Supplementing the Chosen Competitive Strategy: Other Important Business Strategy Choices Chapter 6

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

A Companys Menu of Strategy Options

Strategic Alliances and Partnerships

Strategic 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-tocompany dealings but fall short of merger or full joint venture

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

What Factors Make an Alliance Strategic?

It is critical to a companys 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 important

market opportunities
It mitigates a significant risk

to a companys business

Why Are Strategic Alliances Formed?

To collaborate on technology development or new

product development
To fill gaps in technical or manufacturing expertise To create new skill sets and capabilities

To improve supply chain efficiency

To gain economies of scale in

production and/or marketing

To acquire or improve market

access via joint marketing agreements

Alliances Can Enhance a Firms 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

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 firms capabilities with resources of partners

Capturing the Benefits of 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

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

Merger and Acquisition Strategies

Merger Combination and pooling of equals, with newly created

firm often taking on a new name Acquisition One firm, the acquirer, purchases and absorbs operations of another, the acquired Merger-acquisition strategy
Much-used strategic option Especially suited for situations 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

Objectives of Mergers and Acquisitions

To create a more cost-efficient operation

To expand a firms geographic coverage

To extend a firms business into new

product categories or international markets

To gain quick access to new technologies

or competitive capabilities
To invent a new industry and lead

the convergence of industries whose boundaries are blurred by changing technologies and new market opportunities (Merger of AOL and Time Warner )

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

Vertical Integration Strategies

Extend a firms 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

Activities, Costs, & Margins of Suppliers

Internally Performed Activities, Costs, & Margins

Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners

Buyer/User Value Chains

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: a) suppliers have a sizeable profit margin, b) the item being supplied is a major cost component, c) 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 companys 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 companys 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 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

Strategic Disadvantages of Vertical Integration

Boosts resource requirements Locks firm deeper into same industry Results in fixed sources of supply and less flexibility in accommodating buyer demands for product variety Poses all types of capacity-matching problems May require radically different skills / capabilities Reduces flexibility to make changes in component parts which may lengthen design time and ability to introduce new products

Pros and Cons of Integration vs. De-Integration

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 firms competitiveness

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

Support Services

Distributors or Retailers

When Does Outsourcing an Activity Make Strategic Sense?

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 firms ability to innovate Operations are streamlined to Improve flexibility Cut time to get new products into the market It increases firms ability to assemble diverse kinds of expertise speedily and efficiently Firm can concentrate on core value chain activities that best suit its resource strengths

The Big Risk 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

Matching Strategy to a Companys Situation

Nature of industry and competitive conditions

Most important drivers shaping a firms strategic options fall into two categories

Firms internal resource strengths and weaknesses

6-24

Matching a Companys Strategy to Different Market Conditions

Fragmented Markets Freshly Emerging Markets

Turbulent Markets

Rapidly Growing Markets

Stagnant or Declining Markets

Mature, Slow-Growth Markets

6-25

Features of an Emerging Industry

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

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 develop attractive performance features Consider merging with or acquiring another firm to Gain added expertise Pool resource strengths When technological uncertainty clears and a dominant technology emerges, try to capture any first-mover advantages by moving quickly Form strategic alliances with Companies having related technological expertise or Key suppliers

Strategy Options for Competing in Emerging Industries (continued)

Pursue new customers and user applications Enter new geographical areas Make it easy and cheap for

first-time buyers to try product

Focus advertising emphasis on Increasing frequency of use Creating brand loyalty Use price cuts to attract price-sensitive buyers

What Is the Key to Success for Competing in Rapidly Growing Markets? A company needs a strategy predicated on growing faster than the market average so it
Can boost its market share and
Improve its competitive standing vis--vis

rivals

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 companys product offering apart from rivals Incorporate attributes to appeal to growing numbers of customers

Gain access to additional distribution

channels and sales outlets Expand a companys geographic coverage

Expand product line to add models/styles to appeal to a

wider range of buyers

Industry Maturity: The Standout Features

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

Strategy Options for Competing 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 flexible competitive capabilities

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

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

Strategy Options for Competing in a Stagnant or Declining Industry

Pursue focus strategy aimed at

fastest growing market segments Stress differentiation based on quality improvement 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

End-Game Strategies for 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 industry during early stages of decline Quick recovery of as much of a companys investment as possible

Features of Turbulent Markets

Rapid-fire technological change Short product life-cycles Entry of important new rivals Frequent launches of

new competitive moves

Rapidly evolving

customer expectations

Ways to cope with Rapid Change

A company can assume any of the three strategic postures 1. It can react to change - respond to rivals new product with a better product - respond to unexpected changes in buyers needs and preferences - shift it advertising emphasis to different product attributes Reacting is defensive strategy it is unlikely create fresh opportunity, but is nonetheless a necessary component in companys arsenal of options

Ways to cope with Rapid Change

2. It can anticipate change - anticipating looking ahead to analyze what is likely to occur and then preparing and positioning for future - studying buyers behavior, buyers needs, buyers expectations to get insight of market will evolve Anticipating change is fundamentally defensive in that forces outside the enterprise are in driving seat Anticipating change can open up new opportunities and a better way to manage change than just pure reaction

Ways to cope with Rapid Change

3. It can lead change Entails initiating the market and competitive forces that others must respond It is an offensive strategy aimed at putting the company in the drivers seat. It means: - being the first to market a new product or service - it means being the technological leader - rushing next generation products to market ahead of rivals - having products whose features and attributes shape customer preferences and expectation Companys approach to manage should ideally incorporate all three postures The best performing companies in high velocity markets consistently seek to lead change with proactive strategies that entail the flexibility to pursue several strategic options, depending on how the market actually evolves

Fig. 8.1: Meeting the Challenge of High-Velocity Change

Strategy Options for Competing in High-Velocity Markets

1. Invest aggressively in R&D Where technology is the primary driver of change translating technological advances into innovative new products is necessary It is desirable to focus the R&D efforts to critical areas as it: - avoids stretching the company resources too thin - deepens the firms expertise, master the technology - fully capture experience/ learning curve effects - become dominant leader in particular technology or product category A fast evolving market environment entails many technological areas and product categories Competitors have to employ some type of focus strategy and concentrate on being the leader in a particular product/ technology category

Strategy Options for Competing in High-Velocity Markets

2. Keep the companys products and services fresh and exciting to stand out in the midst of all change that is taking place One risk of rapid change is that products and even companies are lost in the shuffle - keep the firms products and services in the limelight - keep them innovative and well matched to the changes that are occurring in the market place 3. Develop quick response capabilities
Shift resources Adapt competencies Create new competitive capabilities Speed new products to market

Strategy Options for Competing in High-Velocity Markets

4. Rely on strategic partnership with outside suppliers and companies making tie-in products In high velocity industries technology branches off to create many new technologies and product categories No company has the resources and competencies to pursue them all Desirable strategies are: - Specialization to promote necessary technical depth - focus to preserve organizational agility and leverage firms expertise Companies build their competitive position by: - strengthening their own internal resource base - partnering with those suppliers making state of the art parts and components by collaborating closely with both the developers of related technologies and makers of the tie-in- product An outsourcing strategy allows the company the flexibility to replace suppliers: - those fall behind on technology or product feature - those that cease to be competitive on price

Strategy Options for Competing in High-Velocity Markets

5. Initiate fresh actions every few months, not just when a competitive response is needed Change is partly triggered by passage of time rather than solely by the occurrence of events A company can be proactive by making time based moves - introducing a new improved product every four months rather than when the market tapers off or a rival introduces next generation model - a company can expand into new geographic market every six months rather than waiting for new market opportunity present itself - can refresh existing brands every two years rather than waiting until their popularity wanes The keys to successfully using time pacing as strategic weapons are: - choosing intervals that make sense internally and externally - establishing an internal organizational rhythm for change - choreographing the transitions

Keys to Success in Competing in High Velocity Markets

Cutting-edge expertise Speed in responding to new developments

Collaboration with others

Agility Innovativeness Opportunism Resource flexibility

First-to-market capabilities

Examples of Fragmented Industries

Book publishing Landscaping and plant nurseries Auto repair Restaurant industry Public accounting Womens dresses Meat packing Paperboard boxes Hotels and motels Furniture

Competitive Features of a Fragmented Industry

Absence of market leaders with large market shares or widespread

buyer recognition Product/service is delivered to neighborhood locations to be convenient to local residents Buyer demand is so diverse that many firms are required to satisfy buyer needs Low entry barriers Absence of scale economies Market for industrys 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

Competing in a Fragmented Industry: The Strategy Options

1. Construct and operate formula facilities The strategic approach frequently employed in restaurant and retailing industry It involves constructing a standardized outlets in favorable locations and then operating them cost effectively 2. Become a low-cost operator When price competition is intense and profit margins are under constant pressure, companies can stress no frills operations featuring: - low overhead - high productivity/ low-cost labor - lean capital budget - dedicated pursuit of total labor operating efficiency Successful low cost producers in in fragmented industry can play price discounting game and earn profits above the industry average

Competing in a Fragmented Industry: The Strategy Options

3. Specialize by product type When fragmented industrys products include a range of styles or services - furniture industry - auto repair 4. Specialize by customer type A firm can stake out a market niche by catering to customers: - interested in low prices - unique product attributes - customized features 5. Focus on limited geographic area Concentrating company efforts on a limited territory can produce: - greater operating efficiency - speed delivery and customer service - promote strong brand awareness - permit saturation advertisement

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 firms 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

What Is a Blue Ocean Strategy?

Seeks to gain a dramatic, durable

competitive advantage by
Abandoning efforts to beat out competitors in existing markets and Inventing a new industry or distinctive market segment to render existing competitors largely irrelevant and

Allowing a company to create and capture altogether new demand

What Is Different About a Blue Ocean?

Typical Market Space
Industry boundaries are

Blue Ocean Market Space

Industry does not exist yet Industry is untainted

defined and accepted

Competitive rules are well

by competition
Industry offers wide-open

understood by all rivals

Companies try to outperform

rivals by capturing a bigger share of existing demand

opportunities if a firm has a product and strategy allowing it to

Create new demand and Avoid fighting over existing demand
6-53

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

Innovators 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 2year sprint

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