STRATEGIC QUOTES…

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

“The essence of strategy lies in creating tomorrow’s competitive advantages faster than competitors can mimic the ones you possess today.” Gary Hamel & C. K. Prahalad

“Competitive strategy is about being different. It means deliberately choosing to perform activities differently or to perform different activities than rivals to deliver a unique mix of value.” Michael Porter

“Strategies for taking the hill won’t necessarily hold it.” Amar Bhide

THE TOWS MATRIXWEIHRICH 82

INTERNAL FACTORS

STRENGTHS WEAKNESSES- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

OPPORTUNITIES SO STRATEGIES WO STRATEGIES

Use Strengths to take Take advantage of advantage of Opportunities Opportunities by

overcoming Weaknesses

EXTERNAL - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

FACTORS ST STRATEGIES WT STRATEGIES Uses Strengths to avoid Minimize Weaknesses Threats and avoid Threats

THREATS - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

HELPS US TO THINK ABOUT ALTERNATIVE STRATEGIES WE NORMALLY WOULDN’T CONSIDER. PORTER’S COMPETITIVE STRATEGIES

PORTER’S COMPETITIVE STRATEGIES

ISSUE 1 -- SHOULD WE OFFER “SUPERIOR VALUE” BY…

A. OFFERING A GOOD PRODUCT AT A LOW PRICE, OR

B. OFFERING A BETTER PRODUCT THAT IS WORTH PAYING MORE FOR?

ISSUE 2 – SHOULD WE COMPETE

A. “HEAD TO HEAD” WITH OUR MAJOR COMPETITORS, OR

B. SHOULD WE FOCUS ON A NICHE IN WHICH WE CAN SATISFY A LESS SOUGHT-AFTER BUT STILL PROFITABLE SEGMENT OF THE MARKET?

PORTER’S GENERIC STRATEGIESPORTER 1990

COMPETITIVE ADVANTAGE

LOWER COST DIFFERENTIATED- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

BROAD TARGET COST DIFFERENTIATION

LEADERSHIP

COMPETITIVE - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

SCOPE COST DIFFERENTIATION

FOCUS FOCUS

NARROW TARGET

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

PORTER’S GENERIC STRATEGIESPORTER 1990

LOW-COST LEADERSHIPLower costs than competitorsTargeted to a broad cross-section of the market

DIFFERENTIATIONOffer buyers something different from competitorsTargeted to a broad cross-section of the market

FOCUSED LOW-COSTLowest cost in serving a niche marketTargets a narrow market niche where buyer needs and preferences are distinctly different from the larger market

FOCUSED DIFFERENTIATIONOffer niche buyers something customized to their needs and preferencesTargets a narrow market niche where buyer needs and preferences are distinctly different from the larger market

LOW-COST LEADERSHIP STRATEGY

NO ONE CAN MAKE IT FOR LESS COST

STANDARDIZED PRODUCTS & SERVICES WITH LIMITED OPTIONS

GOOD VALUE FOR BUDGET PRICES

NO FRILLS OPERATING CULTURE (Lean and Mean!!!)

HIGH PRODUCTIVITY PER EMPLOYEE – THE EFFICIENCY LEADER

AGGRESSIVELY SEEKS COST-CUTTING INNOVATIONS

ACCEPTS LOW MARGINS IN RETURN HIGH VOLUME SALES

LOW-COST STRATEGIES ARE MOST SUCCESSFUL WHEN…

THE INDUSTRY PRODUCES STANDARDIZED PRODUCTS OR SERVICES

THERE AREN’T VERY MANY WAYS TO DIFFERENTIATE THE PRODUCT

MOST BUYERS USE THE PRODUCT IN SIMILAR WAYS

BUYERS INCUR LOW SWITCHING COSTS IN CHANGING SUPPLIERS

BUYERS ARE LARGE & HAVE POWER TO BARGAIN DOWN PRICES

PRICE COMPETITION IS A DOMINANT COMPETITIVE FORCE

RISKS OF A LOW-COST PRODUCER

COST ADVANTAGES TIED TO LARGE TECHNOLOGICAL INVESTMENTS MAY BACKFIRE IF THE TECHNOLOGY SUDDENLY BECOMES OBSOLETE

TECHNOLOGICAL BREAKTHROUGHS CAN ALSO GIVE RIVALS THE CHANCE TO ACQUIRE THE SAME COST REDUCTIONS WE ENJOY, OR TO DRIVE COSTS EVEN LOWER THAN WE CAN PRESENTLY ACHIEVE

RIVALS MAY FIND IT EASY OR INEXPENSIVE TO IMITATE OUR FIRM’S LOW-COST METHODS. IF THERE ARE NO BARRIERS OR PROTECTIONS, OUR COST ADVANTAGE MAY BE LOST QUICKLY

BUYER PREFERENCES AND TASTES MAY SHIFT TOWARD QUALITY, SERVICE, PERFORMANCE, OR OTHER DIFFERENTIATING FEATURES

STRATEGIC COST ANALYSIS AND ACTIVITY-COST CHAINS

SUPPLIER-RELATED ACTIVITIESPRICES PAID FOR RAW MATERIALS, ENERGY, PARTS, TRANSPORTATION

MANUFACTURING- (OR PROCESS) RELATED ACTIVITIESAGE & EFFICIENCY OF FACILITIES, ECONOMIES OF SCALE, WAGE RATES, PRODUCTIVITY, ADMINISTRATIVE OVERHEAD, ETC.

DISTRIBUTION-RELATED ACTIVITIESMARK UPS OF DISTRIBUTORS, RETAILERS, SALES & ADVERTISING, TRANSPORTATION AND DISTRIBUTION, ETC.

HOW DOES YOUR FIRM’S COST POSITION COMPARE WITH YOUR RIVALS?

ANALYSIS OF ACTIVITY-COST CHAINS…AN EXAMPLE

ACTIVITY-COST ANALYSIS OURS RIVAL 1 Diff

SUPPLY CHAIN COSTS

Cost of 1 ounce of RM #1 $ .61 $ .553 .057

Storage & Insurance & Trans --- .025 -.025

Total Cost per ounce of RM (#1) $ .61 $ .578 .032

Ozs of RM (#1) needed per unit (20 oz) $12.20 (20.5 oz) $ 11.849 .351

Cost of 1 lb of RM #2 $ .51 $ .495 .015

Storage & Insurance & Trans --- .025 -.025

Total Cost – per lb of RM (#2) $ .51 $ .520 -.01

Lbs of RM (#2) needed per unit (13 lbs) $ 6.63 (13.2 lbs) $ 6.864 -.234

Cost of 1 foot of RM #3 $ .728 $ .738 -.01

Storage & Insurance & Trans .042 .025 .017

Total Cost per foot of RM(#3) $ .77 $ .763 .007

Ft of RM (#3) needed per unit (15 ft) $11.55 (15 ft) $11.445 .105

SUPPLY CHAIN COST PER UNIT $ 30.38 $ 30.158 $ .222

ANALYSIS OF ACTIVITY-COST CHAINS…AN EXAMPLE – Contd

ACTIVITY-COST ANALYSIS OURS RIVAL 1 Diff

SUPPLY CHAIN COST PER UNIT $ 30.38 $ 30.158 $ .222

MANUFACTURING & CONVERSION COSTS

Hours needed to make 1 unit 3.0 hrs 3.1 hrs -.1 hr

Wages/Hour $ 9.80 $10.29 - $.49

Variable Labor Cost/Unit $29.40 $31.899 -$2.499

Other Overhead Charges/Unit $16.45 $14.11 $2.34

CONVERSION COST PER UNIT $45.85 $46.009 -$ .159

DISTRIBUTION CHAIN COSTS

Advertising Expenses/unit sold $ 4.28 $ 4.12 $ .16

Sales Commissions/unit sold $ 1.75 $ 2.00 -$ .25

Transportation Charges/unit shipped $ 1.10 $ .87 $ .23

DISTRIBUTION CHAIN COST/UNIT $ 7.13 $ 6.99 $ .14

ACTIVITY-CHAIN COST/UNIT $83.36 $83.157 $ .203

STRATEGIES FOR IMPROVING RELATIVE COST DISADVANTAGES

SUPPLIERS

RENEGOTIATE PRICES

INTEGRATE BACKWARDS

TRY LOWER-PRICED SUBSTITUTES

SEEK TRANSPORTATION SAVINGS

SAVE COSTS ELSEWHERE (Later in the chain)

MANUFACTURING/CONVERSION PROCESS

INVEST IN TECHNOLOGICAL IMPROVEMENTS

RELOCATE HIGH COST-PRODUCING ACTIVITIES

INNOVATE – REDESIGN PRODUCTS, PROCESSES, SERVICES

INITIATE INTERNAL COST-SAVING MEASURES

SAVE COSTS ELSEWHERE

DISTRIBUTION

SEEK BETTER TERMS WITH DISTRIBUTORS

INTEGRATE FORWARD

SEEK TRANSPORTATION SAVINGS

BE MORE EFFICIENT WITH ADVERTISING AND COMMISSION COSTS

SAVE COSTS ELSEWHERE (Earlier in the chain)

DIFFERENTIATION STRATEGY

NO ONE CAN BUILD IT BETTER

WE OFFER SUPERIOR QUALITY – IT’S WORTH THE EXTRA COST

WIDE BREADTH OF PRODUCTS & SERVICES TO CHOOSE FROM

FREQUENT INNOVATION IN PRODUCTS, PROCESSES, & SERVICES

CREATION OF ONE OR MORE POINTS OF DIFFERENCE

INTENSIVE ADVERTISING AND SALES EFFORTS

DIFFERENTIATION STRATEGIES ARE MOST SUCCESSFUL WHEN…

THERE ARE MANY POSSIBLE WAYS TO DIFFERENTIATE

BUYER NEEDS AND PREFERENCES ARE DIVERSE

FEW RIVALS ARE FOLLOWING A SIMILAR DIFFERENTIATION STRATEGY

THE FIRM HAS A TRUE DISTINCTIVE COMPETENCY THAT CAN’T BE COPIED

WAYS TO DIFFERENTIATE

RAW MATERIALS & COMPONENTS USED

PRODUCT QUALITY (GARVIN 87)

PERFORMANCE (operating characteristics; ability to “do the job”)FEATURES & VARIETY (“bells and whistles,” add-ons or supplements)RELIABILITY (functions without maintenance)SERVICEABILITY (easy to repair)CONFORMANCE (how consistently it meets established standards)DURABILITY (product life; how long it lasts before it really deteriorates)AESTHETICS (how does it look, feel, taste, smell, etc)PERCEIVED QUALITY (the overall reputation it has)

PRODUCTION PROCESSES USED

TRANSPORTATION, DISTRIBUTION, & DELIVERY

SERVICE DELIVERY

TECHNICAL SUPERIORITY OF PERSONNEL

SPECIAL CUSTOMER SERVICES

BENEFITS OF EMPHASIZING QUALITY

STRONG CUSTOMER LOYALTYLESS VULNERABILITY TO PRICE WARSCAN CHARGE A HIGHER PRICE WITHOUT LOSING CUSTOMERSLOWER MARKETING COSTSLOWER WARRANTY COSTS

THE VALUE GRID

HIGH - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

POOR PREMIUM VALUE VALUE

PRICE AVERAGE

VALUE

ECONOMY OUTSTANDING VALUE VALUE

LOW - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

INFERIOR SUPERIOR

QUALITY

RISKS OF DIFFERENTIATION

DIFFERENTIATION INCREASES COSTS – WILL BUYERS PAY FOR IT?

CAN COMPETITORS QUICKLY & EASILY COPY YOUR STRATEGY?

DIFFERENTIATION ON THE BASIS OF SOMETHING THAT DOESN’T LOWER BUYER COSTS OR INCREASE A BUYER’S SENSE OF WELL-BEING OR SATISFACTION

OVER-DIFFERENTIATING SO THAT THE PRICE IS TOO HIGH, OR THE QUALITY OR SERVICE LEVELS EXCEED BUYER’S NEEDS & DESIRES

IGNORING THE NEED TO SIGNAL VALUE (ADVERTISE) AND DEPENDING ON PRODUCT ATTRIBUTES ALONE TO ACHIEVE DIFFERENTIATION

NOT UNDERSTANDING WHAT BUYERS CONSIDER AS TRULY VALUABLE

FOCUS STRATEGY

MADE ESPECIALLY FOR YOU (CUSTOMIZED)

SPECIALIZATION FOR SEGMENTS AND NICHES UNDERSERVED OR IGNORED BY PRIMARY COMPETITORS

PRODUCT OR SERVICE REQUIRES SPECIAL KNOWLEDGE OR EXPERTISE TO SERVE THIS UNIQUE POPULATION

COMPETITIVE ADVANTAGE REQUIRES BEING EITHER THE LOW-COST PRODUCER, OR THE QUALITY INNOVATOR IN THE NICHE

FOCUS STRATEGIES ARE MOST SUCCESSFUL WHEN…

THE FIRM HAS THE SKILLS & RESOURCES TO SERVE THE SEGMENT WELL

THE SEGMENT ISN’T CRUCIAL TO THE SUCCESS OF MAJOR COMPETITORS

THE SEGMENT HAS GOOD PROFIT AND GROWTH POTENTIAL

NO OTHER RIVAL IS ATTEMPTING TO STRATEGICALLY SERVE THE SEGMENT IN THE SAME WAY

RISKS OF A FOCUS STRATEGY

THE ADVANTAGES OF A BROAD PRODUCT LINE INCREASE

NICHE BUYER PREFERENCES SHIFT TOWARD THE BROAD MARKET – DEMAND DISAPPEARS

COMPETITORS FIND WAYS OF MATCHING THE FIRM’S SPECIAL SKILLS , PRODUCTS AND SERVICES

ONLY ONE COST-LEADER AND ONE QUALITY INNOVATOR CAN SURVIVE AND THRIVE IN MOST SMALL NICHES

ATTRACTIVE SEGMENTS DRAW IN NEW COMPETITORS

NEW COMPETITORS SUB-SEGMENT THE NICHE

USING OFFENSIVE STRATEGIES TO BUILD COMPETITIVE ADVANTAGE

THREE PHASES:BUILD-UP PERIOD

SHORT FOR NEW SERVICESLONG FOR CAPITALLY-INTENSE TECHNOLOGIES

Ideally, an offensive move should build competitive advantage quickly, before rivals see it and respond to it.

BENEFIT PERIODHOW LONG DOES IT TAKE RIVALS TO CLOSE THE COMPETITIVE GAP?IS THERE ENOUGH TIME TO EARN BACK THE INVESTMENT MADE IN CREATING THE ADVANTAGE?

The best strategic offensives produce BIG competitive advantages and LONG benefit periods.

EROSION PERIODRESOURCEFUL, COMPETENT COMPETITORS WILL RESPOND WITH COUNTEROFFENSIVES WHICH ERODE THE FIRM’S COMPETITIVE ADVANTAGE

Thus, to sustain a competitive advantage, a firm must stay a step ahead of rivals by mounting one creative offensive after another.

COMPETITION AND OFFENSIVE STRATEGIES

TWO OFFENSIVE PRINCIPLES:

1. CHALLENGING LARGER, ENTRENCHED COMPETITORS WITH AGGRESSIVE PRICE-CUTTING IS FOOLHARDY….UNLESS YOU HAVE EITHER A COST ADVANTAGE OR GREATER FINANCIAL STRENGTH, DON’T COMPETE HEAD-TO-HEAD.

2. CHALLENGING RIVALS WHERE THEY ARE LESS COMPETENT IS MORE LIKELY TO SUCCEED THAN CHALLENGING THEM WHERE THEY ARE STRONGEST, ESPECIALLY IF WE HAVE SIGNIFICANT ADVANTAGES IN AREAS WHERE RIVALS ARE WEAK.

SOME COMMON OFFENSIVE TACTICS

PRICE-CUTTING

COMPARISON ADS

CREATE NEW FEATURES THAT APPEAL TO A RIVAL’S CUSTOMERS

CREATE NEW PLANT CAPACITY IN A RIVAL’S BACK YARD

CREATE NEW MODELS THAT MATCH OR MIMIC THE RIVAL’S

COMPETITIVE ADVANTAGES THAT ENHANCE AN OFFENSIVE STRATEGY

DEVELOP A LOWER-COST PRODUCT DESIGN

MAKE PRODUCTION CHANGES THAT LOWER COSTS OR ENHANCE DIFFERENTIATION

DEVELOP PRODUCT FEATURES THAT DELIVER SUPERIOR PERFORMANCE OR LOWER USER COSTS

GIVE BUYERS MORE RESPONSIVE AFTER-SALE SUPPORT

PIONEER A NEW DISTRIBUTION CHANNEL

BYPASS WHOLESALE DISTRIBUTORS & SELL DIRECT TO END-USERS

DEVELOP A STRONG ADVERTISING/MARKETING EFFORT IN AN UNDERMARKETED INDUSTRY

A strategic offense must be tied to what firm does BEST – it’s competitive strengths and capabilities.

OFFENSIVE MARKET LOCATION TACTICS(WHERE TO COMPETE?)

FRONTAL ASSAULT – ATTACK COMPETITOR STRENGTHSA GOOD PRODUCT WITH A LOWER PRICE?

BETTER HAVE A TRUE COST ADVANTAGE BEFORE OFFERING A LOWER PRICE

FLANKING MANEUVER – ATTACK COMPETITOR WEAKNESSESFIND NEGLECTED BUYERS, GAPS IN THE PRODUCT LINE, POOR SERVICE OR QUALITY

CATCH THE RIVAL BY SURPRISE WITH NO READY DEFENSE

BYPASS OR END-RUN – AVOID HEAD-ON CHALLENGESDON’T CHALLENGE OR ATTACK EXISTING COMPETITORS

FIND THE NICHES WHERE NO FIRM HAS YET GONE…GAIN FIRST MOVER ADVANTAGES

GUERRILLA OFFENSIVES – HIT-AND-RUN APPROACH FOR SMALL CHALLENGERSSMALL INTERMITTENT RAIDS TO TAKE ADVANTAGE OF TEMPORARY SITUATIONS

WITHDRAW FROM COMPETITION BEFORE LARGE RIVALS REACT—LIVING ON THE CRUMBS

ENCIRCLEMENT – SURROUND THE COMPETITOR WITH COMPETING PRODUCTS/SERVICESCARRIES A MUCH BROADER PRODUCT LINE, CAN SERVE MORE MARKETS, NEEDS—ONE STOP

SIMULTANEOUSLY ATTACK ON SEVERAL FRONTS (PRODUCTS) – COMPETITOR IS OVERWHELMED

PREEMPTIVE STRIKES – MOVE FIRST TO SECURE AN ADVANTAGEOUS POSITIONEXPAND CAPACITY, CLAIM THE BEST SUPPLIERS, LOCATIONS, DISTRIBUTORS, ETC.

DISCOURAGES RIVALS FROM ATTEMPTING TO DUPLICATE

DEFENSIVE STRATEGIES

TRY TO LOWER THE RISK OF ATTACK OR LESSEN IT’S IMPACT ON YOUR FIRM

DON’T PROVIDE NEW COMPETITIVE ADVANTAGES TO YOUR FIRM, BUT THEY DO TRY TO SUSTAIN WHATEVER PREVIOUS ADVANTAGES YOU’VE ENJOYED BY MAKING ATTACKS AGAINST YOUR FIRM UNATTRACTIVE

THESE TACTICS REDUCE SHORT-TERM PROFITABILITY IN AN EFFORT TO PRESERVE LONG-TERM PROFITABILITY

THREE TYPES OF DEFENSIVE TACTICS:

BLOCK OFF AVENUES OF ATTACK (RAISE BARRIERS)

INCREASE EXPECTATIONS OF RETALIATION

LOWER THE INDUCEMENT TO ATTACK

DEFENSIVE STRATEGIES – 1FRUSTRATING YOUR RIVALS

CREATING BARRIERS

BROADEN YOUR PRODUCT LINE – TO CLOSE OFF VACANT NICHES AND GAPS KEEP PRICES LOW ON MODELS THAT CLOSELY MATCH THE RIVAL’S OFFERINGSSIGN EXCLUSIVE AGREEMENTS WITH DISTRIBUTORS & DEALERS TO KEEP

COMPETITORS FROM USING THEMMAKE IT HARDER FOR BUYER TO SWITCH TO RIVAL BRANDS…

- GIVE SPECIAL PRICE & VOLUME DISCOUNTS- USE COUPONS & SAMPLE GIVEAWAYS TO THOSE MOST PRONE TO SWITCH- MAKE EARLY ANNOUNCEMENTS ABOUT NEW PRODUCTS AND PRICE

CHANGES TO INDUCE POTENTIAL BUYERS TO POSTPONE SWITCHINGINCREASE INVESTMENT IN SCALE ECONOMIES TO REDUCE UNIT COSTSAVOID SUPPLIERS WHO SERVE COMPETITORS – NEGOTIATE EXCLUSIVE CONTRACTSCONTROL ALTERNATIVE TECHNOLOGIES THROUGH PATENTING & LICENSINGLIMIT OUTSIDE ACCESS TO YOUR FACILITIES AND PERSONNELPURCHASE KEY LOCATIONS AND NATURAL RESOUCE RESERVES TO KEEP THEM

FROM RIVALSCHALLENGE RIVALS’ PRODUCTS AND PRACTICES IN REGULATORY PROCEEDINGSENCOURAGE THE GOVERNMENT TO RAISE BARRIERS, SAFETY AND POLLUTION

STANDARDS, AND FAVORABLE TRADE POLICIES

DEFENSIVE STRATEGIES – 2

INCREASE EXPECTATIONS OF RETALIATION

DEFEND ANY EROSION OF MARKET SHARE WITH DRASTIC PRICE CUTS

ADVERTISE THAT “WE WILL NOT BE UNDERSOLD” – MATCH RIVAL PRICE OFFERS

ACCEPT PROMOTIONAL COUPONS AT FACE VALUE…OR EVEN ADD 10%, ETC.

VIGOROUSLY COUNTERATTACK ANY INTRUSION INTO YOUR MARKET

LOWER THE PROFIT INDUCEMENT FOR RIVALS TO ATTACK

KEEP THE PRICES LOW

CONSTANTLY INVEST IN COST-REDUCING TECHNOLOGIES

MAKE SURE THE RIVAL KNOWS THEY WON’T MAKE A PROFIT IF THEY ATTACK YOU

COOPERATIVE STRATEGIESWORKING WITH YOUR RIVALS

COLLUSION -- COOPERATION TO REDUCE OUTPUT AND INCREASE PRICES

Explicit Collusion – illegal collusion, conspiring to control the market and pricesTacit Collusion – no one actually met together and agreed to do anything illegal

TACIT COLLUSION IS MOST LIKELY WHEN:SMALL NUMBER OF COMPETITORSFIRMS EXPERIENCE SIMILAR COSTSONE FIRM TENDS TO ACT AS THE PRICE LEADERTHERE IS A COMMON INDUSTRY CULTURE THAT ACCEPTS COOPERATIONSALES ARE CHARACTERIZED BY A HIGH FREQUENCY OF SMALL ORDERSLARGE INVENTORIES & ORDER BACKLOGS ARE THE WAY FLUCTUATIONS IN DEMAND ARE HANDLEDTHERE ARE HIGH ENTRY BARRIERS WHICH EFFECTIVELY KEEP OUT NEW COMPETITORS

“CONSCIOUS PARALLELISM” CAN BE ILLEGAL – IT REDUCES COMPETITION

STRATEGIC ALLIANCES – LEGAL COOPERATION

MUTUAL SERVICE CONSORTIAJOINT VENTURESLICENSING AGREEMENTSVALUE-CHAIN PARTNERSHIPS

STRATEGIC ALLIANCES

REASONS THEY ARE FORMED:

TO OBTAIN ACCESS TO TECHNOLOGY & MANUFACTURING CAPABILITY

TO OBTAIN ACCESS TO SPECIFIC MARKETS

TO REDUCE FINANCIAL RISK

TO REDUCE POLITICAL RISK

TO LEARN NEW CAPABILITIES

A CONTINUUM OF STRATEGIC ALLIANCES

Mutual Service Joint Ventures Value-Chain

Consortia Licensing Partnerships

= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =WEAK & DISTANT STRONG & CLOSE

TYPES OF STRATEGIC ALLIANCES

MUTUAL SERVICES CONSORTIACompanies pool their resources to gain a benefit that is too expensive to develop aloneLittle interaction among partners – partners work together, but don’t share core competenciesA weak and distant alliance

JOINT VENTURESMost popular alliance – used in international markets to deal with financial/political/legal risksCreates an independent entity, with responsibilities and risks carefully defined for each partyDISADVANTAGES: loss of control, lower profits,conflict with partners, transfers of technologyMeant to be temporary – ventures have a high failure rate

LICENSINGAllows firms to use of trademarks, brand names, and to make and sell products in foreign landsLicensee pays a fee in return for technical expertise and legal permissionsA good way to have your product distributed in a country where you don’t have a presenceCarefully manage any access to your distinctive competence, because it can easily be “stolen”

VALUE-CHAIN PARTNERSHIPSForm a long-term relationship with a key supplier or distributor instead of just using “bids”More quality & reliability in the chain and more profitability for the suppliers & distributors

REMEMBER, YOUR STRATEGIC ALLIES MAY BECOME YOUR COMPETITORS