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Lecture: 7 Unbundling and Outsourcing Strategies & Strategic Alliance

1. Unbundling and Outsourcing StrategiesWhen vertical integration becomes competitively burdensome, some companies adopt vertical disintegration, or unbundling strategies. The focus more narrowly on certain value chain activities and rely on outsiders to perform the remaining value chain activities. They begin outsourcing activities formerly performed in-house and concentrating their energies on a narrower portion of the value chain.Outsourcing involves withdrawing from certain stages or activities in the value chain system a relying on outside vendors to supply the needed products, support services or functionalactivities.

Question: What are the instances that make outsourcing a good strategic sense?

Outsourcing strategy is useful under the following circumstances:

a. When an activity can be performed better or more cheaply by outside specialists.b. When the activity is not crucial to the firm’s ability to achieve sustainable competitive

advantage (eg. Outsourcing of maintenance activities, accounting, data processing and other administrative support activities.)

c. When it resource the firm’s risk exposure to changing technology and changing buyer preferences.

d. When it allows a company to concentrate on its core business and do what it dose best.

The pitfalls of outsourcing: The biggest danger of outsourcing is that a company will phase out many

wrong type of activities and hollow out its own capabilities. In such case, company loses touch with very activities & expertise that over

the long run contributes to and determine its success.

Question: What might be the strategic advantages if a company relies on outside specialists to perform certain value chain activities (i.e., if relies on outsourcing certain activities)?

a. Obtaining higher quality or cheaper components or services than internal sources can provide.

b. Improving the company’s ability to innovate by interacting and allying with the best-of-world their supplier who have considerable intellectual depth and innovative capabilities of their own.

c. Enhancing the company’s strategic flexibility should customer needs and market conditions suddenly shift.

d. Increasing the company’s ability to assemble diverse kinds of expertise speedily and efficiently.

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e. Allowing the company to concentrate its resources on performing those activities internally that it can perform better than outsiders.

2. Strategic AlliancesStrategic alliances are cooperative agreements between firms that go beyond normal company-to-company dealings but fall short of full joint venture partnership or merger.

Reasons for Strategic alliancesa. To collaborate on technology.b. To collaborate on developing new products.c. To overcome deficit in technical and manufacturing expertise.d. To acquire altogether new competencies.e. To improve supply chain efficiency.f. To gain economies of scale in production and marketing.g. To acquire or improve market access through joint marketing agreements.

Risks of strategic alliance with foreign partners: Cross border allies typically have to overcome language & cultural barriers,

communication, trust building etc. To get the alliance to make decisions fast enough to respond rapidly to technological

advancements. Question of mutual trust and exchange of information and expertise is also important. There may be clashes of egos and company culture. Becoming overly dependendant on another company for essential expertise and

capabilities over long run.

Factors to consider when making strategic alliance with foreign partners Picking a good partner: A good partner shares the company’s’ vision about the

purpose of the alliance and has the desired expertise and capabilities. Being sensitive to cultural difference: Unless the outsider respect for the local

culture, productive working relation is unlikely to develop. The alliance must benefit both sides: If either partner plays games with information

ties to take advantage of other, the resulting friction can quickly erode value of further information.

Ensuring both parties’ commitment: Both parties have to deliver on their commitments for the alliance to produce the intended benefits.

Structuring the decision making process: So that actions can be swiftly taken when needed.

Managing the learning process and then adjusting the alliance agreement over time to fit new circumstances.

Choosing whom to attack Market leaders: Offensive attacks on a market leader make the best sense

when the leader is not a true leader in terms of serving the market well. It includes unhappy buyers, inferior product line, using old technology, preoccupation with diversification in other industries. Offensive move has real promise when the company revamp its value chain or innovate a real cost based or differentiation based competitive advantage.

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Runner-up firms: They are the attractive target when a challengers’ resource strength & competitive capabilities are well suited to exploit weakness of others.

Struggling enterprise: Challenging a hard pressed rival in ways that further sap its financial strength and competitive position can weaken its resolve and hasten its exit form the market.

Small local & regional firms: A Challenger with broader capabilities is well positioned to raid the biggest & best customers – particularly who are growing rapidly.

Merger & Acquisition Strategies They are specially suited where alliance and partnership go far enough in providing a

company with access to the need of resource and capabilities. Ownership is more permanent that partnership ties. Merger or acquisition can dramatically strengthen a company’s’ market position.

Together the companies have stronger technological skill, better competitive capabilities, attractive product line, wider geographic coverage, greater financial strength, more R& D activities.

However, merger & acquisition do not always produce desired result: Because of exaggerated expectation and sometimes wrong anticipation. Conflicts in management style, different corporate cultures, difficult process of

integration etc. makes company difficult to cope up with.

Ex: Ford’s acquisition of Jaguar is an example. Ford paid a handsome price to acquire Jaguar but has yet to make the Jaguar brand a major factor in the luxury car segment in competition against Mercedes, BMW, Lexus.

Thirteen Commandments for Crafting Successful Business Startegies

1. Place top priority on crafting and executing strategic moves that enhance the companies’ competitive position for the long term.

2. To understand that a clear and consistent competitive strategy, when well crafted and well executed, builds reputation and recognizable industry position.

3. Avoid strategy that represents compromises between lower costs and greater differentiation and between broad and narrow market appeal.

4. Invest in creating a sustainable competitive advantage.5. Play aggressive offenses to build competitive advantage and aggressive defense

to protect it.6. Avoid strategies capable of succeeding only in the most optimistic

circumstances.7. Be cautious in pursuing a rigid or inflexible strategy that locks the company in

for the long term with little room to maneuver.8. Don’t underestimate the reactions and the commitments of rival firms.

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9. Beware of attacking strong, resourceful rivals without solid competitive ground.

10. Consider that attacking competitive weakness is usually more profitable that attacking competitive strength.

11. Be judicious in cutting prices without an established cost advantage.12. Be aware that aggressive moves to snatch market share away from rivals often

provoke aggressive retaliation in the form of price war.13. Strive to open up very meaningful gaps in quality or service or performance

features when pursuing a differentiation strategy.

Questions: Write a short note on outsourcing & unbundling strategies. What is strategic alliance? What are the reasons for strategic alliance?