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SUPPLEMENTING THE CHOSEN COMPETITIVE STRATEGY—OTHER IMPORTANT STRATEGY CHOICES

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

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LO1 Learn whether and when to pursue offensive strategic moves to improve a company’s market position.

LO2 Learn whether and when to employ defensive strategies to protect the company’s market position.

LO3 Recognize when being a first mover or a fast follower or a late mover can lead to competitive advantage.

LO4 Learn the advantages and disadvantages of extending a company’s scope of operations via vertical integration.

(cont’d)

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LO5 Understand the conditions that favor farming out certain value chain activities to outside parties.

LO6 Gain an understanding of how strategic alliances and collaborative partnerships can substitute for mergers and acquisitions or vertical integration.

LO7 Become aware of the strategic benefits and risks of mergers and acquisitions.

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Choosing Strategy Actions that Complement a Firm’s

Competitive 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 that Complement a Firm’s

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 Improve 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 rivals Has 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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Choosing the Basis for Competitive Attack

Principal Offensive StrategyOptions

Adopt and improve on good ideas of other firms

Attack profitable market segments of key rivals

Capture unoccupied or less contested markets

Attack the competitive weaknesses of rivals

Offer an equal or better product at a lower price

Pursue continuous product innovation

Leapfrog competitors to be the first to market

Use hit-and-run or guerrilla marketing tactics

Launch a preemptive strike on a market opportunity

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Principal Offensive Strategy Options

Attacking the competitive weaknesses of rivals Offering an equally good or better product at a lower

price Pursuing continuous product innovation Leapfrogging competitors by being the first to

market with next generation technology or products Adopting and improving on the good ideas of other

companies (rivals or otherwise) Deliberately attacking those market segments where

a key rival makes big profits Maneuvering around competitors to capture

unoccupied or less contested market territory

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Principal Offensive Strategy Options (cont’d)

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

Launching a preemptive strike to 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

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Choosing Which Rivals to Attack

Small local and regional firms with limited capabilities

Market leaders that are vulnerable

Struggling enterprises that are on the verge of going under

Runner-up firms with weaknesses in areas where the challenger is strongBest Targets

for Offensive Attacks

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Blue Ocean Strategy—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.

Core Concept

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

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

Competitive 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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Blocking the Avenues Open to Challengers

Maintain economy-priced models

Announce new products or price

changes

Grant volume discounts or better

financing terms

Defending a Competitive

Position

Introduce new features

Add new models

Broaden product line to fill vacant

niches

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Blocking the Avenues Open to Challengers

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

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Signaling Challengers that Retaliation Is Likely

Making a strong counterresponse to weak competitor moves to enhance the firm’s image as a tough defender

Publicly announcing management’s strong commitment to maintain the

firm’s present market share

Maintaining a war chest of cash and marketable securities

Publicly committing the firm to a policy of matching competitors’

terms or pricesDissuading or diverting competitors

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Signaling Challengers that Retaliation 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 and 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

Core Concept

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Because of first-mover advantages and disadvantages, competitive advantage can spring from when a move is made as well as from what move is made.

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The Potential for Late-Mover Advantages or 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 or buyer needs allow followers to leapfrog pioneers

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Deciding Whether to Be an Early Mover or 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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Concepts and Connections 6.1Amazon.Com’s First-Mover Advantage in Online Retailing

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Vertical Integration: Operating Across More 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

Core Concept

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A vertically integrated firm is one that performs value chain activities along more than one stage of an industry’s overall value chain.

A vertical integration strategy has appeal only if it significantly strengthens a firm’s competitive position and/or boosts its profitability

Core Concept

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Backward integration involves performing industry value chain activities previously performed by suppliers or other enterprises engaged in earlier stages of the industry value chain; forward integration involves performing industry value chain activities closer to the end user.

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The Advantages of a Vertical Integration Strategy

The two best reasons for vertically integrating into more value chain segments:Strengthen the firm’s competitive positionBoost profitability

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Integrating Backward to Achieve Greater 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 Becomes a Consideration

When powerful suppliers are inclined to raise prices at every opportunity

When suppliers have large profit margins

When the requisite technological skills are easily mastered or acquired

When the item being supplied is a major cost componentBackward

Vertical IntegrationSituations

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When Backward Vertical Integration Becomes 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 Competitiveness

Gain better access to end users Improve market visibility Include the purchasing experience as a

differentiating feature

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Forward Vertical Integration and Internet Retailing

Direct selling and Internet retailing have appeal when there is no potential to:Lower distribution costsGain a cost advantage over rivalsProduce higher marginsAllow for lower prices charged to end users

Competing directly against distribution allies can create channel conflict and signal a weak commitment to dealers.

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Disadvantages of a Vertical Integration Strategy

Increases a firm’s capital investments in its industry

Increases a firm’s business risk if industry growth and profits sour

Can slow the adoption of technical advances for vertically integrated firms using older technologies and facilities

Results in less flexibility to accommodate changing buyer preferences when a new product design requires parts a firm doesn’t make in-house.

Creates capacity-matching problems among integrated in-house component manufacturing units

May require development of radically different skills and business capabilities

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Concepts and Connections 6.2American Apparel’s Vertical Integration Strategy

American Apparel—known for its hip line of basic garments and its provocative advertisements—is no stranger to the concept of “doing it all.” The Los Angeles-based casual wear company has made both forward and backward vertical integration a central part of its strategy, making it a rarity in the fashion industry. Not only does it do all its own fabric cutting and sewing, but it also owns several knitting and dyeing facilities in Southern California, as well as a distribution warehouse, a wholesale operation, and more than 270 retail stores in 20 countries. American Apparel even does its own clothing design, marketing, and advertising, often using its employees as photographers and clothing models.

Founder and CEO Dov Charney claims the company’s vertical integration strategy lets American Apparel respond more quickly to rapid market changes, allowing the company to bring an item from design to its stores worldwide in the span of a week. End-to-end coordination also improves inventory control, helping prevent common problems in the fashion business such as stock-outs and steep markdowns. The company capitalizes on its California-based vertically integrated operations by using taglines such as “Sweatshop Free. Made in the USA” to bolster its “authentic” image.

However, this strategy is not without risks and costs. In an industry where 97 percent of goods are imported, American Apparel pays its workers wages and benefits above the relatively high mandated American minimum. Furthermore, operating in so many key vertical chain activities makes it impossible to be expert in all of them, and creates optimal scale and capacity mismatches—problems with which the firm has partly dealt by tapering its backward integration into knitting and dyeing. Lastly, while the company can respond quickly to new fashion trends, its vertical integration strategy may make it more difficult for the company to scale back in an economic downturn or respond to radical change in the industry environment. Ultimately, only time will tell whether American Apparel will dilute or capitalize on its vertical integration strategy in its pursuit of profitable growth.

Developed with John R. Moran.Sources: American Apparel website, www.americanapparel.net,accessed June 16, 2010; American Apparel investor presentation, June 2009, http://files.shareholder.com/downloads/APP/938846703x0x300331/3dd0b7ca-e458-45b8-8516-e25ca272016d/NYC%20JUNE%202009.pdf; YouTube, “American Apparel—Dov Charney Interview,” CBS News,http://youtube.com/watch?v 5 hYqR8UIl8A4; and Christopher Palmeri, “Living on the Edge at American Apparel,” BusinessWeek, June 27, 2005.

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Outsourcing Strategies: Narrowing 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.

Core Concept

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Outsourcing involves contracting out certainvalue chain activities to outside specialists and strategic allies.

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Outsourcing Strategies: Narrowing 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 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.

Core Concept

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A strategic alliance is a formal agreement between two or more companies to work cooperatively toward some common objective.

A joint venture is a type of strategic alliance that involves the establishment of an independent corporate entity that is jointly owned and controlled by the two partners.

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Reasons for Firms to Enter into Strategic Alliances

Improve supply chain efficiency

Gain economies of scale in production and/or marketing

Acquire or improve market access via joint marketing agreements

Reasons for Alliances

Expedite development of new technologies

or products

Overcome technical or manufacturing expertise deficits

Bring together personnel to create new skill sets

and capabilities

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Reasons for Firms to Enter into 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 in 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 Cooperative 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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The Strategic Dangers of Relying on Alliances for Essential Resources

and Capabilities

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

Ultimately, a firm must develop its own resources and capabilities to protect its competitiveness and capabilities to build and maintain its competitive advantage.

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Merger 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 and 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

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Why Mergers and Acquisitions Sometimes Fail to Produce

Anticipated Results

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 company

may continue to do things as they were done prior to the acquisition.

Key employees of the acquired firm may leave.