Supplementing the chosen competitive strategy chapter 6

Supplementing the Chosen Competitive Strategy Chapter 6

Chapter Roadmap Collaborative Strategies: Alliances and partnership Mergers and Acquisition strategies Vertical integration strategies Outsourcing strategies Offensive strategies Defensive strategies Web site strategies Choosing appropriate functional area strategy First mover advantage and disadvantage

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

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

Reasons for Collaborative Strategies Globalization of the world economy, Revolutionary advances in technology, untapped markets in Asia, Europe and Latin America

Competitive Forces for Strategic Alliances The global race to build a market presence in many different national markets and join the ranks of companies recognized as global leaders The race to seize opportunities on the frontiers of advancing technology and build resource strengths and business capabilities to compete successfully in the industries and product markets of the future Collaborative arrangements can help a company lower its costs and/or gain access to needed expertise and capabilities

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 product

Factors that make an Strategic Alliance It is critical to the 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 important new market opportunities It mitigates a significant risk to a company’s business

Potential Benefits of Alliances to Achieve 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

Capturing the Benefits of Strategic Alliances The extent to which companies benefits from entering into strategic alliance is a function of six factors Picking a good partner Desired expertise and capabilities Shares the company’s vision about the purpose of the alliance No direct competition because of overlapping product line Products are complimentary rather than substitutes Good chemistry among key personnel Strong partner with useful resource or skill 2. Being sensitive to cultural differences

Capturing the Benefits of Strategic Alliances 3. Recognizing that the alliance must benefit both sides Information must be shared as well as gained Relationship must remain forthright and trustful Ensuring that both parties live up to their commitments division of work has to be perceived as fairly appropriate Caliber of the benefits received on both sides has to be perceived as adequate Structuring of the decision-making process so that actions can be taken swiftly when needed

Capturing the Benefits of Strategic Alliances 6. Managing the learning process and then adjusting the alliance agreement over time to fit new circumstances Alliances are more likely to be long-term when: They involve collaboration with suppliers or distribution allies and each party’s contribution involves activities in different portions of the industry value chain Both parties conclude that continued collaboration is in their mutual interest because - new opportunities of learning are emerging - further collaboration will allow each partner to extend its market reach beyond what it could accomplish on its own

Why Alliances Fail 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

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 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

Objectives of Mergers and Acquisitions To create a more cost-efficient operation Inefficient plants can be closed Distribution activities partly combined and downsized Marketing and sales activities combined and downsized Reduce supply chain costs because of buying in greater volume Cost savings in administrative activities by combining and downsizing To expand a firm’s geographic coverage Quickest and best way If geographic overlap, side benefit of reducing cost by eliminating duplicate facilities

Objectives of Mergers and Acquisitions 3. To extend a firm’s business into new product categories Quicker and more potent way to broaden company’s product line than going through the exercise of introducing company’s own new product line 4. To gain quick access to new technologies or competitive capabilities Favorite among technological companies racing to establish a position in product categories about to be born Allows companies bypass time consuming and expensive R&D effort To invent a new industry and lead the convergence of industries whose boundaries are blurred by changing technologies and new market opportunities Company’s management betting that two or more distinct industries are converging into one and deciding to establish strong position in consolidating market Merger of AOL and Time Warner – a move predicated on the belief that entertainment content would ultimately converge into one much of which ill be distributed over internet

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 Pitfalls of Mergers and Acquisitions

Vertical Integration Strategies Extend a firm’s competitive scope within same industry Backward into sources of supply Forward toward end-users of final product Can aim at either full or partial i ntegration Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Suppliers Buyer/User Value Chains Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners

Strategic Advantages of Backward Integration Generates cost savings only if: (a) The volume needed is big enough to capture the scale economies of the supplier have (b) the supplier efficiency can be matched or exceeded with no drop in quality. The potential to reduce costs exists in situations: suppliers have a sizeable profit margin, the item being supplied is a major cost component, where needed technological skills are easily mastered Backward integration can produce a differentiation based competitive advantage when a company by performing activities internally: - ends up with better quality product/service offering - improves the caliber of its customer service - in other ways enhances the performance of its final product

Strategic Advantages of Backward Integration On occasions integrating into more stages along industry value chain can add to company’s differentiation capabilities by; - allowing the company to build or strengthen its core competencies - better muster key skills or strategy – critical technologies - add features that deliver greater customer value Other potential advantages of backward integration are: - sparing a company of uncertainty of being dependent on suppliers for crucial components or support services - lessening a company’s vulnerability to powerful suppliers inclined to raise prices at every opportunity

Strategic Advantages of Forward Integration To gain better access to end users and better market visibility Independent sales agents, wholesalers, retailers handle competing brands of the same product, have no allegiance to any one company’s brand and tend to push “what sells” and earns the biggest profit. This results in: Frustrate a company’s effort to boost sales and market share Give rise to costly inventory pileups and frequent under utilization of capacity If company’s product line is not broad enough to justify stand alone distributor-ship or retail stores. This leaves the option for selling directly to end users – perhaps by internet, which may: Lower distribution costs Produce a relative cost advantage over rivals Enable lower selling prices to end users

Strategic Disadvantages of Integration It boosts a firm’s capital investment in the industry, increasing business risk in case industry growth and profits goes sour Fully integrated firms tend to adapt new technologies slower than partially integrated or nonintegrated firms Integrating forward or backward locks a firm relying on its own in-house activities and potentially results in less flexibility in accommodating buyer demand for greater product variety Pose problems in balancing capacity at each stage in in the value chain Often calls for radically different skills and business capabilities Backward integration into the production and parts components can reduce a company’s manufacturing flexibility, lengthening the time it takes to make design and model changes and bring new products to market.

Whether vertical integration is a viable strategic option depends on its Ability to lower cost, build expertise, increase differentiation, or enhance performance of strategy-critical activities Impact on investment cost, flexibility, and administrative overhead Contribution to enhancing a firm’s competitiveness Pros and Cons of Integration vs. De-Integration

Outsourcing Strategies Outsourcing involves withdrawing from certain value chain activities and relying on outsiders to supply needed products, support services, or functional activities Concept Internally Performed Activities Suppliers Support Services Functional Activities Distributors or Retailers

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/or changing 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 When Does Outsourcing Make Strategic Sense?

Farming out too many or the wrong activities , thus Hollowing out capabilities Losing touch with activities and expertise that determine overall long-term success Risk of an Outsourcing Strategy

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

Principles of Offensive Strategies Focus relentlessly on Building competitive advantage and Striving to convert it into decisive advantage Employ the element of surprise as opposed 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

Types of Offensive Strategy Options Offer an equally good or better product at a lower price AMD head on competition with Intel offering faster alternative to Intel’s Pentium chips at lower price 2. Leapfrog competitors by being First adopter of next-generation technologies or First to market with next-generation products Microsoft introduction of its next generation Xbox four months ahead of Play station 3 3. Pursue continuous product innovation to draw sales and market share away from less innovative rivals

Types of Offensive Strategy Options Such offensive works only if a company has potent product innovation skills of its own Keep its pipeline full of ideas that are consistently well received in the market 4. Adopt and improve on the good ideas of other companies Ryan air in Europe has succeeded as low-cost airline by imitating Southwest airlines’ operating processes by applying them in different geographic markets

Types of Offensive Strategy Options (con’t) 5. Deliberately attack market segments where a key rival makes big profits Dell’s entry into printers and printer cartridges into market dominated by HP 6. Attack competitive weaknesses of rivals Go after the customers of those rivals whose products lag on quality, features or product performance Aggressors with recognized brand names and strong marketing skills can launch efforts to win customers from rivals with weak brand recognition

Types of Offensive Strategy Options (con’t) 7. Maneuver around competitors and concentrate on capturing unoccupied or less contested market territory Create new market segments by introducing products with different attributes and performance features to better meet the needs of selected buyers 8. Use hit-and-run or guerrilla warfare tactics to grab sales and market share from complacent rivals Occasional lowballing on price ( to win big order or steal a key account from rival) Surprising rivals on with sporadic but intense burst of promotional activity ( 20% discount for one week)

Types of Offensive Strategy Options (con’t) 9. Launch a preemptive strike to secure an advantageous position that rivals are prevented from duplicating Whoever strikes first stands to capture competitive assets that rival can’t readily match Securing the best distributors in a particular geographic region or country Moving to obtain the most favorable site Tying up the most reliable, high quality supplier via exclusive partnership, long-term contracts, or acquisitions Moving swiftly to acquire assets of distressed rivals at bargaining price

Blue Ocean: A Special Kind Of Offensive A blue ocean strategy seeks to gain a dramatic and durable competitive advantage by: a) Abandoning efforts to beat out competitors in existing markets b) Inventing a new industry or distinctive market segment that renders existing competitors largely irrelevant and allows a company to create and capture altogether new demand This strategy views the business universe as consisting of two distinct types of market space 1. Industry boundaries are: - well defined and accepted - competitive rules of the game well understood - companies try to out perform rivals by capturing bigger share of existing demand - lively competition constrains a company’s prospects for rapid growth and superior profitability 2. Industry does not really exist yet - is untainted by competition - offers wide –open opportunity for profitable rapid growth Examples : AMC via its pioneering megaplex movie theaters FedEx in overnight package delivery

Choosing Which Rival to Attack 1. Market leaders that are vulnerable Offensive attack make a good sense when a company that leads in terms of size and market share is not a leader in terms of serving the market well Signs of vulnerability include: - unhappy buyers - an inferior product line - a weak competitive strategy with regard to low cost leadership or differentiation - strong emotional commitment to aging technology the leader has pioneered - outdated plants and machinery - a preoccupation with diversification in other industries Offensive to erode position of leaders have real promise when the challenger is able to revamp its value chain or innovate to fresh cost based or differentiation based competitive advantage To be successful attacks on leaders don’t have to result in making the aggressor the new leader; a challenger may win by simply becoming a stronger runner up

Choosing Which Rival to Attack 2. Runner up firms with weaknesses in areas where the challenger is strong Challenger’s resource strength and competitive capabilities are well suited to exploiting their weakness 3. Struggling enterprise that are on the verge of going under 4. Small local and regional firms with limited capabilities

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 manufacturing or distribution Technological superiority A superior product

Defensive Strategy Lessen risk of being attacked Blunt impact of any attack that occurs Influence challengers to aim attacks at other rivals Block avenues open to challengers Signal challengers vigorous retaliation is likely Objectives Approaches

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 new products or price changes Challenge quality or safety of rivals’ products using legal tactics Sign exclusive agreements with distributors

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

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 channel to sell direct to customers Use as one of several important distribution channels to access customers Use as primary distribution channel to access buyers Use as exclusive channel to transact sales with customers

Product Information –only web Strategies Avoiding channel Conflict An attractive market positioning option for manufacturers and wholesalers that have invested heavily in building and cultivating retail dealer network Face channel conflict issues if they try to sell on line in direct competition with dealers A manufacturer that aggressively pursue online sales to end user is signaling - a weak strategic commitment to its dealers - a willingness to cannibalize dealers’ sales and growth potential Such strategy is certain to anger its wholesale distributors and retail dealers who may respond by putting more effort into marketing bands of rival manufacturers that don’t sell on line In sum, manufacturer may stand to lose more sales by offending its dealers than it gains from its own online sale

Web Site e-Stores as a Minor Distribution channel Use on-line sales as minor distribution channel for: - achieving incremental sales - gaining on-line sales experience - doing marketing research If channel conflict posses a big obstacle to on-line sales, or if only a small fraction of buyers can be attracted to make on-line purchases, then company should pursue on line sales with strategic intent of: - gaining experience - learning more about learning buyers taste and preferences - testing reaction to new products - creating more marketing buzz about their products Despite the channel conflict that exist when manufacturer sells directly to end user at its website in head to head competition with its channel members, it may still opt to establish online sales as an important distribution channel because: Profit margins from online sales are bigger Encouraging buyers to visit the company’s Web site helps to educate them to the ease and convenience of purchasing online, and prompt over time more and more buyers to purchase online To make use of build to order manufacturing and assembly

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 Brick-and-Click Strategies: An Appealing Middle Ground Approach

Choosing Appropriate Functional-Area Strategies Involves strategic choices about how functional areas are managed to support competitive strategy and other strategic moves The nature of functional strategies is dictated by the choice of competitive strategy Low cost provider strategy needs: - R&D and product design strategy that emphasizes cheap-to-incorporate features and facilitates economical assembly - production strategy that stresses capture of scale economies, high labor productivity, efficient supply chain management, automated production processes - low budget marketing strategy High end differentiation strategy requires: - production strategy geared to top-notch quality - marketing strategy aimed at touting differentiating features and using advertising and a trusted brand name to pull sales through distribution channels

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 distribution channels can produce cost advantage Loyalty of first time buyers is high Moving first can be a preemptive strike First-Mover Advantages

First-Mover Advantages Sustaining advantages of being first-mover: Needs to be fast learner Continue to move aggressively to capitalize on any initial pioneering advantage Helps immensely if first mover has financial pockets Has competencies and competitive capabilities and astute managers

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

To be a First Mover or Not It matters whether the race to market leadership in a particular industry is a sprint or marathon In marathons a slow mover is not unduly penalized - first mover advantages could be fleeting - there is ample of time for fast mover followers, some times late movers to play catch up The speed at which the pioneering innovation is likely to catch on matters as companies struggle with whether to pursue a particular emerging opportunity aggressively or cautiously There is a market penetration curve for every emerging opportunity The curve has an inflection point at which all pieces of the business model fall into place, buyer demand explodes, and the market takes off

To be a First Mover or Not The inflection point can come early on a fast rising curve or further up on a slow rising curve A company that seeks competitive advantage by being first mover needs to ask: Does market takeoff depend on the development of complementary products or services that currently are not available? Is new infrastructure required before buyer demand surge? Will buyer need to learn new skills or adopt new behaviors? Will buyers encounter high switching costs Are there influential competitors in position to delay or derail the efforts of a first mover When the answer to any of these questions are yes, then a company must e careful not to pour too many resources into getting ahead of the market opportunity The race is going to e a 10-year marathon than a 2–year sprint

Supplementing the chosen competitive strategy chapter 6

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Supplementing the chosen competitive strategy chapter 6