McGraw-Hill/Irwin Copyright © 2011 The McGraw-Hill Companies, All Rights Reserved.

CHAPTER 6CHAPTER 6

Supplementing the Chosen Competitive

Strategy—Other Important Business Strategy Choices

6-2

Business Strategy Choices to Business Strategy Choices to Complement the Company’s Complement the Company’s Competitive ApproachCompetitive Approach

Strategy considerations in rounding out the company’s overall business strategy includeWhether to enter into strategic alliances or

partnerships

Whether to pursue mergers or acquisitions

Whether to integrate backward or forward into more stages of the industry value chain

6-3

Business Strategy Choices to Business Strategy Choices to Complement the Company’s Complement the Company’s Competitive ApproachCompetitive Approach

Whether to outsource certain value chain activities

Whether and when to initiate offensive strategies to improve the company’s market position

Whether and when to employ defensive strategies to protect the company’s market position

Choosing when to undertake strategic moves—whether to be a first-mover, fast follower or a late-mover

6-4

Strategic Alliances and Strategic Alliances and Collaborative PartnershipsCollaborative Partnerships

Strategic Alliance - formal collaborative arrangements where two or more companies join forces to achieve mutually beneficial strategic outcomes

Strategically relevant collaboration

joint contribution of resources

shared risk

shared control

mutual dependence

6-5

Strategic Alliances and Strategic Alliances and Collaborative PartnershipsCollaborative Partnerships

The strategic attractiveness of alliances and collaborative partnerships

Allowing companies to

bundle resources and

competencies that are

more valuable in a joint

effort than when kept

separate

6-6

Reasons Companies Enter Into Reasons Companies Enter Into Strategic AlliancesStrategic Alliances

Expedite the development of new technologies or products

Overcome deficits in technical or manufacturing expertise

To create new skill sets and capabilities by bringing together personnel of each partner

To improve supply chain efficiency

To gain economies of scale inproduction and/or marketing

To acquire or improve market accessvia joint marketing agreements

6-7

Failed Strategic Alliances and Failed Strategic Alliances and Cooperative PartnershipsCooperative Partnerships

Common reasons why as many as 60 percent to 70 percent of alliances fail each year Diverging objectives and priorities

Inability to work well together

Changing conditions that make the purpose of the alliance obsolete

Emergence of more attractive technological paths

Increased marketplace “rivalry” between one or more allies

6-8

The Strategic Dangers Of Relying The Strategic Dangers Of Relying On Alliances For Essential On Alliances For Essential Resources And CapabilitiesResources And Capabilities

The Achilles’ heel of alliances and cooperative partnerships is becoming dependent on other companies for essential expertise and capabilities

A company must ultimately have strategic control of critical resources and capabilities to protect competitiveness and build competitive advantage

6-9

Merger and Acquisition StrategiesMerger and Acquisition Strategies

An attractive strategic option for achieving operating economies, strengthening competencies, and opening avenues to new market opportunities

Merger -- the combining of two or more companies into a single entity, with the newly created company often taking on a new name

Acquisition -- is a combination in which one company, the acquirer, purchases and absorbs the operations of another, the acquired

6-10

Typical Objectives of Mergers and Typical Objectives of Mergers and AcquisitionsAcquisitions

Creating a more cost-efficient operation out of the combined companies

Expanding a company’s geographic coverage

Extending the company’s business into new product categories

Gaining quick access to new technologies or other resources and competitive capabilities

Leading the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunities

6-11

Why Mergers And Acquisitions Why Mergers And Acquisitions Sometimes Fail To Produce Anticipated Sometimes Fail To Produce Anticipated ResultsResults

Cost savings are smaller than expected

Gains in competitive capabilities take much longer to realize or may never materialize

Efforts to mesh the corporate cultures can stall because of resistance from organization members

Managers and employees at the acquired may continue to do things as they were done prior to the acquisition

Key employees of the acquired company may leave

6-12

Vertical Integration: Operating Vertical Integration: Operating Across More Industry Value Chain Across More Industry Value Chain SegmentsSegments

Extend a firm’s competitive scope within the same industry

Backward into sources of supply

Forward toward end-users of final product

Can aim at either full or partial integration

6-13

Potential Advantages of a Vertical Potential Advantages of a Vertical Integration StrategyIntegration Strategy

The two best reasons for vertically integrating into more value chain segments

Strengthen the firm’s competitive position

Boost profitability

6-14

Integrating Backward To Achieve Integrating Backward To Achieve Greater CompetitivenessGreater Competitiveness

For backward integration to boost profitability a company must be able to

Achieve the same scale economies as outside suppliers, and

Match or beat suppliers’ production efficiency with no drop-off in quality

6-15

When Backward Vertical Integration When Backward Vertical Integration Becomes a ConsiderationBecomes a Consideration

Potential situations that create opportunities for cost reduction through backward vertical integration

When suppliers have large profit margins

Where the item being supplied is a major cost component

Where the requisite technological skills are easily mastered or acquired

When powerful suppliers are inclined to raise prices at every opportunity

6-16

Integrating Forward To Enhance Integrating Forward To Enhance CompetitivenessCompetitiveness

Gain better access to end users

Improve market visibility

Include the purchasing experience as a differentiating feature

6-17

Forward Vertical Integration and Forward Vertical Integration and Internet RetailingInternet Retailing

Direct selling and Internet retailing has appeal when there is potential to lower distribution costs, gain a cost advantage over rivals, produce higher margins, or allow for lower prices charged to end users

However, competing against directly against distribution allies can create channel conflict and signal a weak commitment to dealers

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Disadvantages of a Vertical Disadvantages of a Vertical Integration StrategyIntegration Strategy

Boosts capital investment in the industry

Increases business risk if industry growth and profits sour

May slow technological advances if the vertically integrated company is saddled with older technology

Poses all types of capacity-matching problems

May require radically different skills and business capabilities

6-19

Outsourcing Strategies: Narrowing Outsourcing Strategies: Narrowing the Boundaries of the Businessthe Boundaries of the Business

Outsourcing is a consideration when

Activity can be performed better ormore cheaply by outside specialists

Activity is not crucial to achieve asustainable competitive advantage

It improves firm’s ability to innovate

Firm can concentrate on core value chain activities and leverage its resource strengths

6-20

Outsourcing Strategies: Narrowing Outsourcing Strategies: Narrowing the Boundaries of the Businessthe Boundaries of the Business

The big risk of outsourcing

Farming out the wrong types of activities

Hollowing out strategically-important capabilities ultimately damages competitiveness and long-term success in the marketplace

6-21

Strategic Options to Improve a Strategic Options to Improve a Company’s Market Position—The Company’s Market Position—The Use of Strategic OffensivesUse of Strategic Offensives

Strategic offensives are called for when a company

Spots opportunities to gain profitable market share at the expense of rivals or

Has no choice but to try to whittle away at a strong rival’s competitive advantage

The best offensives use resource strengths to attack rivals where they are weak

6-22

Choosing the Basis for Competitive Choosing the Basis for Competitive Attack Attack

Primary offensive strategy options Attack the competitive weaknesses of rivals

Offer a lower price for an equally good or better product

Pursue continuous product innovation

Leapfrog competitors by being the first to market with next generation technology or products

6-23

Choosing the Basis for Competitive Choosing the Basis for Competitive AttackAttack

Adopt and improve on good ideas of other companies

Attack market segments where a key rival make big profits

Maneuver around competitors to capture unoccupied or less contested market territory

Using hit-and-run or guerilla warfare tactics to grab sales and market share from complacent or distracted rivals

6-24

Choosing the Basis for Competitive Choosing the Basis for Competitive AttackAttack

Capture a rare opportunity or secure an industry’s limited resources

Secure the best distributors in a particular geographic region or country

Secure the most favorable retail locations

Tie up the most reliable, high-quality suppliers via exclusive partnerships, long-term contracts, or even acquisition

6-25

Blue Ocean Strategy—A Special Blue Ocean Strategy—A Special Kind of Offensive Kind of Offensive

Blue ocean strategies offer growth in revenues and profits by discovering or inventing new industry segments that create altogether new demand

Cirque du Soleil has attracted 10 million people annually to its shows by “reinventing the circus” - its audience typically doesn’t attend circus events

6-26

Strategic Options to Protect a Strategic Options to Protect a Company’s Market Position—The Company’s Market Position—The Use of Defensive StrategiesUse of Defensive Strategies

Defensive strategies help fortify a competitive position

Lower the risk of being attacked

Weaken the impact of any attack that occurs

Influence challengers to aim their efforts at other rivals

Good defensive strategies help protect competitive advantage but rarely are the basis for creating it

6-27

Blocking the Avenues Open to Blocking the Avenues Open to ChallengersChallengers

Introduce new features

Add new models

Broaden product line to fill vacant niches

Maintain economy-priced models

Make early announcements about upcoming new products or planned price changes

Grant volume discounts or better financing terms to dealers and distributors to discourage them from experimenting with other suppliers

6-28

Signaling Challengers That Signaling Challengers That Retaliation Is LikelyRetaliation Is Likely

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

6-29

Timing A Company’s Strategic Timing A Company’s Strategic MovesMoves

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

First-mover advantages arise when

Pioneering helps build a firm’s image and reputation with buyers

Early commitments produce an absolute cost advantage over rivals

First-time customers remain strongly loyal in making repeat purchases

Constitutes a preemptive strike, making imitation extra hard or unlikely

6-30

Late-Mover Advantages and First-Late-Mover Advantages and First-Mover DisadvantagesMover Disadvantages

Moving early can be a disadvantage (or fail to produce an advantage) when

When pioneering leadership is more costly than imitation

When innovators’ products are primitive, not living up to buyer expectations

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

When rapid technological change allows followers to leapfrog pioneers

6-31

Deciding Whether to Be an Early Deciding Whether to Be an Early Mover or Late MoverMover or Late Mover

Key issue – Is the race to market leadership in an industry a marathon or a sprint?

Seeking a competitive advantage by being a first-mover involves addressing several questions Does market takeoff depend on development of

complementary products or services not currently available?

Is new infrastructure required before buyer demand can surge?

Will buyers need to learn new skills or adopt new behaviors?

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