McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 6: Supplementing the Chapter 6: Supplementing the
Chosen Competitive Strategy: Other Chosen Competitive Strategy: Other
Important Business Strategy ChoicesImportant Business Strategy Choices
Screen graphics created by:Jana F. Kuzmicki, Ph.D.
Troy University
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Chapter Learning Objectives
1. Gain an understanding of how strategic alliances and collaborative partnerships can bolster a company’s competitive capabilities and resource strengths.
2. Become aware of the strategic benefits of mergers and acquisitions.
3. Understand when a company should consider using a vertical integration strategy to extend its operations to more stages of the overall industry value chain.
4. Understand the conditions that favor farming out certain value chain activities to vendors and strategic allies.
5. Recognize how and why different types of market situations shape business strategy choices.
6. Understand when being a first-mover or a fast-follower or a late-mover can lead to competitive advantage.
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Chapter Roadmap
Strategic Alliances and Partnerships Merger and Acquisition Strategies Vertical Integration Strategies: Operating
Across More Stages of the Industry Value Chain
Outsourcing Strategies: Narrowing the Boundaries of the Business
Business Strategy Choices for Specific Market Situations
Timing Strategic Moves – To be an Early Mover of a Late
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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.
Strategic Alliances and Partnerships
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Characteristics of a Strategic Alliance
Strategic alliance – A formal agreement between two or more separate companies where there is Strategically relevant collaboration of some sort Joint contribution of resources Shared risk Shared control Mutual dependence
Alliances often involve Joint marketing Joint sales or distribution Joint production Design collaboration Joint research Projects to jointly develop new technologies or
products
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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 importantmarket opportunities
It mitigates a significant riskto a company’s business
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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 inproduction and/or marketing
To acquire or improve marketaccess via joint marketing agreements
Why Are Strategic Alliances Formed?
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Alliances Can Enhance aFirm’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 can help a company lower its costs and/or gain access to needed expertise and capabilities
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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
Potential Benefits of Alliances toAchieve Global and Industry Leadership
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Capturing the Benefitsof 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
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Why Alliances Fail
Ability of an alliance to endure depends on How well partners work together Success of partners in responding
and adapting to changing conditions Willingness of partners to
renegotiate the bargain
Reasons for alliance failure Diverging objectives and priorities of partners Inability of partners to work well together Changing conditions rendering purpose of alliance
obsolete Emergence of more attractive technological paths Marketplace rivalry between one or more allies
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Merger – Combination and pooling of equals, with newly created firm often taking on a new name
Acquisition – One firm, the acquirer,purchases and absorbs operations ofanother, 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
Merger and Acquisition Strategies
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To create a more cost-efficient operation
To expand a firm’s geographic coverage
To extend a firm’s business into newproduct categories or international markets
To gain quick access to new technologiesor competitive capabilities
To invent a new industry and leadthe convergence of industries whose boundaries are blurred by changing technologies and new market opportunities
Objectives of Mergers and Acquisitions
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Combining operations may result in
Resistance from rank-and-file employees
Hard-to-resolve conflicts in managementstyles and corporate cultures
Tough problems of integration
Greater-than-anticipated difficulties in
Achieving expected cost-savings
Sharing of expertise
Achieving enhanced competitive capabilities
Pitfalls of Mergers and Acquisitions
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Vertical Integration Strategies
Extend a firm’s competitive scope withinsame industry
Backward into sources of supply
Forward toward end-users of final product
Can aim at either full or partial integration
InternallyPerformedActivities, Costs, &Margins
Activities, Costs, &
Margins ofSuppliers
Buyer/UserValue
Chains
Activities, Costs,& Margins of
Forward ChannelAllies &
Strategic Partners
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Strategic Advantagesof Backward Integration
Generates cost savings only ifvolume needed is big enoughto 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
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Strategic Advantagesof Forward Integration
To gain better access to endusers and better market visibility
To compensate for undependable distribution channels which undermine steady operations
To offset the lack of a broad product line, a firm may sell directly to end users
To bypass regular distribution channels in favor of direct sales and Internet retailing which may
Lower distribution costs
Produce a relative cost advantage over rivals
Enable lower selling prices to end users
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Strategic Disadvantagesof Vertical Integration
Boosts resource requirements Locks firm deeper into same industry Results in fixed sources of supply and
less flexibility in accommodating buyerdemands for product variety
Poses all types ofcapacity-matching problems
May require radically differentskills / capabilities
Reduces flexibility to make changes in component parts which may lengthen design time and ability to introduce new products
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Outsourcing Strategies
Outsourcing involves having outsiders perform certain value chain activities rather
than performing them internally
InternallyPerformedActivities
Contract Manufacturers
Vendors with specialized expertise
Distributors or Retailers
Concept
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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/orchanging buyer preferences is reduced
It improves firm’s ability to innovate Operations are streamlined to
Improve flexibilityCut 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
When Does Outsourcing an ActivityMake Strategic Sense?
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Farming out too many or the wrong activities, thus
Hollowing out capabilities
Losing touch with activities and expertise that determine overall long-term success
The Big Risk of Outsourcing
Matching Strategy toa Company’s Situation
Most important
drivers shaping a
firm’s strategic
options fall into
two categoriesFirm’s internal
resource strengths and weaknesses
Nature of industry
and competitive
conditions
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Matching a Company’s Strategyto Different Market Conditions
Fragmented Fragmented MarketsMarkets
Turbulent Turbulent MarketsMarkets
Freshly Freshly Emerging Emerging Markets Markets
Rapidly Rapidly Growing Growing MarketsMarkets
Mature, Slow-Mature, Slow-Growth Growth MarketsMarkets
Stagnant or Stagnant or Declining Declining MarketsMarkets
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New and unproven market Proprietary technology Lack of consensus regarding which of
several competing technologies will win out Low entry barriers Experience curve effects may permit
cost reductions as volume builds Buyers are first-time users and marketing involves
inducing initial purchase and overcoming customer concerns
First-generation products are expected to be rapidly improved so buyers delay purchase until technology matures
Possible difficulties in securing raw materials Firms struggle to fund R&D, operations and build
resource capabilities for rapid growth
Features of an Emerging Industry
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Strategy Options for Competing in Emerging Industries
Win early race for industry leadership by employing a bold, creative strategy
Push hard to perfect technology,improve product quality, and developattractive performance features
Consider merging with oracquiring another firm to
Gain added expertisePool resource strengths
When technological uncertainty clears and a dominant technology emerges, try to capture any first-mover advantages by moving quickly
Form strategic alliances withCompanies having related technological expertise or Key suppliers
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Strategy Options for Competing in Emerging Industries (continued)
Pursue new customers and user applications
Enter new geographical areas
Make it easy and cheap forfirst-time buyers to try product
Focus advertising emphasis on
Increasing frequency of use
Creating brand loyalty
Use price cuts to attract price-sensitive buyers
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What Is the Key to Success forCompeting in Rapidly Growing Markets?
A company needs a strategypredicated on growing faster than
the market average so it Can boost its market share and Improve its competitive standing vis-à-
vis rivals
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Strategy Options for Competing in Rapidly Growing Markets
Drive down costs per unit to enable price reductions that attract droves of new customers
Pursue rapid product innovation to
Set a company’s product offering apart from rivals
Incorporate attributes to appeal togrowing numbers of customers
Gain access to additional distributionchannels and sales outlets
Expand a company’s geographic coverage
Expand product line to add models/styles to appeal to a wider range of buyers
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Slowing demand breeds stiffer competition More sophisticated buyers demand bargains Greater emphasis on cost and service “Topping out” problem in adding
production capacity Product innovation and new
end uses harder to come by International competition increases Industry profitability falls Mergers and acquisitions reduce
number of rivals
Industry Maturity: The Standout Features
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Strategy Options forCompeting in a Mature Industry
Prune marginal products and models
Emphasize innovation in the value chain
Strong focus on cost reduction
Increase sales to present customers
Purchase rivals at bargain prices
Expand internationally
Build new, more flexiblecompetitive capabilities
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Strategic Pitfalls in a Maturing Industry
Employing a ho-hum strategy with no distinctive features thus leaving firm “stuck in the middle”
Being slow to mount a defense against stiffening competitive pressures
Concentrating on short-term profits rather than strengthening long-term competitiveness
Being slow to respond to price-cutting
Having too much excess capacity
Overspending on marketing efforts
Failing to aggressively Invest in product / process innovations
Pursue cost reductions
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Stagnant or Declining Industries:The Standout Features
Demand grows more slowly than economy as a whole (or even declines)
Advancing technology gives rise to better-performing substitute products or lower costs
Customer group shrinks
Changing lifestyles and buyer tastes
Rising costs of complementary products
Competitive battle ensues among industry members for the available business
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Pursue focus strategy aimed atfastest growing market segments
Stress differentiation based on qualityimprovement or product innovation
Work diligently to drive costs down Cut marginal activities from value chain Use outsourcing Redesign internal processes
to exploit e-commerce Consolidate under-utilized production facilities Add more distribution channels Close low-volume, high-cost distribution outlets Prune marginal products
Strategy Options for Competingin a Stagnant or Declining Industry
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End-Game Strategiesfor Declining Industries
An end-game strategy can take either of two paths
Slow-exit strategy involving
Gradual phasing down of operations
Getting the most cash flow from the business
Fast-exit strategy involving
Disengaging from an industryduring early stages of decline
Quick recovery of as much of acompany’s investment as possible
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Features of Turbulent Markets
Rapid-fire technological change
Short product life-cycles
Entry of important new rivals
Frequent launches ofnew competitive moves
Rapidly evolvingcustomer expectations
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Invest aggressively in R&D
Keep products/services fresh and exciting
Develop quick response capabilities Shift resources
Adapt competencies
Create new competitive capabilities
Speed new products to market
Use strategic partnerships to developspecialized expertise and capabilities
Initiate fresh actions every few months
Strategy Options for Competingin High-Velocity Markets
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Cutting-edge expertise
Speed in responding to new developments
Collaboration with others
Agility
Innovativeness
Opportunism
Resource flexibility
First-to-market capabilities
Keys to Success in Competingin High Velocity Markets
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Competitive Featuresof a Fragmented Industry
Absence of market leaders with large market shares or widespread buyer recognition
Product/service is delivered to neighborhoodlocations to be convenient to local residents
Buyer demand is so diverse that manyfirms are required to satisfy buyer needs
Low entry barriers Absence of scale economies Market for industry’s product/service may be globalizing,
thus putting many companies across the world in same market arena
Exploding technologies force firms to specialize just to keep up in their area of expertise
Industry is young and crowded with aspiring contenders, with no firm having yet developed recognition to command a large market share
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Competing in a Fragmented Industry: The Strategy Options
Construct and operate “formula” facilities
Become a low-cost operator
Specialize by product type
Specialize by customer type
Focus on limited geographic area
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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 distributionchannels can produce cost advantage
Loyalty of first time buyers is high
Moving first can be a preemptive strike
First-Mover Advantages
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What Is a Blue Ocean Strategy?
Seeks to gain a dramatic, durablecompetitive advantage by
Abandoning efforts to beat outcompetitors in existing markets and
Inventing a new industry or distinctivemarket segment to render existingcompetitors largely irrelevant and
Allowing a company to create andcapture altogether new demand
What Is Different About a Blue Ocean?
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 untaintedby 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
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First-Mover Disadvantages
Moving early can be a disadvantage (or fail to produce an advantage) when When costs of pioneering are more than being
an imitative follower and only negligible learning/experience curve benefits accrue to the leader
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
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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 requiredbefore buyer demand can surge?
Will buyers need to learn newskills 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?
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