supplemeting the chosen competitve strategy

7/29/2019 supplemeting the chosen competitve strategy

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McGraw-Hill/Irwin Copyright 201 0 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 6: Supplementing the

Chosen Competitive Strategy: Other

Important Business Strategy Choices

Screen graphics created by:Jana F. Kuzmicki, Ph.D.

Troy University

6-2

Chapter Learning Objectives

1. Gain an understanding of how strategic alliances andcollaborative partnerships can bolster a companys

competitive capabilities and resource strengths.

2. Become aware of the strategic benefits of mergers andacquisitions.

3. Understand when a company should consider using avertical integration strategy to extend its operations to

more stages of the overall industry value chain.

4. Understand the conditions that favor farming out certainvalue chain activities to vendors and strategic allies.

5. Recognize how and why different types of marketsituations shape business strategy choi ces.

6. Understand when being a first-mover or a fast-follower ora late-mover can lead to competitive advantage.

6-3

Chapter Roadmap

Strategic Alliances and Partnerships

Merger and Acquisition Strategies

Vertical Integration Strategies: Operating

Across More Stages of the Industry Value

Chain

Outsourcing Strategies: Narrowing the

Boundaries of the Business

Business Strategy Choices for Specific

Market Situations

Timing Strategic Moves To be an Early

Mover of a Late

6-4

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.

Strategic Alliances and Partnerships

6-5

Characteristics of a Strategic Alliance

Strategic alliance A formal agreementbetween

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 orproducts

6-6

What Factors Make an Alliance Strategic?

It is critical to a companys achievement of

an important objective

It helps build, sustain, or enhance a core

competence or competitive advantage

It helps block a competitive threat

It helps open up important

market opportunities

It mitigates a significant risk

to a companys business


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To collaborate on technology development

or new product development To fill gaps in technical or manufacturing

expertise

To create new skill sets and capabilities

To improve supply chain efficiency

To gain economies of scale in

production and/or marketing

To acquire or improve market

access via joint marketing agreements

Why Are Strategic Alliances Formed?

6-8

Alliances Can Enhance aFirms Competitiveness

Alliances and partnerships can help companiescope with two demanding competitivechallenges

Racing against rivals to build amarket presence in many

different national markets

Racing against rivals to seize

opportunities on the frontiers

of advancing technology

Collaborative arrangements can help acompany loweritscosts and/orgain access

to needed expertise and capabilities

6-9

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 firms capabilities with resources of

partners

Potential Benefits of Alliances toAchieve Global and Industry Leadership

6-10

Capturing the Benefitsof Strategic Alliances

Benefits from forming partnerships are a

function ofPicking a good partner

Being sensitive to cultural differences

Recognizing an alliance

must benefit both parties

Ensuring both parties live

up to their commitments

Structuring the decision-making process

so actions can be taken swiftly when needed

Managing the learning process and then

adjusting the alliance agreement over time to fit

new circumstances

6-11

Why Alliances Fail

Abilityof an alliance to enduredepends on

How well partners work together

Success of partners in respondingand adapting to changing conditions

Willingness of partners torenegotiate the bargain

Reasons foralliance 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

6-12

Merger Combination and pooling of equals,with newly created firm often taking on a newname

Acquisition One f irm, the acquirer,purchases and absorbs operations of

another, the acquired Merger-acquisition strategy

Much-used strategic option

Especially suited for situations where alliances do

not provide a firm with needed capabilities or cost-

reducing opportunities

Ownership allows for tightly integrated operations,

creating more control and autonomy than alliances

Merger and Acquisition Strategies


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6-13

To create a more cost-efficient operation

To expand a firms geographic coverage

To extend a firms business into new

product categories or international markets

To gain quick access to new technologies

or competitive capabilities

To invent a new industry and lead

the convergence of industries whose

boundaries are blurred by changing

technologies and new market opportunities

Objectives of Mergers and Acquisitions

6-14

Combining operations may result in

Resistance from rank-and-file employees

Hard-to-resolve conflicts in managementstyles 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

6-15

Vertical Integration Strategies

Extenda firms competitive scope within

same industry

Backward into sources of supply

Forwardtoward end-users of final product

Can aim at either fullorpartial integration

Internally

PerformedActivities,

Costs, &

Margins

Activities,

Costs, &Margins of

Suppliers

Buyer/User

ValueChains

Activities, Costs,& Margins of

Forward ChannelAllies &

Strategic Partners

6-16

Strategic Advantagesof Backward Integration

Generates cost savings only if

volume needed is big enoughto capture efficiencies of suppliers

Potential to reduce costs exists when

Suppliers have sizable profit margins

Item supplied is a major cost component

Resource requirements are easily met

Can produce a differentiation-based competitiveadvantage when it results in a better quality part

Reduces risk of depending on suppliers of

crucial raw materials / parts / components

6-17

Strategic Advantagesof Forward Integration

To gain better access to end

users and better market visibility

To compensate for undependable distributionchannels which undermine steady operations

To offset the lack of a broad product line, a firmmay sell directly to end users

To bypass regular distribution channels in favorof direct sales and Internet retailing which may

Lower distribution costs

Produce a relative cost advantage over rivals

Enable lower selling prices to end users

6-18

Strategic Disadvantagesof Vertical Integration

Boosts resource requirements

Locks firm deeper into same industry

Results in fixed sources of supply andless flexibility in accommodating buyerdemands for product variety

Poses all types ofcapacity-matching problems

May require radically differentskills / capabilities

Reduces flexibility to make changes incomponent parts which may lengthen designtime and ability to introduce new products


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Outsourcing Strategies

Outsourcing involves having outsiders

perform certain value chain activities rather

than performing them internally

Internally

PerformedActivities

Contract

Manufacturers

Vendors with

specialized

expertise

Distributors

or Retailers

Concept

6-20

Activity can be performed better or more cheaply by

outside specialists

Activity is not crucial to achieve a sustainable

competitive advantage

Risk exposure to changing technology and/or

changing buyer preferences is reduced

It improves firms ability to innovate

Operations are streamlined to

Improve flexibility

Cut time to get new products into the market

It increases firms ability to assemble diverse kinds

of expertise speedily and efficiently

Firm can concentrate on core value chain activitiesthat best suit its resource strengths

When Does Outsourcing an ActivityMake Strategic Sense?

6-21

Farmingout too manyor the wrongactivities, thus

Hollowing outcapabilities

Losing touch with activities and expertise

that determine overall long-term success

The Big Risk of Outsourcing

Matching Strategy toa Companys Situation

Most important

drivers shaping a

firms strategic

options fall into

two categoriesFirms internal

resource strengths

and weaknesses

Nature of industry

and competitive

conditions

6-22

Matching a Companys Strategyto Different Market Conditions

Fragmented

Markets

Turbulent

Markets

Freshly

Emerging

Markets

Rapidly

Growing

Markets

Mature, Slow-

Growth

Markets

Stagnant or

Declining

Markets6-23

6-24

New and unproven market

Proprietary technology

Lack of consensus regarding which ofseveral competing technologies will win out

Low entry barriers

Experience curve effects may permitcost reductions as volume builds

Buyers are first-time users and marketing involvesinducing initial purchase and overcoming customerconcerns

First-generation products are expected to be rapidlyimproved so buyers delay purchase until technologymatures

Possible difficulties in securing raw materials

Firms struggle to fund R&D, operations and buildresource capabilities for rapid growth

Features of an Emerging Industry


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Strategy Options for Competingin Emerging Industries

Win early race for industry leadership by employinga bold, creative strategy

Push hard to perfect technology,

improveproduct quality, and develop

attractiveperformance features

Considermergingwith or

acquiring another firm toGain added expertise

Pool resource strengths

When technological uncertainty clears and a

dominant technology emerges,try to capture any

first-mover advantages by moving quickly

Form strategic alliances withCompanies having related technological expertise or

Key suppliers

6-26

Strategy Options for Competingin Emerging Industries (continued)

Pursuenew customers and user

applications

Enternew geographical areas

Make it easyand cheap for

first-time buyers to try product

Focus advertisingemphasis on

Increasing frequency of use

Creating brand loyalty

Useprice cuts to attract price-sensitive

buyers

6-27

What Is the Key to Success forCompeting in Rapidly Growing Markets?

A company needs a strategy

predicatedon growing fasterthan

the market average so it

Can boost its market share and

Improve its competitive standing vis--

vis rivals

6-28

Strategy Options for Competingin Rapidly Growing Markets

Drive down costs per unit to enable price

reductions that attract droves of new customers Pursue rapid product innovation to

Set a companys product offering apart from rivals

Incorporate attributes to appeal to

growing numbers of customers

Gain access to additional distribution

channels and sales outlets

Expand a companys geographic coverage

Expand product line to add models/styles toappeal to a wider range of buyers

6-29

Slowing demand breeds stiffer competition

More sophisticated buyers demand bargains

Greater emphasis on cost and service

Topping out problem in addingproduction capacity

Product innovation and new

end uses harder to come by

International competition increases

Industry profitability falls

Mergers and acquisitions reduce

number of rivals

Industry Maturity: The Standout Features

6-30

Strategy Options forCompeting in a Mature Industry

Prune marginal products and models

Emphasize innovation in the value chain

Strong focus on cost reduction

Increase sales to present customers

Purchase rivals at bargain prices

Expand internationally

Build new, more flexible

competitive capabilities


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Strategic Pitfalls in a Maturing Industry

Employing a ho-hum strategywith no distinctive

features thus leaving firm stuck in the middle Being slowto mountadefense againststiffening

competitive pressures

Concentratingon short-term profits rather than

strengthening long-term competitiveness

Being slowto respondtoprice-cutting

Having too much excess capacity

Overspending on marketing efforts

Failingto aggressively

Invest inproduct / process innovations

Pursue cost reductions

6-32

Stagnant or Declining Industries:The Standout Features

Demand grows more slowly than economy

as a whole (or even declines)

Advancing technology gives rise to better-

performing substitute products or lower

costs

Customer group shrinks

Changing lifestyles and buyer tastes

Rising costs of complementary products

Competitive battle ensues among industrymembers for the available business

6-33

Pursue focus strategyaimed at

fastest growing market segments

Stress differentiation based on quality

improvement or product innovation

Work diligently to drive costs down

Cut marginal activities from value chain Use outsourcing

Redesign internal processes

to exploit e-commerce

Consolidate under-utilized production facili ties

Add more distribution channels

Close low-volume, high-cost distribution outlets

Prune marginal products

Strategy Options for Competingin a Stagnant or Declining Industry

6-34

End-Game Strategiesfor Declining Industries

An end-game strategycan take either of

two paths

Slow-exit strategy involving

Gradual phasing down of operations

Getting the most cash flow from the business

Fast-exitstrategy involving

Disengaging from an industry

during early stages of decline

Quick recovery of as much of a

companys investment as possible

6-35

Features of Turbulent Markets

Rapid-fire technological change

Short product life-cycles

Entry of important new rivals

Frequent launches of

new competitive moves

Rapidly evolving

customer expectations

6-36

Investaggressively in R&D

Keepproducts/services fresh and

exciting

Develop quick response capabilities

Shift resources

Adapt competencies

Create new competitive capabilities

Speed new products to market

Use strategic partnerships to develop

specialized expertise and capabilities

Initiate fresh actions every few months

Strategy Options for Competingin High-Velocity Markets


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Cutting-edge expertise

Speed in responding to new developments

Collaboration with others

Agility

Innovativeness

Opportunism

Resource flexibility

First-to-market capabilities

Keys to Success in Competingin High Velocity Markets

6-38

Competitive Featuresof a Fragmented Industry

Absence of market leaders with large market shares or

widespread buyer recognition

Product/service is delivered to neighborhood

locations to be convenient to local residents

Buyer demand is so diverse that many

firms are required to satisfy buyer needs

Low entry barriers

Absence of scale economies

Market for industrys product/service may be globalizing,

thus putting many companies across the world in same

market arena

Exploding technologies force firms to specialize just to

keep up in their area of expertise

Industry is young and crowded with aspiring contenders,

with no firm having yet developed recognition to commanda large market share

6-39

Competing in a Fragmented Industry:The Strategy Options

Construct and operate formula facilities

Become a low-costoperator

Specialize byproducttype

Specialize by customertype

Focus on limited geographicarea

6-40

When to make a strategic move is often as

crucial as whatmove to make

First-mover advantages arise when

Pioneering helps build firms image and

reputation

Early commitments to new technologies,

new-style components, and distribution

channels can produce cost advantage

Loyalty of first time buyers is high

Moving first can be a preemptive strike

First-Mover Advantages

6-41

What Is a Blue Ocean Strategy?

Seeks to gain a dramatic, durable

competitive advantage by

Abandoning efforts to beat out

competitors in existing markets and

Inventing a new industryordistinctive

market segmentto render existingcompetitors largely irrelevant and

Allowing a company to create and

capture altogethernew demand

What Is Different About a Blue Ocean?

Typical Market Space

Industry boundaries are

defined and accepted

Competitive rules are well

understood by all rivals

Companies try tooutperform rivals by

capturing a bigger share of

existing demand

Blue Ocean Market Space

Industry does not exist yet

Industry is untainted

by competition

Industry offers wide-openopportunities if a firm has a

product and strategy

allowing it to

Create new demand and

Avoid fighting over existing

demand

6-42


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First-Mover Disadvantages

Moving earlycan 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

Innovators 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

6-44

To Be a First-Mover or Not?

Key issue Is the race to market leadership inan industry a marathon or a sprint?

Seeking a competitive advantage by being afirst-moverinvolves addressing severalquestions Does market takeoff depend on development of

complementary products or services not currentlyavailable?

Is new infrastructure requiredbefore buyer demand can surge?

Will buyers need to learn newskills or adopt new behaviors?

Will buyers encounter high switching costs?

Are there influential competitors in a positionto delay or derail the efforts of a first-mover?

supplemeting the chosen competitve strategy

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