CORPORATE LEVEL STRATEGIES CHAPTER 6

1. CORPORATE LEVEL STRATEGIESCHAPTER 6 MGT 455 SPRING 2010

2. 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.

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. Pros and Cons ofIntegration vs. De-Integration • Whethervertical 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 Many companies are finding thatde-integrating value chain activities is a more flexible, economic strategic option!

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

16. 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 6-16

17. 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

18. 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

19. 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

20. Strategic Hurdles for Companiesin Emerging Industries • Raising capital to finance initial operations until • Sales and revenues take off • Profits appear • Cash flows turn positive • Developing a strategy to ridethe wave of industry growth • What market segments to pursue • What competitive advantages to go after • Managing the rapid expansion of facilities and sales to position a company to contend for industry leadership • Defending against competitors trying to horn in on the company’s success

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. Examples of Fragmented Industries Book publishing Landscaping and plant nurseries Auto repair Restaurants and fast food Public accounting Apparel manufacturing and retailing Hotels and motels Health and medical care Paperboard boxes Furniture

34. 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

35. For Discussion: Your Opinion What classification would you assign to each of the following industries—emerging, rapid-growth, mature/slow-growth, stagnant/declining, high-velocity/turbulent, or fragmented? A. Dry cleaning industry B. Beef industry C. Mobile phone industry D. Computer software industry E. Solar energy production industry

36. 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 6-36