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Lecture: 7
Unbundling and Outsourcing Strategies & Strategic Alliance

1. Unbundling and Outsourcing Strategies

When vertical integration becomes competitively burdensome, some companies adopt
vertical disintegration, or unbundling strategies. The focus more narrowly on certain value
chain activities and rely on outsiders to perform the remaining value chain activities. They
begin outsourcing activities formerly performed in-house and concentrating their energies on
a narrower portion of the value chain.
Outsourcing involves withdrawing from certain stages or activities in the value chain system
a relying on outside vendors to supply the needed products, support services or functional
activities.

Question: What are the instances that make outsourcing a good strategic
sense?
Outsourcing strategy is useful under the following circumstances:
a. When an activity can be performed better or more cheaply by outside specialists.
b. When the activity is not crucial to the firm’s ability to achieve sustainable competitive
advantage (eg. Outsourcing of maintenance activities, accounting, data processing and
other administrative support activities.)
c. When it resource the firm’s risk exposure to changing technology and changing buyer
preferences.
d. When it allows a company to concentrate on its core business and do what it dose
best.

The pitfalls of outsourcing:

• The biggest danger of outsourcing is that a company will phase out many
wrong type of activities and hollow out its own capabilities.
• In such case, company loses touch with very activities & expertise that over
the long run contributes to and determine its success.

Question: What might be the strategic advantages if a company relies on

outside specialists to perform certain value chain activities (i.e., if relies on
outsourcing certain activities)?
a. Obtaining higher quality or cheaper components or services than internal sources
can provide.
b. Improving the company’s ability to innovate by interacting and allying with the
best-of-world their supplier who have considerable intellectual depth and
innovative capabilities of their own.
c. Enhancing the company’s strategic flexibility should customer needs and market
conditions suddenly shift.
d. Increasing the company’s ability to assemble diverse kinds of expertise speedily
and efficiently.
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e. Allowing the company to concentrate its resources on performing those activities

internally that it can perform better than outsiders.

2. Strategic Alliances
Strategic alliances are cooperative agreements between firms that go beyond normal
company-to-company dealings but fall short of full joint venture partnership or merger.

Reasons for Strategic alliances

a. To collaborate on technology.
b. To collaborate on developing new products.
c. To overcome deficit in technical and manufacturing expertise.
d. To acquire altogether new competencies.
e. To improve supply chain efficiency.
f. To gain economies of scale in production and marketing.
g. To acquire or improve market access through joint marketing agreements.

Risks of strategic alliance with foreign partners:

• Cross border allies typically have to overcome language & cultural barriers,
communication, trust building etc.
• To get the alliance to make decisions fast enough to respond rapidly to technological
advancements.
• Question of mutual trust and exchange of information and expertise is also important.
• There may be clashes of egos and company culture.
• Becoming overly dependendant on another company for essential expertise and
capabilities over long run.

Factors to consider when making strategic alliance with foreign partners

• Picking a good partner: A good partner shares the company’s’ vision about the
purpose of the alliance and has the desired expertise and capabilities.
• Being sensitive to cultural difference: Unless the outsider respect for the local
culture, productive working relation is unlikely to develop.
• The alliance must benefit both sides: If either partner plays games with information
ties to take advantage of other, the resulting friction can quickly erode value of further
information.
• Ensuring both parties’ commitment: Both parties have to deliver on their
commitments for the alliance to produce the intended benefits.
• Structuring the decision making process: So that actions can be swiftly taken when
needed.
• Managing the learning process and then adjusting the alliance agreement over time
to fit new circumstances.

Choosing whom to attack

• Market leaders: Offensive attacks on a market leader make the best sense
when the leader is not a true leader in terms of serving the market well. It
includes unhappy buyers, inferior product line, using old technology,
preoccupation with diversification in other industries. Offensive move has real
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promise when the company revamp its value chain or innovate a real cost
based or differentiation based competitive advantage.
• Runner-up firms: They are the attractive target when a challengers’ resource
strength & competitive capabilities are well suited to exploit weakness of
others.
• Struggling enterprise: Challenging a hard pressed rival in ways that further
sap its financial strength and competitive position can weaken its resolve and
hasten its exit form the market.
• Small local & regional firms: A Challenger with broader capabilities is well
positioned to raid the biggest & best customers – particularly who are growing
rapidly.

Merger & Acquisition Strategies

• They are specially suited where alliance and partnership go far enough in providing a
company with access to the need of resource and capabilities.
• Ownership is more permanent that partnership ties.
• Merger or acquisition can dramatically strengthen a company’s’ market position.
Together the companies have stronger technological skill, better competitive
capabilities, attractive product line, wider geographic coverage, greater financial
strength, more R& D activities.

However, merger & acquisition do not always produce desired result:

• Because of exaggerated expectation and sometimes wrong anticipation.
• Conflicts in management style, different corporate cultures, difficult process of
integration etc. makes company difficult to cope up with.
Ex: Ford’s acquisition of Jaguar is an example. Ford paid a handsome price to acquire
Jaguar but has yet to make the Jaguar brand a major factor in the luxury car segment
in competition against Mercedes, BMW, Lexus.

Thirteen Commandments for Crafting Successful Business Startegies

1. Place top priority on crafting and executing strategic moves that enhance the
companies’ competitive position for the long term.
2. To understand that a clear and consistent competitive strategy, when well
crafted and well executed, builds reputation and recognizable industry position.
3. Avoid strategy that represents compromises between lower costs and greater
differentiation and between broad and narrow market appeal.
4. Invest in creating a sustainable competitive advantage.
5. Play aggressive offenses to build competitive advantage and aggressive defense
to protect it.
6. Avoid strategies capable of succeeding only in the most optimistic
circumstances.
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7. Be cautious in pursuing a rigid or inflexible strategy that locks the company in

for the long term with little room to maneuver.
8. Don’t underestimate the reactions and the commitments of rival firms.
9. Beware of attacking strong, resourceful rivals without solid competitive
ground.
10. Consider that attacking competitive weakness is usually more profitable that
attacking competitive strength.
11. Be judicious in cutting prices without an established cost advantage.
12. Be aware that aggressive moves to snatch market share away from rivals often
provoke aggressive retaliation in the form of price war.
13. Strive to open up very meaningful gaps in quality or service or performance
features when pursuing a differentiation strategy.

Questions:
• Write a short note on outsourcing & unbundling strategies.
• What is strategic alliance? What are the reasons for strategic alliance?