McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 6: Supplementing the Chapter 6: Supplementing the

Chosen Competitive Strategy: Other Chosen Competitive Strategy: Other

Important Business Strategy ChoicesImportant Business Strategy Choices

Screen graphics created by:Jana F. Kuzmicki, Ph.D.

Troy University

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Chapter Learning Objectives

1. Gain an understanding of how strategic alliances and collaborative partnerships can bolster a company’s competitive capabilities and resource strengths.

2. Become aware of the strategic benefits of mergers and acquisitions.

3. Understand when a company should consider using a vertical integration strategy to extend its operations to more stages of the overall industry value chain.

4. Understand the conditions that favor farming out certain value chain activities to vendors and strategic allies.

5. Recognize how and why different types of market situations shape business strategy choices.

6. Understand when being a first-mover or a fast-follower or a late-mover can lead to competitive advantage.

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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

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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.

Strategic Alliances and Partnerships

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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

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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

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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

Why Are Strategic Alliances Formed?

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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

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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

Potential Benefits of Alliances toAchieve Global and Industry Leadership

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Capturing the Benefitsof Strategic Alliances

Benefits from forming partnerships are a function of Picking a good partner Being sensitive to cultural differences Recognizing an alliance

must benefit both parties Ensuring both parties live

up to their commitments Structuring the decision-making process

so actions can be taken swiftly when needed Managing the learning process and then

adjusting the alliance agreement over time to fit new circumstances

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Why Alliances Fail

Ability of an alliance to endure depends on How well partners work together Success of partners in responding

and adapting to changing conditions Willingness of partners to

renegotiate 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

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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

Merger and Acquisition Strategies

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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

Objectives of Mergers and Acquisitions

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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

Pitfalls of Mergers and Acquisitions

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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

InternallyPerformedActivities, Costs, &Margins

Activities, Costs, &

Margins ofSuppliers

Buyer/UserValue

Chains

Activities, Costs,& Margins of

Forward ChannelAllies &

Strategic Partners

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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

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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

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Strategic Disadvantagesof Vertical Integration

Boosts resource requirements Locks firm deeper into same industry Results in fixed sources of supply and

less 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

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Outsourcing Strategies

Outsourcing involves having outsiders perform certain value chain activities rather

than performing them internally

InternallyPerformedActivities

Contract Manufacturers

Vendors with specialized expertise

Distributors or Retailers

Concept

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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 flexibilityCut 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

When Does Outsourcing an ActivityMake Strategic Sense?

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Farming out too many or the wrong activities, thus

Hollowing out capabilities

Losing touch with activities and expertise that determine overall long-term success

The Big Risk of Outsourcing

Matching Strategy toa Company’s Situation

Most important

drivers shaping a

firm’s strategic

options fall into

two categoriesFirm’s internal

resource strengths and weaknesses

Nature of industry

and competitive

conditions

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Matching a Company’s Strategyto Different Market Conditions

Fragmented Fragmented MarketsMarkets

Turbulent Turbulent MarketsMarkets

Freshly Freshly Emerging Emerging Markets Markets

Rapidly Rapidly Growing Growing MarketsMarkets

Mature, Slow-Mature, Slow-Growth Growth MarketsMarkets

Stagnant or Stagnant or Declining Declining MarketsMarkets

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New and unproven market Proprietary technology Lack of consensus regarding which of

several competing technologies will win out Low entry barriers Experience curve effects may permit

cost 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

Features of an Emerging Industry

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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 merging with oracquiring another firm to

Gain added expertisePool resource strengths

When technological uncertainty clears and a dominant technology emerges, try to capture any first-mover advantages by moving quickly

Form strategic alliances withCompanies having related technological expertise or Key suppliers

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Strategy Options for Competing in Emerging Industries (continued)

Pursue new customers and user applications

Enter new geographical areas

Make it easy and cheap forfirst-time buyers to try product

Focus advertising emphasis on

Increasing frequency of use

Creating brand loyalty

Use price cuts to attract price-sensitive buyers

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What Is the Key to Success forCompeting in Rapidly Growing Markets?

A company needs a strategypredicated on growing faster than

the market average so it Can boost its market share and Improve its competitive standing vis-à-

vis rivals

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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

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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 new

end uses harder to come by International competition increases Industry profitability falls Mergers and acquisitions reduce

number of rivals

Industry Maturity: The Standout Features

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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

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Strategic Pitfalls in a Maturing Industry

Employing a ho-hum strategy with no distinctive features thus leaving firm “stuck in the middle”

Being slow to mount a defense against stiffening competitive pressures

Concentrating on short-term profits rather than strengthening long-term competitiveness

Being slow to respond to price-cutting

Having too much excess capacity

Overspending on marketing efforts

Failing to aggressively Invest in product / process innovations

Pursue cost reductions

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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

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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 processes

to exploit e-commerce Consolidate under-utilized production facilities Add more distribution channels Close low-volume, high-cost distribution outlets Prune marginal products

Strategy Options for Competingin a Stagnant or Declining Industry

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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-exit strategy involving

Disengaging from an industryduring early stages of decline

Quick recovery of as much of acompany’s investment as possible

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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

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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

Strategy Options for Competingin High-Velocity Markets

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Cutting-edge expertise

Speed in responding to new developments

Collaboration with others

Agility

Innovativeness

Opportunism

Resource flexibility

First-to-market capabilities

Keys to Success in Competingin High Velocity Markets

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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

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Competing in a Fragmented Industry: The Strategy Options

Construct and operate “formula” facilities

Become a low-cost operator

Specialize by product type

Specialize by customer type

Focus on limited geographic area

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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 distributionchannels can produce cost advantage

Loyalty of first time buyers is high

Moving first can be a preemptive strike

First-Mover Advantages

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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

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

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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

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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 position

to delay or derail the efforts of a first-mover?