit. Consequently, their objectives in the cooperation may differ and whether each company receives a fair share from the cooperation benefit has to be evaluated. The second component of strategic fit is concerned with the companies’ strategies. For instance, one partner could pursue a strategy of cost leadership, while the other partner attempts to be a differentiator. Different strategies do not necessarily imply that the cooperation will not work but various strategies must be thoroughly taken into account when planning the cooperation. Furthermore, the relevance of the cooperation for the companies’ overall success has to be evaluated, too. If the cooperation is very important for one partner but not very relevant for the other one, it creates an asymmetry that is very hard to manage. Third, the planned time line of the cooperation must fit with both companies’ needs [17]. The companies have to agree whether the cooperation is established for a fixed time period or whether it is to be created for an indefinite time.

Fundamental fit

The fundamental fit evaluates if the cooperation is able to create a win–win situation, making the cooperation a benefit to all participants. Therefore, companies willing to cooperate have to account for all benefits and costs that might arise from the cooperation. Every cooperation results in intended changes of revenues and costs, which may decrease or increase. In order to estimate these effects it is advisable to distinguish between increases and decreases in costs and revenues, which may occur directly or indirectly. Most relevant are the direct revenue increases or cost decreases that are linked to the intended objectives of the cooperation. For example, a given horizontal cooperation may target reducing costs through economies of scale, or a cooperation aiming to gain access to certain markets expects revenue increases through sales in the new market. New technologies provided by a partner result in new products that increase revenue or new technologies can be used for cheaper production and decreased costs. These expected effects may vary with the different cooperation partners that are analysed in the partner choice procedure. Hence, it is necessary to derive the size of the positive expected effects for the planned cooperation objective. In this example, different cooperation partners may have different networks and experience in promoting sales in the new markets, leading to widely different revenue increases.

The same organisational change that is necessary to implement the cooperation may also have other positive and negative effects, which mainly occur as cost increases that are needed to set up and run the cooperation, for example, contracting costs, costs for adapting infrastructure like IT, costs for monitoring the interface to the cooperation, cooperation partner or costs for protecting specific investors or positive learning effects in other company areas. Listing possible indirect effects illustrates that these effects are predominantly negative. Similar to the intended positive impacts of cooperation, these cost effects vary with different partners. If two companies have similar infrastructures (e.g. information systems), the costs will be much lower than for a cooperation where significant adaptations are necessary.

Effects not only occur in parts of the company that are directly involved in the cooperation, but also in other parts of the firm. For instance, if changes in data format or software are needed to manage the interfaces between the cooperating parts of the partner companies, other areas using these data formats also have to adapt to these changes. Figure 4.4 shows a summary of possible effects that should be checked in the analysis of the fundamental fit.

Cultural fit

Finally, companies may differ with respect to their national or organisational culture. Since partners remain independent companies within the cooperation, the coordination of the partner companies and the contacts of their employees at the cooperation interfaces are highly relevant. A similar cultural mind‐set promotes a joint understanding of a problem, while significant cultural differences may trigger misunderstandings. For example, in a cooperation of a small and young start‐up company with a large and established strategy, the organisational culture will differ significantly. On the one hand, the start‐up will exhibit a culture of quick decisions and flat hierarchies, while the large company will have established decision procedures that will be more time consuming due to a hierarchical organisation. If the start‐up does not receive a quick reply to a request it will be interpreted as an unwillingness to reply, while the real reason is the large company’s elaborate ways of decision making. Therefore, communication becomes more complicated with increasing cultural distance, because different cultural mind‐sets result in more needs to explain certain behaviour in order to avoid the wrong conclusions. In particular, cooperations with foreign partners face the challenge of different cultural settings. In contrast, similar cultural backgrounds facilitate cooperation since it reduces the need to communicate. These differences not only refer to different national cultures but also to organisational cultures. The understanding of how business should be done can be different in family‐owned companies in comparison with capital‐markets‐focussed joint stock companies. A new technology‐focussed start‐up has completely different leadership and decision making structures compared with a large, established company. To evaluate cultural fit, the following criteria should be analysed:

• cultural distance
• degree of internationalisation
• strategic orientation (e.g. customer orientation, cost orientation)
• innovativeness
• quality orientation (e.g. reliability, minor error range)
• employer–employee relationships [10, 23, 24].

Although similar organisational cultures facilitate cooperation, different cultures do not necessarily prevent cooperation. Following an analysis of criteria of cultural fit, cooperation partners are able to address the cultural diversity in their cooperation and react to these dissimilarities by allowing for more extensive communication, establishing workshops and promoting a mutual understanding. These instruments improve the cultural fit but the subsequent cost increases decrease the net benefit derived in the fundamental fit.

4.5.1 Institutionalisation of Cooperation Management

For the institutionalisation of the cooperation management, different types of cooperation must be distinguished. If as in the case of a joint venture a new legal entity is founded, then this new cooperation company will have its own management. Nevertheless, the companies owning this joint venture have to assign cooperation competences internally, that is, responsibilities for the relationships to the joint venture have to be allocated to managers. If no new legal entity is established, institutionalisation is focussed on creating cooperation management structures within each company and constituting joint managing structures necessary to take responsibility for the joint operations. These different types of cooperation management can be characterised as internal or external and symmetric or asymmetric.

For every cooperation (with and without founding a new entity) an internal cooperation management has to be established to deal with the relationships with the cooperation partner and/or the jointly owned company. For this purpose, different implementation options are available. The cooperation management can be allocated to a dedicated organisational unit for managing the cooperation (e.g. adjunct to the management board) or it could be assigned to units within the company that deal with the processes adjacent to the cooperation, where the cooperation management would be added to their other tasks, that is, it is a part‐time position for the cooperation management. Both approaches have advantages and disadvantages. Having a separate unit facilitates the coordination of the operating units of the company. This could be important if several units are involved in the cooperation or if the company maintains several cooperation projects that have to be orchestrated. Thus, a separate unit is useful if the cooperation is complex and there are multiple interfaces to the cooperating partner that have to be coordinated. However, a separate cooperation management unit has disadvantages in generating and processing relevant information originating at the interfaces to the cooperation partner. Here a cooperation management allocation to operational units that maintain direct contacts with the cooperating partner is advisable. In particular, if the interfaces are well defined, namely, if the products or services are fairly standardised and the cooperation impact to other process steps and business units of the company is somewhat negligible, the operational unit is better suited for managing the cooperation. Moreover, the size and relevance of the cooperation for the company co‐determine the allocation of the management. Large and relevant cooperation projects will have the cooperation management in separate units or even at the board level, while smaller cooperation projects can be managed by unit managers [19].

Concerning the management of the jointly operated processes, the implementation of the cooperation management depends on the nature of the cooperation. If intensive coordination is necessary, that is, when the processes of the two companies are interwoven or if operational decisions have to be made frequently, a standing steering board for the cooperation, consisting of delegated managers from the partner companies, is advisable. With a decreasing intensity of necessary contacts, a steering committee composed of members of the participating companies’ internal cooperative management is another organisational option.

Depending on the cooperating partners’ involvement in the cooperation, the cooperation management may take different forms. In particular, the capital shares in newly established joint ventures can result in corresponding management involvement in the joint venture. Thus, symmetric or asymmetric cooperation management structures are observed. The more involved in assets or capital one cooperation partner is, the more the cooperation will tend to be asymmetric, with one partner dominating the cooperation. For a cooperation that is not implemented by establishing a new legal unit (such as a joint venture), the symmetry or asymmetry in the management usually follows the companies’ economic involvement in, or contribution to, the cooperation.

4.5.2 Rules and Rights

Describing rules and rights in a cooperation is an essential part of the institutionalisation, since the normal command and control rules that work within a firm (see Section 4.1) cannot usually be applied to a cooperation, and governance by means of market prices are equally not sufficient for a cooperation. Rules and rights for the cooperation are part of the partial stabilisation of the relationship. Moreover, they co‐determine the mutual influence of the partner companies. Keeping in mind that the “command and control” paradigm cannot be applied in a cooperation, rules and regulations form the basis for influencing the partner by means of “coordination and cultivation”. Decisions on a cooperation’s rules must address the issue of relevant areas to be regulated and to what extent rules have to be negotiated and agreed on. Since a cooperation may have different objectives, operates in different parts of the value chain and has changing degrees of flexibility and stability, there is no general rule for these decisions, but there are guidelines that can be followed.

One could suppose that extensive rule books and long cooperation contracts are a useful framework for cooperation with another company, but defining rules is subject to an inherent trade‐off. On the one hand rules are appropriate to protect the individual partner’s investments in the cooperation and to assign the outputs of the cooperation to the partners. Clearly assigned property rights in a cooperation will reduce the costs of resolving any conflicts, but in complex cooperative arrangements not all future contingencies can be foreseen, and it could be unclear what the output will be (particularly in R&D cooperation). Hence, even if partners were to create a long rule book, unforeseeable events can still occur and require supplementary mechanisms. Evidently, the larger a cooperation is and the more relevant it is for the cooperating companies, the more elaborate the regulations and rules will be, since large investments in the cooperation have to be protected. On the other hand, long contracts containing countless duties and rights may have negative incentives for the cooperative behaviour of the partners. In order to comply with the extensive rules, the cooperating partner may only check with all the rules and duties that they have agreed on. This “checking behaviour” may restrict the partners’ activities and even worse may hamper the partners’ creativity. One of the reasons for a cooperation is to have adaptability and to leave some room so that transaction partners can react to incentives from the market and to provide suitable new solutions. Hence, reduced sets of rules may increase the flexibility of a cooperation, which is valuable in fast‐changing markets. Substituting for the extensive rule books, efficient conflict resolution mechanisms should be implemented that stabilise the cooperation but leave enough freedom for individual activities of the partners.

The contents of the rules and regulations can be categorised into: (1) regulations on contributions, (2) outputs and compensation, (3) organisational and infrastructure regulation and (4) regulations on behaviour. The contribution part determines which assets (machines, capital, etc.) the partners have to provide to the cooperation and if monetary compensation has to be paid in the case of asymmetric asset contributions. Additionally, there should be stipulations on how many staff have to be dedicated to work for the cooperation or are transferred to a joint venture. Infrastructure rules concern the precise assignment of competences for the cooperation within the partner companies, so that requests can be answered swiftly and competently. Corresponding to the assignment of competences for the cooperation within the companies (and the cooperation), communication structures have to be defined precisely and communication infrastructures have to be provided to the cooperation. Behaviour rules are important but sensitive, since too much regulation of the partners’ (and their employees’) behaviour restricts their creativity (see later) and may be in contradiction of the rules of the company. Behaviour rules substitute for the “command and control” structures in hierarchies, they are general “commands” to all participants. Nevertheless, some rules that have proved to be highly relevant are proposal rights and stipulations on how to behave in situations lacking clear guidelines from the cooperation agreement or in the case of external shocks. Conflict resolution mechanisms are a necessary inclusion in cooperation rule books [21, 27].

4.5.3 “Cooperative Transfer Prices”

Between the cooperation partners, or between the cooperation partners and a joint venture that they own, goods and services are exchanged and therefore have to be priced, because these are transactions between entities that are legally still independent. One could assume that this is not a problem as long as comparable market prices are readily available. But a cooperation is not based on market transactions, so choosing market prices would mean applying a governance mechanism that exhibits different transaction cost structures which would lead to the wrong prices within the governance mechanism of the cooperation. Similar pricing problems are well‐known for exchanging goods and services within a firm, where transfer prices are used to solve the problem. Accordingly, for a cooperation “cooperative transfer prices” have to be defined. Transfer prices have different functions. Within a company the accounting and measuring of a company’s performance are main functions. In a cooperation the coordination function becomes predominant. These prices for goods and services that cross the interface between the cooperation partners are able to influence the behaviour of the partner and are therefore essential for coordinating the cooperation.

If market prices were chosen as “cooperative transfer prices”, they would have the advantage that they are hard to manipulate, leading to broad acceptance in the cooperating companies. But they do not reflect the special cost characteristics of a cooperation, a cooperation transaction is not a market transaction. Thus, applying market prices in a cooperation relationship could imply misleading incentives to the partners. Cost‐based transfer prices are another mechanism for solving the pricing problem. But cost‐based prices are accompanied by significant problems too. It has to be decided whether marginal or average costs should be chosen. Marginal costs (i.e. the costs that are necessary to produce one small (marginal) additional unit) are superior in setting appropriate incentives, but then prices would not cover expenditures for fixed costs and associated overheads. Choosing average costs would solve the problem of covering total costs but the incentives would be discouraged and companies could be inclined to transfer their overhead costs to the cooperation partner. In a cooperation, identifying marginal or average costs is more complicated due to the information asymmetries. It is especially hard to gauge the “right” overhead costs that are associated with the cooperation, resulting in somewhat rough estimates of these costs.

It becomes evident that no pricing mechanism is superior. If there is sufficient transparency between the cooperation partners, cost‐based prices on the basis of marginal costs with some mark‐up could be a solution. If retrieving the cost information is difficult in a cooperation or if fixed costs are particularly relevant, then cost‐based prices may show inferior results [28].

4.6.1 Monitoring

In order to coordinate the operations of the cooperating partners, their activities have to be monitored. Information can be detected at the interfaces between the cooperation partners or between the joint venture and the cooperation partner, namely, all information that is transmitted or that can be derived from products or services crossing these boundaries can be evaluated. The cooperation agreement defines each cooperation partner’s rights of information acquisition. The cooperation partners have access to all the information that they can record at the cooperation interfaces. In some cases, the cooperation rules allow deeper inspection into the joint venture or into the partner company. This inspection may show opposite effects. On the one hand it can promote the success of the cooperation. Better information that is gathered within the cooperation but outside the company can improve a company’s contribution to the cooperation by adapting its production or services. Getting access to information beyond a company’s boundaries aims to imitate common intra‐company behaviour, whereas information collection within the company is always available and clearly betters a company’s performance. On the other hand, a company could use information from the cooperating partner to the detriment of the partner company. Particularly in a horizontal cooperation with cooperating competitors or in a cooperation where getting access to the other company’s technology or know‐how is an objective, additional information could be absorbed without using the information to the benefit of the cooperation [19].

4.6.2 Influence and Communication

Since direct intervention in another company beyond a company’s boundaries is not possible, installing reliable information channels and understanding mechanisms for influencing the partner company become essential in cooperation. Providing information is the basis for the management paradigm of “coordination and cultivation”.

Planning the communication requirements and determining appropriate information techniques and assigning them to the communication requirements should be part of the institutionalisation. Nevertheless, they are also used and adapted in the operation of the cooperation. Typical communication techniques that can be used in cooperations are:

• establishing communication norms (e.g., accessibility, reply deadlines)
• creating a directory and assigning competences
• creating direct contacts between employees with similar tasks (especially for parts of a cooperation where intensive exchange of information is expected and crucial)
• periodic workshops, meetings, or phone calls
• creating a wiki or handbook for the cooperation (collecting widely distributed information, especially suited to information that is needed infrequently).

These communication tools can be used to influence the partner company and its decisions. For this purpose, not only is collecting and evaluating information necessary (as described earlier), but it also intelligently provides information to the partner. From the knowledge of the value chain and from communication with the partner, their information needs can be derived. Knowing these information requirements, a company can provide the appropriate information and make assumptions on the effects of the information, providing an instrument for influencing decisions. A company could be tempted to provide wrong or manipulated information or data to the partner, which would violate a trusting relationship and also destabilise the cooperation. Providing the right information at the right time is the “cultivation” in the cooperation management process. Providing information provision works like a fertilizer: the partner company decides on which information it uses but it helps to make the cooperation grow.

Besides this informal but highly relevant mechanism for coordinating a cooperation, there are the institutionalised coordination mechanisms that are used in the operational cooperation management. The cooperation agreement usually provides stipulations for management meetings or other means of coordination. Moreover, the transfer prices for exchanging or providing goods are another way of coordinating actions in the cooperation.