6 15/e PPT

McGraw-Hill/Irwin

Supplementing the Chosen Competitive Strategy

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

Troy University-Florida Region

© 2007 The McGraw-Hill Companies, Inc. All rights reserved.

“Successful business strategy is about actively shaping the game you play, not just playing the game you find.”

Adam M. Brandenburger and Barry J. Nalebuff

6-2

“The sure path to oblivion is to stay where you are.”

Bernard Fauber

6-3

Chapter Roadmap

 Collaborative Strategies: 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  Offensive Strategies: Improving Market Position and Building Competitive Advantage  Defensive Strategies: Protecting Market Position and Competitive Advantage  Web Site Strategies  Choosing Appropriate Functional-Area Strategies  First-Mover Advantages and Disadvantages 6-4

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

6-5

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.

6-6

Alliances Can Enhance a Firm’s Competitiveness

 Alliances and partnerships can help companies cope with two demanding

competitive challenges

 Racing against rivals to build a market presence in many different national markets  Racing against rivals to seize opportunities on the frontiers of advancing technology 

Collaborative arrangements lower

its

costs

can help a company and/or

gain access

to needed

expertise

and

capabilities

6-7

Characteristics of a Strategic Alliance



Strategic alliance

– A

formal agreement

more separate companies where there is  between two or 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 6-8

What Factors Make an Alliance Strategic?

 It is critical to a company’s achievement of an important objective  It helps build, sustain, or enhance a core competence or competitive advantage  It helps block a competitive threat  It helps open up important market opportunities  It mitigates a significant risk to a company’s business 6-9

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 6-10

Examples of Strategic Alliances



General Electric – Snecma of France



Low-thrust commercial aircraft engines



Toshiba – IBM



64-megabyte and 25-megabyte memory chip facility



Mitsui – General Electric



Power systems



GM – Daewoo



Build Buick Excells in Shanghai



Texas Instrument – Compel Communications



Build ultra cheap cell phones



Mitsubishi – Caterpillar



Joint venture to manufacture excavator line

6-11

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 6-12

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 6-13

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 6-14

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 6-15

Objectives of Mergers and Acquisitions

 To create a more cost-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 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 6-16

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 6-17

Vertical Integration Strategies



Extend

a firm’s

same industry competitive scope

within 

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

6-18

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

Strategic Advantages of Backward Integration

 Generates cost savings only if volume needed is big enough to capture efficiencies of suppliers  Potential to reduce costs exists when  Suppliers have sizable profit margins  Item supplied is a major cost component  Resource requirements are easily met  Can produce a differentiation-based competitive advantage when it results in a better quality part  Reduces risk of depending on suppliers of crucial raw materials / parts / components 6-19

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 6-20

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 6-21

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 firm’s competitiveness

Many companies are finding that

de-integrating

value chain activities is a

more flexible, economic strategic option!

6-22

Outsourcing Strategies

Concept

Outsourcing involves

withdrawing

certain

value chain activities

and from

relying on outsiders

to supply needed products, support services, or functional activities

Suppliers Internally Performed Activities Functional Activities Support Services Distributors or Retailers

6-23

When Does Outsourcing 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 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 6-24

Risk of an Outsourcing Strategy



Farming

thus out

too many

or the

wrong activities,



Hollowing out

capabilities 

Losing touch

with activities and expertise that determine overall long-term success 6-25

For Discussion: Write your opinion and discuss

Refer to Illustration Capsule 6.3 (p. 190): Explain why the telephone companies were overtaken by cable companies in providing internet access using DSL. Were they really that slow?? 6-26

Offensive and Defensive Strategies

Offensive Strategies

Used to

build new

or

stronger market position

and/or

create competitive advantage

Defensive Strategies

Used to

protect competitive advantage

(rarely lead to creating advantage) 6-27

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 6-28

Types of Offensive Strategy Options

1.

Offer an equally good or better product at a lower price

2.

Leapfrog competitors by being  First adopter of next-generation technologies

or

 First to market with next-generation products

3.

Pursue continuous product innovation to draw sales and market share away from less innovative rivals

4.

Adopt and improve on the good ideas of other companies 6-29

Types of Offensive Strategy Options

(con’t) 5.

Deliberately attack market segments where a key rival makes big profits

6.

Attack competitive weaknesses of rivals

7.

Maneuver around competitors and concentrate on capturing unoccupied or less contested market territory

8.

Use hit-and-run or guerrilla warfare tactics to grab sales and market share from complacent rivals

9.

Launch a preemptive strike to secure an advantageous position that rivals are prevented from duplicating 6-30

What Is a Blue Ocean Strategy?

 Seeks to gain a dramatic, durable

competitive advantage

by 

Abandoning efforts competitors

to

beat out

in existing markets

and



Inventing a new industry market segment

or

distinctive

to render existing competitors largely irrelevant

and

 Allowing a company to

capture create

and altogether

new demand

6-31

Type of Markets: Blue Ocean Strategy

Typical Market Space

 Industry boundaries are defined and accepted  Competitive rules are well understood by all rivals  Companies try to outperform rivals by capturing a bigger share of existing demand

Blue Ocean Market Space

 Industry does not exist yet  Industry is untainted by competition  Industry offers wide-open opportunities if a firm has a product and strategy allowing it to  Create new demand

and

 Avoid fighting over existing demand 6-32

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 6-33

Using Offensive Strategy to Achieve Competitive Advantage



Strategic offensives offering competitive advantage

entail strongest basis for  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 6-34

Defensive Strategy

Objectives

 Lessen risk of being attacked  Blunt impact of any attack that occurs  Influence challengers to aim attacks at other rivals

Approaches

 Block avenues open to challengers  Signal challengers vigorous retaliation is likely 6-35

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 6-36

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 counter-response to moves of weaker rivals 6-37

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 6-38

Using the Internet to Disseminate Product Information



Approach

– Website used to provide product information of manufacturers or wholesalers  Relies on click-throughs to websites of dealers for sales transactions   Informs end-users of location of retail stores

Issues

– Pursuing online sales may     Signal weak strategic commitment to dealers Signal willingness to cannibalize dealers’ sales Prompt dealers to aggressively market rivals’ brands

Avoids channel conflict

with dealers – Important where strong support of dealer networks is essential 6-39

Using the Internet as a Minor Distribution Channel



Approach

– Use online sales to  Achieve incremental sales  Gain online sales experience  Conduct marketing research  Learn more about buyer tastes and preferences  Test reactions to new products  Create added market buzz about products  Unlikely to provoke much outcry from dealers 6-40

Reasons to Use the Internet as a Minor Distribution Channel

 Manufacturer’s profit margin from online sales is bigger than that from sales through traditional channels  Encouraging buyers to visit a firm’s website educates them to the ease and convenience of purchasing online  Selling directly to end users allows a manufacturer to make greater use of build-to-order manufacturing and assembly 6-41

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



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 6-42

Strategies for Online Enterprises



Approach

– Use Internet as the exclusive channel for all buyer-seller contact and transactions 

Strategic issues

for an online company  How to deliver unique value to buyers  Whether it will pursue competitive advantage based on lower costs, differentiation, or better value for the money  Whether it will have a broad or narrow product offering  Whether to perform order fulfillment activities internally or to outsource them  How it will draw traffic to its Web site and then convert page views into revenues 6-43

Choosing Appropriate Functional-Area Strategies

 Involves

strategic choices

about

how functional areas

are

managed strategy

to

support competitive

and other strategic moves 

Functional strategies

include  Research and development  Production  Human resources  Sales and marketing  Finance

Tailoring

functional-area strategies

to

support key business-level strategies

is critical!

6-44

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  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 6-45

First-Mover Disadvantages



Moving early

can be a

disadvantage

produce an advantage)

when

(or fail to  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 6-46

Strategic Issues: To Be a First-Mover or Not



Key issue

– Is the race to market leadership in an industry a marathon or a sprint?

 Seeking a

competitive advantage

by being a first mover involves addressing several questions  Does market takeoff depend on development of complementary products or services not currently available?

 Is new infrastructure required before buyer demand can surge?

 Will buyers need to learn new skills or adopt new behaviors?

 Will buyers encounter high switching costs?

 Are there influential competitors in a position to delay or derail the efforts of a first-mover?

6-47