Supplementing the Chosen Competitive Strategy

1. Supplementing the Chosen Competitive Strategy

2. “Successful business strategy is about actively shaping the game you play, not just playing the game you find.” Adam M. Brandenburger and Barry J. Nalebuff

3. “The sure path to oblivion is to stay where you are.” Bernard Fauber

4. Chapter Roadmap • Collaborative Strategies: 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 • Offensive Strategies: Improving Market Position and Building Competitive Advantage • Defensive Strategies: Protecting Market Position and Competitive Advantage • Web Site Strategies • Choosing Appropriate Functional-Area Strategies • First-Mover Advantages and Disadvantages

5. Fig. 6.1: A Company’s Menu of Strategy Options

6. 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.

7. 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 lower its costs and/or gain access to needed expertise and capabilities

8. 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

9. 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

10. 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 market accessvia joint marketing agreements

11. 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

12. 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

13. Why Alliances Fail • Ability of an alliance to endure depends 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

14. Test Your Knowledge Which one of the following is not a factor that makes an alliance “strategic” as opposed to just a convenient business arrangement? A. The alliance involves joint contribution of resources, shared risk, and is mutually beneficial. B. The alliance helps block a competitive threat or open up new market opportunities. C. The alliance helps mitigate a significant risk to a company’s business. D. The alliance helps build, enhance, or sustain a core competence or competitive advantage. E. The alliance is critical to the company’s achievement of an important objective.

15. 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 strategy • Much-used strategic option • Especially suited for situations wherealliances do not provide a firm with neededcapabilities or cost-reducing opportunities • Ownership allows for tightly integrated operations, creating more control and autonomy than alliances

16. 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 lead theconvergence of industries whose boundariesare blurred by changing technologies andnew market opportunities

17. 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

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

19. Strategic Advantagesof Backward Integration • Generates cost savings only if volume needed is big enough to 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

20. Strategic Advantagesof Forward Integration • To gain better access to end usersand better market visibility • To compensate for undependable distributionchannels 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

21. 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 of capacity-matching problems • May require radically different skills / capabilities • Reduces flexibility to make changes in component parts which may lengthen design time and ability to introduce new products

22. Pros and Cons ofIntegration vs. De-Integration • Whether vertical 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-integratingvalue chain activities is amore flexible, economic strategic option!

23. Internally Performed Activities Suppliers Functional Activities Support Services Distributors or Retailers Outsourcing Strategies Outsourcing involves withdrawing fromcertain value chain activities and relyingon outsiders to supply needed products,support services, or functional activities Concept

24. When Does OutsourcingMake Strategic Sense? • Activity can be performed better ormore cheaply by outside specialists • Activity is not crucial to achieve asustainable 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

25. Risk of an 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

26. Used to build newor stronger market position and/or create competitive advantage Used to protect competitive advantage (rarely lead to creating advantage) Offensive and Defensive Strategies Defensive Strategies Offensive Strategies

27. Principles of Offensive Strategies • Focus relentlessly on • Building competitive advantage and • Striving to convert it into decisive advantage • Employ the element of surprise asopposed 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

28. Types of Offensive Strategy Options 1. Offer an equally good or better product at a lower price 2. Leapfrog competitors by being • First adopter of next-generation technologies or • First to market with next-generation products 3. Pursue continuous product innovationto draw sales and market share awayfrom less innovative rivals 4. Adopt and improve on thegood ideas of other companies

29. Types of Offensive Strategy Options (con’t) 5. Deliberately. attack market segments where a key rival makes big profits 6. Attack competitive weaknesses of rivals 7. Maneuver around competitors andconcentrate on capturing unoccupiedor less contested market territory 8. Use hit-and-run or guerrilla warfare tactics to grab sales and market share from complacent rivals 9. Launch a preemptive strike to secure an advantageous position that rivals are prevented from duplicating

30. 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

31. 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 untainted by 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 Type of Markets: Blue Ocean Strategy

32. For Discussion: Your Opinion Which of the following is the best example of a blue ocean strategy — Apple’s entry into MP3 players with its iPod models or Dell’s entry into LCD TVs or Audi’s recent move to bring out a luxury SUV? Explain.

33. Choosing Rivals to Attack • Four types of firms can be the target of a fresh offensive • Vulnerable market leaders • Runner-up firms with weaknesseswhere challenger is strong • Struggling rivals onverge of going under • Small local or regional firms with limited capabilities

34. 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 manufacturingor distribution • Technological superiority • A superior product

35. Test Your Knowledge Which one of the following is not a good type of rival for an offensive-minded company to target? A. Market leaders that are vulnerable B. Runner-up firms with weaknesses in areas where the challenger is strong. C. Small local and regional companies with limited capabilities D. Companies with lower costs and lower prices E. Struggling enterprises that are on the verge of going under

36. Defensive Strategy • Lessen risk of being attacked • Blunt impact of any attack that occurs • Influence challengers to aim attacks at other rivals Objectives Approaches • Blocking the avenues open to challengers • Signal challengers thatretaliation is likely

37. 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 newproducts or price changes • Challenge quality or safety of rivals’ productsusing legal tactics • Sign exclusive agreements with distributors

38. Signal Challengers Retaliation Is Likely • Publicly announce management’s strong commitment to maintain present market share • Publicly commit firm to policy ofmatching rivals’ terms or prices • Maintain war chest of cash reserves • Make occasional counter-responseto moves of weaker rivals

39. 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 channelto sell direct to customers • Use as one of several important distributionchannels to access customers • Use as primary distribution channel to access buyers • Use as exclusive channel to transact sales with customers

40. Using the Internet toDisseminate Product Information • Approach – Website used to provide product information of manufacturers or wholesalers • Relies on click-throughs to websites ofdealers for sales transactions • Informs end-users of location of retail stores • Issues – Pursuing online sales may • Signal weak strategic commitment to dealers • Signal willingness to cannibalize dealers’ sales • Prompt dealers to aggressively market rivals’ brands • Avoids channel conflict with dealers – Important where strong support of dealer networks is essential

41. Using the Internet as aMinor Distribution Channel • Approach – Use online sales to • Achieve incremental sales • Gain online sales experience • Conduct marketing research • Learn more about buyer tastes and preferences • Test reactions to new products • Create added market buzz about products • Unlikely to provoke much outcry from dealers

42. Reasons to Use the Internetas a Minor Distribution Channel • Manufacturer’s profit margin fromonline sales is bigger than that fromsales through traditional channels • Encouraging buyers to visit a firm’swebsite educates them to the easeand convenience of purchasing online • Selling directly to end users allows amanufacturer to make greater use ofbuild-to-order manufacturing and assembly

43. 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 economic reach • Provide both existing and potential customers another choice of how to • Communicate with a company • Shop for product information • Make purchases • Resolve customer service problems

44. Strategies for Online Enterprises • Approach – Use Internet as the exclusive channel for all buyer-seller contact and transactions • Strategic issues for an online company • How to deliver unique value to buyers • Whether it will pursue competitive advantage based on lower costs, differentiation, or better value for the money • Whether it will have a broad or narrow product offering • Whether to perform order fulfillment activities internally or to outsource them • How it will draw traffic to its Web site and then convert page views into revenues

45. Test Your Knowledge One very important advantage of a product-information-only Web site strategy is A. lower advertising costs. B. avoiding the extra costs associated with operating Web site e-stores. C. avoiding channel conflict—trying to sell online in direct competition with retail dealers signals both a weak strategic commitment to dealers and a willingness to cannibalize dealers’ sales and growth potential. D. added ability to create a positive image of the company. E. lower sales force costs.

46. For Discussion: Your Opinion Suppose that you are a retailer of athletic footwear and one of the major brands you stock in your store is New Balance. What would be your reaction if you learned that New Balance announced that it would soon begin selling its footwear online at the company’s Web site? What actions would you consider taking?