chapter 6 supplementing the ... choices
TRANSCRIPT
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Supptementing
the Chosen
Co
m
petitive
Strategy
-
Oth
e
r
lmportant
Business
Strategy
Choices
Chapter Learning
Obiectives
LOl.
Gain
an understanding
of how strategic
atliances
and
cotlaborative
partnerships can bolster a
company's
competitive capabilities
and
resource
strengths.
LO2.
Become
aware
of
the strategic benefits
of
mergers
and
acquisitions.
LO3.
Understand
when a
company
should consider
using
a vertical
integra-
tion strategy
to
extend
its
operations
to more stages of
the
overall
industry
value chain.
LO4.
Understand
the condtions
that
favor
farming
out
certain value
chain
activities
to
outside vendors and strategic
alties.
LOs.
Learn whether
and when
to
pursue
offensive strategic
moves to
improve
a company's market
position.
LO6,
Learn whether
and when
to emptoy
defensive
strategies
to
protect
the
companyb
market
position.
LO7.
Recognize when
being
a
first-mover
or a
fast-follower
or
a
[ate-mover
can
lead
to competitive
advantage.
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117
hapter 6
Supplementing
the
Chosen
Competitive Strategy-other
lmportant
Business
Strategy
Choices
Oncc
a
company
has
settled
on which of
the
five
basic
competitive
strategies
to emplov attention
turns to what
other strategic actions
t
can
take to comple-
ment
its
competitive
approach
and round out
its
business
strategy.
As dis-
cussed
in
earlier
chapters, a companv's overall
business strategy
includes
not
only
the
details of
its
competitive strategy
to
deliver
value
to customers
in a
unique
way,
but
also any
other
strategic
initiatives
that can
promote
comPeti-
tive
advantage.
Several
measures
to enhance
a
comPany's stratcgy have to
be
considered:
.
Whether
to enter
into
strategic
alliances or
partncrship
arrangements
with
other enterprises.
.
Whether to bolster
the
company's
market position via
merger
or
acquisitions.
.
Whether
to
intcgrate
backward or forward into more stages of
the
indus-
try
value chain.
.
Which value chain
activities,
if
any,
should
be
outsourced.
.
Whether
and
when
to go
on the offensive and
initiate
aggressive strategic
moves to
improve
the
company's
market
Position.
.
Whether
and
when
to
employ
defensive strategies
to
protect the
compa-
ny's market position.
.
When to undertake stratcgic
moves-whether
it is advanta;eous to be
a
first-mover or
a fast follower
or
a late-mover.
This chaptcr
presents
the
pros
and cons of each of these
business strategy
choices.
Strategic
Altiances
and
Collaborative
Partnershps
Companics
in
all
types
of
industries have
elected
to
form strategic alliances
and partnerships
io add to their accumulation of
resources and competitive
capabilities
and
strengthen
their
competitiveness
in
domestic
and
interna-
tional markets. Strategic
alliances
allow
companies
to
correct particular
resource gaps
or
deficiencies
by
part-
$rategc alliances are collaborative
arrange-
nering
with
other
enterprises
having
the
missing
ments where
two or
more companies
oin
forces
know-how
and capabilities.
Thus,
a
strategic
alliance
to achieve mutually beneficial
strategic
out-
is a
formnl
ngreement bettueen
tloo or
ffiore separnte
compa-
comes.
The
competitive
attracton
of
allances
is
nies
in
zuhich
there
is strategically
releannt
collaboration
of
in
allowing companies
to
bundle resources
and
some sort,
joint
contribution
of resources,
shnred risk, slured
competences
that
are more
valuable in a
ioint
control,
and mutunl
dependnce, Collaborative
relation-
effort an
when
kept
separate.
ships
between parbners
may
entail
a contractual
agree-
ment
but
they commonlv
stop short of
formal ownership ties
between
the
partners
(although
thcrc
are
a feu'strategic
alliances where
one or
more allies
havc
minority
ownership
in
certain
of
the
othe
alllance
members).
The most
common
reasons
why
companies enter
into
strategic
alliances are
to
expedite ihe development
of promising
new
technologies
or products,
to
overcome
deficits
in their
own
technical
and
manufacturing
expertise,
to bring
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Part
One: Section
C: Crafting
a
Strategy
together the personnel
and expertise needed
to
create desirable
new
skill sets
and
capabilities, to
improve
supply chairr efficiency, to gain economies
of
scale
in
production
and/
or
marketing,
and to
acquire
or improve market access
through
joint
marketing
agreements.l
In many
instances, the resources,
capa-
bilities, skills, and knowledge
bases
of
parbner firms
are more
valuable when
bundled in
a
joint
effort
than
when kept
separate.
Companies
in
many different
industries
all
across
the
world
have
made
strategic alliances a core
part
of their
overall
strategy;
U.S. cornpanies alone
arrnounced nearly
68,000 alliances frcrn 7996 through
2003.':
Cenentech, a
leader in
biotechnology
and
human
genetics, has
formed R&D
alliances with
over 30
companies
to boost its
prospects
for
developing new
cures
for vari-
ous diseases and ailments.
United Airlines, American
Airlines,
Continental,
Delta,
and
Northwest
created an
alliance
to form
Orbitz,
an
Internet
travel
site
that
enabled
them
to compete head-to-head
against Expedia
and Travelocity
and,
further,
to
give
them more
economical
access
to travelers
and vacationers
shopping online for
airfares,
rental
cars,
lodging,
cruises,
and
vacation
pack-
ages.
johnson
&
|ohnson
and
Merck
entered
into
an
alliance to
market
Pepcid
AC;
Merck
developed the
stomach distress
remedy and
Johnson
&
Johnson
functioned
as
marketer-the
alliance made Pepcid the best-selling
heartburn
and
acid
indigestion
remedy
sold
in
the United States.
Failed
Strategic Alliances
and
Cooperative
Partnershps
Most
alliances u-ith
an objective of technology sharing
or providing
market
access turn
out to be temporary,
fulfilling
their purpose after
a few years
because
the
benefts
of mutual learning
have
occurred.
Although
long-term
alliances
sometimes prove mutually
beneficial, most
partners
don't hesitate
to terminate the
alliance
and
go
it
alone
r+'hen
the
payoffs
run
out.
Alliances
are more likely to be krng-lasting when
(1)
they involve
collaboration
with
suppliers
or
distribution
allies,
or
(2)
both
pafties
conclude that
continued
col-
Iaboration
is
in
their mutual interest,
perhaps because
new
opportunities
for
Ieaming
are emerging.
A
surprising number
of
alliances never
live
up to expectations. In 2007,
a Hnroard
Busness
Rzrlezu
article reported
that
even
though
the
number
of
strategic
alliances incrcases
by about
25
percent annually,
about 60 percent
to 70 percent of alliances
continue to fail
each year.3
The
hgh
"divorce
rate"
among
strategic allies has several
causes,
thc
most
common of
which
are:a
'
Michael
E. Porter,
fhe
Compettve
Advdntoge
of
Notions
(New
York:
Free
Press,
r99o),
p. 66.
For
a dscussion
of
how
to realize
the advantages
of
strategic
partnerships,
see
Nancy
J.
Kaplan
and
lonathan
Hurd, "ReaLizing
the
Promise
of
Partnerships,"
Journ0l
of
?usness Strotegy 23, no.
3
[May-]une
zooz),
pp. j8-42;
Salvatore Parise
and Lisa Sasson,
"Leveraging
Knowtedge Manage-
ment
across Strategic Alliances,"
lvey
9usness
Journol
66,
no.
4
(March-April
zooz),
pp.
4rq7;
and Davd Ernst and
James
Bamford,
"Your Alliances Are Too
Stable," Horvard Business Revew
8?,
no.
6
(fune
zoo5)
pp.
r33-t4r.
'Jeffrey
H. Dyer,
Prashant Kale,
and Harbir
Singh,
"When
to
ALly
and When
to
Acquire,"
Horvard
Business Revew
82,
no.
t/8
(July-August
zoo4),
p.
ro9.
,
Jonathan
Hughes
and
Jeff
Weiss,
"Smple
Rules for
Making Alliances Work,"
Horvotd
Busness
Review
85, no.
rr
(November
zooT),
pp.
tzz t3t.
a
Yves L.
Doz and
Gary
Hamel, Allance
Advontoge;
The Aft
of
Creotng Volue
thrcugh
Porfnering
(Boston:
Harvard Business School Press,
1998),
pp.
16-18.
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Chaptcr 6
Supplementng
the
Chosen
Competitive Strategy-Other
lmportant
Business
Strategy
Choces
.
Divergin8 objectives
and
priorities.
.
An
inability to
work
rt'ell
together.
.
Changin8 conditions
that
make
the
purpose
of the alliance
obsolete.
.
The
emergence
of
more attractive technological
paths.
.
Marketplace rivalry
betr.t'een one
or more allies.
Experience
indicates
thal
allinnces stand n
reasonnble chnnce
of
helping
a
company
reduce
cotnpetitiae disndtsantage
but
oerr
rnrely
haae
they
protted a
strntegic ottion
for
gnining
n
Juruble comteliliae
edge ouer
rianls.
The Strategic Dangers
of
Relying
on Alliances
for
Essential Resources
and
Capabitities
The
Achilles'
heel of allianccs and
cooperative
strategies is
becoming dependent
on
other
companies
for
ssarf
ial expertise
and capabilities.
To
be
a
market leader
(and
pcrhaps even
a
serious
market
contender),
a company
must ultimately
develop
its
own
resources and capabilities
in
areas
where
internal
strategic
con-
trol
is
pivotal
to
protecting
its
competitiveness
and
buildrng competitive
advan-
tage. Moreover, some
alliances
hold
only
limited
potential because
the
Partncr
guards its most
valuable
skills
and expertise;
in
such
instances, acquiring or
merging
lvith a
company
possessing the dcsired
know-how and
resources is a
better solution.
Merger
and
Acquisition Strategies
Mergers and acquisitions
are
especially
suited for situations in which strategic
alliances or
partnerships
do
not
go
far enough
in
pro'r'iding
a
company
with
access
to
needed
resources
and
capabilities.5
Olr,'nership
ties
are
more
Pe
ma-
nent
than
partnership ties, allowing
the
operations
of
the merger/acquisition
participants
to
be tightly
integratecl and creating
more
in-hottse control and autonomy
A nterger
is
thc
com-
combining
the operations
of
two companies,
via
bining of t14'o or
more
companies
into
a
single
:ntity,
merger
oiacquisition,
is
an
attracttve
strategrc
with
the
newly
created
company often
taking
on a
new
option
for
achieving
operating
economies,
name. An
ncquisition
is
a
combination
in which
one
strengthening
the
resulting company's
compe-
company, the
acquirer,
purchases
and
absorbs the
tencies
and
competitiveness,
and opening
up
operations of
another,
the
acquired. The di
:rer-rce
avenues
of
new
market
opportunrty.
between
a merger and an acquisition
relates
more to
the
details
of ownership,
management control,
and financial arrange
rents
than
to
strategy and competitive advantagc. The
resources
and compe
itive
capabilities of the
newly
creatcd enterprise
end up much the same w ther
the combination
is
the result of acquisition or
merger.
Merger and acquisition strategies
typically set sights on
achieving any of
five
obiectives:
'
For
an excellent discussion of
the
Dros
and cons
of
alliances
versus
acquisitions,
see
jeffrey
H.
Dyer, Preshant
Kale,
and
Harbir Singh,
"When
to
Ally
and
When to Acquire," Horvard Busne
s
Revew
82,
no.
4
0uly-August,
zoo4),
pp.
ro9-5.
For
an excetlent review of the strategic objectves
of
various
types
of
mergers and acquisitions
and
the
managerial chaLlenges that dfferent knds of mergers and acquisition
present,
see
loseph
L. Bower,
"Not
All M&As
Are
Al
ke-and
That Matters,"
HaNa
d Business Review
79,
no.
3
(vlarch
zoor),
pp.
93-ror.
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"1.
To
crente
a more
cost-efficient operation out of the combined companies-Whcn
a
company acquires another
company in
the
same
industry,
therc's usually
enough
overlap
in
operations that certain inefficient plants can be closed
or
distribution
and
sales
activities
can be partly
combined and dorvn-
sized.
The
combined companies may
also
be able
to reduce
supply chain
costs bccause of buying in
greater
voiume
from
common
suppliers.
Like-
r.r.ise,
it
is
usually
feasible
to
squcezc
out
cost
savings
in
adminisirative
activities, again by
combining
and
downsizing such activities
as
finance
and accounting,
information
technology, human
resources,
and
so on.
2.
To
expand a company's geographic
coaerage-4ne
of
the best
and quickest
ways
to expand
a company's
geographic
coverage s
to
acquire rivals
w.ith
operations
in
thc desired locations. Food
products
companies
like
Nestl, Kraft, Unilever, and Procter
& Gamble have made acquisitions
an
integrai
part of their strategies to expand internationally.
3.
To
extend the
company's business
into
nezu
prodttct
categories-Many times
a
company
has
gaps
in its
product
linc
that need
to be filled. Acquisition
can be
a
quicker
and more
potent
\4'ay
to broaden
a
company's product
Iine than going
through the
exercise
of introducing a
company's own
new
product
to fill the gap. PepsiCo's
Frito-Lay division acquired Flat Earth,
a
maker
of fruit and
vegetable
crisps,
to
broaden its lineup of
snacks
that
appeal
to
heath-conscious
consumers. Coca-Cola added
to
its lineup
of
healthy
bcvcrages n'ith the
$4.1
billion acquisition
of Glacau
ir2007.
Glacau
VitaminWatcr
was the leading
enhanced water brand in the
United States.
4.
To gain
quick
access
to neru
technologies or other resoLtrces
nnd competitiue
capabilities-Making
acquisitions
to
bolster
a
company's technological
know-how or to expand its
skills
and
capabilitics allows
a
company to
bypass
a time-consuming
and perhaps expensive internal effort to
t:uild
desirable new
resource
strengths. Fom
2000
through April 2009, Cisco
Systems
purchased
85
companies to
give it
more technological
reach
and
product
breadth, thereby
enhancing its
standing as the world's
biggest
providcr of hardware,
software, and
services
for
building and operating
Internet networks.
5.
To
lead the conaergence
of industries uose
bowtdaries are
beinp
blurred ba
changing teclutologies
and
neu mrket
opportunif
ies-Such acqurisitions are
the result
of a company's
management
betting that two
or
lnore distilrct
industries
are
converging
into
one and deciding
to
establish a strong posi-
tion
in
the
consolidating
markets
by
bringing
together the
resources
and
products
of
several
different companies. Microsoft
has
made
a
scrics
of
acquisitions that have
enabled
it to
launch
Microsoft TV Internet
Protocol
Television
(IPTD.
Microsoft TV
allows
broadband
users to use their
home
compuiers or
Xbox
360 game
consoles to watch live programming, video
on demand, view pictures,
and
listen
to music.
Conccpts &
Connections
6.1.
describes how
Clear Channel Communications
has used
acquisitions
to build a
leading global
postion in outdoor advertising
and radio
broadcasting.
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lementing the Chosen
Competitive
Strategy-Other lmportant
Buslness
Strategy
Choices
t9r
CLEAR
CHANNEL
COMMUNICATIONS_USING
MERGERS
AND
ACQUISITIONS
TO
BECOME
A
GLOBAL MARKET
LEADER
In zoo9,
Clear Channel
Communicatons
was
among the
worldwide
leaders
in
radio broadcasting
and
outdoor
advertising.
Ctear Channel
owned and
operated
more
than
1,ooo
radio stations in
the
United
States
and about
goo,ooo
outdoor
advertsing
displays
across the world.
The
company,
which
was
founded
in
r97z
by
Lowry
Mays
and Billy
Joe
McCornbs,
got
its start
by
acquiring
an
unprofltabLe
country,music
radio
station in
San
Antonio,
Texas.
Over the next 10
years,
Mays
learned
the radio
business
and slowly
bought
other
rado
stations n a
variety
of
states.
When
the
FederaI
Communications Commission
loos-
ened the rules regarding
the abitity of
one company to
own both
radio
and
TV
statons in
the late
198os,
Clear
Channel
broadened
its
strategy
and
began acquiring
smatl,
struggling
TV
stations.
By 1998,
Clear
Channel
had
used
acquisitions
to
build
a leadng
position
in radio
and
television
stations.
Domestlcally,
it
owned,
programmed,
or sold
airtime for
69
Al\4
radio stations,
135 FM
stations,
nd
rB TV
>tlio^s in
8 locdl
rarkets
n
24
staTes.
ln
ry97,
Clear
Channel
used
acquistions
to establsh
a major
position
n
outdoor
advertising. lts first
acqusi-
tion
was Phoenix-based
Eller Media Company,
an
outdoor
advertising
company with
over
roo,ooo billboard
facings,
This
was
quickly
followed
by additional
acquisitions
of
outdoor
advertising companies,
the
most important
of
which
were ABC
0utdoor in
Milwaukee.
Wisconsin;
Paxton
Communcations
(with
operations n Tampa
and
Orlando,
Florida);
Universal Outdoor;
and the More
Group, with
outdoor
operations and
9o,ooo
dsplays
in z4
countries.
Then
in
October
999,
Clear
Channel made
a
major
move
by
acquring AM-FM, Inc.,
and changed
its
name
to Clear
Channel
Communications;
the AM-FM
acouisiton
gave
Ctear Channel
operations in
32
countries, includ-
ing 83o
radio
stations, 19 TV
stations,
and more
than
425,ooo
outdoor disptays. In
2ooo
Clear Channel
broad-
ened ts media
strategy
by acquiring
SFX Entertanment,
one
of the world's
Largest
promoters,
producers,
and
pre-
senters
of live entertainment
events.
ln zoo6,
Clear
Channel management
recognized
that
the company's
outdoor
advertising and radio
businesses
were
by far
the company's most
profitable
businesses
and began a
search for
buyers of its lesser
performing
busnesses.
The
company spun
off of
its
live
entertain.
ment
busness
in
zoo6
and divested its
56
television
stations
ln
zoo8.
1n
zoo9,
Clear Channel
operated
1,166
radio
stations
and
owned and
operated more
than
z3o,ooo
billboards in
the
United States and 670,000 out-
door displays
in 36
other
countries.
Sources: www.clearchannel.com,
accessed May
2oo8;
and
BusinessWeek,October
19,
1999,
p,
56.
Why
Mergers
and Acquisitions
Sometmes
Fail
to Produce
Anticipated
Results
AII too frequc.ntlri rrrergers
arrcl acquisitions
clo
not produce
the hoped for
outcomes.; Cost savings
may prove smaller
than
expectecl.
Gains
in
competi-
tive
capabilities mav
takc.
suhstantially longer
to realize,
or
worse, mcry
never
malerialrze
.tt.tll.
Efforis
to mesh
thc
corpt>rate
crrltur.es can
sLrll olrt clue
to
fclrmrdable
resistrncc.
frorn
organizatirr mc.mbcrs.
Nlanagels
aud
er-nplovees
at the acrluirerl
cornpany
rnry
rglle forcefully for
corrtintring
to
.lt
certalr-r
thir-rgs
tlre
n'av
they n,ere
done
prior
to
the
acrr-risition.
And
kcy
c.rnployees at
the
actlttirccl
colxPaltv
can rlurckly Lrecome
c1rscuch.rnted
and leave.
,
For
a more
expansive cliscussion,
see Dyer, Kale,
and Singh,
"Whcn
to Ally and
Whe
r
to
Acqu
re,"
pp.
1o9
11o.
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Part
One: Section
C: Crafting
a
Strategy
Anumber of
previously
applauded
mcrgers
/
acquisitions
have yet to
live up
to expecta
tions-prominent
examples
include the merger of
Sprint
and
Nextel
and FedEx's
acquisition
of
Kinkos.
The
merger
of
Daimler
Benz
(Mercedes)
and Chrysler
was a
failure, as was Ford's
$2.5
billion
acquisition
of
Jaguar
and
its
$2.5
billion
acquisition of
Land
Rover
(both
were sold
to India's
Tata
Motors in
2008
for
$2.3
billion).
eBay's 52.6
billion
acquisition
of Skype
(an
Internet
phone service
companv) in
2005
proved
to
be
a
failure
as
well-eBay
wrote off $900
million
of
its
Skvpe
investmcnt
in 2007
and announced
it u'ould
sell Skvpe
iu
2010.
Vertical
lntegration
:
Operating
across
More Industry
Value Chain
Segments
Vertical integration
extends
a
firm's competitivc
and operating
scope
n-ithin
the same
irdustry. It
involves
expanding
the
firm's range of value chain
activi-
ties
backward
into
sources of
supply
and/or
forward toward
end
users.
Thus,
if
a
manufacturer invests
in
facilities to
produce
cer-
A
vertical ntegration
strategy
has appeal
oniy
tain component
Palts
that
it formerly
purchased
from
if
it
signifrcantly
strengthens
a
frrm's
competitiv
outside
suppliers
or
if it opens
its own
chain of
retail
position
andlor boosts
ts
profitability.
stores to
market
its products
to
consumers,
it
remains
ur esserrhally
the
same
industry
as before.
The only
change
is
that it
has
operations
in two
stages
of
the industry
value
charn.
For
example,
pair-rt
manufacturer
Shcrwin-Williams
remains
in the
paint
business
even
though
it
has
integratcd
forward into retailing
by operating
more
than
3,300
retail
stores
that
market
its
paint products
directly
to
consumers.
Vertical
intcgration
strategies can aim
atfull
itrtegratiorl
(participating
in all
stagcs
of
the
industry
value chain)
ot
partial inLegration
(building
positions
in
selecied
stages
of
the
industry's
total value
chain). A
firm
can
Pursue
vertical
irtegration by
starting
its
own
operations
in
other
sta;es in the
industrv's
activity
chain or
by acquiring
a
company
alreadv
performing
the
activties.
The Advantages
of
a
Vertical
Integration
Strategy
The
tzuo
best
reasons
for
in'oesting
comPnny
resoLffces
in'oertical
integration
are
to
strengtlrcn the
firm's
competitirte
position and/or
to boost
its profitability.E
Vertical
integration has no real
payoff nnless
it produces sufficient
cost
savings to
justlfy
the extra
im.estment, adds
materially
to a comPany's
technological
and com-
petitive
strengths,
and/or
helps
diffcrentiate
the comPany's
product offering.
INTECRATING BACKI AI(D
'I
O
ACHIEVE
CREATI-I{
CON4PET-
ITIVENESS
It
is
harder than one
might
think to
generate cost
savings
or boost profitability
by integrating
backward
into activities such
as parts
and components manufacture.
For backward
integration
to be a viable
and
E
See
Kathryn
R. Harrlgan,
"Matching Vertical
Integration
Strategies
to Competitive
Conditions,"
Strotegc
Management
Journol
7,
no.
6
(Novem
ber-December
1986),
pp.
ss-s16;
for
a
more
extensive
discussion
of
the
advantages
and disadvantages of
vertcal
integration, see
John
Stuckev
and David
White,
"When
and
When
Not
to
VerticalLy Integrate," Sloan
Monogement
Revlew
(Spring
ry9t,
pp.
7r-83.
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Chapter e Supplementing the
Chosen
Competitve
Strategy-0ther
lmportant
Eusiness Strategy Choices
profitabie strategy, a company must be able to
(1)
achieve the
same
scalc
economies
as outside suppliers and
(2)
match or
beat
suppliers' production
efficiency with no drop-off in quality. Neither outcome is easily achieved.
Tcr
begin
with,
a
company's
in-house requirements
are often too small to reach the
optimum
size
for
low-cost
operation-for
instance,
if it takes
a
minimum
pro-
duction
volume
of
1
million
r.rnits
to
achieve
scale
economies and
a
company's
in-house requirements
are
just
250,000
units,
then
it
falls
r+.ay
short of being
able
to
match
the
costs
of outside suppliers
(who
may readily
find
buyers
for
1 million
or more units).
But that
said,
there
are
still occasions
when
a
company
can improve
its
cost
position and
competitiveness
by performing a broader range
of value
chain
activities
in-house rather
than
having
these activities performed
by
outside
suppliers. The best potential for being able to reduce costs via a backward
integration strategy
exists
in
situations
where suppliers have very large
profit
margins, where
the
item being supplied
is
a major
cost
component, and where
the
requisite
technological skills are easily mastered
or
acquired. Backward
vertical integration
can
produce a differentiation-based
competitive advanta;e
when performing activities
intemally
contributes
to
a
better-quality
product/
service
offering,
improves
the caliber of customer
service,
or in other
ways
enhances
the performance
of
a
final
product.
Other
potential
advantages
of
backward integration include
sparing
a
company
the uncertainty
of being
dependent
on
suppliers
for
crucial components or support
services
and
lessen-
ing a company's vulnerability to
powerful
suppliers
inclined to
raise
prices at
every opporturiity. Panera Bread
has
been quite successful with a backward
vertical integration strategy that involves
intemally
producing fresh dough
that
company-owned
and franchised bakery-cafs use in makirg
baguettes,
pashies,
bagels
and
other
types
of
breacl-the company
earns
substantial prof-
its from producing both
these
items internally rather
than
having
these
sup-
plied by outsiders.
Furthermorc,
Panera Bread's vertical integration sategy
made good competitive sense because it not
only
has helped lower
store
oper-
ating
costs,
but
also has
ensured
consistent
product quality irr the company's
1,185 Iocations in
the
United States.
IN
I
ECITAI'INC
FOI(WAITD TO
ENHANCE
CON,II'ETITIVENESS
Vertical
integration into forward
stages of
the rndustry value
chain
allows
manufacturers to gain
better access to end
users,
improve market visibility,
and include
the end user's purchasing cxpcrience
as a
differentiating feature.
ln many industries, independent sales agents, whtrlesalers, and retailers han-
dle competing brands
of the
same
product
and have
no
allegiance to any one
company's
brand-they
tend
to
push
whatever
offers
the
biggest
profits. An
independent insurance
agency,
for
example,
represents
a
number
of different
insurance
companies
and tries to
find
the best match between a
customer's
insurance requirements
and.
the
policies
of
alternative insurance
companies.
Under this affangement,
it
is possible an agent
will
develop
a
preference for
one company's policies
or underwriting
practices
and neglect
other
repre-
sented insurance
companies.
An insurance
company
may
conclude,
therefore,
that it is better off integrating forward and setting up its own local sales offices.
The insurance
company also has the ability to
make
consumers'
interactions
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C: Crafting
a
Strategy
with
local agents and office personnel a differentiating
feature. Likewise,
apparel
manufacturers as varied as Ralph Lauren and Nike have
integrated
forn'ard into retailing by operating full-price stores,
factory
outlet stores,
and
Tntemet
retailing
Web
sites.
FORWARD
VERTICAL
INTEGRATION AND INTEI{NET
I{ETAILINC
Bypassing
regular
wholesale/retail
chamels
in favor
of
direct
sales
and
Inter-
net retailing
can
have appeal
if
it lowers distribution
costs,
produces
a
relative
cost
advantage over certain
rivals,
offers
higher margins,
or
results in lower
selling
prices
to end
users. In addition, sellers are compelled to
include
the
Internet
as
a retail chael when a sufficiently
large
number
of
buyers in an
industry prefer to make purchases online.
However, a
company
that is vig-
orously pursuing online
sales to
consumers
at
the same
time that it is also
heavily promoting
sales to
consumers through its
network
of
wholesalers
and
retailes
is
competing
directly against its distribution
allies. Suc}.
actions consti-
tute
channel
conflict and
create
a tricky
route
to
negotiate. A
company
that is
actively
trying
to grow
online
sales
to
consumers
is
signaling
a weak strategic
commitment
to
its dealers
and
a
willingness
to cannibalize dealers'
sales
and
grozuth
potential.
The
likely result
is
angry
dealers
and loss of
dealer
goodwill.
Quite
possibly,
a
company
may
stand
to lose
more
sales
by offending its
dealers
than
it
gains from its own online
sales
effort. Consequently, in industies where the
strong support and
goodwill
of
dealer
networks is
essential, companies
may
conclude
that it is important to avoid chanrel conflict and that
their
Web site
should
be
designed to
partner
with dealers rather
than
compete with
them.
The Disadvantages of a
Vertical Integration
Strategy
Vertical integration has
some substantial
drawbacks beyond the
potential
for
channel
conflict.e The
most serious drawbacks to
vertical integration include:
.
Vertical integration boosts a
frm's
capital inaestmenf
in the industry
.
Integrating into
more
industry
value chain segments
increases
business
risk
industry growth
and
profitability
sour.
.
Vertically integrated
companies
are
often
slow to embrace technological
aduances
or more efficient production methods when they
are
saddled
with
older technology or facilities.
.
Integrating
backward
potentially
results in less flexibility in accommo-
dating shifting buyer
preferences
when a new product design doesn't
include
parts and components that the
company
makes
in-house.
.
Vertical integration
poses
all kinds
of
capacity matching problems.
In motor
vehicle
manufacturing, for example,
the
most efficient
scale of
operation
for making
axles
is different from
the
most
economic
volume for radiators,
and different yet again for both
engines
and transmissions. Consequently,
integrating
across several
production
stages
in
ways
that
achieve
the
Iowest
feasible
costs can be a
monumental
challenge.
e
The reslience of vertical integration strategies despite the disadvantages s discussed
n
Thomas
Osegowitsch
and
Anoop Madhok,
"Vertical
Integration ls Dead,
or
ls lt?" Eusiness Horizons
46,
no.
z
(March-April
zoo3),
pp.
z5-35.
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Chapter 6
Supplementng
the
Chosen
Competitive Strategy-Other lmportant
Business
Strategy Choices
.
Integration
forward
or
backward
often
requires
the
dauelopment
of
neu
skills and business cnpabilities.
Parts
and
componcnts manufacturing, assembly
operations,
wholesale
distribution
and
retailing,
and direct
sales
via
the
Internet
are
diffcrcnt
busi-
nesses with
different kev
success
factors.
In
today's
world
of close
relationshrps
wth
suppliers and efcent supply chain manage-
ment,
very few
businesses can make
a case
for
ntegrating
backward
into
the
business
of
suppliers.
Outsourcing
Strategies:
Narrowing
the
Boundaries
of the Business
Absent the
ability to
strengthen the
firm's
competitive
position or boost
its
profitability, integrating forward or backward into additional industry value
chain
stages
is not
likelv
to be an attractive strategy option.
Outsourcing
for-
goes
attempts to perform
certain
value
chain activities
internallv
and instead
farms them
out to outside specialists and
strategic
allies-
Outsourcing
makes
strategic sense
whenever:
.
An
nctiaity
cnn
be
performed better
or
more
chenply
by
otttside specialists.
Nikon-by
outsourcing the distribution
of
digital
cameras to UPS-
gained the capability to deliver its
cameras
to rctailcrs in
the
United
States, Latin America, and
the
Caribbean in as little as two days after
an
order
u'as placed
even
though
its
manufacturing
facilities were located in
Japan,
Korea,
and
Indonesia.
.
The
actaity
is not crucial to the
t'irnt's
ability
to achieae
sustainable conryetitiae
adaantage and won't hollozu out its capnbilities,
core
competencies,
or technical
knou-how.
Outsourcing of support activities such as maintenance
sen'ices,
data processrng
and
data storage,
fringe benefit management, and
Web site
operations
has become
commonplace. Colgate-Palmolive, for irstance,
has
been able to reduce
its
information
technology operational
costs
by
more
than 10
percent per
year
through
an
outsourcing agreement with IBM.
.
lt itnprooes
n
coffipany's
ability to
inno'oate.
Coliaborative partnerships with
worldclass
sr.rppliers
who have
cutting-edge
intellectual
capital and are
early
adopters
of
the
latest technology give
a
companv
access
to
eve
bet-
ter parts and
components.
.
It allotus a compnny to
concentrte on
its
core business, lez,erage its
ker
resources
and core competencies, and do
ezten better
zuhat it
already
does best. A
com-
pany is
better able to build and
develop
its
own competitively valuable
competcncies and capabilities
',vhen
it
concen-
A
company should
generally
not
perform
any
value chan actvity
internally
that can be
ource
ffliJffl,ff:ffift1'.:'JiliJ;i:'f]'
handbag
production to 40 contract manufacturers
particular
activity
s
strategically
crucal.
in 15
countries.
1'lll
lilC I{lSK
OF
AN
OUTSOL,RCINC STRAT[GY
Thcbiggcstdan-
ger of outsourcing is that
a
company
will farm
out
the wrong
types
of activitics
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t9e
Part One: Section
C:
Crafting
a
Strategy
and thereby
hollow
out
its
own
capabilities.lO
In
such cases,
a
company
loses
touch with the
very activities
and expertise
that over
the long run dctcrmine
its
success.
But most
companies
are
alert
to this danger and take actions
tcr
protect
against being
held
hostage
by outside supplicts.
Cisco Systems
guards
against
loss
of control
and protects
its manufacturing expertise by designing
the production
methods that its contract manufacturers
must
use. Cisco
keeps
the
source code
for
its
designs
proprietary, thereby
controlling
the
initiation
of all improvernents and safeguarding
its
innovations from
imitation.
Further,
Cisco
uses
the Internet to
monitor
the
factory operations of contract
rnanufac-
turers around the clock,
and
can
therefore
know
immediately when
problems
arise
and decide
'n'hether
to
get
involved.
Strategic Options to
lmprove a Companfs
Market Position-The
Use
of Strategic
Offensives
Beyond stratcgic options
for
expanding
a company's business scope, enhanc-
ing
its
collection of
resources
and capabilities,
improving
efficiency,
gaining
economies
of
scale, and
accessing
new markets,
matlagers must consider
strategic options
for improving a company's
market
prosition.
There are
times when
a
company
should be
aggressiae and
go
ort
the
offensiae.
Strategic
offensives
are
called
for when
a
company
spots opportunities
to
gain profit-
able
market
share
at the expensc of
rivals
or
when a company has no
choice
but to try to
whittle away at a
strong
rival's competitive
advantage.
Compa-
nies like Walmart, Toyota, Microsoft, and Google
play hardball, aggressively
pursuing cornpetitive advanta;e and trying
to
reap the benefits a competi-
tive
edge offes-a
leading
market
share,
excellent
profit
margins,
and
rapid
growth.lr
Choosing
the Basis
for
Competitive
Attack
As
a
general rule,
strategic
offensivcs should be grounded
in
a
company's com-
petitive assets and strong points
and
exploit competitor
weaknesses.r2
Ignoring
the
need to tie
a
strategic
offensive
to
a
company's com-
The
best
offensives use a company's
resource
petitive
strengths and
what it does best
is
like going to
strengs to
attack
rivals in
those
competitive
war n'ith a popgun-the
prosPects
for
success
are
areas where
ihey
are
weak.
dim. For
instance, it
is
foolish for
a
company
with rela-
tively high
costs to employ
a price-cutting offensive.
''
For
a
good
discussion
of
the problems that
can arise
from outsourcng,
see Jrome Barthlemy,
"The
Seven
Deadly
Sins of
Outsourcing," Acodemy of
Manogement Executive
r7,
no.
z
(May
zoo3),
pp.
87-roo.
"
For
an excellent discussion
of
aggressive offensive strateges,
see George Statk,
Jr.,
and
Rob
Lachenauer,
"Hardball:
Five Killer Strategies for Trouncng
the
Competton," Horvard
Busness
Revew
82,
no.
4
(April
zoo4),
pp.
6z-7r. A
discussion
of
offensive strateges
particularly
suitable
for industry
leaders is
presented
in
Richard D'Aven,
"The
Empire Strkes
Back: Counterrevolu-
tionary Strategies
for
Industry Leaders," Harvard Busness Revlew
80,
no,
rr
(November
zooz),
pp.
66
74.
"
For
an
excellent discussion
of
how
to
wage offensives against strong rivals, see
David
B.
Yoffle
and
Mary Kwak,
"Mastering
Balance: How
to
Meet
and
Beat
a Stronger
Opponent," Calforno
Monogement
Revew
44,
no.
2
(Winter
2oo2),
pp.
8-24.
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Chapter 6 Supplementing
the
Chosen
Competitive
Strategy-Other lmportant
Business Strategy Choices
Likewise,
it is ill-advised
to
pursue
a
product innovation
offensive
without
having proven
expertise in R&D.
new
product
development,
and
speeding
new
or
improved
products
to
market.
The
principal
offensive
strategy options include the following:
l. Attacking the
competitiue tueaknesses
of
riaals.
For example,
a company
with
especially good
customer
service capabilities
can
make special
sales
pitches to the customers
of
those
rivals who provide
subpar customer
service.
Aggressors
with
a
recognized
brand
name
and
strong
marketing
skills
can
launch
efforts
to win
customers away from rivals
with weak
brand recognition.
2, Offering
an
equally
good
or better product
at a lorner price. Lower
prices
can
pro-
duce
market
share
gains
if
competitors offering similarly performing
prod-
ucts don't
respond
with price
cuts of
their own. Price-cutting
offensives are
best initiated
by companies
that
havefrsf
achieaed
a
cost adpantage.l3
3.
Pursuing continuous product
innooation to drato sales and market
share away
from
less innouatiae
ritsals.
Ongoing introductions of new/improved
prod-
ucts can
put rivals under
tremendous
competitive
pressure,
especially
when
rivals' new product
development
capabilities are weak.
4.
Leapfrogging
competitors
by being the
first
to market with next
generation
tech-
nology or producls.
Microsoft got
its next-generation Xbox
360
to
market
a
full
12
months ahead
of Sony's PlayStation
3
and
Nintendo's Wii, helping
it
convince video
gamers
to
buy
an
Xbox
360 rather than
wait
for
the new
PlayStation
3 and
Wii
to
hit
the market.
5.
Adopting and
improuing
on
the
good
ideas of other companies
(ruals
or other-
wise).1A
The idea
of warehouse-type home
improvement centers did not
originate with
Home Depot
co-founders
Arthur
Blank
and Bernie Marcus;
they
got the
"big box"
concept
from
their former employer Handy
Dan
Home lmprovement. But
they were quick
to
improve
on
Handy Dan's
business
model and strategy and
take Home Depot to
a
higher
plateau in
terms
of
product
line breadth and customer
service.
6.
Deliberately
attacking
those
mnrket
segments
where a key riaal makes
big
profits.ls
Toyota has
launched
a
hardball
attack
on General
Motors,
Ford, and
Chrys-
ler
irr the
U.S.
market
for light
trucks and
SUVs, the
very market
arena
where
the Dehoit automakers typically
eam their big profits
(roughly
$10,000
to
$15,000
per
vehicle).
Toyota's
pick-up trucks and
SUVs
have
weakened
the Big
3
U.S.
automakers by taking away
sales
and market
share
that
they desperately
need.
7
.
Maneuaering
around competitors
to capture unoccupied or less contested market
territory.
Examples include
launching initiatives
to build
strong
positions
in
geographic
areas
or product
categories
where
close
rivals have little
or
no market
presence.
'r
lan
C. MacMillan,
Alexander
B.
van Putten,
and
Rta
Gunther
McGrath,
"Global Gamesmanship,"
Harvard
Busness
Review
8r,
no.
5
(May
zoo3),
pp.
66-67i
also,
see
Askay R. Rao, Mark E. Ber
gen,
and Scott Davis,
"How
to
Fght
a Price War," Horyard
Busness
Revew
78,
no. z
(March-April,
zooo),
pp.
ro7-t6.
'4
StaLk
and
Lachenauer,
"Hardball: Five Killer
Strateges for Trouncing the Competiton,"
p.
64.
"
lbid.,
p.
67.
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Part One:
Section C:
Craftng
a
Strategy
Using
hit-and-run or
guerrilla
warfare
tactics to
grnb
sales and market share
from
complacent
or distracted
rit'als.
Options for
"guerrilia
offensives"
include
occasional
low-balling
on
price
(to
wrn a big order
or
steal
a key account
from a rival) or surprising
key
rivals with
sporadic
but
intense
bursts of
promotional
activity
(offering
a
20
Percent
discount
for
one
wcek
to draw
customers away
from
rival
brands).16
Guerrilla
offensives
are
particularly
well
suited
to
small challengers
who
have neither the
resources
nor
the
maket
visibility
to mount
a full-fledged
attack on
industry
leaders.
Lawrching
a
preemptire strike
to capture
n rare
opportunity
or secure nn
ittdustry's
limited
resources.rT
What makes a
move preemPtive
is
its
one-of-
a-kind
nature-whoever strikes
first
stands to acquire
competitive
assets
that rivals can't
readily
match. Examples
of
preemptive
moves
include
(1)
securing
the
best distributors
in a particular
geographic
region
or
country;
(2)
moving
to
obtain
the
most favorable
site
at a
new
interchange
or
intersection, in a
new
shopping
mall, and
so
on; and
(3)
tying up the
most reliable,
high-quality suppliers
via exclusive partnerships,
long-
term contracts,
or even
acquisition.
To be
successful,
a preemptive
move
doesn't have
to totally block rivals from
following
or
copying;
it
merely
needs
to
give a firm a prime position
ihat is not
easily
circumvented.
Choosing
Which
Rivals
to
Attack
Offensive-minded
firms need to analyze
which of their
rivals to challenge
as
well
as
how to mount that
challenge.
The following are
the best targets
for
offensive
attacks:18
.
Market leaders
that nre znnerable--0flensive
attacks
make good
sense
u'hen
a
company
that
leads
in
terms
of size and
market
share
is not a true
leader
in terms of sen'in8 the
market well.
Signs of
leader vulnerability
include
unhappy buyers,
an
inferior
product line, a weak competitive
strategy
with
regard
to
low-cost
leadership or differentiation,
a
PreoccuPatii>n
with
diversification
into other
industries, and
mediocre or declining
Profitability.
.
Runner-up
firms
utith
arcaknesses
in areas where
the challenger is strong-
Runner-up
firms are an
especially
attractive
target when
a
challenger's
resource strengths
and compctitive capabilities
ae
weil-suited to
exploit-
ing their weaknesses.
.
Struggling
enterprises
that are on the uerge
of
going
u nder-Challenging
a
hard-pressed rival in ways that further sap
its financial strength
and com-
petitive position can
hasten
its exit
from
the
market.
'6
For
an interesting study
of how small
firms
can successfutly
employ
guerrilla-style
tactics,
see Ming-
Jer
Chen
and Donatd
C.
Hambrick,
"Speed,
Stealth, and
SeLective
Attack:
How Small
Firms
Dffer from
Large Firms
n
Competitve
Behavior," Acodemy
of
Monogement
Joum1l38,
no.
z
(April
r995),
pp.
45)-482.
Other
discussions of
guerrilla
offensives
can be
found n lan MacMiltan,
"How
Business
Strategists
Can Use Guerritla
Warfare Tactics,"
/ournol
of
Business Strotegy
\
no. z
(Fatl
1980),
pp.
6j-65;
Wllam E.
Rothschitd,
"Surprse
and the Competitive
Advantage,"
lournol
of
Busness
Strotegy
4,
no.
3
(Wnter
1984),
pp.
10 18; Kathryn
R.
Harrigan,
Strategic
Flexiblity
(Lexington,
MA:
Lexngton
Books, r985),
pp.
30
45;
and Liam
Fahey,
"Guerrilla
Strategy:
The
Hit-and-Run
Attack,"
in The
Strutegic
Monogement Planning
Reader,
ed.
Liam
Fahey
(Englwood
Clffs, NJ: Prentce
Halt,
1989),
pp.
194-797.
'/
The
use
of
preemptve
strike offensves
s
treated
comprehensvely
in lan
I\4acMllan,
"Preemp'
tive
Strategies,"
/ournol
of
Business Strategy
4,
no.
z
(Fall
t983),
pp.
16-26.
'3Phlip
Kotler, Marketing
Management,5th
ed.
(Englewood
Ctiffs,
NJ:
Prentice Hall, 1984),
p.4oo.
8.
9.
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Chapter
6 Supplementing the
Chosen
Competitive
Strategy-other
lmportant
Business
Strategy
Choices
.
Small
local and regionnl
firms
zuith limited
capabilitie
s-Because
smaLl
firms
typically have limited expertise and
resources, a
challenger
with broader
capabilities is well positioned to
raid their biggest and
best
customers.
Blue
Ocean
Strategy-A Specia[
Kind
of
Offensive
A
blue
ocean strategy
seeks
to gain a dramatic
and
durable competitive
advantage
br1
nbandoning
elforts
to
bent
out
competitors
in
existing
markets and,
instead,
inoenting
n
nezu
industry
or distinctize mnrket
seg
ment
that renders
existittg
competitors
largely irreleaant
Blue ocean strategies
offer
growth
in
and nlloztts n coIPnnu
to create and capture
altogether
new
revenues and
profrts
by
discovering or
rnventing
demand.1e
This
strategy
views the business universe
as
new industry segments that create altogether
consisting
of
two distinct types
of
market
space.
One
is
new
demand.
wherc industrv boundaries
are
defined and accepted,
the competitive
rules
of
the
game
are
well understood by all
industry mem-
bcrs,
and
companies
try to outperform rivals bv capturing
a
bigger share of
existing
demand;
in
such
markets, Iively competition constrains
a comPany's
prospects
for rapid growth
and superior
profitability
since
rivals move
quickly
to
either
imitate or counter
the
successes
of competitors.
Thc sccond type of
market space
is a
"blue
ocean"
where the industry
does
not really
exist yet,
is
untainted bv competition,
and offcrs
wide
open
opportunity for profitable
and rapid growth
if
a company
can come up with a product offering and strat-
egy
that
allows it
to create new,
demand
ather
than
fight
over
existing demand.
A terrific
example
of such
wide
open
or blue
ocean
market space is the online
auction
industry that
eBay created
and now dominates.
Other
examples of companies
that
have achieved compctitive
advantages
by
creating blue ocean
market spaces
include
Starbucks
in
the coffee
shop
industry,
Dollar
General
in extreme
discount rctailing,
FedEx
in
overnight
package
delivery,
and
Cirque du
Soleil
in
live entertainment. Cirque du
Soleil
"reinvented
thc circus" by creating
a distinctively diffeent market space
for
its pcrformances
(Las
Vegas night clubs and theater-type settings)
and pull-
ing in a whole new
group
of customers-adults ancl corporate
clients-who
were
willing
to
pay
several times
more
than
the price of a conventional
circus
ticket to
have an
"entertainment
experience"
featuring sophisticated clowns
and star-quality acrobatic
acts in a
comfortable
atmosphere.
Companies
that
create blue ocean
market
spaces
can
usually sustain
their initially won com-
petitive
advantage without encountering major competitive
challenge
for 10
to 15 years because of high barriers to
imitation
and the strong
brand
name
awareness that a blue ocean strategy can
produce.
Strategic
Options to
Protect
a
Compant's
Market Position and
Competitive
Advantage-The
Use
of
Defensive
Strategies
In a
competitive
market,
all
firms
are subject to
offensive
challenges
from
rrvals.
The purposes
of
defensive strategies are
to
lou'er the risk of
being
attacked,
weaken
the
irnpact
of
any attack that occurs,
and
influence
challengers
to aim
.e
W.
Chan
Kim
and
Rene Mauborgne,
"Blue
Ocean Strategy," HoNard
Business Review
82,
no.
rc
(October
zoo4),
pp.
76-84.
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Part One: Section C: Crafting a Strategy
their
cfforts at othcr rivals. While defensive
strategies
Good defensive stratesies...l: .g:1.:1
il#'::j'ffil:ilT"lj1ff,;il,r::]il:i,i,l:";1ff1
competitive
advantage but rarely are
the
basis
,,_ I ;-.,
ion. Delensir
e strategies can take either of tw o iorms:
r0r
creaung't
octions
to block
challengers and actions
signaling the
likelil-rood
of strong
retaliation.
Blocking
the
Avenues
Open to Challengers
The
most frequentlv empkryed approach to defending a
company's prcsent
positron involves actions
to
restrict
tr
competitive attack by
a
challenger.
There
are
any
number
of
obstacles
that
can be
pr-rt in
the path of n'ould-be challeng-
ers.rr'A defender can intoduce nerv features,
add
nelv
models,
or
broaden
its product line to
close
off vacant nicl-res to
opportunity-seeking challengers.
It
can thn'art the efforts of rrvals to attack n,ith a lower
price by maintain-
ing
cconomy-priced
options
oi
its
ou'n.
lt
can
try
to discourage
buyers
from
trving compctitors' brands by making
early announcenents about upcoming
new products or planncd price
changes.
Finalll',
a
defender
can
grant volume
discounts or
better
financing terms to dcalcrs
and distributors to discourage
them from
experimenting
with
other suppliers.
Signating
Challengers
That
Retaliation ls Likety
The
goal of signaling challcngers that
strong
retaliation is
likelv in
the
event
of an attack
is
either to dissuadc
challcngers from attacking at all
ol
to divert
them to
less
threatening options. Either
goal can bc
achieved
by letting
chal-
lengers know
the battle rvill
cost
more than
it is r,vorth.
Would-bc
challcngcrs
can
be
sigr-ralecl bv:rr
.
Publicly
amrouncing management's
commitment
to
maintain
the
firm's
present market
share.
.
Publicly
committing
the company
to
a policy of matching competitors'
telms
or
p-rrices.
o
Maintaining
a war chest
of
cash
and
markctablc
sccuritics.
.
Making
an
occasional strong
counter-resFronse to the
moves
of weak
com-
petitors
to
cnhance the
firm's
image as a tough defender,
Timing
a
Company's
Strategic
Moves
INlten
to
makc
a
strategic move
is
often
as
crucial
as ulrnl
move
to
make.
Tim-
ing
is
especiallv important
w'hcn
first-ntortt:r
ntlunntnges
or
disntlz,nntngs
exist.r:
Being first to initiatc
a
stratcgic
movc
can
havc
a
high
Because
of
frsfmover
advantages
and
payoff rvhen
(l)
pioneering
hclps
build
a
firm's imagc
disadvantages,
competitive advantage
can
ncl repr.rtation
with
burers;
(1)
early
commitments
spring
from
when
a
move is
made
as
well
s
to
rle*
technologies,
new-style
componenrs,
nelv
or
from what move is
made
emerging clistributiorr
charrnels,
anrl
so on. e alr pro'lure
"M
chael
E.
Potter, Compettve
Advontaqe
(New
York:
Free
Press, 1985),
pp.
489
494.
"
lb d.,
pp.
495 497.
The
list
here is selective; Pofter
offers a
greater
number
of options.
"
Potle\
Competitve Advontage,
pp.
2
)2-2))
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Chapter
6
Supptementing
the
Chosen
Competitive
Strategy-Other lmportant
Business Strategy Choices
an
absolute cost advantage over
rivals;
(3)
first-time
customcrs
remain
strongly
loyal b pioneering firms
in
making
rePeat
Purchases;
and
(4)
moving first
constitutes
a preemptive strike,
making
imitation extra
hard ot unlikely.
The
bigger
the
first-mover
advantages,
the
more attractive
making
the
first move
becomes.23
Sometimes,
though,
markets
are
slow
to acccpt
the innovative product offer-
ing of
a
first-mover,
in which
case
a fast
follower
n'ith
substantial
resources
and marketing
mLlscle can
overtake
a first-mover
(as
Fox
News
has
done
in
competing
against
CNN
to
become
the
leading cable news network). Some-
times
furious
technological
change
or
product
innovation
makes a
first-mover
'r'ulnerable
to quickly
appearing next-generation
technology or
products
Motorola, oncc
a
market leader
in mobile
phones,
has
been
victimized by
the
far more innovative phones
offered by
Apple
(iPhone)
and Research
in
Motion
(Blackberry).
Hence,
there
are
no guarantees
that
a
first-mover will
rvin sustainable
competitive
advantage.2a
Tb sustain any advantage
that
may initially accrue
to a pioneer,
a first-mover
needs
to
be
a fast learner
and continue
to
move
aggressively
to capitalize on
any
initial
pioneering
advantage. If
a
first-mover's
skills, know-how,
and
actions
are easily
copied
or
even surpassed,
then
followers
and even late-movers can
catch
or
overtake
the first-mover
in a relatively short
period. What
makes
being
a first-mover
strategically
important
is not being the
first
comPany
to
do something
but
rather being the
first competitor
to
Put
together
the
pre-
cise
combination of
features,
customer
value, and sound
revenuc
/cost/profit
economics
that
gives
it
an edge
over
dvals in
the battle
for
market
leadership.25
If
the marketplace
quickly takes to
a
first-mover's
innovative product
offer-
ing,
a
first-mover
must
have
large-scale
production,
marketing, and distribu-
tion capabilities
if it is to
stave
off
fast-followers
who
possess
similar resources
capabilities.
If
technology
is
advancing
at
torrid
Pace,
a first-mover
cannot
hope to sustain
its lead without
having
strong
capabilities
in
R&D,
design,
and new
product
development,
along with the financial strength
to
fund these
activities.
Concepts & Conrections
6.2 describes
how
Amazon.com
achieved
a
first-mover
advantage
in online
retailing.
The
Potential
for Late-Mover
Advantages
or Frst-Mover
Dsadvantages
There are instances
when there are actually
adanntages
to
being an adept
follower
rather than a first-mover.
Late-mover
advantages
(or
first-moz:er
disndztnntnges)
arise
in four
instances:
.
When
pioneering
leadership
is
more
costly
than
imitating
followership
and
only
negligible
experience
or
learning-curve
benefits accrue to the
'r
For reserch evidence on the effects of
pioneering
versus foltowing,
see
Jeffrey
G.
Covin,
Dennis
P.
Slevin, and
Michael B. Heeley,
"Poneers
and
Followers: Competitive
Tactics,
Envronment, and
Growth,"
lournol
of Business
Venturing
r5,
no. z
(March
199q,
pp.
t75-2rc;
and
Chrstopher
A.
Bartlett and
Sumantra Ghoshal,
"Going
Global:
Lessons from Late'Movers,"
Horvard Business
Review
78,
no.z
(March-April
zooo),
pp.
t3:-r45.
'4
For
a more extensive
dscussion of this
point,
see Fernando
Suarez and Gianvito
Lanzolla,
"The
Half-Truth of
First-Mover
Adv
anlage," Harvard Busness
Review 83
no.
4
(April
zoo5),
pp.
tzr-t27.
'5
Gary
Hamet,
"Smart Mover, Dumb Mover,"
Fortlne,
September
3,
20o1,
p.
195.
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7/23/2019 Chapter 6 Supplementing the ... Choices
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t3a
Part
One: Sertior
C: Crafting
a
Slraregy
AMAZON.COM'S
FIRST.MOVER
ADVANTAGE
IN
Amazon.com's
path
to
world's
[argest
online
retailer
began
in
1994
when
Jeff
Bezos,
a
lvlanhattan
hedge
fund
analyst at the time, noticed
that the number
of lnternet
users was increasing
by z,3oo
percent
annually.
Bezos
saw the tremendous
growth
as
an
opportunity
to
sell
products
online that would
be
demanded
by
a
large num-
ber
of
Internet
users
and could be
easity
shipped.
Bezos
Launched
the
ontine
bookselLer, Amazon.com, in 1995. The
start-up's
revenues
soared
to
$r48
million in r997,
$6ro
million in 1998,
and
$r.6
bittion in
1999. Bezo's
business
plan
hatched
white on a
cross-country
trip
r,vith
his
wfe
in 1994 made
him
Time's Person
of
the
Year n
1999.
Amazon.com's
early entry nto online
retaiLing
had
delivered
a
first
mover advantage,
but between zooo
and
2oo9,
Bezos
undertook a
series
of additional
strategic
inrtiatives to solidify
the
company's
number-one
ranking
n the industry Bezos
undertook a
massive
buiLding
pro-
gram
in
the late r99os that
added
five
new
warehouses
and fulfiLtment centers
totaling
$3oo
mitlion. The
addi-
tional warehouse space ws
added
years
before it
was
needed, but Bezos wanted
to nsure
that, as demand
continued
to
grow,
the
company could
continue
to offer
ts customers the
best selection, the
lowest
prices.
and
ONLINE RETAILING
the
cheapest
and most convenient
deLivery.
The company
aLso
expanded its product
Iine
to
nclude
sporting
goods,
tools, toys,
grocery
items, electronics,
and digitaI music
downloads. Amazon.com's 2oo8 revenues
of
$r9.2
bit-
Lon made
it
the world's largest Internet
retailer
and
letf
Bezos'shares
in Amazon.com
made
him
the 11oth wealth-
iest
person
in
the wortd with
an estimated net worth
of
$8.2
billion.
Not
atL
of Bezos'
efforts
to maintain
a
first-mover
advantage in
online
retailing
were
a success. Bezos
corn-
mented
in a
2oo9 Fortune
article
profiling
the
company,
"We
were nvestors
in every
bankrupt,
19g9-vintage
e-commerce
start-up.
Pets.com,
Living.com, kozmo.com.
We
nvested in
a
lot of
high-profile
Flameouts." He
went
on
to
specifu
that
although the
ventures were a
"waste
of
money,"
they
"didn't
take
us
off our own misson." Bezos
also suggested
that
ganing
advantage as
a
first
mover
is'taking
a million
tiny steps-and Learning
quickly
from
your
m issteps.
"
Sources:
N,lark
Brohan,
"The
Top
5oo
Guide,"
/I]cl/1ef
Re
taler,
lue
zoo9,
(accessed
dt
wwr,.internetretaiLer
cor
on
lune
12,
zoog);
losh
Qu
ttner,
"How
leff
Eczos R,rles
the
Retail
Space," Forlune,
May
5,
2oo8,
pp.
126 rl4-
lcadcr
a condition
that
allon's
a follou,er
to cnd
up
n ith lor,vcr
costs
than
ther
first-mover.
lVhen
the
procllrcts
of
an
inltrrator
are sclmcr,vh.rt
primitive arrd
do
not
live
up to
btrver
expect.rtions,
thus allorving a
clc.\,cr
follor,r'er
tct rvln r.lis-
cnchanted brryers
arvay
frorn
the letder
wiih
be tter-perform in
g products.
lVl-ren
the
clemancl side of thc markc.tplace
is
skeptical
about
thc benefits
of a neu,,
technologv
or
procl r.Lct
beirrg pioncr..rt.,l
hy
a first-rnover.
lVtren
rapid market evolution
(drrc
to
fast-paced changes
in either technol-
ogy or
LrLrVer
neecls
ancl
expectatiotrs)
givcs
iast-followers
and mavbc
cr,'en
canfious late-movers
the
opening
kr
lcapfrog
a
first
mover's
p1'oducts
u,ith
rolc
attractive
nex[ \.ersion prodLlcts.
Deciding
Whether
to
Be
an
Early-Mover
or Late-Mover
Tn rvc.ighing
the
pros.rtcl
cons
of being
a
first-movcr \/crsus
a fast-follon'er
\ersus a
slo\\-mo\er,
lt matters lvhether
the
race
to
market
lcadcrs]-rip
in
a
par
ticular inclustry
is
a marathrtrr
or a
sprint. In
rn;rr.tthons,
a skrn,-mrlvcr
is
not
-
7/23/2019 Chapter 6 Supplementing the ... Choices
18/20
Chapter
6
Supplementing
the
Chosen
Competitive
Strategy-Other
lmportant
Business
Strategy
Choices
unduly
penalized-first-mover
advantages
can be
fleeting,
and
there's
ample
time
for
fast-followers
and sometimes
even late-movers
to
play catch-up''z6
Thus
the speed
at
which
the
pioneering innovation
is
likely to
catch
on
mat-
ters
considerably
as companies
struggle with
whether
to
Pursue
a particular
emerging
market opportunity
aggressively
or
cautiously.
For instance,
it took
18
months
for 10
million users to sign
up for
Hotmail,5.5 years
for
worldwide
mobile
phone
use
to
grow from
1.0
million
to
100
million worldwide,
and
close
to 10 years
for
the
number of
at-home
broadband
subscribers
to
grow to 100
million
worldwide.
The lesson
here is that
there
is a market-penetration curve
for every emerging
opporhurity;
typically,
the curve
has
an
inflection
point
at which all
the
pieces
of
the
business
model
fall into
place,
buyer demand
explodes,
and
the
market
takes
off.
The
irflection
point can come
early on
a
fast-rising curve
(like
use
of e-mail)
or farther on
uP a
slow-rising
curve
(like
use of
broadband).
Any
cornpany that
seeks
competitive
advantage
by being
a
first-mover
thus
needs to ask some
hard
questions:
.
Does market
take-off depend
on
the development
of
complementary
products
or
services
that
currently
are
not
available?
.
Is new
infrastructure
required
before
buyer
demand
can surge?
.
\,