STRENGTHENING A COMPANYS COMPETITIVE POSITION Strategic Moves, Timing, and Scope of Operations

STRENGTHENING A COMPANYSCOMPETITIVE POSITIONStrategic Moves, Timing, and Scopeof OperationsCHAPTER 6LEARNING OBJECTIVESLearn whether and when to pursue offensive or defensive strategic moves to improve a companys market position.Recognize when being a first mover or a fast follower or a late mover is most advantageousBecome aware of the strategic benefits and risks of expanding a companys horizontal scope through mergers and acquisitionsLearn the advantages and disadvantages of extending the companys scope of operations via vertical integration.Become aware of the conditions that favor farming out certain value chain activities to outside partiesUnderstand when and how strategic alliances can substitute for horizontal mergers and acquisitions or vertical integration and how they can facilitate outsourcing.GOING ON THE OFFENSIVESTRATEGIC OPTIONSTO IMPROVE A COMPANYS MARKET POSITIONStrategic offensives are called for: When a company spots opportunities to gain profitable market share at the expense of rivals When a company has no choice but to try to whittle away at a strong rivals competitive advantage The best offensives tend to incorporate several principles: (1) focusing relentlessly on building competitive advantage and then striving to convert it into sustainable advantage (2) creating and deploying company resources in ways that cause rivals to struggle to defend themselves (3) employing the element of surprise as opposed to doing what rivals expect and are prepared for(4) displaying a strong bias for swift, decisive, and overwhelming actions to overpower rivals.Choosing the Basis for Competitive AttackStrategic offensives should, as a general rule, be based on exploiting a companys strongest strategic assets its most valuable resources and capabilities. Such as:A better-known brand name, A more efficient production or distribution system, Greater technological capability, or A superior reputation for quality. But a consideration of the companys strengths should not be made without also considering the rivals strengths and weaknesses. A strategic offensive should be based on those areas of strength where the company has its greatest competitive advantage over the targeted rivals.Choosing the Basis for Competitive AttackThe principal offensive strategy options include the following:Using a cost-based advantage to attack competitors on the basis of price or value.A price-cutting offensive can involve offering customers an equally good or better product at a lower price or offering a low-priced, lower-quality product that gives customers more value for the moneyConditions For Price Cutting Strategy Lower prices can produce market share gains if competitors dont respond with price cuts of their own and if the challenger convinces buyers that its product offers them a better value propositionsuch a strategy increases total profits only if the gains in additional unit sales are enough to offset the impact of lower prices and thinner margins per unit sold. Price-cutting offensives are generally successful only when a company first achieves a cost advantage and then hits competitors with a lower price.

Choosing the Basis for Competitive AttackLeapfrogging competitors by being the first adopter of next-generation technologies or being first to market with next-generation productsMicrosoft got its next-generation Xbox 360 to market a full 12 months ahead of Sonys PlayStation 3 and Nintendos Wii, helping it convince video gamers to buy an Xbox rather than wait for the new PlayStation 3 and Wii to hit the market.This type of offensive strategy is high-risk, since it requires costly investment at a time when consumer reactions to the new technology are yet unknownChoosing the Basis for Competitive AttackPursuing continuous product innovation to draw sales and market share away from less innovative rivalsOngoing introductions of new and improved products can put rivals under tremendous competitive pressure, especially when rivals new product development capabilities are weak. But such offensives can be sustained only if a company has sufficient product innovation skills to keep its pipeline full and maintain buyer enthusiasm for its new and better product offerings.4.Adopting and improving on the good ideas of other companies (rivals or otherwise).Casket maker Hillenbrand greatly improved its market position by adapting Toyotas production methods to casket making.Offense-minded companies are often quick to take any good idea (not nailed down by a patent or other legal protection), make it their own, and then aggressively apply it to create competitive advantage for themselves.Choosing the Basis for Competitive AttackUsing hit-and-run or guerrilla warfare tactics to grab sales and market share from complacent or distracted rivals.Options for guerrilla offensives include:Occasional low-balling on price (to win a big order or steal a key account from a rival),Surprising key rivals with sporadic but intense bursts of promotional activity (offering a special trial offer for new customers to draw them away) from rival brands, Undertaking special campaigns to attract buyers away from rivals plagued with a strike or problems in meeting buyer demandGuerrilla offensives are particularly well suited to small challengers that have neither the resources nor the market visibility to mount a full-fledged attack on industry leaders and that may not merit a full retaliatory response from larger rivals

Choosing the Basis for Competitive AttackLaunching a pre-emptive strike to secure an advantageous position that rivals are prevented or discouraged from duplicatingWhat makes a move pre-emptive is its one-of-a-kind naturewhoever strikes first stands to acquire competitive assets that rivals cant readily match.Examples of pre-emptive moves include(1) securing the best distributors in a particular geographic region or country;(2) obtaining the most favorable sites in terms of customer demographics, cost characteristics, or access to transportation, raw-material supplies, or low cost inputs; (3) tying up the most reliable, high-quality suppliers via exclusive partnerships, long-term contracts, or acquisition; (4) moving swiftly to acquire the assets of distressed rivals at bargain prices.To be successful, a pre-emptive move doesnt have to totally block rivals from following; it merely needs to give a firm a prime position that is not easily replicated or circumventedChoosing Which Rivals to AttackMarket leaders that are vulnerableSigns of leader vulnerability include: unhappy buyers,an inferior product line, a weak competitive strategy with regard to low-cost leadership or differentiation, strong emotional commitment to an aging technology the leader has pioneered, outdated plants and equipment,a preoccupation with diversification into other industries, mediocre or declining profitability.To be judged successful, attacks on leaders dont have to result in making the aggressor the new leader; a challenger may win by simply becoming a stronger runner-up. Caution is well advised in challenging strong market leaderstheres a significant risk of squandering valuable resources in a futile effort or precipitating a fierce and profitless industry wide battle for market share.Choosing Which Rivals to AttackRunner-up firms with weaknesses in areas where the challenger is strongStruggling enterprises that are on the verge of going underChallenging a hard pressed rival in ways that further sap its financial strength and competitive position can weaken its resolve and hasten its exit from the marketIn this type of situation, it makes sense to attack the rival in the market segments where it makes the most profits, since this will threaten its survival the most.Small local and regional firms with limited capabilitiesBlue-Ocean StrategyA Special Kind of OffensiveSeeks to gain a dramatic, durablecompetitive advantage byAbandoning efforts to beat outcompetitors in existing markets andInventing a new industry or distinctivemarket segment to render existingcompetitors largely irrelevant andAllowing a company to create andcapture altogether new demand

What Is Different About a Blue Ocean?Typical Market SpaceIndustry boundaries are defined and acceptedCompetitive rules are well understood by all rivalsCompanies try to outperform rivals by capturing a bigger share of existing demandBlue Ocean Market Space Industry does not exist yetIndustry is untaintedby competitionIndustry offers wide-open opportunities if a firm has a product and strategy allowing it toCreate new demand andAvoid fighting over existing demand

6-1313Blue-Ocean StrategyAn example of such wide-open or blue-ocean market space is the online auction industry that eBay created and now dominates Other examples of companies that have achieved competitive advantages by creating blue-ocean market spaces include Starbucks in the coffee shop industry, Dollar General in extreme discount retailing, FedEx in overnight package deliveryZipcar Inc. is presently using a blue-ocean strategy to compete against entrenched rivals in the rental-car industry. It rents cars by the hour or day (rather than by the week) to members who pay a yearly fee for access to cars parked in designated spaces located conveniently throughout large citiesDEFENSIVE STRATEGIESPROTECTING MARKETPOSITION AND COMPETITIVE ADVANTAGEThe purposes of defensive strategies are to:(1) lower the risk of being attacked, (2) weaken the impact of any attack that occurs, (3) influence challengers to aim their efforts at other rivalsWhile defensive strategies usually dont enhance a firms competitive advantage, they can : Help fortify the firms competitive position, Protect its most valuable resources and capabilities from imitation, Defend whatever competitive advantage it might haveDefensive strategies can take either of two forms:(1) actions to block challengers (2) actions to signal the likelihood of strong retaliation.Blocking the Avenues Open to ChallengersThere are any number of obstacles that can be put in the path of would-be challengersA defender can participate in alternative technologies as a hedge against rivals attacking with a new or better technology. A defender can introduce new features, add new models, or broaden its product line to close off gaps and vacant niches to opportunity-seeking challengers.Blocking the Avenues Open to Challengers It can thwart the efforts of rivals to attack with a lower price by maintaining economy priced options of its own. It can try to discourage buyers from trying competitors brands by lengthening warranties, offering free training and support services, developing the capability to deliver spare parts to users faster than rivals can, providing coupons and sample giveaways to buyers most prone to experiment, and making early announcements about impending new products or price changes to induce potential buyers to postpone switching. It can challenge the quality or safety of rivals products.Finally, a defender can grant volume discounts or better financing terms to dealers and distributors to discourage them from experimenting with other suppliers, or it can convince them to handle its product line exclusively and force competitors touse other distribution outletsSignaling Challengers That Retaliation Is LikelyThe goal of signaling challengers that strong retaliation is likely in the event of an attack is either to: dissuade challengers from attacking at all or to divert them to less threatening optionsEither goal can be achieved by letting challengers know the battle will cost more than it is worthSignals to would-be challengers can be given byPublicly announcing managements commitment to maintaining the firms present market share.Publicly committing the company to a policy of matching competitors terms or prices. Maintaining a war chest of cash and marketable securities.Making an occasional strong counter response to the moves of weak competitors to enhance the firms image as a tough defenderSignaling is most likely to be an effective defensive strategy if the signal is accompanied by a credible commitment to follow throughTIMING A COMPANYS OFFENSIVE AND DEFENSIVESTRATEGIC MOVESWhen to make a strategic move is often as crucial as what move to makeTiming is especially important when first-mover advantages or disadvantages existUnder certain conditions, being first to initiate a strategic move can have a high payoff in the form of a competitive advantage that later movers cant dislodgeMoving first is no guarantee of success since first movers also face some significant disadvantages.There are circumstances in which it is more advantageous to be a fast follower or even a late moverBecause the timing of strategic moves can be consequential, it is important for company strategists to be aware of the nature of first-mover advantages and disadvantages and the conditions favoring each typeThe Potential for First-Mover AdvantagesWhen pioneering helps build a firms reputation with buyers and creates brand loyaltyWhen a first movers customers will thereafter face significant switching costs.When property rights protections thwart rapid imitation of the initial moveWhen an early lead enables the first mover to move down the learning curve ahead of rivalsWhen a first mover can set the technical standard for the industry

The Potential for First-Mover Disadvantages or Late-Mover AdvantagesWhen pioneering is more costly than imitating, and only negligible experience or learning-curve benefits accrue to the leaderWhen the products of an innovator are somewhat primitive and do not live up to buyer expectations3.When rapid market evolution gives fast followers the opening to leapfrog a first movers products with more attractive next-version products 4.When market uncertainties make it difficult to ascertain what will eventually succeed.

To Be a First Mover or NotIt matters whether the race to market leadership in a particular industry is a sprint or marathonIn marathons a slow mover is not unduly penalized- first mover advantages could be fleeting- there is ample of time for fast mover followers, some times late movers to play catch upThe speed at which the pioneering innovation is likely to catch on matters as companies struggle with whether to pursue a particular emerging opportunity aggressively or cautiously There is a market penetration curve for every emerging opportunityThe curve has an inflection point at which all pieces of the business model fall into place, buyer demand explodes, and the market takes off

To Be a First Mover or NotThe inflection point can come early on a fast rising curve or further up on a slow rising curveA company that seeks competitive advantage by being first mover needs to ask:Does market takeoff depend on the development of complementary products or services that currently are not available?Is new infrastructure required before buyer demand surge?Will buyer need to learn new skills or adopt new behaviors? Will buyers encounter high switching costsAre there influential competitors in position to delay or derail the efforts of a first moverWhen the answer to any of these questions are yes, then a company must e careful not to pour too many resources into getting ahead of the market opportunityThe race is going to e a 10-year marathon than a 2year sprint

STRENGTHENING A COMPANYS MARKET POSITION VIA ITS SCOPE OF OPERATIONSAnother set of managerial decisions concern the scope of a companys operationsthe breadth of its activities and the extent of its market reachDecisions regarding the scope of the firm focus on which activities a firm will perform internally and which it will notSuch decisions determine where the boundaries of a firm lie and the degree to which the operations within those boundaries cohere They also have much to do with the direction and extent of a businesss growth Scope issues are at the very heart of corporate-level strategy.Several dimensions of firm scope have relevance for business-level strategy in terms of their capacity to strengthen a companys position in a given marketThese include the firms horizontal scope, which is the range of product and service segments that the firm serves within its market Mergers and acquisitions involving other market participants provide a means for a company to expand its horizontal scope

STRENGTHENING A COMPANYS MARKET POSITION VIA ITS SCOPE OF OPERATIONSExpanding the firms vertical scope by means of vertical integration can also affect the success of its market strategy. Vertical scope is the extent to which the firm engages in the various activities that make up the industrys entire value chain system, from initial activities such as raw-material production all the way to retailing and after-sales service activitiesOutsourcing decisions concern another dimension of scope since they involve narrowing the firms boundaries with respect to its participation in value chain activitiesSince strategic alliances and partnerships provide an alternative to vertical integration and acquisition strategies and are sometimes used to facilitate outsourcingIt becomes essential to discuss the benefits and challenges associated with cooperative arrangements of this sortHORIZONTAL MERGER ANDACQUISITION STRATEGIESA merger is the combining of two or more companies into a single corporate entity, with the newly created company often taking on a new nameAn acquisition is a combination in which one company, the acquirer, purchases and absorbs the operations of another, the acquiredThe resources and competitive capabilities of the newly created enterprise end up much the same whether the combination is the result of acquisition or mergerHorizontal mergers and acquisitions, which involve combining the operations means for firms to rapidly increase the scale and horizontal scope of their core businessMicrosoft has used an aggressive acquisition strategy to extend its software business into new segments and strengthen its technological capabilities in this domain

HORIZONTAL MERGER ANDACQUISITION STRATEGIESIncreasing a companys horizontal scope can strengthen its business and increase its profitability in five ways: by improving the efficiency of its operations, by heightening its product differentiation, by reducing market rivalry, by increasing the companys bargaining power over suppliers and buyers, by enhancing its flexibility and dynamic capabilities

HORIZONTAL MERGER ANDACQUISITION STRATEGIESTo achieve these benefits, horizontal merger and acquisition strategies typically are aimed at any of five outcomesIncreasing the companys scale of operations and market shareMany mergers and acquisitions are undertaken with the objective of transforming two or more high cost companies into one lean competitor with significantly lower costsless efficient plants can be closeddistribution and sales activities partly combined and downsizedsqueeze out cost savings in administrative activities, by combining and downsizing such administrative activities as finance and accounting, information technology, human resources,able to reduce supply chain costs because of greater bargaining power over common suppliers and closer collaboration with supply chain partnersBy helping to consolidate the industry and remove excess capacity, such combinations can also reduce industry rivalry and improve industry profitability.

HORIZONTAL MERGER ANDACQUISITION STRATEGIES2. Expanding a companys geographic coverageIf there is some geographic overlap, then one benefit is being able to reduce costs by eliminating duplicate facilities in those geographic areas where undesirable overlap existsSince a companys size increases with its geographic scope, another benefit is increased bargaining power with the companys suppliers or buyersFor companies whose business customers require national or international coverage, a broader geographic scope can provide differentiation benefits while also enhancing the companys bargaining power. Food products companies like Nestl, Kraft, Unilever, and Procter & Gamble have made acquisitions an integral part of their strategies to expand internationally in order to serve key customers such as Walmart on a global basis.Greater geographic coverage can also contribute to product differentiation by enhancing a companys name recognition and brand awareness.HORIZONTAL MERGER ANDACQUISITION STRATEGIES3. Extending the companys business into new product categoriesAcquisition can be a quicker and more potent way to broaden a companys product line than going through the exercise of introducing a companys own new product to fill the gapExpanding into additional market segments or product categories can offer companies benefits similar to those gained by expanding geographically: greater product differentiation, bargaining power, and efficiencies Coca-Cola has increased the effectiveness of the product bundle it provides to retailers by acquiring Minute Maid (juices and juice drinks), Odwalla (juices), Hi-C (ready-to-drink fruit beverages), and Glaceau, the maker of Vitamin Water

HORIZONTAL MERGER ANDACQUISITION STRATEGIESGaining quick access to new technologies or complementary resources and capabilitiesBy making acquisitions to bolster a companys technological know-how or to expand its skills and capabilities, a company can bypass a time-consuming and expensive internal effort to build desirable new resources and organizational capabilitiesFrom 2000 through April 2009, Cisco Systems purchased 85 companies to give it more technological reach and product breadth, thereby enhancing its standing as the worlds biggest provider of hardware, software, and services for building and operating Internet networksHORIZONTAL MERGER ANDACQUISITION STRATEGIESLeading the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunitiesIn fast-cycle industries or industries whose boundaries are changing, companies can use acquisition strategies to hedge their bets about: the direction that an industry will take, increase their capacity to meet changing demands, respond flexibly to changing buyer needs and technological demandsMicrosoft has made a series of acquisitions that have enabled it to launch Microsoft TV Internet Protocol Television (IPTV). Microsoft TV allows broadband users to use their home computers or Xbox game consoles to watch live programming, see video on demand, view pictures, and listen to music.News Corporation has also prepared for the convergence of media services with the purchase of satellite TV companies to complement its media holdings in TV broadcasting (the Fox network and TV stations in various countries), cable TV (Fox News, Fox Sports, and FX), filmed entertainment (Twentieth Century Fox and Fox studios), newspapers, magazines, and book publishing.Why Mergers and Acquisitions Sometimes Fail to Produce Anticipated ResultsAll too frequently, mergers and acquisitions do not produce the hoped for outcomesCost savings may prove smaller than expected. Gains in competitive capabilities may take substantially longer to realize or, worse, may never materialize at allEfforts to mesh the corporate cultures can stall due to formidable resistance from organization memberManagers and employees at the acquired company may argue forcefully for continuing to do things the way they were done before the acquisition. Key employees at the acquired company can quickly become disenchanted and leave; the morale of company personnel who remain can drop to disturbingly low levels because they disagree with newly instituted changes. Differences in management styles and operating procedures can prove hard to resolve. The managers appointed to oversee the integration of a newly acquired company can make mistakes in deciding which activities to leave alone and which activities to meld into their own operations and systems.Why Mergers and Acquisitions Sometimes Fail to Produce Anticipated ResultsA number of mergers/acquisitions have been notably unsuccessful. Fords $2.5 billion acquisition of Jaguar was a failure, as was its $2.5 billion acquisition of Land Rover (both were sold to Indias Tata Motors in 2008 for $2.3 billion).Daimler AG, the maker of Mercedes-Benz and Smart cars, entered into a high profile merger with Chrysler only to dissolve it in 2007, taking a loss of $30 billionA number of recent mergers and acquisitions have yet to live up to expectations prominent examples include Oracles acquisition of Sun Microsystems, the Fiat- Chrysler deal, Bank of Americas acquisition of Merrill Lynch, and the merger of Sprint and Nextel in the mobile phone industry.VERTICAL INTEGRATION STRATEGIESA vertically integrated firm is one that participates in multiple segments or stages of an industrys overall value chainA vertical integration strategy can expand the firms range of activities backward into sources of supply and/or forward toward end usersVertical integration strategies can aim at full integration (participating in all stages of the vertical chain) or partial integration (building positions in selected stages of the vertical chain). Firms can also engage in tapered integration strategies, which involve a mix of in-house and outsourced activity in any given stage of the vertical chain

Oil companies, for instance, supply their refineries with oil from their own wells aswell as with oil that they purchase from other producersthey engage intapered backward integration. Since Boston Beer Company, the maker of Samuel Adams, sells most of its beer through distributors but alsooperates brew-pubs, it practices tapered forward integration.35Strategic Advantages of Backward IntegrationGenerates cost savings only if:(a) The volume needed is big enough to capture the scale economies of the supplier have the supplier efficiency can be matched or exceeded with no drop in quality.Occasions when a company can improve its cost position and competitiveness by performing a broader range of vertical chain activities in-house rather than having certain of these activities performed by outside suppliers. When the item being supplied is a major cost component, when there is a sole supplier, when suppliers have outsized profit margins, Vertical integration can lower costs by limiting supplier power. Vertical integration can also lower costs by facilitating the coordination of production flows and avoiding bottleneck problems.Furthermore, when a company has proprietary know-how that it wants to keep from rivals, then in-house performance of value adding activities related to this know-how is beneficial even if such activities could be performed by outsiders

Apple recently decided to integrate backward into producing its own chips for iPhones, chiefly because chips are a major cost component, they have big profit margins, and in-house production would help coordinate design tasks and protect Apples proprietary iPhone technology.36Strategic Advantages of Backward IntegrationBackward vertical integration can produce a differentiation-based competitive advantage when: Performing activities internally contributes to a better-quality product/service offering,Improves the caliber of customer service, in other ways enhances the performance of the final productOn occasion, integrating into more stages along the vertical added-value chain can add to a companys differentiation capabilities by allowing To build or strengthen its core competencies, Better master key skills or strategy-critical technologies, Add features that deliver greater customer value.Apple recently decided to integrate backward into producing its own chips for iPhones, chiefly because chips are a major cost component, they have big profit margins, and in-house production would help coordinate design tasks and protect Apples proprietary iPhone technology.37Integrating Forward to Enhance CompetitivenessForward integration can lower costs by increasing efficiency and bargaining power.It can allow manufacturers to :Gain better access to end users, Strengthen brand awareness, Increase product differentiationIn many industries, independent sales agents, wholesalers, and retailers handle competing brands of the same product; having no allegiance to any one companys brand, they tend to push whatever earns them the biggest profitsSome producers have opted to integrate forward by selling directly to customers at the companys Web siteBypassing regular wholesale/retail channels in favor of direct sales and Internet retailing can have appeal if it:Reinforces the brand and enhances consumer satisfaction Lowers distribution costs, produces a relative cost advantage over certain rivals, and results in lower selling prices to end users.

Automakers, for example, have forward integrated into the lending business in order to exercise more control and make auto loans a more attractive part of the car-buying process38The Disadvantages of a Vertical Integration Strategy1.Vertical integration raises a firms capital investment in the industry, increasing business risk. What if industry growth and profitability go sour?Vertically integrated companies are often slow to embrace technological advances or more efficient production methods when they are saddled witholder technology or facilities.Integrating backward into parts and components manufacture can impair a companys operating flexibility when it comes to changing out the use of certain parts and componentsMost of the worlds automakers, despite their expertise in automotive technology and manufacturing, have concluded that purchasing many of their key parts and components from manufacturing specialists results in higher quality, lower costs, and greater design flexibility than does the vertical integration option4.Vertical integration potentially results in less flexibility in accommodating shiftingbuyer preferences when a new product design doesnt include parts and components that the company makes in-house

The Disadvantages of a Vertical Integration StrategyVertical integration may not enable a company to realize economies of scale if its production levels are below the minimum efficient scale.Vertical integration poses all kinds of capacity matching problemsIn motor vehicle manufacturing, for example, the most efficient scale of operation for making axles is different from the most economic volume for radiators and different yet again for both engines and transmissions. Building the capacity to produce just the right number of axles, radiators, engines, and transmissions in-houseanddoing so at the lowest unit costs for eachis much easier said than done7.Integration forward or backward often calls for radical new skills and business capabilities.Weighing the Pros and Cons of Vertical IntegrationA strategy of vertical integration can have both important strengths and weaknessesThe tip of the scales depends on: Whether vertical integration can enhance the performance of strategy-critical activities in ways that lower cost, build expertise, protect proprietary know-how, or increase differentiation; The impact of vertical integration on investment costs, flexibility and response times, and the administrative costs of coordinating operations across more vertical chain activities; How difficult it will be for the company to acquire the set of skills and capabilities needed to operate in another stage of the vertical chain. Vertical integration strategies have merit according to which capabilities and value-adding activities truly need to be performed in-house and which can be performed better or cheaper by outsiders Without solid benefits, integrating forward or backward is not likely to be an attractive strategy option.OUTSOURCING STRATEGIES: NARROWINGTHE SCOPE OF OPERATIONSIn contrast to vertical integration strategies, outsourcing strategies narrow the scope of a businesss operations (and the firms boundaries, in terms of what activities are performed internally).Outsourcinginvolves a conscious decision to forgo attempts to perform certain value chain activities internally and instead to farm them out to outside specialists.

OUTSOURCING STRATEGIES: NARROWINGTHE SCOPE OF OPERATIONSOutsourcing certain value chain activities can be advantageous whenever:An activity can be performed better or more cheaply by outside specialistsThe chief exception occurs when a particular activity is strategically crucial and internal control over that activity is deemed essential.The activity is not crucial to the firms ability to achieve sustainable competitive advantage and wont hollow out its core competenciesOutsourcing of support activities such as maintenance services, data processing and data storage, fringe benefit management, and Web site operations has become commonplaceOUTSOURCING STRATEGIES: NARROWINGTHE SCOPE OF OPERATIONS3.It streamlines company operations in ways that improve organizational flexibility and speed time to marketThe flexibility to switch suppliers in the event that its present supplier falls behind competing suppliersTo the extent that its suppliers can speedily get next-generation parts and components into production, then a company can get its own next-generation product offerings into the marketplace quickerSeeking out new suppliers with the needed capabilities already in place is frequently quicker easier, less risky, and cheaper than hurriedly retooling internal operations to replace obsolete capabilities or trying to install and master new technologiesOUTSOURCING STRATEGIES: NARROWINGTHE SCOPE OF OPERATIONSIt reduces the companys risk exposure to changing technology and/or buyer preferencesSuppliers must bear the burden of incorporating state-of-the-art technologies and/or undertaking redesigns and upgrades to accommodate a companys plans to introduce next-generation productsIf what a supplier provides falls out of favor with buyers, or is designed out of next-generation products, or rendered unnecessary by technological change, it is the suppliers business that suffers rather than a companys own internal operationsIt allows a company to assemble diverse kinds of expertise speedily and efficiently6.It allows a company to concentrate on its core business, leverage its key resources, and do even better what it already does bestCoach,for example, devotes its energy to designing new styles of ladies handbags and, leather accessories, opting to outsource handbag production to 40 contract manufacturers in 15 countries45The Big Risk of Outsourcing Value Chain ActivitiesThe biggest danger of outsourcing is that a company will farm out too many or the wrong types of activities and thereby hollow out its own capabilitiesNearly every U.S. brand of laptop and cell phone (with the notable exception of Apple) is not only manufactured but designed in Asia. It is strategically dangerous for a company to be dependent on outsiders for competitive capabilities that over the long run determine its market success.Another risk of outsourcing comes from the lack of direct controlIt may be difficult to monitor, control, and coordinate the activities of outside parties by mean of contracts and arms-length transactions alone; unanticipated problems may arise that cause delays or cost overruns and become hard to resolve amicablyContract-based outsourcing can be problematic because outside parties lack incentives to make investments specific to the needs of the outsourcing company's value chainSTRATEGIC ALLIANCES AND PARTNERSHIPSA strategic alliance is a formal agreement between two or more separate companies in which there is strategically relevant collaboration of some sort: Joint contribution of resources, Shared risk, Shared control, Mutual dependence Often, alliances involve cooperative marketing, sales or distribution, joint production, design collaboration, or projects to jointly develop new technologies or productsThey can vary in terms of their duration and the extent of the collaboration;some are intended as long-term arrangements, involving an extensive set of cooperative activitiesOthers are designed to accomplish more limited, short-term objectives

STRATEGIC ALLIANCES AND PARTNERSHIPSA special type of strategic alliance involving ownership ties is the joint ventureA joint venture entails forming a new corporate entity that is jointly owned by two or more companies that agree to share in the revenues, expenses, and control of the newly formed entity.Since joint ventures involve setting up a mutually owned business, they tend to be more durable but also riskier than other arrangementsIn other types of strategic alliances, the collaboration between the partners involves a much less rigid structure in which the partners retain their independence from one anotherSTRATEGIC ALLIANCES AND PARTNERSHIPSFive factors make an alliance strategic, as opposed to just a convenient business arrangement:1. It helps build, sustain, or enhance a core competence or competitive advantage.2. It helps block a competitive threat.3. It increases the bargaining power of alliance members over suppliers or buyers.4. It helps open up important new market opportunities.5. It mitigates a significant risk to a companys businessWhy and How Strategic Alliances Are AdvantageousThe most common reasons companies enter into strategic alliances are to:Expedite the development of promising new technologies or products, To overcome deficits in their own technical and manufacturing expertise,To bring together the personnel and expertise needed to create desirable new skill sets and capabilities, To improve supply chain efficiency, To share the risks of high-stake, risky ventures, To gain economies of scale in production and/or marketing,To acquire or improve market access through joint marketing agreements.Why and How Strategic Alliances Are AdvantageousA company that is racing for global market leadership needs alliances to: Get into critical country markets quickly and accelerate the process of building a potent global market presence.Gain inside knowledge about unfamiliar markets and cultures through alliances with local partners.Access valuable skills and competencies that are concentrated in particular geographic locationsA company that is racing to stake out a strong position in an industry of the future needs alliances to: Establish a stronger beachhead for participating in the target industry. Master new technologies and build new expertise and competencies faster than would be possible through internal efforts. Open up broader opportunities in the target industry by melding the firms own capabilities with the expertise and resources of partners

Capturing the Benefits of Strategic AlliancesThe extent to which companies benefit from entering into alliances and partnerships seems to be a function of six factorsPicking a good partner. A good partner must bring complementary strengths to the relationship. To the extent that alliance members have non overlapping strengths, there is greater potential for synergy and less potential for coordination problems and conflictStrong partnerships also depend on good chemistry among key personnel and compatible views about how the alliance should be structured and managedBeing sensitive to cultural differencesUnless there is respect among all the parties for company cultural differences, including those stemming from different local cultures and local business practices, productive working relationships are unlikely to emerge.

Capturing the Benefits of Strategic Alliances3. Recognizing that the alliance must benefit both sides.Information must be shared as well as gained, and the relationship must remain forthright and trustful4. Ensuring that both parties live up to their commitmentsBoth parties have to deliver on their commitments for the alliance to produce the intended benefits.The division of work has to be perceived as fairly apportioned, and the caliber of the benefits received on both sides has to be perceived as adequateCapturing the Benefits of Strategic Alliances5.Structuring the decision-making process so that actions can be taken swiftly when neededIn many instances, the fast pace of technological and competitive changes dictates an equally fast decision-making process. If the parties get bogged down in discussions or in gaining internal approval from higher-ups, the alliance can turn into an anchor of delay and inactionManaging the learning process and then adjusting the alliance agreement over time to fit new circumstancesOne of the keys to long-lasting success is adapting the nature and structure of the alliance to be responsive to shifting market conditions, emerging technologies, and changing customer requirements.Wise allies are quick to recognize the merit of an evolving collaborative arrangement, where adjustments are made to accommodate changing market conditions and to overcome whatever problems arise in establishing an effective working relationship

Capturing the Benefits of Strategic AlliancesAlliances are more likely to be long-lasting when they involve collaboration with partners that do not compete directly, a trusting relationship has been established, both parties conclude that continued collaboration is in their mutual interest, perhaps because new opportunities for learning are emerging55The Drawbacks of Strategic Alliancesand PartnershipsCulture clash and integration problems due to different management styles and business practices can interfere with the success of an alliance, just as they can with vertical integration or horizontal mergers and acquisitions.Anticipated gains may fail to materialize due to an overly optimistic view of the synergies or a poor fit in terms of the combination of resources and capabilities.The greatest danger is that a partner will gain access to a companys proprietary knowledge base, technologies, or trade secrets, enabling the partner to match the companys core strengths and costing the company its hard-won competitive advantageWhen to engage in a strategic allianceThe answer to this question depends on the relative advantages of each method and the circumstances under which each type of organizational arrangement is favored.The principle advantages of strategic alliances over vertical integration or horizontal mergers/ acquisitions are threefoldThey lower investment costs and risks for each partner by facilitating resource pooling and risk sharing This can be particularly important when investment needs and uncertainty are high, such as when a dominant technology standard has not yet emergedThey are more flexible organizational forms and allow for a more adaptive response to changing conditionsWhen to engage in a strategic allianceFlexibility is key when environmental conditions or technologies are changing rapidlystrategic alliances under such circumstances may enable the development of each partners dynamic capabilities3.They are more rapidly deployeda critical factor when speed is of the essence.Speed is of the essence when there is a winner-take-all type of competitive situation, such as the race for a dominant technological design or a race down a steep experience curve, where there is a large first-mover advantage

When to engage in a strategic allianceThe key advantages of using strategic alliances rather than arms-length transactions to manage outsourcing are:the increased ability to exercise control over the partners activities and(2) a greater willingness for the partners to make relationship-specific investments. Arms-length transactions discourage such investments since they imply less commitment and do not build trust Mergers and acquisitions are especially suited for situations in which strategic alliances or partnerships do not go far enough in providing a company with access to needed resources and capabilities. Ownership ties are more permanent than partnership ties, allowing the operations of the merger/acquisition participants to be tightly integrated and creating more in-house control and autonomy.When there is limited property rights protection for valuable know-how and when companies fear being taken advantage of by opportunisticpartners.

How to Make Strategic Alliances WorkCompanies that have greater success in managing their strategic alliances and partnerships often credit the following factors:They create a system for managing their alliancesThis means setting up a process for managing the different aspects of alliance management from partner selection to alliance termination procedureTo ensure that the system is followed on a routine basis by all company managers, many companies create a set of explicit procedures, process templates, manuals, or the like.They build relationships with their partners and establish trustEstablishing strong interpersonal relationships is a critical factor in making strategic alliances work since they facilitate opening up channels of communication, coordinating activity, aligning interests, and building trust.They protect themselves from the threat of opportunism by setting up safeguardsContractual safeguards, including non-compete clauses

How to Make Strategic Alliances WorkThey make learning a routine part of the management processwhen the purpose of an alliance is to improve a companys knowledge assets and capabilities, it is important for the company to learn thoroughly and rapidly about its partners technologies, business practices, and organizational capabilities and then transfer valuable ideas and practices into its own operations promptly.They make commitments to their partners and see that their partners do the same.Equity-based alliances tend to be more successful than non equity alliances.