Supplementing the Chosen Competitive Strategy

Chapter 6

Chapter Roadmap

• Collaborative Strategies: Alliances and partnership

• Mergers and Acquisition strategies• Vertical integration strategies• Outsourcing strategies• Offensive strategies• Defensive strategies• Web site strategies• Choosing appropriate functional area strategy• First mover advantage and disadvantage

Fig. 6.1: A Company’s Menu of Strategy Options

Collaborative Strategies:Alliances and Partnerships

• Companies sometimes use strategic alliances or collaborative partnerships to complement their own strategic initiatives and strengthen their competitiveness

• Such cooperative strategies go beyond normal company-to-company dealings but fall short of merger or full joint venture partnership

Reasons for Collaborative Strategies

Globalization of the world economy,

Revolutionary advances in technology,

untapped markets in Asia, Europe and Latin America

Competitive Forces for Strategic Alliances

1. The global race to build a market presence in many different national markets and join the ranks of companies recognized as global leaders

2. The race to seize opportunities on the frontiers of advancing technology and build resource strengths and business capabilities to compete successfully in the industries and product markets of the future

• Collaborative arrangements can help a company lower its costs and/or gain access to needed expertise and capabilities

Characteristics of a Strategic Alliance• Strategic alliance – A formal agreement between two

or more separate companies where there is– Strategically relevant collaboration of some sort– Joint contribution of resources– Shared risk– Shared control– Mutual dependence

• Alliances often involve– Joint marketing– Joint sales or distribution– Joint production– Design collaboration– Joint research– Projects to jointly develop new technologies or product

Factors that make an Strategic Alliance

1. It is critical to the company’s achievement of an important objective

2. It helps build, sustain, or enhance a core competence or competitive advantage

3. It helps block a competitive threat

4. It helps open important new market opportunities

5. It mitigates a significant risk to a company’s business

Potential Benefits of Alliances toAchieve Global and Industry

Leadership• Get into critical country markets quickly to accelerate

process of building a global presence• Gain inside knowledge about unfamiliar markets and

cultures• Access valuable skills and competencies concentrated in

particular geographic locations• Establish a beachhead to participate in target industry• Master new technologies and build new expertise faster

than would be possible internally• Open up expanded opportunities in target industry by

combining firm’s capabilities with resources of partners

Capturing the Benefits of Strategic Alliances

• The extent to which companies benefits from entering into strategic alliance is a function of six factors

1. Picking a good partner Desired expertise and capabilities Shares the company’s vision about the purpose of the

alliance No direct competition because of overlapping product

line Products are complimentary rather than substitutes Good chemistry among key personnel Strong partner with useful resource or skill2. Being sensitive to cultural differences

Capturing the Benefits of Strategic Alliances

3. Recognizing that the alliance must benefit both sides Information must be shared as well as gained Relationship must remain forthright and trustful4. Ensuring that both parties live up to their commitments division of work has to be perceived as fairly

appropriate Caliber of the benefits received on both sides has to be

perceived as adequate5. Structuring of the decision-making process so that

actions can be taken swiftly when needed

Capturing the Benefits of Strategic Alliances

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

Alliances are more likely to be long-term when:1. They involve collaboration with suppliers or distribution

allies and each party’s contribution involves activities in different portions of the industry value chain

2. Both parties conclude that continued collaboration is in their mutual interest because- new opportunities of learning are emerging- further collaboration will allow each partner to extend its market reach beyond what it could accomplish on its own

Why Alliances Fail• Reasons for alliance failure

– Diverging objectives and priorities of partners

– Inability of partners to work well together

– Changing conditions rendering purpose of alliance obsolete

– Emergence of more attractive technological paths

– Marketplace rivalry between one or more allies

• Merger – Combination and pooling of equals, with newly created firm often taking on a new name

• Acquisition – One firm, the acquirer, purchases and absorbs operations of another, the acquired

• Merger-acquisition strategy

– Much-used strategic option

– Especially suited for situations wherealliances do not provide a firm with neededcapabilities or cost-reducing opportunities

– Ownership allows for tightly integrated operations, creating more control and autonomy than alliances

Merger and Acquisition Strategies

Objectives of Mergers and Acquisitions1. To create a more cost-efficient operation Inefficient plants can be closed Distribution activities partly combined and downsized Marketing and sales activities combined and

downsized Reduce supply chain costs because of buying in

greater volume Cost savings in administrative activities by combining

and downsizing2. To expand a firm’s geographic coverage Quickest and best way If geographic overlap, side benefit of reducing cost by

eliminating duplicate facilities

Objectives of Mergers and Acquisitions3. To extend a firm’s business into new

product categories Quicker and more potent way to broaden company’s product line

than going through the exercise of introducing company’s own new product line

4. To gain quick access to new technologiesor competitive capabilities

Favorite among technological companies racing to establish a position in product categories about to be born

Allows companies bypass time consuming and expensive R&D effort5. To invent a new industry and lead the

convergence of industries whose boundariesare blurred by changing technologies andnew market opportunities

Company’s management betting that two or more distinct industries are converging into one and deciding to establish strong position in consolidating market

Merger of AOL and Time Warner – a move predicated on the belief that entertainment content would ultimately converge into one much of which ill be distributed over internet

• Combining operations may result in

– Resistance from rank-and-file employees

– Hard-to-resolve conflicts in management styles and corporate cultures

– Tough problems of integration

– Greater-than-anticipated difficulties in

• Achieving expected cost-savings

• Sharing of expertise

• Achieving enhanced competitive capabilities

Pitfalls of Mergers and Acquisitions

Vertical Integration Strategies• Extend a firm’s competitive scope within

same industry

– Backward into sources of supply

– Forward toward end-users of final product

• Can aim at either full or partial integration

InternallyPerformedActivities, Costs, &Margins

Activities, Costs, &

Margins ofSuppliers

Buyer/UserValue

Chains

Activities, Costs,& Margins of

Forward ChannelAllies &

Strategic Partners

Strategic Advantages of Backward Integration• Generates cost savings only if:(a) The volume needed is big enough to capture the scale

economies of the supplier have (b) the supplier efficiency can be matched or exceeded with no

drop in quality.• The potential to reduce costs exists in situations:a) suppliers have a sizeable profit margin,b) the item being supplied is a major cost component,c) where needed technological skills are easily mastered• Backward integration can produce a differentiation based

competitive advantage when a company by performing activities internally:- ends up with better quality product/service offering - improves the caliber of its customer service- in other ways enhances the performance of its final product

Strategic Advantages of Backward Integration

• On occasions integrating into more stages along industry value chain can add to company’s differentiation capabilities by;- allowing the company to build or strengthen its core competencies- better muster key skills or strategy – critical technologies- add features that deliver greater customer value

• Other potential advantages of backward integration are:- sparing a company of uncertainty of being dependent on suppliers for crucial components or support services- lessening a company’s vulnerability to powerful suppliers inclined to raise prices at every opportunity

Strategic Advantages of Forward Integration• To gain better access to end users

and better market visibility• Independent sales agents, wholesalers, retailers handle

competing brands of the same product, have no allegiance to any one company’s brand and tend to push “what sells” and earns the biggest profit. This results in:

a. Frustrate a company’s effort to boost sales and market shareb. Give rise to costly inventory pileups and frequent under utilization

of capacity If company’s product line is not broad enough to justify stand

alone distributor-ship or retail stores. This leaves the option for selling directly to end users – perhaps by internet, which may:

– Lower distribution costs– Produce a relative cost advantage over rivals– Enable lower selling prices to end users

Strategic Disadvantages of Integration

1. It boosts a firm’s capital investment in the industry, increasing business risk in case industry growth and profits goes sour

2. Fully integrated firms tend to adapt new technologies slower than partially integrated or nonintegrated firms

3. Integrating forward or backward locks a firm relying on its own in-house activities and potentially results in less flexibility in accommodating buyer demand for greater product variety

4. Pose problems in balancing capacity at each stage in in the value chain

5. Often calls for radically different skills and business capabilities6. Backward integration into the production and parts components

can reduce a company’s manufacturing flexibility, lengthening the time it takes to make design and model changes and bring new products to market.

• Whether vertical integration is a viablestrategic option depends on its – Ability to lower cost, build expertise,

increase differentiation, or enhanceperformance of strategy-critical activities

– Impact on investment cost, flexibility, and administrative overhead

– Contribution to enhancing a firm’s competitiveness

Pros and Cons ofIntegration vs. De-Integration

Outsourcing Strategies

Outsourcing involves withdrawing fromcertain value chain activities and relyingon outsiders to supply needed products,support services, or functional activities

Concept

InternallyPerformedActivities

Suppliers

Support Services

Functional Activities

Distributors or Retailers

• Activity can be performed better ormore cheaply by outside specialists

• Activity is not crucial to achieve asustainable competitive advantage

• Risk exposure to changing technology and/orchanging buyer preferences is reduced

• It improves firm’s ability to innovate• Operations are streamlined to

– Improve flexibility– Cut time to get new products into the market

• It increases firm’s ability to assemble diverse kinds of expertise speedily and efficiently

• Firm can concentrate on “core” value chain activities that best suit its resource strengths

When Does OutsourcingMake Strategic Sense?

• Farming out too many or the wrong activities, thus

– Hollowing out capabilities

– Losing touch with activities and expertise that determine overall long-term success

Risk of an Outsourcing Strategy

Offensive and Defensive Strategies

Used to build newor stronger market

position and/or create competitive advantage

Used to protect competitive advantage (rarely lead to creating

advantage)

Offensive Strategies Defensive Strategies

Principles of Offensive Strategies

• Focus relentlessly on

– Building competitive advantage and

– Striving to convert it into decisive advantage

• Employ the element of surprise asopposed to doing what rivals expect

• Apply resources where rivals are least able to defend themselves

• Be impatient with the status quo and display a strong bias for swift, decisive actions to boost a firm’s competitive position vis-à-vis rivals

Types of Offensive Strategy Options

1. Offer an equally good or better product at a lower price

AMD head on competition with Intel offering faster alternative to Intel’s Pentium chips at lower price

2. Leapfrog competitors by being

– First adopter of next-generation technologies or

– First to market with next-generation products

– Microsoft introduction of its next generation Xbox four months ahead of Play station 3

3. Pursue continuous product innovationto draw sales and market share awayfrom less innovative rivals

Types of Offensive Strategy Options

Such offensive works only if a company has potent product innovation skills of its own

Keep its pipeline full of ideas that are consistently well received in the market

4. Adopt and improve on the good ideas of other companies

Ryan air in Europe has succeeded as low-cost airline by imitating Southwest airlines’ operating processes by applying them in different geographic markets

Types of Offensive Strategy Options (con’t)

5. Deliberately attack market segments where a key rival makes big profits

Dell’s entry into printers and printer cartridges into market dominated by HP

6. Attack competitive weaknesses of rivals Go after the customers of those rivals whose products

lag on quality, features or product performance Aggressors with recognized brand names and strong

marketing skills can launch efforts to win customers from rivals with weak brand recognition

Types of Offensive Strategy Options (con’t)

7. Maneuver around competitors andconcentrate on capturing unoccupiedor less contested market territory

Create new market segments by introducing products with different attributes and performance features to better meet the needs of selected buyers

8. Use hit-and-run or guerrilla warfare tactics to grab sales and market share from complacent rivals

Occasional lowballing on price ( to win big order or steal a key account from rival)

Surprising rivals on with sporadic but intense burst of promotional activity ( 20% discount for one week)

Types of Offensive Strategy Options (con’t)

9. Launch a preemptive strike to secure an advantageous position that rivals are prevented from duplicating

Whoever strikes first stands to capture competitive assets that rival can’t readily match

1. Securing the best distributors in a particular geographic region or country

2. Moving to obtain the most favorable site3. Tying up the most reliable, high quality supplier via

exclusive partnership, long-term contracts, or acquisitions

4. Moving swiftly to acquire assets of distressed rivals at bargaining price

Blue Ocean: A Special Kind Of Offensive • A blue ocean strategy seeks to gain a dramatic and durable competitive

advantage by:a) Abandoning efforts to beat out competitors in existing marketsb) Inventing a new industry or distinctive market segment that renders existing

competitors largely irrelevant and allows a company to create and capture altogether new demand

• This strategy views the business universe as consisting of two distinct types of market space

1. Industry boundaries are:- well defined and accepted- competitive rules of the game well understood- companies try to out perform rivals by capturing bigger share of existing demand- lively competition constrains a company’s prospects for rapid growth and superior profitability

2. Industry does not really exist yet- is untainted by competition- offers wide –open opportunity for profitable rapid growth

• Examples : AMC via its pioneering megaplex movie theaters• FedEx in overnight package delivery

Choosing Which Rival to Attack1. Market leaders that are vulnerable• Offensive attack make a good sense when a company that leads in

terms of size and market share is not a leader in terms of serving the market well

• Signs of vulnerability include:- unhappy buyers- an inferior product line- a weak competitive strategy with regard to low cost leadership or differentiation- strong emotional commitment to aging technology the leader has pioneered- outdated plants and machinery- a preoccupation with diversification in other industries

• Offensive to erode position of leaders have real promise when the challenger is able to revamp its value chain or innovate to fresh cost based or differentiation based competitive advantage

• To be successful attacks on leaders don’t have to result in making the aggressor the new leader; a challenger may win by simply becoming a stronger runner up

Choosing Which Rival to Attack

2. Runner up firms with weaknesses in areas where the challenger is strong

Challenger’s resource strength and competitive capabilities are well suited to exploiting their weakness

3. Struggling enterprise that are on the verge of going under

4. Small local and regional firms with limited capabilities

Using Offensive Strategy to Achieve Competitive Advantage

• Strategic offensives offering strongest basis for competitive advantage entail

– An important core competence

– A unique competitive capability

– A better-known brand name

– A cost advantage in manufacturingor distribution

– Technological superiority

– A superior product

Defensive Strategy

• Lessen risk of being attacked

• Blunt impact of any attack that occurs

• Influence challengers to aim attacks at other rivals

• Block avenues open to challengers

• Signal challengers vigorousretaliation is likely

Objectives

Approaches

Block Avenues Open to Challengers

• Participate in alternative technologies

• Introduce new features, add new models, or broaden product line to close gaps rivals may pursue

• Maintain economy-priced models

• Increase warranty coverage

• Offer free training and support services

• Reduce delivery times for spare parts

• Make early announcements about newproducts or price changes

• Challenge quality or safety of rivals’ productsusing legal tactics

• Sign exclusive agreements with distributors

• Publicly announce management’s strong commitment to maintain present market share

• Publicly commit firm to policy ofmatching rivals’ terms or prices

• Maintain war chest of cash reserves

• Make occasional counter-responseto moves of weaker rivals

Signal Challengers Retaliation Is Likely

Web Site Strategies• Strategic Challenge – What use of the Internet

should a company make in staking out its position in the marketplace?

• Five Web site approaches– Use to disseminate only product information – Use as minor distribution channel

to sell direct to customers – Use as one of several important distribution

channels to access customers– Use as primary distribution channel to access buyers– Use as exclusive channel to transact sales with

customers

Product Information –only web Strategies Avoiding channel Conflict

• An attractive market positioning option for manufacturers and wholesalers that have invested heavily in building and cultivating retail dealer network

• Face channel conflict issues if they try to sell on line in direct competition with dealers

• A manufacturer that aggressively pursue online sales to end user is signaling - a weak strategic commitment to its dealers- a willingness to cannibalize dealers’ sales and growth potential

• Such strategy is certain to anger its wholesale distributors and retail dealers who may respond by putting more effort into marketing bands of rival manufacturers that don’t sell on line

• In sum, manufacturer may stand to lose more sales by offending its dealers than it gains from its own online sale

Web Site e-Stores as a Minor Distribution channel• Use on-line sales as minor distribution channel for:

- achieving incremental sales- gaining on-line sales experience- doing marketing research

• If channel conflict posses a big obstacle to on-line sales, or if only a small fraction of buyers can be attracted to make on-line purchases, then company should pursue on line sales with strategic intent of:- gaining experience- learning more about learning buyers taste and preferences- testing reaction to new products- creating more marketing buzz about their products

• Despite the channel conflict that exist when manufacturer sells directly to end user at its website in head to head competition with its channel members, it may still opt to establish online sales as an important distribution channel because:

1. Profit margins from online sales are bigger 2. Encouraging buyers to visit the company’s Web site helps to educate

them to the ease and convenience of purchasing online, and prompt over time more and more buyers to purchase online

3. To make use of build to order manufacturing and assembly

• Approach– Sell directly to consumers and

– Use traditional wholesale/retail channels

• Strategic appeal for wholesalers and retailers– Economic means of expanding a company’s economic

reach

– Provide both existing and potential customers another choice of how to• Communicate with a company

• Shop for product information

• Make purchases

• Resolve customer service problems

Brick-and-Click Strategies:An Appealing Middle Ground Approach

Choosing Appropriate Functional-Area Strategies

• Involves strategic choices about how functional areas are managed to support competitive strategy and other strategic moves

• The nature of functional strategies is dictated by the choice of competitive strategy

• Low cost provider strategy needs:- R&D and product design strategy that emphasizes cheap-to-incorporate features and facilitates economical assembly- production strategy that stresses capture of scale economies, high labor productivity, efficient supply chain management, automated production processes- low budget marketing strategy

• High end differentiation strategy requires:- production strategy geared to top-notch quality- marketing strategy aimed at touting differentiating features and using advertising and a trusted brand name to pull sales through distribution channels

• When to make a strategic move is often as crucial as what move to make

• First-mover advantages arise when

– Pioneering helps build firm’s image and reputation

– Early commitments to new technologies,new-style components, and distributionchannels can produce cost advantage

– Loyalty of first time buyers is high

– Moving first can be a preemptive strike

First-Mover Advantages

First-Mover Advantages

• Sustaining advantages of being first-mover:

1. Needs to be fast learner

2. Continue to move aggressively to capitalize on any initial pioneering advantage

3. Helps immensely if first mover has financial pockets

4. Has competencies and competitive capabilities and astute managers

First-Mover Disadvantages• Moving early can be a disadvantage (or fail to produce

an advantage) when

– When costs of pioneering are more than being an imitative follower and only negligible learning/experience curve benefits accrue to the leader

– Innovator’s products are primitive, not living up to buyer expectations

– Demand side of the market is skeptical about the benefits of new technology/product of a first-mover

– Rapid technological change allows followers to leapfrog pioneers

To be a First Mover or Not• It matters whether the race to market leadership in a

particular industry is a sprint or marathon• In 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 up

• The 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 opportunity

• The 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 Not• The inflection point can come early on a fast rising curve or further

up on a slow rising curve• A 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 costs Are there influential competitors in position to delay or derail the

efforts of a first mover• When 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 opportunity

• The race is going to e a 10-year marathon than a 2–year sprint