Supplementing the Chosen Competitive Strategy

Strategic Management

Fig. 6.1: A Companys Menu of Strategy Options

Collaborative Strategies:Alliances and PartnershipsCompanies sometimes use strategic alliances or collaborative partnerships to complement their own strategic initiatives and strengthen their competitivenessSuch cooperative strategies go beyond normal company-to-company dealings but fall short of merger or full joint venture partnership

Reasons for Collaborative StrategiesGlobalization of the world economy Revolutionary advances in technology Untapped markets in Asia, Europe, Africa and Latin America

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

Characteristics of a Strategic AllianceStrategic alliance A formal agreement between two or more separate companies where there is:Strategically relevant collaboration of some sortJoint contribution of resourcesShared riskShared controlMutual dependenceAlliances often involve:Joint marketingJoint sales or distributionJoint productionDesign collaborationJoint researchProjects to jointly develop new technologies or product

Advantages of a Strategic AllianceIt is critical to the companys achievement of an important objectiveIt helps build, sustain, or enhance a core competency or competitive advantageIt helps block a competitive threatIt helps open important new market opportunitiesIt mitigates a significant risk to a companys business

Potential Benefits of Alliances toAchieve Global and Industry LeadershipGet into critical countries/markets quickly to accelerate process of building a global presenceGain inside knowledge about unfamiliar markets and culturesAccess valuable skills and competencies concentrated in particular geographic locationsEstablish a beachhead to participate in target industryMaster new technologies and build new expertise faster than would be possible internallyOpen up expanded opportunities in target industry by combining firms capabilities with resources of partners

Capturing the Benefits of Strategic AlliancesThe extent to which companies benefits from entering into strategic alliance is a function of six factors:Picking a good partnerDesired expertise and capabilitiesSharing the companys vision about the purpose of the allianceNo direct competition because of overlapping product linesProducts are complimentary rather than substitutesGood chemistry among key personnelStrong partner with useful resources or skills2.Being sensitive to cultural differences

Capturing the Benefits of Strategic Alliances3.Recognizing that the alliance must benefit both sidesInformation must be shared as well as gainedRelationship must remain forthright and trustfulEnsuring that both parties live up to their commitmentsdivision of work has to be perceived as fairly appropriateCaliber of the benefits received on both sides has to be perceived as adequateStructuring of the decision-making process so that actions can be taken swiftly when needed

Capturing the Benefits of Strategic Alliances6.Managing the learning process and then adjusting the alliance agreement over time to fit new circumstancesAlliances are more likely to be long-term when:They involve collaboration with suppliers or distribution allies and each partys contribution involves activities in different portions of the industry value chainBoth parties conclude that continued collaboration is in their mutual interest because:- new opportunities of learning are emerging- further collaboration will allow each partner to extend its market reach beyond what it could accomplish on its own

Why Alliances FailReasons for alliances failure:Diverging objectives and priorities of partnersInability of partners to work well togetherChanging conditions rendering purpose of alliance obsoleteEmergence of more attractive technological pathsMarketplace rivalry between one or more allies

Merger Combination and pooling of equals, with newly created firm often taking on a new nameAcquisition One firm, the acquirer, purchases and absorbs operations of another, the acquired Merger & acquisition strategiesMuch-used strategic optionsEspecially suited for situations where alliances do not provide a firm with needed capabilities or cost-reducing opportunitiesOwnership allows for tightly integrated operations, creating more control and autonomy than alliancesMerger and Acquisition Strategies

Objectives of Mergers and AcquisitionsTo create a more cost-efficient operationInefficient plants can be closedDistribution activities partly combined and downsizedMarketing and sales activities combined and downsizedReduced supply chain costs because of buying in greater volumeCost savings in administrative activities by combining and downsizingTo expand a firms geographic coverageQuickest and best wayIn case of geographic overlap, there is the additional benefit of reducing cost by eliminating duplicate facilities

Objectives of Mergers and Acquisitions3. To extend a firms business into new product categories Quicker and more potent way to broaden companys product line than going through the exercise of introducing companys own new product line 4. To gain quick access to new technologies or competitive capabilitiesFavorite among technological companies racing to establish a position in product categories about to be bornAllows companies to bypass time-consuming and expensive R&D effortTo invent a new industry and lead the convergence of industries whose boundaries are blurred by changing technologies and new market opportunitiesCompanys management betting that two or more distinct industries are converging into one and deciding to establish strong position in consolidating marketMerger of AOL and Time Warner a move predicated on the belief that entertainment content would ultimately converge into one much of which will be distributed over internet

Combining operations may result in:Resistance from rank-and-file employeesHard-to-resolve conflicts in management styles and corporate culturesTough problems of integrationGreater-than-anticipated difficulties in:Achieving expected cost-savingsSharing of expertiseAchieving enhanced competitive capabilitiesPitfalls of Mergers and Acquisitions

Vertical Integration StrategiesExtend a firms competitive scope within the same industryBackward into sources of supplyForward toward end-users of final productCan aim at either full or partial integrationInternallyPerformedActivities, Costs, &MarginsActivities, Costs, &Margins ofSuppliersBuyer/UserValueChainsActivities, Costs,& Margins ofForward ChannelAllies &Strategic Partners

Strategic Advantages of Backward IntegrationGenerates cost savings only if:(a) The volume needed is big enough to capture the scale economies of the supplier (b) the supplier efficiency can be matched or exceeded with no drop in quality.The potential to reduce costs exists in situations where:suppliers have a sizeable profit marginthe item being supplied is a major cost componentneeded technological skills are easily masteredBackward 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 IntegrationOn 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 valueOther 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 IntegrationTo gain better access to end users and better market visibilityIndependent sales agents, wholesalers, retailers handle competing brands of the same product, have no allegiance to any one companys brand and tend to push what sells and earns the biggest profit. This results in:Frustrating a companys effort to boost sales and market shareGiving rise to costly inventory pileups and frequent under utilization of capacityIf companys product line is not broad enough to justify stand alone distributor-ship or retail stores, it leaves the option for selling directly to end users perhaps by internet, which may:Lower distribution costsProduce a relative cost advantage over rivalsEnable lower selling prices to end users

Strategic Disadvantages of IntegrationIt boosts a firms capital investment in the industry, increasing business risk in case industry growth and profits go sourFully integrated firms tend to adapt new technologies slower than partially integrated or non-integrated firmsIntegrating forward or backward locks a firm relying on its own in-house activities and potentially results in less flexibility in accommodating buyer demand for greater product varietyPoses problems in balancing capacity at each stage in in the value chainOften calls for radically different skills and business capabilitiesBackward integration into the production and parts components can reduce a companys manufacturing flexibility, lengthening the time it takes to make design and model changes and bring new products to market.

Whether vertical integration is a viable strategic option depends on its: Ability to lower cost, build expertise, increase differentiation, or enhance performance of strategy-critical activitiesImpact on investment, cost, flexibility, and administrative overhead Contribution to enhancing a firms competitivenessPros and Cons ofIntegration vs. De-Integration

Outsourcing Strategies

Outsourcing involves withdrawing from certain value chain activities and relying on outsiders to supply needed products, support services, or functional activitiesConcept

Activity can be performed better or more cheaply by outside specialists Activity is not crucial to achieve a sustainable competitive advantageRisk of exposure to changing technology and/or changing buyer preferences is reducedIt improves firms ability to innovateOperations are streamlined to:Improve flexibilityCut time to get new products into the marketIt increases firms ability to assemble diverse kinds of expertise speedily and efficientlyFirm can concentrate on core value chain activities that best suit its resource strengths When Does OutsourcingMake Strategic Sense?

Farming out too many or the wrong activities, thus Hollowing out capabilitiesLosing touch with activities and expertise that determine overall long-term success

Risks of Outsourcing Strategy

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

Principles of Offensive StrategiesFocus relentlessly on:Building competitive advantage and Striving to convert it into decisive advantageEmploy the element of surprise as opposed to doing what rivals expectApply resources where rivals are least able to defend themselvesBe impatient with the status quo and display a strong bias for swift, decisive actions to boost a firms competitive position vis--vis rivals

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

Types of Offensive Strategy OptionsSuch offensive options work only if a company has potent product innovation skills of its own, and Keeps its pipeline full of ideas that are consistently well received in the market 4. Adopt and improve on the good ideas of other companiesE.g. Ryan Air in Europe succeeded as a low-cost airline by imitating Southwest Airlines operating processes by applying them in different geographic markets

Types of Offensive Strategy Options 5. Deliberately attack market segments where a key rival makes big profitsDells entry into printers and printer cartridges, a market dominated by HP 6. Attack competitive weaknesses of rivalsGo after the customers of those rivals whose products lag on quality, features or product performanceAggressors with recognized brand names and strong marketing skills can launch efforts to win customers from rivals with weak brand recognitionE.g. Olpers effectively filling the void left open by Haleeb and Nestle

Types of Offensive Strategy Options7. Maneuver around competitors and concentrate on capturing unoccupied or less contested market territoryCreate new market segments by introducing products with different attributes and performance features to better meet the needs of selected buyers8. Use hit-and-run or guerrilla warfare tactics to grab sales and market share from complacent rivals Occasional lowballing on price (to win a big order or steal a key account from rival) Surprising rivals with sporadic but intense bursts of promotional activity ( 20% discount for one week)

Types of Offensive Strategy Options9. Launch a preemptive strike to secure an advantageous position that rivals are prevented from duplicatingWhoever strikes first stands to capture competitive assets that rival cant readily matchSecuring the best distributors in a particular geographic region or countryMoving to obtain the most favorable siteTying up the most reliable, high quality supplier via exclusive partnerships, long-term contracts, or acquisitionsMoving swiftly to acquire assets of distressed rivals at bargaining price

Blue Ocean: A Special Kind Of Offensive A blue ocean strategy seeks to gain a dramatic and durable competitive advantage by:a) Abandoning efforts to beat competitors in existing marketsb) Inventing a new industry or distinctive market segment that renders existing competitors largely irrelevant and allows a company to create and capture altogether new demandThis strategy views the business universe as consisting of two distinct types of market space1. Industry boundaries are:- well defined and accepted- competitive rules of the game well understood- companies try to out perform rivals by capturing bigger share of existing demand- lively competition constrains a companys prospects for rapid growth and superior profitability 2. Industry does not really exist yet- is untainted by competition- offers wide open opportunity for profitable rapid growthExamples : AMC via its pioneering megaplex movie theatersFedEx in overnight package delivery

Choosing which Rival to Attack1.Market leaders that are vulnerableOffensive attack makes good sense when a company that leads in terms of size and market share is not a leader in terms of serving the market wellSigns of vulnerability include:- unhappy buyers- an inferior product line- a weak competitive strategy with regard to low cost leadership or differentiation- strong emotional commitment to aging technology the leader has pioneered- outdated plants and machinery- a preoccupation with diversification in other industriesOffensive to erode position of leaders have real promise when the challenger is able to revamp its value chain or innovate to fresh cost based or differentiation based competitive advantageTo be successful attacks on leaders dont have to result in making the aggressor the new leader; a challenger may win by simply becoming a stronger runner up

Choosing Which Rival to Attack2. Runner up firms with weaknesses in areas where the challenger is strongChallengers resource strength and competitive capabilities are well suited to exploiting their weaknesses3. Struggling enterprises that are on the verge of going under4. Small local and regional firms with limited capabilities

Using Offensive Strategy to Achieve Competitive AdvantageStrategic offensives offering strongest basis for competitive advantage entail:An important core competenceA unique competitive capabilityA better-known brand nameA cost advantage in manufacturing or distributionTechnological superiorityA superior product

Defensive StrategyLessen risk of being attackedBlunt impact of any attack that occursInfluence challengers to aim attacks at other rivalsBlock avenues open to challengersSignal to challengers that vigorous retaliation is likelyObjectivesApproaches

Block Avenues Open to ChallengersParticipate in alternative technologiesIntroduce new features, add new models, or broaden product line to close gaps rivals may pursueMaintain economy-priced modelsIncrease warranty coverageOffer free training and support servicesReduce delivery times for spare partsMake early announcements about new products or price changesChallenge quality or safety of rivals products using legal tacticsSign exclusive agreements with distributors

Publicly announce managements strong commitment to maintain present market sharePublicly commit firm to policy of matching rivals terms or pricesMaintain war chest of cash reservesMake occasional counter-response to moves of weaker rivalsSignal to Challengers Retaliation is Likely

Web Site StrategiesStrategic Challenge What use of the Internet should a company make in staking out its position in the marketplace?Five Web site approachesUse 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 customersUse as primary distribution channel to access buyersUse as exclusive channel to transact sales with customers

Product Information-only Web Strategies Avoiding Channel ConflictAn attractive market positioning option for manufacturers and wholesalers that have invested heavily in building and cultivating retail dealer network Face channel conflict issues if they try to sell on line in direct competition with dealersA manufacturer that aggressively pursues online sales to end user is signaling: - a weak strategic commitment to its dealers- a willingness to cannibalize dealers sales and growth potentialSuch strategy is certain to anger its wholesale distributors and retail dealers who may respond by putting more effort into marketing bands of rival manufacturers that dont sell on lineIn sum, manufacturer may stand to lose more sales by offending its dealers than it gains from its own online sale

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

ApproachSell directly to consumers andUse traditional wholesale/retail channelsStrategic appeal for wholesalers and retailersEconomic means of expanding a companys reachProvide both existing and potential customers another choice of how to:Communicate with the companyShop for product informationMake purchasesResolve customer service problemsBrick-and-Click Strategies:An Appealing Middle Ground Approach

Choosing Appropriate Functional-Area StrategiesInvolves strategic choices about how functional areas are managed to support competitive strategy and other strategic movesThe nature of functional strategies is dictated by the choice of competitive strategyLow 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 strategyHigh end differentiation strategy requires:- production strategy geared to top-notch quality- marketing strategy aimed at touting differentiating features and using advertising and a trusted brand name to pull sales through distribution channels

When to make a strategic move is often as crucial as what move to makeFirst-mover advantages arise whenPioneering helps build firms image and reputationEarly commitments to new technologies, new-style components, and distribution channels can produce cost advantageLoyalty of first time buyers is highMoving first can be a pre-emptive strikeFirst-Mover Advantages

First-Mover CharacteristicsSustaining advantages of being first-mover:Needs to be fast learnerContinue to move aggressively to capitalize on any initial pioneering advantageHelps immensely if first mover has financial pocketsHas competencies and competitive capabilities and astute managers

First-Mover DisadvantagesMoving early can be a disadvantage (or fail to produce an advantage) when:Cost of pioneering is more than being an imitative follower and only negligible learning/experience curve benefits accrue to the leaderInnovators products are primitive, not living up to buyer-expectationsDemand side of the market is skeptical about the benefits of new technology/product of a first-moverRapid technological change allows followers to leapfrog pioneers

First Mover: To be or not to beIt matters whether the race to market leadership in a particular industry is a sprint or marathonIn marathons a slow mover is not unduly penalized- first mover advantages could be fleeting- there is ample time for fast-mover followers, some times even late-movers to play catch upThe 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 opportunityThe 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 NotThe inflection point can come early on a fast rising curve or further up on a slow rising curveA 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 surges?Will buyers 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 be careful not to pour too many resources into cutting edge technologyThe race is going to be a 10-year marathon rather than a 2year sprint

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