Supplementing the Chosen Competitive Supplementing the Chosen Competitive Strategy: Other Important Business Strategy Strategy: Other Important Business Strategy

ChoicesChoices

Chapter 6Chapter 6

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

A Company’s Menu of Strategy Options

Strategic Alliances and Partnerships

Strategic 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

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 products

What Factors Make an Alliance Strategic?

It is critical to a company’s 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 importantmarket opportunities

It mitigates a significant riskto a company’s business

Why Are Strategic Alliances Formed?

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 inproduction and/or marketing

To acquire or improve marketaccess via joint marketing agreements

Alliances Can Enhance aFirm’s Competitiveness

• Alliances and partnerships can help companies cope with two demanding competitive challenges

– Racing against rivals to build a market presence in many different national markets

– Racing against rivals to seize opportunities on the frontiers of advancing technology

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

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 Benefitsof Strategic Alliances

• Benefits from forming partnerships are a function of– Picking 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

Why Alliances Fail

Ability of an alliance to endure depends on How well partners work together Success of partners in responding

and adapting to changing conditions Willingness of partners to

renegotiate the bargain 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 and Acquisition Strategies

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 ofanother, 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

Objectives of Mergers and Acquisitions

To create a more cost-efficient operation

To expand a firm’s geographic coverage

To extend a firm’s business into newproduct categories or international markets

To gain quick access to new technologiesor competitive capabilities

To invent a new industry and leadthe convergence of industries whose boundaries are blurred by changing technologies and new market opportunities (Merger of AOL and Time Warner )

Pitfalls of Mergers and Acquisitions

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

Vertical Integration Strategies

Extend a firm’s competitive scope withinsame 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/UserValueChains

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 Advantagesof Forward Integration

To gain better access to endusers and better market visibility

To compensate for undependable distribution channels which undermine steady operations

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

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

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

Strategic Disadvantagesof Vertical Integration

• Boosts resource requirements• Locks firm deeper into same industry• Results in fixed sources of supply and

less flexibility in accommodating buyerdemands for product variety

• Poses all types ofcapacity-matching problems

• May require radically differentskills / capabilities

• Reduces flexibility to make changes in component parts which may lengthen design time and ability to introduce new products

Pros and Cons ofIntegration vs. De-Integration

• 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

Outsourcing Strategies

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

Concept

InternallyPerformedActivitiesSuppliers

Support Services

Functional Activities

Distributors or Retailers

When Does Outsourcing an ActivityMake Strategic Sense?

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/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

The Big Risk of Outsourcing

Farming out too many or the wrong activities, thus

Hollowing out capabilities

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

Matching Strategy toa Company’s Situation

Most important drivers shaping a firm’s strategic options fall

into two categories

Firm’s internal resource strengths and weaknesses

Nature of industry and competitive conditions

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Matching a Company’s Strategyto Different Market Conditions

Fragmented MarketsFragmented Markets

Turbulent MarketsTurbulent Markets

Freshly Emerging Markets Freshly Emerging Markets

Rapidly Growing MarketsRapidly Growing Markets

Mature, Slow-Growth Mature, Slow-Growth MarketsMarkets

Stagnant or Declining Stagnant or Declining MarketsMarkets

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Features of an Emerging Industry

New and unproven market Proprietary technology Lack of consensus regarding which of

several competing technologies will win out Low entry barriers Experience curve effects may permit

cost reductions as volume builds Buyers are first-time users and marketing involves inducing

initial purchase and overcoming customer concerns First-generation products are expected to be rapidly improved

so buyers delay purchase until technology matures Possible difficulties in securing raw materials Firms struggle to fund R&D, operations and build resource

capabilities for rapid growth

Strategy Options for Competing in Emerging Industries

Win early race for industry leadership by employing a bold, creative strategy

Push hard to perfect technology,improve product quality, and developattractive performance features

Consider merging with oracquiring another firm to

Gain 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 with Companies having related technological expertise or Key suppliers

Strategy Options for Competing in Emerging Industries (continued)

Pursue new customers and user applications

Enter new geographical areas

Make it easy and cheap forfirst-time buyers to try product

Focus advertising emphasis on Increasing frequency of use

Creating brand loyalty

Use price cuts to attract price-sensitive buyers

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

A company needs a strategypredicated on growing faster than

the market average so it Can boost its market share and Improve its competitive standing vis-à-vis

rivals

Strategy Options for Competing in 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 company’s product offering apart from rivals Incorporate attributes to appeal to

growing numbers of customers

Gain access to additional distributionchannels and sales outlets

Expand a company’s geographic coverage Expand product line to add models/styles to appeal to a

wider range of buyers

Industry Maturity: The Standout Features

Slowing demand breeds stiffer competition More sophisticated buyers demand bargains Greater emphasis on cost and service “Topping out” problem in adding

production capacity Product innovation and new

end uses harder to come by International competition increases Industry profitability falls Mergers and acquisitions reduce

number of rivals

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 flexiblecompetitive capabilities

Strategic Pitfalls in a Maturing Industry

Employing a ho-hum strategy with no distinctive features thus leaving firm “stuck in the middle”

Being slow to mount a defense against stiffening competitive pressures

Concentrating on short-term profits rather than strengthening long-term competitiveness

Being slow to respond to price-cutting Having too much excess capacity Overspending on marketing efforts Failing to aggressively

Invest in product / process innovations Pursue cost reductions

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 industry members for the available business

Strategy Options for Competingin a Stagnant or Declining Industry

Pursue focus strategy aimed atfastest growing market segments

Stress differentiation based on qualityimprovement 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 facilities Add more distribution channels Close low-volume, high-cost distribution outlets Prune marginal products

End-Game Strategiesfor Declining Industries

An end-game strategy can take either of two paths

Slow-exit strategy involving

Gradual phasing down of operations

Getting the most cash flow from the business

Fast-exit strategy involving

Disengaging from an industryduring early stages of decline

Quick recovery of as much of acompany’s investment as possible

Features of Turbulent Markets

Rapid-fire technological change

Short product life-cycles

Entry of important new rivals

Frequent launches ofnew competitive moves

Rapidly evolvingcustomer expectations

Ways to cope with Rapid Change• A company can assume any of the three strategic

postures1. It can react to change

- respond to rival’s new product with a better product- respond to unexpected changes in buyers needs and preferences- shift it advertising emphasis to different product attributes

• Reacting is defensive strategy it is unlikely create fresh opportunity, but is nonetheless a necessary component in company’s arsenal of options

Ways to cope with Rapid Change2. It can anticipate change

- anticipating looking ahead to analyze what is likely to occur and then preparing and positioning for future- studying buyer’s behavior, buyer’s needs, buyer’s expectations to get insight of market will evolve

• Anticipating change is fundamentally defensive in that forces outside the enterprise are in driving seat

• Anticipating change can open up new opportunities and a better way to manage change than just pure reaction

Ways to cope with Rapid Change3. It can lead change• Entails initiating the market and competitive forces that

others must respond• It is an offensive strategy aimed at putting the company in the

drivers seat. It means:- being the first to market a new product or service- it means being the technological leader- rushing next generation products to market ahead of rivals- having products whose features and attributes shape customer preferences and expectation

• Company’s approach to manage should ideally incorporate all three postures

• The best performing companies in high velocity markets consistently seek to lead change with proactive strategies that entail the flexibility to pursue several strategic options, depending on how the market actually evolves

Fig. 8.1: Meeting the Challenge of High-Velocity Change

Strategy Options for Competingin High-Velocity Markets

1. Invest aggressively in R&D• Where technology is the primary driver of change translating

technological advances into innovative new products is necessary• It is desirable to focus the R&D efforts to critical areas as it:

- avoids stretching the company resources too thin- deepens the firm’s expertise, master the technology- fully capture experience/ learning curve effects- become dominant leader in particular technology or product category

• A fast evolving market environment entails many technological areas and product categories

• Competitors have to employ some type of focus strategy and concentrate on being the leader in a particular product/ technology category

Strategy Options for Competingin High-Velocity Markets

2. Keep the company’s products and services fresh and exciting to stand out in the midst of all change that is taking place

• One risk of rapid change is that products and even companies are lost in the shuffle- keep the firms products and services in the limelight- keep them innovative and well matched to the changes that are occurring in the market place

3. Develop quick response capabilities – Shift resources– Adapt competencies– Create new competitive capabilities– Speed new products to market

Strategy Options for Competingin High-Velocity Markets

4. Rely on strategic partnership with outside suppliers and companies making tie-in products

• In high velocity industries technology branches off to create many new technologies and product categories

• No company has the resources and competencies to pursue them all• Desirable strategies are:

- Specialization to promote necessary technical depth- focus to preserve organizational agility and leverage firm’s expertise

• Companies build their competitive position by:- strengthening their own internal resource base- partnering with those suppliers making state of the art parts and components by collaborating closely with both the developers of related technologies and makers of the tie-in- product

• An outsourcing strategy allows the company the flexibility to replace suppliers: - those fall behind on technology or product feature- those that cease to be competitive on price

Strategy Options for Competingin High-Velocity Markets5. Initiate fresh actions every few months, not just when a competitive

response is needed• Change is partly triggered by passage of time rather than solely by the

occurrence of events• A company can be proactive by making time based moves

- introducing a new improved product every four months rather than when the market tapers off or a rival introduces next generation model- a company can expand into new geographic market every six months rather than waiting for new market opportunity present itself- can refresh existing brands every two years rather than waiting until their popularity wanes

• The keys to successfully using time pacing as strategic weapons are:- choosing intervals that make sense internally and externally- establishing an internal organizational rhythm for change- choreographing the transitions

• 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

Examples of Fragmented Industries

Book publishingLandscaping and plant nurseries

Auto repairRestaurant industryPublic accountingWomen’s dresses

Meat packingPaperboard boxesHotels and motels

Furniture

Competitive Featuresof a Fragmented Industry

Absence of market leaders with large market shares or widespread buyer recognition

Product/service is delivered to neighborhoodlocations to be convenient to local residents

Buyer demand is so diverse that manyfirms are required to satisfy buyer needs

Low entry barriers Absence of scale economies Market for industry’s 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 command a large market share

Competing in a Fragmented Industry: The Strategy Options

1. Construct and operate “formula” facilities• The strategic approach frequently employed in restaurant and

retailing industry• It involves constructing a standardized outlets in favorable locations

and then operating them cost effectively2. Become a low-cost operator• When price competition is intense and profit margins are under constant

pressure, companies can stress no frills operations featuring:- low overhead- high productivity/ low-cost labor- lean capital budget- dedicated pursuit of total labor operating efficiency

• Successful low cost producers in in fragmented industry can play price discounting game and earn profits above the industry average

Competing in a Fragmented Industry: The Strategy Options

3. Specialize by product type• When fragmented industry’s products include a range of styles or

services- furniture industry- auto repair

4. Specialize by customer type• A firm can stake out a market niche by catering to customers:

- interested in low prices- unique product attributes- customized features

5. Focus on limited geographic area• Concentrating company efforts on a limited territory can produce:

- greater operating efficiency- speed delivery and customer service- promote strong brand awareness- permit saturation advertisement

First-Mover Advantages

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

What Is a Blue Ocean Strategy?

Seeks to gain a dramatic, durablecompetitive advantage by

Abandoning efforts to beat outcompetitors in existing markets and

Inventing a new industry or distinctivemarket segment to render existingcompetitors largely irrelevant and

Allowing a company to create andcapture altogether new 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 to outperform rivals by capturing a bigger share of existing demand

Blue Ocean Market Space

Industry does not exist yet

Industry is untaintedby competition

Industry offers wide-open opportunities if a firm has a product and strategy allowing it to

Create new demand and

Avoid fighting over existing demand

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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

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