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Chapter Title

16/e PPT

Supplementing the Chosen Competitive

Strategy

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

Troy University-Florida Region McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

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“Successful business strategy is about

actively shaping the game you play, not just playing the game you

find.”Adam M. Brandenburger and Barry J. Nalebuff

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“The sure path to oblivion is to stay where you are.”

Bernard Fauber

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Chapter Roadmap Collaborative Strategies: 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 Offensive Strategies: Improving Market Position and

Building Competitive Advantage Defensive Strategies: Protecting Market Position and

Competitive Advantage Web Site Strategies Choosing Appropriate Functional-Area Strategies First-Mover Advantages and Disadvantages

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Fig. 6.1: A Company’s Menu of Strategy Options

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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.

Collaborative Strategies:Alliances and Partnerships

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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

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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

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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

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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 inproduction and/or marketing

To acquire or improve market accessvia joint marketing agreements

Why Are Strategic Alliances Formed?

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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

Potential Benefits of Alliances toAchieve Global and Industry Leadership

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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

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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

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Test Your Knowledge

Which one of the following is not a factor that makes an alliance “strategic” as opposed to just a convenient business arrangement?

A. The alliance involves joint contribution of resources, shared risk, and is mutually beneficial.

B. The alliance helps block a competitive threat or open up new market opportunities.

C. The alliance helps mitigate a significant risk to a company’s business.

D. The alliance helps build, enhance, or sustain a core competence or competitive advantage.

E. The alliance is critical to the company’s achievement of an important objective.

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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 of another, the acquired

Merger-acquisition strategy Much-used strategic option Especially suited for situations where

alliances do not provide a firm with neededcapabilities 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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To create a more cost-efficient operation To expand a firm’s geographic coverage To extend a firm’s 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 boundariesare blurred by changing technologies andnew market opportunities

Objectives of Mergers and Acquisitions

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Combining operations may result in

Resistance from rank-and-file employees

Hard-to-resolve conflicts in management styles 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

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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/UserValue

Chains

Activities, Costs,& Margins of

Forward ChannelAllies &

Strategic Partners

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Strategic Advantagesof Backward Integration

Generates cost savings only if volume needed is big enough to 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 competitive advantage when it results in a better quality part

Reduces risk of depending on suppliers of crucial raw materials / parts / components

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Strategic Advantagesof Forward Integration

To gain better access to end usersand better market visibility

To compensate for undependable distributionchannels 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

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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 of capacity-matching problems May require radically different skills / capabilities Reduces flexibility to make changes in component

parts which may lengthen design time and ability to introduce new products

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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

Pros and Cons ofIntegration vs. De-Integration

Many companies are finding thatde-integrating value chain activities is a

more flexible, economic strategic option!

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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

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Activity can be performed better ormore cheaply by outside specialists

Activity is not crucial to achieve asustainable 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

When Does OutsourcingMake Strategic Sense?

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Farming out too many or the wrong activities, thus

Hollowing out capabilities

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

Risk of an Outsourcing Strategy

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Offensive and Defensive Strategies

Used to build newor stronger market

position and/or create competitive advantage

Used to protect competitive advantage (rarely lead to creating

advantage)

Offensive Strategies Defensive Strategies

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Principles of Offensive Strategies

Focus relentlessly on Building competitive advantage and Striving to convert it into decisive advantage

Employ the element of surprise asopposed to doing what rivals expect

Apply resources where rivals are least able to defend themselves

Be impatient with the status quo and display a strong bias for swift, decisive actions to boost a firm’s competitive position vis-à-vis rivals

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Types of Offensive Strategy Options

1. Offer an equally good or better product at a lower price

2. Leapfrog competitors by being First adopter of next-generation technologies or First to market with next-generation products

3. Pursue continuous product innovationto draw sales and market share awayfrom less innovative rivals

4. Adopt and improve on thegood ideas of other companies

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Types of Offensive Strategy Options (con’t)

5. Deliberately attack market segments where a key rival makes big profits

6. Attack competitive weaknesses of rivals7. Maneuver around competitors and

concentrate on capturing unoccupiedor less contested market territory

8. Use hit-and-run or guerrilla warfare tactics to grab sales and market share from complacent rivals

9. Launch a preemptive strike to secure an advantageous position that rivals are prevented from duplicating

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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

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Type of Markets: Blue Ocean Strategy

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 untainted by 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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For Discussion: Your Opinion

Which of the following is the best example of a blue ocean strategy — Apple’s entry into MP3 players with its iPod models or Dell’s entry into LCD TVs or Audi’s recent move to bring out a luxury SUV? Explain.

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Choosing Rivals to Attack

Four types of firms can be the target of a fresh offensive

Vulnerable market leaders

Runner-up firms with weaknesseswhere challenger is strong

Struggling rivals onverge of going under

Small local or regional firms with limited capabilities

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Using Offensive Strategy to Achieve Competitive Advantage

Strategic offensives offering strongest basis for competitive advantage entail

An important core competence

A unique competitive capability

A better-known brand name

A cost advantage in manufacturingor distribution

Technological superiority

A superior product

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Test Your Knowledge

Which one of the following is not a good type of rival for an offensive-minded company to target?

A. Market leaders that are vulnerable

B. Runner-up firms with weaknesses in areas where the challenger is strong.

C. Small local and regional companies with limited capabilities

D. Companies with lower costs and lower prices

E. Struggling enterprises that are on the verge of going under

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Defensive Strategy

Lessen risk of being attacked

Blunt impact of any attack that occurs

Influence challengers to aim attacks at other rivals

Block avenues open to challengers

Signal challengers vigorousretaliation is likely

Objectives

Approaches

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Block Avenues Open to Challengers

Participate in alternative technologies Introduce new features, add new models, or broaden

product line to close gaps rivals may pursue Maintain economy-priced models Increase warranty coverage Offer free training and support services Reduce delivery times for spare parts Make early announcements about new

products or price changes Challenge quality or safety of rivals’ products

using legal tactics Sign exclusive agreements with distributors

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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

Signal Challengers Retaliation Is Likely

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Web Site Strategies

Strategic Challenge – What use of the Internet should a company make in staking out its position in the marketplace?

Five Web site approaches Use to disseminate only product information Use as minor distribution channel

to sell direct to customers Use as one of several important distribution

channels to access customers Use as primary distribution channel to access buyers Use as exclusive channel to transact sales with

customers

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Using the Internet toDisseminate Product Information

Approach – Website used to provide product information of manufacturers or wholesalers Relies on click-throughs to websites of

dealers for sales transactions Informs end-users of location of retail stores

Issues – Pursuing online sales may Signal weak strategic commitment to dealers Signal willingness to cannibalize dealers’ sales Prompt dealers to aggressively market rivals’ brands

Avoids channel conflict with dealers – Important where strong support of dealer networks is essential

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Approach – Use online sales to

Achieve incremental sales

Gain online sales experience

Conduct marketing research

Learn more about buyer tastes and preferences

Test reactions to new products

Create added market buzz about products

Unlikely to provoke much outcry from dealers

Using the Internet as aMinor Distribution Channel

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Manufacturer’s profit margin fromonline sales is bigger than that fromsales through traditional channels

Encouraging buyers to visit a firm’swebsite educates them to the easeand convenience of purchasing online

Selling directly to end users allows amanufacturer to make greater use ofbuild-to-order manufacturing and assembly

Reasons to Use the Internetas a Minor Distribution Channel

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Approach Sell directly to consumers and Use traditional wholesale/retail channels

Strategic appeal for wholesalers and retailers Economic means of expanding a company’s economic

reach Provide both existing and potential customers another

choice of how to Communicate with a company Shop for product information Make purchases Resolve customer service problems

Brick-and-Click Strategies:An Appealing Middle Ground Approach

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Approach – Use Internet as the exclusive channel for all buyer-seller contact and transactions

Strategic issues for an online company How to deliver unique value to buyers

Whether it will pursue competitive advantage based on lower costs, differentiation, or better value for the money

Whether it will have a broad or narrow product offering

Whether to perform order fulfillment activities internally or to outsource them

How it will draw traffic to its Web site and then convert page views into revenues

Strategies for Online Enterprises

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Test Your Knowledge

One very important advantage of a product-information-only Web site strategy is

A. lower advertising costs.

B. avoiding the extra costs associated with operating Web site e-stores.

C. avoiding channel conflict—trying to sell online in direct competition with retail dealers signals both a weak strategic commitment to dealers and a willingness to cannibalize dealers’ sales and growth potential.

D. added ability to create a positive image of the company.

E. lower sales force costs.

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For Discussion: Your Opinion

Suppose that you are a retailer of athletic footwear and one of the major brands you stock in your store is New Balance. What would be your reaction if you learned that New Balance announced that it would soon begin selling its footwear online at the company’s Web site? What actions would you consider taking?

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Involves strategic choices about how functional areas are managed to support competitive strategy and other strategic moves

Functional strategies include Research and development Production Human resources Sales and marketing Finance

Tailoring functional-area strategies tosupport key business-level strategies is critical!

Choosing AppropriateFunctional-Area Strategies

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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

First-Mover Advantages

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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

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Strategic Issues:To Be a First-Mover or Not

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? Will buyers encounter high switching costs? Are there influential competitors in a position

to delay or derail the efforts of a first-mover?