Chapter 6: Supplementing the

Chosen Competitive Strategy: Other

Important Business Strategy Choices

Screen graphics created by:

Jana F. Kuzmicki, Ph.D.
Troy University
McGraw-Hill/Irwin

Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Learning Objectives

1. Gain an understanding of how strategic alliances and
collaborative partnerships can bolster a companys
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.
6-2

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
6-3

Strategic Alliances and Partnerships

Companies sometimes use
strategic alliances or
collaborative partnerships to
complement their own strategic
initiatives and strengthen their
competitiveness. Such
cooperative strategies go
beyond normal company-tocompany dealings but fall short
of merger or full joint venture
partnership.
6-4

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
6-5

What Factors Make an Alliance Strategic?

It is critical to a companys achievement of

an important objective
It helps build, sustain, or enhance a core

competence or competitive advantage

It helps block a competitive threat
It helps open up important

market opportunities
It mitigates a significant risk

to a companys business
6-6

Why Are Strategic Alliances Formed?

To collaborate on technology development or

new product development

To fill gaps in technical or manufacturing

expertise
To create new skill sets and capabilities
To improve supply chain efficiency
To gain economies of scale in

production and/or marketing

To acquire or improve market

access via joint marketing agreements

6-7

Alliances Can Enhance a

Firms 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
6-8

Potential Benefits of Alliances to

Achieve Global and Industry Leadership
Get into critical country markets quickly to

accelerate process of building a global presence

Gain inside knowledge about unfamiliar markets

and cultures
Access valuable skills and competencies

concentrated in particular geographic locations

Establish a beachhead to participate in target

industry
Master new technologies and build new expertise

faster than would be possible internally

Open up expanded opportunities in target industry

by combining firms capabilities with resources of

partners
6-9

Capturing the Benefits

of Strategic Alliances
Benefits from forming partnerships are a

function of
Picking a good partner
Being sensitive to cultural differences
Recognizing an alliance
must benefit both parties
Ensuring both parties live
up to their commitments
Structuring the decision-making process
so actions can be taken swiftly when needed
Managing the learning process and then
adjusting the alliance agreement over time to fit
new circumstances
6-10

Why Alliances Fail

Ability of an alliance to endure depends on

How well partners work together

Success of partners in responding
and adapting to changing conditions
Willingness of partners to
renegotiate the bargain
Reasons for alliance failure

Diverging objectives and priorities of partners

Inability of partners to work well together
Changing conditions rendering purpose of alliance
obsolete
Emergence of more attractive technological paths
Marketplace rivalry between one or more allies
6-11

Merger and Acquisition Strategies

Merger Combination and pooling of equals,

with newly created firm often taking on a new

name
Acquisition One firm, the acquirer,

purchases and absorbs operations of

another, the acquired
Merger-acquisition strategy
Much-used strategic option
Especially suited for situations where alliances do not
provide a firm with needed capabilities or costreducing opportunities

Ownership allows for tightly integrated operations,

creating more control and autonomy than alliances
6-12

Objectives of Mergers and Acquisitions

To create a more cost-efficient operation
To expand a firms geographic coverage
To extend a firms business into new

product categories or international markets

To gain quick access to new technologies

or competitive capabilities
To invent a new industry and lead

the convergence of industries whose

boundaries are blurred by changing
technologies and new market opportunities
6-13

Pitfalls of Mergers and Acquisitions

Combining operations may result in
Resistance from rank-and-file employees
Hard-to-resolve conflicts in management
styles and corporate cultures
Tough problems of integration
Greater-than-anticipated difficulties in

Achieving expected cost-savings

Sharing of expertise
Achieving enhanced competitive capabilities
6-14

Vertical Integration Strategies

Extend a firms competitive scope within

same industry
Backward into sources of supply
Forward toward end-users of final product
Can aim at either full or partial integration

Activities,
Costs, &
Margins of
Suppliers

Internally
Performed
Activities,
Costs, &
Margins

Activities, Costs,
& Margins of
Forward Channel
Allies &
Strategic Partners

Buyer/User
Value
Chains

6-15

Strategic Advantages
of Backward Integration
Generates cost savings only if

volume needed is big enough

to capture efficiencies of suppliers
Potential to reduce costs exists when
Suppliers have sizable profit margins
Item supplied is a major cost component
Resource requirements are easily met

Can produce a differentiation-based competitive

advantage when it results in a better quality part

Reduces risk of depending on suppliers of

crucial raw materials / parts / components

6-16

Strategic Advantages
of Forward Integration
To gain better access to end

users and better market visibility

To compensate for undependable distribution

channels which undermine steady operations

To offset the lack of a broad product line, a firm

may sell directly to end users

To bypass regular distribution channels in favor

of direct sales and Internet retailing which may

Lower distribution costs
Produce a relative cost advantage over rivals
Enable lower selling prices to end users
6-17

Strategic Disadvantages
of Vertical Integration
Boosts resource requirements
Locks firm deeper into same industry
Results in fixed sources of supply and

less flexibility in accommodating buyer

demands for product variety
Poses all types of
capacity-matching problems
May require radically different
skills / capabilities
Reduces flexibility to make changes in
component parts which may lengthen design
time and ability to introduce new products
6-18

Outsourcing Strategies
Concept
Outsourcing involves having outsiders
perform certain value chain activities rather
than performing them internally
Internally
Performed
Activities
Contract
Manufacturers

Distributors
or Retailers
Vendors with
specialized
expertise
6-19

When Does Outsourcing an Activity

Make Strategic Sense?
Activity can be performed better or more cheaply by

outside specialists
Activity is not crucial to achieve a sustainable
competitive advantage
Risk exposure to changing technology and/or
changing buyer preferences is reduced
It improves firms ability to innovate
Operations are streamlined to
Improve flexibility
Cut time to get new products into the market
It increases firms ability to assemble diverse kinds of
expertise speedily and efficiently
Firm can concentrate on core value chain activities
that best suit its resource strengths
6-20

The Big Risk of Outsourcing

Farming out too many or the wrong

activities, thus
Hollowing out capabilities
Losing touch with activities and expertise
that determine overall long-term success

6-21

Matching Strategy to
a Companys Situation

Most important
drivers shaping a
firms strategic
options fall into
two categories

Nature of industry
and competitive
conditions

Firms internal
resource strengths
and weaknesses
6-22

Matching a Companys Strategy

to Different Market Conditions
Fragmented
Markets

Turbulent
Markets
Stagnant or
Declining
Markets

Freshly
Emerging
Markets
Rapidly
Growing
Markets
Mature, SlowGrowth
Markets
6-23

Features of an Emerging Industry

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
6-24

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 develop
attractive performance features
Consider merging with or
acquiring another firm to
Gain added expertise
Pool resource strengths
When technological uncertainty clears and a
dominant technology emerges, try to capture any
first-mover advantages by moving quickly
Form strategic alliances with
Companies having related technological expertise or
Key suppliers
6-25

Strategy Options for Competing

in Emerging Industries (continued)
Pursue new customers and user

applications
Enter new geographical areas
Make it easy and cheap for

first-time buyers to try product

Focus advertising emphasis on
Increasing frequency of use
Creating brand loyalty

Use price cuts to attract price-sensitive

buyers
6-26

What Is the Key to Success for

Competing in Rapidly Growing Markets?
A company needs a strategy
predicated on growing faster than
the market average so it
Can boost its market share and
Improve its competitive standing vis--

vis rivals

6-27

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 companys product offering apart from rivals
Incorporate attributes to appeal to
growing numbers of customers

Gain access to additional distribution

channels and sales outlets

Expand a companys geographic coverage
Expand product line to add models/styles to

appeal to a wider range of buyers

6-28

Industry Maturity: The Standout Features

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
6-29

Strategy Options for

Competing 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 flexible

competitive capabilities
6-30

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
6-31

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

6-32

Strategy Options for Competing

in a Stagnant or Declining Industry
Pursue focus strategy aimed at

fastest growing market segments

Stress differentiation based on quality
improvement 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
6-33

End-Game Strategies
for 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 industry

during early stages of decline

Quick recovery of as much of a

companys investment as possible
6-34

Features of Turbulent Markets

Rapid-fire technological change
Short product life-cycles
Entry of important new rivals
Frequent launches of

new competitive moves

Rapidly evolving

customer expectations
6-35

Strategy Options for Competing

in High-Velocity Markets
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 develop

specialized expertise and capabilities

Initiate fresh actions every few months
6-36

Keys to Success in Competing

in High Velocity Markets
Cutting-edge expertise
Speed in responding to new developments
Collaboration with others
Agility
Innovativeness
Opportunism
Resource flexibility
First-to-market capabilities
6-37

Competitive Features
of a Fragmented Industry
Absence of market leaders with large market shares or

widespread buyer recognition

Product/service is delivered to neighborhood
locations to be convenient to local residents
Buyer demand is so diverse that many
firms are required to satisfy buyer needs
Low entry barriers
Absence of scale economies
Market for industrys 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
6-38

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
6-39

First-Mover Advantages
When to make a strategic move is often as

crucial as what move to make

First-mover advantages arise when
Pioneering helps build firms image and
reputation
Early commitments to new technologies,
new-style components, and distribution
channels can produce cost advantage
Loyalty of first time buyers is high
Moving first can be a preemptive strike
6-40

What Is a Blue Ocean Strategy?

Seeks to gain a dramatic, durable

competitive advantage by
Abandoning efforts to beat out
competitors in existing markets and
Inventing a new industry or distinctive
market segment to render existing
competitors largely irrelevant and
Allowing a company to create and
capture altogether new demand
6-41

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 untainted

by competition
Industry offers wide-open

opportunities if a firm has a

product and strategy
allowing it to
Create new demand and
Avoid fighting over existing
demand
6-42

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
Innovators 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 firstmover
Rapid technological change allows followers to
leapfrog pioneers
6-43

To Be a First-Mover or Not?
Key issue Is the race to market leadership in

an industry a marathon or a sprint?

Seeking a competitive advantage by being a
first-mover involves addressing several
questions
Does market takeoff depend on development of
complementary products or services not currently
available?
Is new infrastructure required
before buyer demand can surge?
Will buyers need to learn new
skills or adopt new behaviors?
Will buyers encounter high switching costs?
Are there influential competitors in a position
to delay or derail the efforts of a first-mover?
6-44