Student Version

6-2

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.

6-3

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 advantage Can reap benefits of 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.

6-5

Choosing the Basis for Competitive Attack

Principal Offensive StrategyOptions

Adopt and improving 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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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 strong.Best Targets

for Offensive Attacks

6-7

Blue Ocean Strategy—A Special Kind of Offensive

• A firm seeks a large and lasting competitive advantage by abandoning existing markets and inventing an exclusive new industry or market segment (open competitive space) that makes former competitors irrelevant. By “reinventing the circus”, Cirque du Soleil annually

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

6-8

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

Competitive Advantage

• Defensive strategies defend against competitive challenges by: Lowering the risk of being attacked. Weakening the impact of any attack that occurs. Influencing challengers to aim their competitive efforts

towards other rivals.

• Good defensive strategies can 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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Signaling Challengers That Retaliation Is Likely

Making a strong counter response 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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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-movers can earn big payoffs when: Pioneering helps build a firm’s image and reputation

with buyers. Early commitments to new ways produce an absolute

cost advantage over rivals. First-time customers remain strongly loyal in making

repeat purchases. Moving first constitutes a preemptive strike, making

imitation extra hard or unlikely.

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

• Late-mover advantages (or first-mover disadvantages) arise in four instances: When pioneering leadership is more costly than

imitation.

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

When potential buyers are skeptical about the benefits of a first-mover’s new technology/product.

When rapid market and technology changes allow fast followers and late movers 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?

• The decision to seek first-mover competitive advantage requires asking: 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?

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Strengthening a Company’s Market Position Via its Scope of Operations

• Scope of a Firm’s Operations Describes the breadth and strength of its activities

and the extent of its reach into geographic, product and service market segments.

• Dimensions of a Firm’s Scope Breadth of its product and service offerings The range of activities it performs internally The extent of its geographic market presence Its mix of businesses

6-15

Horizontal Merger and Acquisition Strategies

• A strategic option that strengthens a firm’s market position by achieving operating scale and scope economies, gaining complementary competencies, and extending current and new market and product 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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Strategic Objectives of Mergers and Acquisitions

1. Extend the firm’s business into new product categories.

2. Create a more cost-efficient operation out of the combined firms.

3. Expand the firm’s geographic coverage.

4. Gain quick access to new technologies or complementary resources and capabilities.

5. 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 May 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 stall because of resistance from organization members.

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

• Dissatisfied key employees of the acquired firm leave.

• Mistakes are made in deciding which activities to leave alone and which activities to meld into the acquiring firm’s own operations and systems.

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Vertical Integration Strategies

• Involve extending a firm’s competitive and operating 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

Suppliers End-Users

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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 position Boost profitability

Suppliers End-Users

ProfitsCompetitive Advantage

6-20

Integrating Backward to Achieve Greater Competitiveness

• For backward integration to boost profitability a firm must be able to:1. Achieve the same scale economies

as outside suppliers.

2. Match or beat suppliers’ production efficiency with no decline in quality.

Suppliers

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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 componentFavorable

Backward Vertical IntegrationSituations

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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

End-Users

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Forward Vertical Integration and Internet Retailing

• Direct selling and Internet retailing is appealing when: It lowers distribution costs It produces a relative cost advantage over rivals It produces higher profit margins It allows lower prices to be charged to end users. Numbers of buyers prefer to make online purchases

• 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 Integration Strategy

• Increases a firm’s specialized capital investments in its industry.

• Increases a firm’s overall business risk if industry growth slows and profitability declines.

• Increases resistance by vertically integrated firms using aging technologies and facilities to technical advances and efficiencies

• Results in less flexibility in accommodating shifting buyer preferences when a new product design doesn’t include parts and components that the firm makes in-house.

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

• May require development of new and different skills and business capabilities.

6-25

Outsourcing Strategies: Narrowing the Scope of Operations

• Outsourcing an activity should be considered when: It can be performed better or more cheaply by outside specialists.

It is not crucial to achieving a sustainable competitive advantage and won’t hollow out capabilities, core competencies, or technical know-how of the 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 the Scope of Operations (cont’d)

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

hollowing out strategically-important capabilities that ultimately leads to reduction of the firm’s strategic competitiveness and long-run success in the marketplace.

6-27

Strategic Alliances and Partnerships

• Strategic Alliance Is a formal contractual agreement in which two or

more firms collaborate to achieve mutually beneficial strategic outcomes based on: Strategically relevant collaboration Joint contribution of resources Shared risk Shared control Mutual dependence

Allows firms to complementarily bundle resources and competencies to increase their competitive effects and value.

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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

6-29

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.

6-30

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.