Chapter 6 3v2d1w

Chapter 6: Strengthening a Company’s Competitive Position LAUNCHING S TRATEGIC OFFENSIVES TO IMPROVE A COMPANY’S MARKET POSITION  Strategic offensives are called for when a company spots opportunities to gain profitable market share at its rivals’ expense or when a company has no choice but to try to whittle away at a strong rival’s competitive advantage.  The best offensives tend to incorporate several principles: o Focusing relentlessly on building competitive advantage and then striving to convert it into a sustainable advantage. o Applying resources where rivals are least able to defend themselves. o Employing the element of surprise as opposed to doing what rivals expect and are prepared for. o Displaying a capacity for swift and decisive actions to overwhelm rivals.

Choosing the Basis for Competitive Attack  Strategic offensives should exploit the power of a company’s strongest competitive assets, its most valuable resources and capabilities such as a better, known brand name, a more efficient production or distribution system, greater technological capability, or a superior reputation for quality.  A strategic offensive should be based on those areas of strength where the company has its greatest competitive advantage over the targeted rivals.  It may be beneficial to pay special attention to buyer segments that a rival is neglecting or is weakly equipped to serve.  The principal offensive strategy options include the following: o Offering an equally good or better product at a lower price. o Leapfrogging competitors by being first to market with next-generation products. o Pursuing continuous product innovation to draw sales and market share away from less innovative rivals. o Pursuing disruptive product innovations to create new markets. o Adopting and improving on the good ideas of other companies (rivals or otherwise). o Using hit-and-run or guerrilla warfare tactics to grab market share from complacent or distracted rivals. o Launching a preemptive strike to secure an industry’s limited resources or capture a rare opportunity.  Securing the best distributors in a particular geographic region or country.  Obtaining the most favorable site at a new interchange or intersection, in a new shopping mall, and so on.

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Tying up the most reliable, high-quality suppliers via exclusive partnerships, long-term contracts, or acquisition. Moving swiftly to acquire the assets of distressed rivals at bargain prices.

Choosing Which Rivals to Attack  The best targets for offensive attacks: o Market leaders that are vulnerable. o Runner-up firms with weaknesses in areas where the challenger is strong. o Struggling enterprises that are on the verge of going under. o Small local and regional firms with limited capabilities.

Blue-Ocean Strategy—A Special Kind of Offensive  A blue-ocean strategy seeks to gain a dramatic and durable competitive advantage by abandoning efforts to beat out competitors in existing markets and, instead, inventing a new market segment that renders existing competitors irrelevant and allows a company to create and capture altogether new demand.  Two distinct types of market space: o One is where industry boundaries are well defined, the competitive rules of the game are understood, and companies try to outperform rivals by capturing a bigger share of existing demand. Intense competition constrains a company’s prospects for rapid growth and superior profitability since rivals move quickly to either imitate or counter the successes of competitors. o The second type of market space is a “blue ocean,” where the industry does not really exist yet, is untainted by competition, and offers wideopen opportunity for profitable and rapid growth if a company can create new demand with a new type of product offering.  Blue-ocean strategies provide a company with a great opportunity in the short run.

DEFENSIVES TRATEGIES—PROTECTING MARKET POSITIONANDCOMPETITIVEAD VANTAGE  Defensive strategies can take either of two forms: actions to block challengers or actions to signal the likelihood of strong retaliation.

Blocking the Avenues Open to Challengers  The most frequently employed approach to defending a company’s present position involves actions that restrict a challenger’s options for initiating a competitive attack. o A defender can introduce new features, add new models, or broaden its product line to close off gaps and vacant niches to opportunityseeking challengers.

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Can thwart rivals’ efforts to attack with a lower price by maintaining its own lineup of economy-priced options. Can discourage buyers from trying competitors’ brands by lengthening warranties, making early announcements about impending new products or price changes, offering free training and services, or providing coupons and sample giveaways to buyers most prone to experiment. Can induce potential buyers to reconsider switching. It can challenge the quality or safety of rivals’ products. A defender can grant volume discounts or better financing to dealers and distributors to discourage them from experimenting with other suppliers Can convince them to handle its product line exclusively and force competitors to use other distribution outlets.

Signaling Challengers That Retaliation Is Likely  Signals to would-be challengers can be given by: o Publicly announcing management’s commitment to maintaining the firm’s present market share. o Publicly committing the company to a policy of matching competitors’ or prices. o Maintaining a war chest of cash and marketable securities. o Making an occasional strong counter-response to the moves of weak competitors to enhance the firm’s image as a tough defender.  To be an effective defensive strategy, however, signaling needs to be accompanied by a credible commitment to follow through.

TIMING A COMPANY’S OFFENSIVE AND DEFENSIVES TRATEGIC MOVES  Timing is especially important when first-mover advantages or disadvantages exist. o Because of firs-mover advantages and disadvantages, competitive advantage can spring from when a move is made as well as from what move is made.  Because the timing of strategic moves can be consequential, it is important for company strategists to be aware of the nature of first-mover advantages and disadvantages and the conditions favoring each type of move.

The Potential for First-Mover Advantages  Market pioneers and other types of first movers typically bear greater risks and greater development costs than firms that move later.  Five such conditions in which first-mover advantages are most likely to arise: o When pioneering helps build a firm’s reputation and creates strong brand loyalty.

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When a first mover’s customers will thereafter face significant switching costs. When property rights protections thwart rapid imitation of the initial move. When an early lead enables the first mover to move down the learning curve ahead of rivals. When a first mover can set the technical standard for the industry.

The Potential for Late-Mover Advantages or First-Mover Disadvantages  Late-mover advantages (or first-mover disadvantages ) arise in four instances: o When the costs of pioneering are high relative to the benefits accrued and imitative followers can achieve similar benefits with far lower costs. o When an innovator’s products are somewhat primitive and do not live up to buyer expectations, thus allowing a follower with betterperforming products to win disenchanted buyers away from the leader. o When rapid market evolution (due to fast-paced changes in either technology or buyer needs) gives second movers the opening to leapfrog a first mover’s products with more attractive next-version products. o When market uncertainties make it difficult to ascertain what will eventually succeed, allowing late movers to wait until these needs are clarified. o When customer loyalty to the pioneer is low and a first mover’s skills, know-how, and actions are easily copied or even sured

To Be a First Mover or Not  In weighing the pros and cons of being a first mover versus a fast follower versus a late mover, it matters whether the race to market leadership in a particular industry is a marathon or a sprint.  The speed at which the pioneering innovation is likely to catch on matters considerably as companies struggle with whether to pursue an emerging market opportunity aggressively (as a first mover) or cautiously (as a late mover).  There is a market penetration curve for every emerging opportunity. o The curve has an inflection point at which all the pieces of the business model fall into place, buyer demand explodes, and the market takes off.  Any company that seeks competitive advantage by being a first mover thus needs to ask some hard questions: o Does market takeoff depend on the development of complementary products or services that currently are not available? o Is new infrastructure required before buyer demand can surge? o Will buyers need to learn new skills or adopt new behaviors?

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Will buyers encounter high switching costs in moving to the newly introduced product or service? Are there influential competitors in a position to delay or derail the efforts of a first mover?

STRENGTHENINGACOMP ANY’S MARKET POSITION VIA ITS SCOPE OF OPERATIONS  The scope of the firm refers to the range of activities that the firm performs internally, the breadth of its product and service offerings, the extent of its geographic market presence, and its mix of businesses.  Scope issues are at the very heart of corporate-level strategy.  Horizontal scope is the range of product and service segments that a firm serves within its focal market. o Mergers and acquisitions involving other market participants provide a means for a company to expand its horizontal scope.  Vertical scope is the extent to which a firm’s internal activities encom the range of activities that make up an industry’s entire value chain system, from raw material production to final sales and service activities.  Outsourcing decisions concern another dimension of scope since they involve narrowing the firm’s boundaries with respect to its participation in value chain activities. o Strategic alliances and partnerships provide an alternative to vertical integration and acquisition strategies and are sometimes used to facilitate outsourcing

HORIZONTAL MERGER AND ACQUISITION STRATEGIES  Mergers and acquisitions are much-used strategic options to strengthen a company’s market position. o Merger is the combining of two or more companies into a single corporate entity, with the newly created company often taking on a new name o An acquisition is a combination in which one company, the acquirer, purchases and absorbs the operations of another, the acquired. o The difference between a merger and an acquisition relates more to the details of ownership, management control, and financial arrangements than to strategy and competitive advantage.  Horizontal mergers and acquisitions, which involve combining the operations of firms within the same product or service market, provide an effective means for firms to rapidly increase the scale and horizontal scope of their core business.  Merger and acquisition strategies typically set sights on achieving any of five objectives: o Creating a more cost-efficient operation out of the combined companies. o Expanding a company’s geographic coverage. o Extending the company’s business into new product categories.

Gaining quick access to new technologies or other resources and capabilities. o Leading the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunities.  Horizontal mergers and acquisitions can strengthen a firm’s competitiveness in five ways: o By improving the efficiency of its operations o By heightening its product differentiation o By reducing market rivalry o By increasing the company’s bargaining power over suppliers and buyers o By enhancing its flexibility and dynamic capabilities. o

Why Mergers and Acquisitions Sometimes Fail to Produce Anticipated Results  Despite many successes, mergers and acquisitions do not always produce the hoped for outcomes. o Cost savings may prove smaller than expected o Gains in competitive capabilities may take substantially longer to realize or, worse, may never materialize o Efforts to mesh the corporate cultures can stall due to formidable resistance from organization . o Key employees at the acquired company can quickly become disenchanted and leave; the morale of company personnel who remain can drop to disturbingly low levels because they disagree with newly instituted changes. o Differences in management styles and operating procedures can prove hard to resolve. o The managers appointed to oversee the integration of a newly acquired company can make mistakes in deciding which activities to leave alone and which activities to meld into their own operations and systems.

VERTICAL INTEGRATION STRATEGIES  A vertically integrated firm is one that participates in multiple stages of an industry’s value chain system.  A vertical integration strategy can expand the firm’s range of activities backward into sources of supply and/or forward toward end s.  A firm can pursue vertical integration by starting its own operations in other stages of the vertical activity chain or by acquiring a company already performing the activities it wants to bring in-house.  Vertical integration strategies can aim at full integration (participating in all stages of the vertical chain) or partial integration (building positions in selected stages of the vertical chain).  Firms can also engage in tapered integration strategies, which involve a mix of in-house and outsourced activity in any given stage of the vertical chain.

The Advantages of a Vertical Integration Strategy  Under the right conditions, a vertical integration strategy can add materially to a company’s technological capabilities, strengthen the firm’s competitive position, and boost its profitability.  Integrating Backward to Achieve Greater Competitiveness: o Backward integration to be a cost-saving and profitable strategy, a company must be able to (1) achieve the same scale economies as outside suppliers and (2) match or beat suppliers’ production efficiency with no drop-off in quality. o When there are few suppliers and when the item being supplied is a major component, vertical integration can lower costs by limiting supplier power. o Vertical integration can also lower costs by facilitating the coordination of production flows and avoiding bottleneck problems. o When a company has proprietary know-how that it wants to keep from rivals, then in-house performance of value-adding activities related to this knowhow is beneficial even if such activities could otherwise be performed by outsiders. o Backward vertical integration can produce a differentiation-based competitive advantage when performing activities internally contributes to a better-quality product or service offering, improves the caliber of customer service, or in other ways enhances the performance of the final product.  Integrating Forward to Enhance Competitiveness: o Forward integration can lower costs by increasing efficiency and bargaining power. o Allow manufacturers to gain better access to end s, improve market visibility, and include the end ’s purchasing experience as a differentiating feature. o Some producers have opted to integrate forward by selling directly to customers at the company’s website.

The Disadvantages of a Vertical Integration Strategy  Vertical integration include the following concerns: o Vertical integration raises a firm’s capital investment in the industry, thereby increasing business risk. o Vertically integrated companies are often slow to embrace technological advances or more efficient production methods when they are saddled with older technology or facilities. o Vertical integration can result in less flexibility in accommodating shifting buyer preferences. o Vertical integration may not enable a company to realize economies of scale if its production levels are below the minimum efficient scale. o Vertical integration poses all kinds of capacity-matching problems. o Integration forward or backward often calls for developing new types of resources and capabilities.

Weighing the Pros and Cons of Vertical Integration  The tip of the scales depends on o (1) Whether vertical integration can enhance the performance of strategy-critical activities in ways that lower cost, build expertise, protect proprietary know-how, or increase differentiation. o (2) What impact vertical integration will have on investment costs, flexibility, and response times. o (3) What istrative costs will be incurred by coordinating operations across more vertical chain activities. o (4) How difficult it will be for the company to acquire the set of skills and capabilities needed to operate in another stage of the vertical chain.  Vertical integration strategies have merit according to which capabilities and value-adding activities truly need to be performed in-house and which can be performed better or cheaper by outsiders.

OUTSOURCINGS TRATEGIES: NARROWING THE SCOPE OF OPERATIONS  Outsourcing involves contracting out certain value chain activities that are normally performed in-house to outside vendors.  Outsourcing certain value chain activities makes strategic sense whenever: o An activity can be performed better or more cheaply by outside specialists. o The activity is not crucial to the firm’s ability to achieve sustainable competitive advantage. o The outsourcing improves organizational flexibility and speeds time to market. o It reduces the company’s risk exposure to changing technology and buyer preferences. o It allows a company to concentrate on its core business, leverage its key resources, and do even better what it already does best.

The Risk of Outsourcing Value Chain Activities  The biggest danger of outsourcing is that a company will farm out the wrong types of activities and thereby hollow out its own capabilities. o Ability to lead the development of innovative new products is weakened because so many of the cutting-edge ideas and technologies for next-generation products come from outsiders.  Another risk of outsourcing comes from the lack of direct control. o Difficult to monitor, control, and coordinate the activities of outside parties via contracts and arm’s-length transactions alone. o Unanticipated problems may arise that cause delays or cost overruns and become hard to resolve amicably.

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Contract-based outsourcing can be problematic because outside parties lack incentives to make investments specific to the needs of the outsourcing company’s internal value chain.

STRATEGIC ALLIANCES AND PARTNERSHIPS  Strategic alliances and cooperative partnerships provide one way to gain some of the benefits offered by vertical integration, outsourcing, and horizontal mergers and acquisitions while minimizing the associated problems. o Companies frequently engage in cooperative strategies as an alternative to vertical integration or horizontal mergers and acquisitions. o Companies are also employing strategic alliances and partnerships to extend their scope of operations via international expansion and diversification strategies.  A strategic alliance is a formal agreement between two or more separate companies in which they agree to work collaboratively toward some strategically relevant objective. o Involve shared financial responsibility, t contribution of resources and capabilities, shared risk, shared control, and mutual dependence.  A t venture entails forming a new corporate entity that is tly owned by two or more companies that agree to share in the revenues, expenses, and control of the newly formed entity. o The collaboration between the partners involves a much less rigid structure in which the partners retain their independence from one another.  An alliance becomes “strategic,” as opposed to just a convenient business arrangement, when it serves any of the following purposes: o It facilitates achievement of an important business objective (like lowering costs or delivering more value to customers in the form of better quality, added features, and greater durability). o It helps build, strengthen, or sustain a core competence or competitive advantage. o It helps remedy an important resource deficiency or competitive weakness. o It helps defend against a competitive threat, or mitigates a significant risk to a company’s business. o It increases bargaining power over suppliers or buyers. o It helps open up important new market opportunities. o It speeds the development of new technologies and/or product innovations.

Capturing the Benefits of Strategic Alliances  The extent to which companies benefit from entering into alliances and partnerships seems to be a function of six factors: o Picking a good partner.

Being sensitive to cultural differences. Recognizing that the alliance must benefit both sides. Ensuring that both parties live up to their commitments. Structuring the decision-making process so that actions can be taken swiftly when needed. o Managing the learning process and then adjusting the alliance agreement over time to fit new circumstances.  Alliances are more likely to be long-lasting when o (1) They involve collaboration with partners that do not compete directly, such as suppliers or distribution allies. o (2) A trusting relationship has been established. o (3) Both parties conclude that continued collaboration is in their mutual interest, perhaps because new opportunities for learning are emerging. o o o o

The Drawbacks of Strategic Alliances and Partnerships  Anticipated gains may fail to materialize due to an overly optimistic view of the synergies or a poor fit in of the combination of resources and capabilities.  When outsourcing is conducted via alliances, there is no less risk of becoming dependent on other companies for essential expertise and capabilities— indeed, this may be the Achilles’ heel of such alliances.  The greatest danger is that a partner will gain access to a company’s proprietary knowledge base, technologies, or trade secrets, enabling the partner to match the company’s core strengths and costing the company its hard-won competitive advantage.  This risk is greatest when the alliance is among industry rivals or when the alliance is for the purpose of collaborative R&D, since this type of partnership requires an extensive exchange of closely held information.  The principal advantages of strategic alliances over vertical integration or horizontal  mergers and acquisitions are threefold: o They lower investment costs and risks for each partner by facilitating resource pooling and risk sharing. o They are more flexible organizational forms and allow for a more adaptive response to changing conditions. o They are more rapidly deployed—a critical factor when speed is of the essence.  The key advantages of using strategic alliances rather than arm’s-length transactions to manage outsourcing are o (1) The increased ability to exercise control over the partners’ activities o (2) A greater willingness for the partners to make relationship specific investments.

How to Make Strategic Alliances Work  The success of an alliance depends on how well the partners work together, their capacity to respond and adapt to changing internal and external conditions, and their willingness to renegotiate the bargain if circumstances so warrant.  A successful alliance requires real in-the-trenches collaboration, not merely an arm’s-length exchange of ideas.  Companies that have greater success in managing their strategic alliances and partnerships often credit the following factors: o They create a system for managing their alliances. o They build relationships with their partners and establish trust. o They protect themselves from the threat of opportunism by setting up safeguards. o They make commitments to their partners and see that their partners do the same. o They make learning a routine part of the management process.  It is wise to begin slowly, with simple alliances designed to meet limited, short-term objectives.