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Chapter

4
Analyzing a
Company’s Resources
and Competitive Position

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“Before executives can
chart a new strategy, they
must reach common
understanding of the
company’s current position.”
W. Chan Kim and Renee Mauborgne
Chapter highlights
Situation Analysis
 Question 1: How Well Is the Company’s Present Strategy
Working?
 Question 2: What Are the Company’s Resource Strengths
and Weaknesses and Its External Opportunities and
Threats?
 Question 3: Are the Company’s Prices and Costs
Competitive?
 Question 4: Is the Company Competitively Stronger or
Weaker than Key Rivals?
 Question 5: What Strategic Issues and Problems attract
Managerial Attention?
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Q #1: How Well Is the Company’s
Present Strategy Working?
Key Issues
 Identify competitive approach
 Low-cost leadership
 Differentiation
 Focus on a particular market niche
 Determine competitive scope
 Geographic market coverage
 Operating stages in industry’s production/distribution chain
 Examine recent strategic moves
 Identify functional strategies
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Approaches to Assess How Well
the Present Strategy Is Working
 Qualitative assessment –  Quantitative assessment – What
What is the strategy? are the results?
 Completeness  Is company achieving its
financial and strategic
 Internal consistency objectives?
 Rationale  Is company an above-average
industry performer?
 Relevance

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Key Indicators of How Well
the Strategy Is Working
 Trend in sales and market share.
 Acquiring and/or retaining customers.
 Trend in profit margins.
 Trend in net profits, ROI,
 Overall financial strength and credit ranking.
 Efforts at continuous improvement activities.
 Trend in stock price and stockholder value.
 Image and reputation with customers.
 Leadership role(s) – Technology, quality, innovation, e-
commerce, etc.
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Q #2: What Are the Company’s Strengths,
Weaknesses, Opportunities and Threats ?

 S W O T represents the first letter in


S trengths
S W
W eaknesses
O pportunities
T hreats O T
 For a company’s strategy to be well-conceived, it must be
 Matched to its resource strengths and weaknesses
 Aimed at capturing its best market opportunities and erecting
defenses against external threats to its well-being

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Identifying Resource Strengths
and Competitive Capabilities
 A strength is something a firm does well or an attribute that
enhances its competitiveness
 Valuable competencies or know-how
 Valuable physical assets
 Valuable human assets
 Valuable organizational assets
 Valuable intangible assets
 Important competitive capabilities
 An attribute that places a company in a position of market
advantage
 Alliances or cooperative ventures with partners

Resource strengths and competitive


capabilities are competitive assets!
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Competencies vs. Core Competencies
vs. Distinctive Competencies
 A competence is the product of organizational learning and
experience and represents real proficiency in performing an
internal activity

 A core competence is a well-performed


internal activity central (not peripheral or incidental)
to a company’s competitiveness and profitability

 A distinctive competence is a competitively valuable activity a


company performs better than its rivals

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Examples: Core Competencies
 Expertise in integrating multiple technologies
to create families of new products
 Know-how in creating operating systems
for cost efficient supply chain management
 Speeding new/next-generation products to market

 Better after-sale service capability

 Skills in manufacturing a high quality product

 System to fill customer orders accurately and swiftly

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Distinctive Competence -- A
Competitively Superior Resource
 A distinctive competence is a competitively significant activity
that a company performs better than its competitors
 A distinctive competence
 Represents a competitively valuable
capability rivals do not have 1
 Presents attractive potential for
being a cornerstone of strategy
 Can provide a competitive edge in the marketplace —because it
represents a competitively superior resource strength

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Examples: Distinctive
Competencies
 Sony Corporation
 Expertise in flat-panel HDTV
 Toyota and Honda
 Low-cost, high-quality manufacturing
capability and short design-to-market cycles
 Intel
 Abilityto design and manufacture
ever more powerful microprocessors for PCs
 Wal-Mart
 Low-cost distribution and use of
state-of-the-art retail technology
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Determining the Competitive
Value of a Company Resource
 To qualify as competitively valuable or to be the basis for
sustainable competitive advantage, a “resource” must
pass 4 tests:

1. Is the resource hard to copy?

2. Does the resource have staying power –


is it durable?

3. Is the resource really competitively superior?

4. Can the resource be trumped by


the different capabilities of rivals?

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Identifying Resource Weaknesses
and Competitive Deficiencies
 A weakness is something a firm lacks, does poorly, or a
condition placing it at a disadvantage
 Resource weaknesses relate to
 Inferior or unproven skills,
expertise, or intellectual capital
 Lack of important physical,
organizational, or intangible assets
 Missing capabilities in key areas

Resource weaknesses and deficiencies


are competitive liabilities!
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Identifying External Threats
 Emergence of cheaper/better technologies
 Introduction of better products by rivals
 Entry of lower-cost foreign competitors
 regulations
 Rise in interest rates
 Potential of a hostile takeover
 Unfavorable demographic shifts
 Adverse shifts in foreign exchange rates
 Political upheaval in a country
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Q #4: Are the Company’s
Prices and Costs Competitive?
 Assessing whether a firm’s costs are competitive with those of
rivals is a crucial part of company analysis

 Key analytical tools

 Value chain analysis

 Benchmarking

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The Concept of a
Company Value Chain
 A company’s business consists of all activities undertaken in
designing, producing, marketing, delivering, and supporting its
product or service
 A company’s value chain consists of a linked set of value-
creating activities performed internally
 The value chain contains two types of activities
 Primary activities – where most of the value for customers is
created
 Support activities – facilitate performance of the primary
activities
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Fig. 4.3: Representative
Company Value Chain

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Characteristics of
Value Chain Analysis
 Combined costs of all activities in a company’s value chain
define the company’s internal cost structure

 Compares a firm’s costs activity


by activity against costs of key rivals

 From raw materials purchase to

 Price paid by ultimate customer

 Pinpoints which internal activities are a


source of cost advantage or disadvantage
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Why Do Value
Chains of Rivals Differ?
 Several factors can cause differences in value chains of rival
companies
 Internal operations

 Strategy

 Approaches used in execution of the strategy

 Underlying economics of the activities

 Differences complicate task of assessing rivals’ relative cost


positions
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Fig. 4.4: Representative Value
Chain for an Entire Industry

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Example: Value Chain Activities
Pulp & Paper Industry

Timber farming

Logging

Pulp mills

Papermaking

Distribution
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Example: Value Chain Activities
Home Appliance Industry

Parts and components manufacture

Assembly

Wholesale distribution

Retail sales

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Example: Value Chain Activities
Soft Drink Industry
Processing of basic ingredients
Syrup manufacture
Bottling and can filling
Wholesale distribution
Advertising Albertson’s

Retailing
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Example: Value Chain Activities
Software Computer Industry

Programming

Disk loading

Marketing

Distribution

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Activity-Based Costing: A Key
Tool in Analyzing Costs
 Determining whether a company’s costs are in line with those
of rivals requires
 Measuring how a company’s costs compare with those of rivals
activity-by-activity
 Requires having accounting data to measure cost
of each value chain activity
 Activity-based costing entails
 Defining expense categories according
to specific activities performed and
 Assigning costs to the activity
responsible for creating the cost
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Benchmarking

Benchmarking is a potent tool for learning which


companies are best at performing particular
activities and then using their techniques(‘best
practices’) to improve the cost and effectiveness
of a company’s owns internal activities.

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Benchmarking Costs of
Key Value Chain Activities
 Focuses on cross-company comparisons of how certain
activities are performed and costs associated with these
activities
 Purchase of materials
 Payment of suppliers
 Management of inventories
 Getting new products to market
 Performance of quality control
 Filling and shipping of customer orders
 Training of employees
 Processing of payrolls
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Objectives of Benchmarking
 Identify best practices in performing an activity

 Understand the best practices in performing


an activity – learn what is the “best” way
to do a particular activity from those
demonstrating they are “best-in-world”

 Learn how other firms achieve lower costs

 Take action to improve company’s cost competitiveness

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Ethical Standards in
Benchmarking: Do’s and Don’ts
 Avoid talk about pricing or competitively sensitive costs

 Don’t ask rivals for sensitive data

 Don’t share proprietary data without clearance

 Have impartial third party assemble and present competitively


sensitive cost data with no names attached

 Don’t disparage a rival’s business to outsiders based on data


obtained

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What Determines if a
Company Is Cost Competitive?
 Cost competitiveness depends on how well a company
manages its value chain relative to how well competitors
manage their value chains
 When costs are out-of-line, high-cost activities can exist in any
of three areas in the industry value chain
1. Suppliers’ activities
2. Company’s own internal activities
3. Forward channel activities

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

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Options to Correct
Internal Cost Disadvantages
 Implement use of best practices throughout company
 Eliminate some cost-producing activities altogether by revamping
value chain system
 Relocate high-cost activities to lower-cost geographic areas
 See if high-cost activities can be performed
cheaper by outside vendors/suppliers
 Invest in cost-saving technology
 Innovate around troublesome cost components
 Simplify product design
 Make up difference by achieving savings in backward or forward
portions of value chain system
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The Five Generic
Competitive Strategies

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Chapter Roadmap
 Five Competitive Strategies

 Low-Cost Provider Strategies

 Differentiation Strategies

 Best-Cost Provider Strategies

 Focused (or Market Niche) Strategies

 The Contrasting Features of the Five Generic Competitive


Strategies: A Summary
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Strategy and
Competitive Advantage
 Competitive advantage exists when a firm’s strategy gives it
an edge in
 Attracting customers and
 Defending against competitive forces
Key to Gaining a Competitive Advantage
 Convince customers firm’s product / service offers superior
value
A good product at a low price
A superior product worth paying more for
A best-value product
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What Is
“Competitive Strategy”?
 Deals exclusively with a company’s
business plans to compete successfully
 Specific efforts to please customers

 Offensive and defensive moves


to counter maneuvers of rivals

 Responses to prevailing market conditions

 Initiatives to strengthen its market position

 Narrower in scope than business strategy

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The Five Generic Competitive Strategies

Competitive Advantage
Sought
Lower Cost Differentiation

Broad Overall Low-Cost Broad


Range of Provider Differentiation
Market Target

Buyers Strategy Strategy


Best-Cost
Provider
Strategy
Narrow Focused Focused
Buyer
Low-Cost Differentiation
Segment
or Niche Strategy Strategy

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Low-Cost Provider Strategies
Keys to Success
 Make achievement of meaningful lower costs
than rivals is the theme of firm’s strategy
 Include features and services in product
offering that buyers consider essential
 Find approaches to achieve a cost advantage
in ways difficult for rivals to copy or match

Low-cost leadership means low


overall costs, not just low
manufacturing or production costs!
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When Does a Low-Cost
Strategy Work Best?
 Price competition is vigorous
 Product is standardized or readily available
from many suppliers
 There are few ways to achieve
differentiation that have value to buyers
 Most buyers use product in same ways
 Buyers incur low switching costs
 Buyers are large and have
significant bargaining power
 Industry newcomers use introductory low prices to attract
buyers and build customer base
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Pitfalls of Low-Cost Strategies
 Being overly aggressive in cutting price

 Low cost methods are easily imitated by rivals

 Becoming too fixated on reducing costs


and ignoring
 Buyer interest in additional features
 Declining buyer sensitivity to price
 Changes in how the product is used
 Technological breakthroughs open up cost reductions for rivals

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Differentiation Strategies
Objective
 Incorporate differentiating features that cause buyers to
prefer firm’s product or service over brands of rivals

Keys to Success
 Find ways to differentiate that create value for buyers
and are not easily matched or cheaply copied by rivals

 Not spending more to achieve differentiation


than the price premium that can be charged

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Signaling Value as Well
as Delivering Value
 Incomplete knowledge of buyers causes them to
judge value based on such signals as
 Price
 Attractive packaging
 Extensive ad campaigns
 Ad content and image
 Characteristics of seller
 Facilities
 Customers
 Professionalism and personality of employees
 Signals of value may be as important as actual value when
 Nature of differentiation is hard to quantify
 Buyers are making first-time purchases
 Repurchase is infrequent
 Buyers are unsophisticated
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When Does a Differentiation
Strategy Work Best?
 There are many ways to differentiate a product that have
value and please customers

 Buyer needs and uses are diverse

 Few rivals are following a similar


differentiation approach

 Technological change and


product innovation are fast-paced

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Pitfalls of
Differentiation Strategies
 Buyers see little value in unique attributes of product
 Appealing product features are easily copied by rivals
 Differentiating on a feature buyers do not perceive as lowering
their cost or enhancing their well-being
 Over-differentiating such that product
features exceed buyers’ needs
 Charging a price premium
buyers perceive is too high
 Not striving to open up meaningful gaps in quality, service, or
performance features vis-à-vis rivals’ products
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Best-Cost Provider Strategies
 Combine a strategic emphasis on low-cost with a strategic
emphasis on differentiation
 Make an upscale product at a lower cost
 Give customers more value for the money
Objectives
 Deliver superior value by meeting or exceeding buyer
expectations on product attributes and beating their price
expectations
 Be the low-cost provider of a product with good-to-excellent
product attributes, then use cost advantage to underprice
comparable brands
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Competitive Strength of a
Best-Cost Provider Strategy
 A best-cost provider’s competitive advantage comes
from matching close rivals on key product attributes and
beating them on price
 Success depends on having the skills and capabilities to
provide attractive performance and features at a lower
cost than rivals
 A best-cost producer can often out-compete both
a low-cost provider and a differentiator when
 Standardized features/attributes
won’t meet diverse needs of buyers
 Many buyers are price and value sensitive
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Risk of a Best-Cost
Provider Strategy
 A best-cost provider may get squeezed between
strategies of firms using low-cost and differentiation
strategies

 Low-cost leaders may be able to drain off


customers away with a lower price

 High-end differentiators may be able to


steal customers away with better product attributes

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Focus / Niche Strategies
 Involve concentrated attention on a narrow piece of the total
market
Objective
Serve niche buyers better than rivals

Keys to Success
 Choose a market niche where buyers have distinctive
preferences, special requirements, or unique needs
 Develop unique capabilities to serve needs of target buyer
segment
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What Makes a Niche
Attractive for Focusing?
 Big enough to be profitable and offers good growth potential
 Costly or difficult for multi-segment competitors
to meet specialized needs of niche members
 Focuser has resources and capabilities
to effectively serve an attractive niche
 Few other rivals are specializing in same niche
 Focuser can defend against challengers via superior ability to
serve niche members

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Risks of a Focus Strategy

 Competitors find effective ways to match


a focuser’s capabilities in serving niche

 Niche buyers’ preferences shift towards product attributes


desired by majority of buyers – niche
becomes part of overall market

 Segment becomes so attractive it becomes crowded with rivals,


causing segment profits to be splintered

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Deciding Which Generic
Competitive Strategy to Use
 Each positions a company differently in its market
 Each establishes a central theme for how a company will endeavor
to outcompete rivals
 Each creates some boundaries for maneuvering as market
circumstances unfold
 Each points to different ways of experimenting with the basics of the
strategy
 Each entails differences in product line, production emphasis,
marketing emphasis, and means to sustain the strategy
The big risk – Selecting a “stuck in the middle”
strategy!
This rarely produces a sustainable competitive
advantage or a distinctive competitive position.
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Fig. 6.1: A Company’s Menu of Strategy Options

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Strategic Alliances and
Collaborative 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.

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Alliances Can Enhance a
Firm’s Competitiveness
 Alliances and partnerships can help companies cope with
two demanding competitive challenges
 to build a market presence in many
different national markets
 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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Why Are Strategic
Alliances Formed?
 To collaborate on technology development or new product
development
 To fill gaps in technical or manufacturing expertise

 To acquire new competencies

 To improve supply chain efficiency

 To gain economies of scale in


production and/or marketing
 To acquire or improve market access via joint marketing
agreements
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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 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
 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
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Objectives of Mergers
and Acquisitions
 To pave way for acquiring firm to gain more market share and
create a more efficient operation
 To expand a firm’s geographic coverage

 To extend a firm’s business into new product


categories or international markets
 To gain quick access to new technologies

 To invent a new industry and lead the convergence of


industries whose boundaries are blurred by changing
technologies and new market opportunities
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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

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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 integration

Internally Activities, Costs,


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

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Strategic Advantages
of Forward Integration
 To gain better access to end users
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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Outsourcing Strategies
Concept
Outsourcing involves withdrawing from certain value
chain activities and relying on outsiders
to supply needed products, support
services, or functional activities

Internally
Performed
Activities Functional
Suppliers
Activities

Support Distributors
Services or Retailers

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Pitfalls of Outsourcing
 Farming out too many or the wrong activities, thus

 Hollowing out capabilities

 Losing touch with activities and expertise that determine overall


long-term success

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Offensive and Defensive Strategies
Offensive Strategies Defensive Strategies

Used to build new or Used to protect competitive


stronger market position advantage (rarely used to
and/or create competitive create advantage)
advantage

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1.Attacking Competitor Strengths
Objectives
 Whittle away at a rival’s
competitive advantage

 Gain market share by out-matching


strengths of weaker rivals

Challenging strong competitors with a lower price is


foolhardy unless the aggressor has a cost advantage
or advantage of greater financial strength!

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Options for Attacking
a Competitor’s Strengths
 Offer equally good product at a lower price

 Develop low-cost edge, then use it to under-price rivals

 Leapfrog into next-generation technologies

 Add appealing new features

 Run comparison ads

 Construct new plant capacity in rival’s market strongholds

 Offer a wider product line

 Develop better customer service capabilities


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2.Attacking Competitor
Weaknesses
Objective
Utilize company strengths to exploit a
rival’s weaknesses

Weaknesses to Attack
 Customers that a rival is least equipped to serve

 Rivals providing sub-par customer service

 Rivals with weaker marketing skills

 Geographic regions where rival is weak

 Market segments a rival is neglecting


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3. Launching Simultaneous
Offensives on Many Fronts
Objective
 Launch several major initiatives to
 Throw rivals off-balance
 Splinter their attention
 Force them to use substantial
resources to defend their position

A challenger with superior resources can overpower


weaker rivals by out-competing them across-the-
board long enough to become a market leader!
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4. End-Run Offensives
Objectives
 Maneuver around strong competitors

 Capture unoccupied or less contested markets

 Change rules of competition in aggressor’s favor

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Approaches for
End-Run Offensives
 Introduce new products that redefine market and terms of
competition

 Build presence in geographic areas


where rivals have little presence

 Create new segments by introducing products


with different features to better meet buyer needs

 Introduce next-generation
technologies to leapfrog rivals

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5. Guerrilla Offenses
Approach
Use principles of surprise and hit-and-run to
attack in locations and at times where conditions
are most favorable to initiator

Appeal
Well-suited to small challengers
with limited resources and
market visibility

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Options for Guerrilla Offenses
 Make random, scattered raids on leaders’ customers

 Occasional low-balling on price


 Intense bursts of promotional activity
 Special campaigns to attract buyers from
rivals plagued with a strike or delivery problems

 Challenge rivals encountering problems with quality or


providing adequate technical support
 File legal actions charging antitrust violations,
patent infringements, or unfair advertising
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6. Preemptive Strikes
Approach
Involves moving first to secure an
advantageous position that rivals are foreclosed
or discouraged from duplicating!

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Preemptive Strike Options
 Secure exclusive/dominant access to best distributors

 Secure best geographic locations

 Tie up best or most sources of essential raw materials

 Obtain business of prestigious customers

 Expand capacity ahead of demand in hopes


of discouraging rivals from following suit
 Build an image in buyers’ minds that
is unique or hard to copy
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Choosing Rivals to Attack
 Four types of firms can be the target of a fresh offensive

 Vulnerable market leaders

 Runner-up firms with weaknesses


where challenger is strong

 Struggling rivals on verge


of going under

 Small local or regional


firms with limited capabilities

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DEFENSIVE-
1. 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
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2. Signal Challengers
Retaliation Is Likely
 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 counterresponse


to moves of weaker rivals

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First-Mover Advantages
 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


 Earlycommitments 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
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First-Mover Disadvantages
 Moving early can be a disadvantage (or fail to produce an
advantage) when

 Costs of pioneering are sizable and


loyalty of first time buyers is weak

 Innovator’s products are primitive,


not living up to buyer expectations

 Rapid technological change allows


followers to leapfrog pioneers

4-79
Timing and Competitive Advantage

Principle 1
Being a fast follower can sometimes yield
as good a result as being a first mover

Principle 2
Being a late-mover may or may not be fatal --
it varies with the situation
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