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Supplementing the Chosen

Competitive Strategy

Strategic Management
Fig. 6.1: A Company’s Menu of Strategy
Options
Collaborative Strategies:
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 partnership
Reasons for Collaborative Strategies
 Globalization of the world economy
 Revolutionary advances in technology
 Untapped markets in Asia, Europe, Africa and Latin
America
Competitive Forces for Strategic
Alliances
1. The global race to build a market presence in many
different national markets and join the ranks of
companies recognized as global leaders
2. The race to seize opportunities on the frontiers of
advancing technology and build resource strengths and
business capabilities to compete successfully in the
industries and product markets of the future
• Collaborative arrangements can help a company
lower its costs and/or gain access to needed
expertise and capabilities
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 product
Advantages of a Strategic Alliance
1. It is critical to the company’s achievement of an
important objective
2. It helps build, sustain, or enhance a core
competency or competitive advantage
3. It helps block a competitive threat
4. It helps open important new market opportunities
5. It mitigates a significant risk to a company’s
business
Potential Benefits of Alliances to
Achieve Global and Industry
Leadership
• Get into critical countries/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 Benefits of Strategic
Alliances
• The extent to which companies benefits from entering
into strategic alliance is a function of six factors:
1. Picking a good partner
 Desired expertise and capabilities
 Sharing the company’s vision about the purpose of the
alliance
 No direct competition because of overlapping product
lines
 Products are complimentary rather than substitutes
 Good chemistry among key personnel
 Strong partner with useful resources or skills
2. Being sensitive to cultural differences
Capturing the Benefits of Strategic
Alliances
3. Recognizing that the alliance must benefit both sides
 Information must be shared as well as gained
 Relationship must remain forthright and trustful
4. Ensuring that both parties live up to their commitments
 division of work has to be perceived as fairly
appropriate
 Caliber of the benefits received on both sides has to
be perceived as adequate
5. Structuring of the decision-making process so that
actions can be taken swiftly when needed
Capturing the Benefits of Strategic
Alliances
6. Managing the learning process and then adjusting the
alliance agreement over time to fit new circumstances
 Alliances are more likely to be long-term when:
1. They involve collaboration with suppliers or distribution
allies and each party’s contribution involves activities
in different portions of the industry value chain
2. Both parties conclude that continued collaboration is in
their mutual interest because:
- new opportunities of learning are emerging
- further collaboration will allow each partner to extend
its market reach beyond what it could accomplish on
its own
Why Alliances Fail
• Reasons for alliances’ 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 of another, the acquired
• Merger & acquisition strategies
– Much-used strategic options
– 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
1. To create a more cost-efficient operation
 Inefficient plants can be closed
 Distribution activities partly combined and downsized
 Marketing and sales activities combined and
downsized
 Reduced supply chain costs because of buying in
greater volume
 Cost savings in administrative activities by combining
and downsizing
2. To expand a firm’s geographic coverage
 Quickest and best way
 In case of geographic overlap, there is the additional
benefit of reducing cost by eliminating duplicate
facilities
Objectives of Mergers and Acquisitions
3. To extend a firm’s business into new
product categories
 Quicker and more potent way to broaden company’s product line
than going through the exercise of introducing company’s own new
product line
4. To gain quick access to new technologies
or competitive capabilities
 Favorite among technological companies racing to establish a
position in product categories about to be born
 Allows companies to bypass time-consuming and expensive R&D
effort
5. To invent a new industry and lead the convergence of industries
whose boundaries are blurred by changing technologies and
new market opportunities
 Company’s management betting that two or more distinct industries
are converging into one and deciding to establish strong position in
consolidating market
 Merger of AOL and Time Warner – a move predicated on the belief
that entertainment content would ultimately converge into one much
of which will be distributed over internet
Pitfalls of Mergers and
Acquisitions
• 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


Vertical Integration Strategies
• Extend a firm’s competitive 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

Internally Activities, Costs,


Activities,
Performed & Margins of Buyer/User
Costs, &
Activities, Forward Channel Value
Margins of
Costs, & Allies & Chains
Suppliers
Margins 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
(b) the supplier efficiency can be matched or exceeded with no
drop in quality.
• The potential to reduce costs exists in situations where:
a) suppliers have a sizeable profit margin
b) the item being supplied is a major cost component
c) 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 Advantages of Forward Integration
• To gain better access to end users and better market visibility
• Independent sales agents, wholesalers, retailers handle
competing brands of the same product, have no allegiance to any
one company’s brand and tend to push “what sells” and earns the
biggest profit. This results in:
a. Frustrating a company’s effort to boost sales and market share
b. Giving rise to costly inventory pileups and frequent under
utilization of capacity
 If company’s product line is not broad enough to justify stand
alone distributor-ship or retail stores, it leaves the option for selling
directly to end users – perhaps by internet, which may:
– Lower distribution costs
– Produce a relative cost advantage over rivals
– Enable lower selling prices to end users
Outsourcing Strategies
Concept

Outsourcing involves withdrawing from


certain value chain activities and relying
on outsiders to supply needed products,
support services, or functional activities
Internally
Performed
Activities Functional
Suppliers
Activities

Support Distributors
Services or Retailers
When Does Outsourcing
Make Strategic Sense?
• Activity can be performed better or
more cheaply by outside specialists
• Activity is not crucial to achieve a
sustainable competitive advantage
• Risk of exposure to changing technology and/or
changing 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
Risks of Outsourcing Strategy
• Farming out too many or the wrong activities, thus

– Hollowing out capabilities

– Losing touch with activities and expertise that


determine overall long-term success
Offensive and Defensive Strategies
Offensive Strategies Defensive Strategies

Used to build new Used to protect


or stronger market competitive advantage
position and/or create (rarely lead to creating
competitive advantage advantage)
Principles of Offensive
Strategies
• Focus relentlessly on:
– Building competitive advantage and
– Striving to convert it into decisive advantage
• Employ the element of surprise as
opposed 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
Types of Offensive Strategy
Options
1. Offer an equally good or better product at a lower price
 E.g. AMD’s head-on competition with Intel offering
faster alternative to Intel’s Pentium chips at lower price
2. Leapfrog competitors by being:
– First adopter of next-generation technologies or
– First to market with next-generation products
– E.g. Microsoft introduction of its next generation
Xbox four months ahead of Play station 3
3. Pursue continuous product innovation
to draw sales and market share away
from less innovative rivals
Types of Offensive Strategy
Options
 Such offensive options work only if a company has
potent product innovation skills of its own, and
 Keeps its pipeline full of ideas that are consistently well
received in the market
4. Adopt and improve on the good ideas of other
companies
 E.g. Ryan Air in Europe succeeded as a low-cost airline
by imitating Southwest Airlines’ operating processes by
applying them in different geographic markets
Types of Offensive Strategy
Options
5. Deliberately attack market segments where a key rival
makes big profits
 Dell’s entry into printers and printer cartridges, a market
dominated by HP
6. Attack competitive weaknesses of rivals
 Go after the customers of those rivals whose products
lag on quality, features or product performance
 Aggressors with recognized brand names and strong
marketing skills can launch efforts to win customers
from rivals with weak brand recognition
 E.g. Olpers effectively filling the void left open by Haleeb
and Nestle
Types of Offensive Strategy
Options
7. Maneuver around competitors and
concentrate on capturing unoccupied
or less contested market territory
 Create new market segments by introducing products
with different attributes and performance features to
better meet the needs of selected buyers
8. Use hit-and-run or guerrilla warfare tactics to grab sales
and market share from complacent rivals
 Occasional lowballing on price (to win a big order or
steal a key account from rival)
 Surprising rivals with sporadic but intense bursts of
promotional activity ( 20% discount for one week)
Types of Offensive Strategy
Options
9. Launch a preemptive strike to secure an advantageous
position that rivals are prevented from duplicating
 Whoever strikes first stands to capture competitive
assets that rival can’t readily match
1. Securing the best distributors in a particular geographic
region or country
2. Moving to obtain the most favorable site
3. Tying up the most reliable, high quality supplier via
exclusive partnerships, long-term contracts, or
acquisitions
4. Moving swiftly to acquire assets of distressed rivals at
bargaining price
Blue Ocean: A Special Kind Of Offensive
• A blue ocean strategy seeks to gain a dramatic and durable competitive
advantage by:
a) Abandoning efforts to beat competitors in existing markets
b) Inventing a new industry or distinctive market segment that renders existing
competitors largely irrelevant and allows a company to create and capture
altogether new demand
• This strategy views the business universe as consisting of two distinct types
of market space
1. Industry boundaries are:
- well defined and accepted
- competitive rules of the game well understood
- companies try to out perform rivals by capturing bigger share of existing
demand
- lively competition constrains a company’s prospects for rapid growth and
superior profitability
2. Industry does not really exist yet
- is untainted by competition
- offers wide open opportunity for profitable rapid growth
• Examples : AMC via its pioneering megaplex movie theaters
• FedEx in overnight package delivery
Choosing which Rival to Attack
1. Market leaders that are vulnerable
• Offensive attack makes good sense when a company that leads in
terms of size and market share is not a leader in terms of serving
the market well
• Signs of vulnerability include:
- unhappy buyers
- an inferior product line
- a weak competitive strategy with regard to low cost leadership or
differentiation
- strong emotional commitment to aging technology the leader has
pioneered
- outdated plants and machinery
- a preoccupation with diversification in other industries
• Offensive to erode position of leaders have real promise when the
challenger is able to revamp its value chain or innovate to fresh
cost based or differentiation based competitive advantage
• To be successful attacks on leaders don’t have to result in making
the aggressor the new leader; a challenger may win by simply
becoming a stronger runner up
Choosing Which Rival to Attack

2. Runner up firms with weaknesses


in areas where the challenger is strong
Challenger’s resource strength and
competitive capabilities are well suited to
exploiting their weaknesses
3. Struggling enterprises that are on the
verge of going under
4. Small local and regional firms with limited
capabilities
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 manufacturing


or distribution

– Technological superiority

– A superior product
Defensive Strategy
Objectives
• Lessen risk of being attacked
• Blunt impact of any attack that occurs
• Influence challengers to aim attacks at
other rivals
Approaches

• Block avenues open to challengers


• Signal to challengers that vigorous
retaliation is likely
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
Signal to Challengers Retaliation is Likely

• Publicly announce management’s strong


commitment to maintain present market share

• Publicly commit firm to policy of


matching rivals’ terms or prices

• Maintain war chest of cash reserves

• Make occasional counter-response


to moves of weaker rivals
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
Product Information-only Web Strategies Avoiding
Channel Conflict
• An attractive market positioning option for manufacturers
and wholesalers that have invested heavily in building
and cultivating retail dealer network
• Face channel conflict issues if they try to sell on line in
direct competition with dealers
• A manufacturer that aggressively pursues online sales to
end user is signaling:
- a weak strategic commitment to its dealers
- a willingness to cannibalize dealers’ sales and growth
potential
• Such strategy is certain to anger its wholesale
distributors and retail dealers who may respond by
putting more effort into marketing bands of rival
manufacturers that don’t sell on line
• In sum, manufacturer may stand to lose more sales by
offending its dealers than it gains from its own online
sale
Web Site e-Stores as Minor Distribution Channel
• Use on-line sales as minor distribution channel for:
- achieving incremental sales
- gaining on-line sales experience
- doing marketing research
• If channel conflict posses a big obstacle to on-line sales, or if only a small
fraction of buyers can be can be attracted to make on-line purchases,
then company should pursue on line sales with strategic intent of:
- gaining experience
- learning more about buyers’ tastes and preferences
- testing reaction to new products
- creating more marketing buzz about their products
• Despite the channel conflict that exists when manufacturer sells directly
to end user at its website in head to head competition with its channel
members, it may still opt to establish online sales as an important
distribution channel because:
1. Profit margins from online sales are bigger
2. Encouraging buyers to visit the company’s web site helps to educate
them to the ease and convenience of purchasing online, and prompt over
time more and more buyers to purchase online
3. To make use of build-to-order manufacturing and assembly
Brick-and-Click Strategies:
An Appealing Middle Ground Approach
• Approach
– Sell directly to consumers and
– Use traditional wholesale/retail channels
• Strategic appeal for wholesalers and retailers
– Economic means of expanding a company’s reach
– Provide both existing and potential customers
another choice of how to:
• Communicate with the company
• Shop for product information
• Make purchases
• Resolve customer service problems
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
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 distribution
channels can produce cost advantage
– Loyalty of first time buyers is high
– Moving first can be a pre-emptive strike
First-Mover Characteristics
• Sustaining advantages of being first-mover:
1. Needs to be fast learner
2. Continue to move aggressively to
capitalize on any initial pioneering
advantage
3. Helps immensely if first mover has
financial pockets
4. Has competencies and competitive capabilities
and astute managers
First-Mover Disadvantages
• Moving early can be a disadvantage (or fail to produce
an advantage) when:
– Cost of pioneering is 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
First Mover: To be or not to be
• 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 time for fast-mover followers, some
times even 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 surges?
 Will buyers 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 be careful not to pour too many resources into
cutting edge technology
• The race is going to be a 10-year marathon rather than a 2–year
sprint

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