Chapter 6: Supplementing the Chosen Competitive Strategy: Other Important Business Strategy Choices

1. Chapter 6: Supplementing the Chosen Competitive Strategy: Other Important Business Strategy Choices Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University

2. Chapter Learning Objectives • Gain an understanding of how strategic alliances and collaborative partnerships can bolster a company’s competitive capabilities and resource strengths. • Become aware of the strategic benefits of mergers and acquisitions. • Understand when a company should consider using a vertical integration strategy to extend its operations to more stages of the overall industry value chain. • Understand the conditions that favor farming out certain value chain activities to vendors and strategic allies. • Recognize how and why different types of market situations shape business strategy choices. • Understand when being a first-mover or a fast-follower or a late-mover can lead to competitive advantage.

3. Chapter Roadmap • Strategic 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 • Business Strategy Choices for Specific Market Situations • Timing Strategic Moves – To be an Early Mover of a Late

4. Strategic 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.

5. 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

6. 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

7. Why Are Strategic Alliances Formed? • 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 marketaccess via joint marketing agreements

8. 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 loweritscosts and/or gain access to needed expertise and capabilities

9. Potential Benefits of Alliances toAchieve Global and Industry Leadership • 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

10. Capturing the Benefitsof Strategic Alliances • Benefits from forming partnerships are a function of • Picking a good partner • Being sensitive to cultural differences • Recognizing an alliancemust benefit both parties • Ensuring both parties liveup to their commitments • Structuring the decision-making processso actions can be taken swiftly when needed • Managing the learning process and then adjusting the alliance agreement over time to fit new circumstances

11. Why Alliances Fail • Ability of an alliance to enduredepends on • How well partners work together • Success of partners in respondingand adapting to changing conditions • Willingness of partners torenegotiate 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

12. 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 ofanother, the acquired • Merger-acquisition strategy • Much-used strategic option • 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

13. Objectives of Mergers and Acquisitions • To create a more cost-efficient operation • To expand a firm’s geographic coverage • To extend a firm’s business into newproduct categories or international markets • To gain quick access to new technologiesor competitive capabilities • To invent a new industry and leadthe convergence of industries whose boundaries are blurred by changing technologies and new market opportunities

14. Pitfalls of Mergers and Acquisitions • Combining operations may result in • Resistance from rank-and-file employees • Hard-to-resolve conflicts in managementstyles and corporate cultures • Tough problems of integration • Greater-than-anticipated difficulties in • Achieving expected cost-savings • Sharing of expertise • Achieving enhanced competitive capabilities

15. Activities, Costs, & Margins of Suppliers Internally Performed Activities, Costs, & Margins Buyer/User Value Chains Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners 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

16. Strategic Advantagesof Backward Integration • Generates cost savings only ifvolume needed is big enoughto 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

17. Strategic Advantagesof Forward Integration • To gain better access to endusers and better market visibility • To compensate for undependable distribution channels 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

18. Strategic Disadvantagesof Vertical Integration • Boosts resource requirements • Locks firm deeper into same industry • Results in fixed sources of supply andless flexibility in accommodating buyerdemands for product variety • Poses all types ofcapacity-matching problems • May require radically differentskills / capabilities • Reduces flexibility to make changes in component parts which may lengthen design time and ability to introduce new products

19. Internally Performed Activities Contract Manufacturers Distributors or Retailers Vendors with specialized expertise Outsourcing Strategies Outsourcing involves having outsiders perform certain value chain activities rather than performing them internally Concept

20. When Does Outsourcing an ActivityMake Strategic Sense? • Activity can be performed better or more cheaply by outside specialists • Activity is not crucial to achieve a sustainable 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

21. The Big Risk of Outsourcing • Farming out too many or the wrong activities, thus • Hollowing out capabilities • Losing touch with activities and expertise that determine overall long-term success

22. Matching Strategy toa Company’s Situation Nature of industry and competitive conditions Most important drivers shaping a firm’s strategic options fall into two categories Firm’s internal resource strengths and weaknesses 6-22

23. Matching a Company’s Strategyto Different Market Conditions Fragmented Markets Freshly Emerging Markets Rapidly Growing Markets Turbulent Markets Stagnant or Declining Markets Mature, Slow-Growth Markets 6-23

24. Features of an Emerging Industry • New and unproven market • Proprietary technology • Lack of consensus regarding which ofseveral competing technologies will win out • Low entry barriers • Experience curve effects may permitcost reductions as volume builds • Buyers are first-time users and marketing involves inducing initial purchase and overcoming customer concerns • First-generation products are expected to be rapidly improved so buyers delay purchase until technology matures • Possible difficulties in securing raw materials • Firms struggle to fund R&D, operations and build resource capabilities for rapid growth

25. Strategy Options for Competing in Emerging Industries • Win early race for industry leadership by employing a bold, creative strategy • Push hard to perfect technology,improve product quality, and developattractive performance features • Consider mergingwith oracquiring another firm to • Gain added expertise • Pool resource strengths • When technological uncertainty clears and a dominant technology emerges,try to capture any first-mover advantages by moving quickly • Form strategic alliances with • Companies having related technological expertise or • Key suppliers

26. Strategy Options for Competing in Emerging Industries (continued) • Pursuenew customers and user applications • Enternew geographical areas • Make it easy and cheap forfirst-time buyers to try product • Focus advertisingemphasis on • Increasing frequency of use • Creating brand loyalty • Use price cuts to attract price-sensitive buyers

27. What Is the Key to Success forCompeting in Rapidly Growing Markets? • A company needs a strategypredicated on growing faster thanthe market average so it • Can boost its market share and • Improve its competitive standing vis-à-vis rivals

28. Strategy Options for Competing in Rapidly Growing Markets • Drive down costs per unit to enable price reductions that attract droves of new customers • Pursue rapid product innovation to • Set a company’s product offering apart from rivals • Incorporate attributes to appeal togrowing numbers of customers • Gain access to additional distributionchannels and sales outlets • Expand a company’s geographic coverage • Expand product line to add models/styles to appeal to a wider range of buyers

29. Industry Maturity: The Standout Features • Slowing demand breeds stiffer competition • More sophisticated buyers demand bargains • Greater emphasis on cost and service • “Topping out” problem in adding production capacity • Product innovation and newend uses harder to come by • International competition increases • Industry profitability falls • Mergers and acquisitions reducenumber of rivals

30. Strategy Options forCompeting in a Mature Industry • Prune marginal products and models • Emphasize innovation in the value chain • Strong focus on cost reduction • Increase sales to present customers • Purchase rivals at bargain prices • Expand internationally • Build new, more flexiblecompetitive capabilities

31. Strategic Pitfalls in a Maturing Industry • Employing a ho-hum strategy with no distinctive features thus leaving firm “stuck in the middle” • Being slowto mount adefense againststiffening competitive pressures • Concentrating on short-term profits rather than strengthening long-term competitiveness • Being slow to respondto price-cutting • Having too much excess capacity • Overspending on marketing efforts • Failing to aggressively • Invest in product / process innovations • Pursue cost reductions

32. Stagnant or Declining Industries:The Standout Features • Demand grows more slowly than economy as a whole (or even declines) • Advancing technology gives rise to better-performing substitute products or lower costs • Customer group shrinks • Changing lifestyles and buyer tastes • Rising costs of complementary products • Competitive battle ensues among industry members for the available business

33. Strategy Options for Competingin a Stagnant or Declining Industry • Pursue focus strategy aimed atfastest growing market segments • Stress differentiation based on qualityimprovement or product innovation • Work diligently to drive costs down • Cut marginal activities from value chain • Use outsourcing • Redesign internal processesto exploit e-commerce • Consolidate under-utilized production facilities • Add more distribution channels • Close low-volume, high-cost distribution outlets • Prune marginal products

34. End-Game Strategiesfor Declining Industries • An end-game strategy can take either of two paths • Slow-exit strategy involving • Gradual phasing down of operations • Getting the most cash flow from the business • Fast-exitstrategy involving • Disengaging from an industryduring early stages of decline • Quick recovery of as much of acompany’s investment as possible

35. Features of Turbulent Markets • Rapid-fire technological change • Short product life-cycles • Entry of important new rivals • Frequent launches ofnew competitive moves • Rapidly evolvingcustomer expectations

36. Strategy Options for Competingin High-Velocity Markets • Invest aggressively in R&D • Keep products/services fresh and exciting • Develop quick response capabilities • Shift resources • Adapt competencies • Create new competitive capabilities • Speed new products to market • Use strategic partnerships to developspecialized expertise and capabilities • Initiate fresh actions every few months

37. Keys to Success in Competingin High Velocity Markets • Cutting-edge expertise • Speed in responding to new developments • Collaboration with others • Agility • Innovativeness • Opportunism • Resource flexibility • First-to-market capabilities

38. Competitive Featuresof a Fragmented Industry • Absence of market leaders with large market shares or widespread buyer recognition • Product/service is delivered to neighborhoodlocations to be convenient to local residents • Buyer demand is so diverse that manyfirms are required to satisfy buyer needs • Low entry barriers • Absence of scale economies • Market for industry’s product/service may be globalizing, thus putting many companies across the world in same market arena • Exploding technologies force firms to specialize just to keep up in their area of expertise • Industry is young and crowded with aspiring contenders, with no firm having yet developed recognition to command a large market share

39. Competing in a Fragmented Industry: The Strategy Options • Construct and operate “formula” facilities • Become a low-cost operator • Specializeby product type • Specialize by customertype • Focus on limited geographicarea

40. First-Mover Advantages • When to make a strategic move is often as crucial as whatmove 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

41. 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

42. What Is Different About a Blue Ocean? • 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 untaintedby 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 6-42

43. 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

44. 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 requiredbefore buyer demand can surge? • Will buyers need to learn newskills or adopt new behaviors? • Will buyers encounter high switching costs? • Are there influential competitors in a positionto delay or derail the efforts of a first-mover?