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SUPPLEMENTING SUPPLEMENTING THE CHOSEN THE CHOSEN COMPETITIVE COMPETITIVE STRATEGY—STRATEGY—OTHER IMPORTANT OTHER IMPORTANT STRATEGY CHOICESSTRATEGY CHOICES

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

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Choosing Strategy Actions Choosing Strategy Actions that Complement a Firm’s that Complement a Firm’s

Competitive ApproachCompetitive Approach

Decisions regarding the firm’s operating scope and how to best strengthen its market standing must be made: Whether and when to go on the offensive and initiate aggressive

strategic moves to improve the firm’s market position.

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

When to undertake strategic moves based upon whether it is advantageous to be a first mover or a fast follower or a late mover.

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Choosing Strategy Actions Choosing Strategy Actions that Complement a Firm’s that Complement a Firm’s

Competitive Approach (cont’d)Competitive Approach (cont’d)

Decisions regarding the firm’s operating scope and how to best strengthen its market standing must be made: Whether to integrate backward or forward into more stages of the

industry value chain.

Which value chain activities, if any, should be outsourced.

Whether to enter into strategic alliances or partnership arrangements with other enterprises.

Whether to bolster the firm’s market position by merging with or acquiring another company in the same industry.

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Launching Strategic Offensives to Launching Strategic Offensives to Improve a Company’s Market PositionImprove a Company’s Market Position

Aggressive strategic offensives are called for when a firm:Spots opportunities to gain profitable market share

at the expense of rivalsHas no choice but to try to whittle away at a strong

rival’s competitive advantageCan reap the benefits a competitive edge offers—a

leading market share, excellent profit margins, and rapid growth

The best offensives use a firm’s resource strengths to attack its rivals’ weaknesses.

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

Involves a firm seeking sizable and durable competitive advantage by abandoning its existing markets and, then, inventing a new industry or distinctive market segment in which that firm has exclusive access to new demand.By “reinventing the circus,” Cirque du Soleil annually

attracts an audience of millions of people who typically do not attend circus events.

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Using Defensive Strategies to Protect Using Defensive Strategies to Protect a Company’s Market Position and a Company’s Market Position and

Competitive AdvantageCompetitive Advantage

Defensive strategies help fortify a competitive position by:Lowering the risk of being attacked.Weakening the impact of any attack that occurs.Influencing challengers to redirect their competitive

efforts toward other rivals.Good defensive strategies help protect

competitive advantage but rarely are the basis for creating it.

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Signaling Challengers that Signaling Challengers that Retaliation Is LikelyRetaliation Is Likely

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

Publicly commit firm to policy ofmatching rivals’ terms or prices

Maintain war chest of cash reservesMake occasional counterresponse

to moves of weaker rivals

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Timing a Company’s Offensive Timing a Company’s Offensive and Defensive Strategic Movesand Defensive Strategic Moves

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 buyersEarly commitments (technology, market channels)

produce an absolute cost advantage over rivalsFirst-time customers remain strongly loyal in making

repeat purchasesMoving first constitutes a preemptive strike, making

imitation extra hard or unlikely

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The Potential for Late-Mover Advantages The Potential for Late-Mover Advantages or First-Mover Disadvantagesor First-Mover Disadvantages

Moving early can be a disadvantage (or fail to produce an advantage) when:Pioneering leadership is more costly than imitation

Innovators’ products are primitive, and do not live up to buyer expectations

Potential buyers are skeptical about the benefits of new technology/product of a first mover

Rapid changes in technology change or buyer needs allow followers to leapfrog pioneers

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

Key Issue: Is the race to market leadership a marathon or a sprint?

Seeking first-mover competitive advantage 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 position to delay or derail the efforts of a first mover?

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Vertical Integration: Operating Across Vertical Integration: Operating Across More Industry Value Chain SegmentsMore Industry Value Chain Segments

Involves extending a firm’s competitive and operating scope within the same industryBackward into sources of supply

Forward toward end users of final product

Can aim at either full or partial integration

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Integrating Backward to Achieve Integrating Backward to Achieve Greater CompetitivenessGreater Competitiveness

For backward integration to boost profitability a firm must be able to:Achieve the same scale economies

as outside suppliersMatch or beat suppliers’ production

efficiency with no drop in quality

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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

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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

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Forward Vertical Integration Forward Vertical Integration and Internet Retailingand Internet Retailing

Direct selling and Internet retailing have appeal when there is potential to:Lower distribution costsGain a cost advantage over rivalsProduce higher marginsAllow for lower prices charged to end usersCompeting 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

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Outsourcing Strategies: Outsourcing Strategies: Narrowing the Scope of OperationsNarrowing the Scope of Operations

Outsourcing an activity is a consideration when: It can be performed better or more cheaply by outside specialists.

It is not crucial to achieve a sustainable competitive advantage and will not hollow out capabilities, core competencies, or technical know-how of a firm.

It improves organizational flexibility and speeds time to market.

It reduces a firm’s risk exposure to changing technology and/or buyer preferences.

It allows a firm to concentrate on its core business, leverage its key resources and core competencies, and do even better what it already does best.

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Outsourcing Strategies: Narrowing Outsourcing Strategies: Narrowing the Scope of Operations (cont’d)the Scope of Operations (cont’d)

The Big Risk of Outsourcing:Farming out the wrong types of activities

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

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Strategic Alliances and PartnershipsStrategic Alliances and Partnerships

Strategic AllianceIs a formal collaborative agreement in which two or

more firms join forces to achieve mutually beneficial strategic outcomes: A strategically relevant collaboration A joint contribution of resources An assumption of a shared risk An agreement to shared control A recognition of mutual dependence

Is attractive in that it allows firms to bundle resources and competencies that are more valuable in a joint effort than when kept separate.

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Reasons for Firms to Enter Reasons for Firms to Enter into Strategic Alliancesinto Strategic Alliances

To expedite development of new technologies or products

To overcome deficits in technical or manufacturing expertise

To bring together personnel of each partner 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 through joint

marketing agreements

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Reasons for Firms to Continue Reasons for Firms to Continue in Strategic Alliancesin Strategic Alliances

Alliances are likely to be long-lasting when:They involve collaboration with suppliers or

distribution allies.Both parties conclude that continued collaboration

is in their mutual interest, perhaps because new opportunities for learning are emerging.

Experience indicates that:Alliances stand a reasonable chance of helping a

firm reduce its competitive disadvantage but very rarely have alliances proved a strategic option for gaining a durable competitive edge over rivals.

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Failed Strategic Alliances and Failed Strategic Alliances and Cooperative PartnershipsCooperative Partnerships

Common causes for the failure of 60–70% of alliances each year:Diverging objectives and priorities

An inability to work well together

Changing conditions that make the purpose of the alliance obsolete

The emergence of more attractive technological paths

Marketplace rivalry between one or more allies

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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 firms into a single entity, with the newly created firm often taking on a new name

Acquisition The combination in which one firm, the acquirer, purchases

and absorbs the operations of another, the acquired firm

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Typical Objectives of Mergers Typical Objectives of Mergers and Acquisitionsand Acquisitions

1. To create a more cost-efficient operation out of the combined firms

2. To expand a firm’s geographic coverage

3. To extend the firm’s business into new product categories

4. To gain quick access to new technologies or other resources and competitive capabilities

5. To lead the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunities