6

Supplementing
Chapter Title
the Chosen
Competitive
Strategy

Screen graphics created by:

15/e PPT Jana F. Kuzmicki, Ph.D.
Troy University-Florida Region

McGraw-Hill/Irwin 2007 The McGraw-Hill Companies, Inc. All rights reserved.

 Successful business
strategy is about
actively shaping the
game you play, not just
playing the game you
find.
Adam M. Brandenburger and Barry J.
6-2
Nalebuf
The sure path to
oblivion is to stay
where you are.

Bernard Fauber
6-3
 Chapter Roadmap
Collaborative Strategies: 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
Offensive Strategies: Improving Market Position and
Building Competitive Advantage
Defensive Strategies: Protecting Market Position and
Competitive Advantage
Web Site Strategies
Choosing Appropriate Functional-Area Strategies
First-Mover Advantages and Disadvantages
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Fig. 6.1: A Companys Menu of Strategy Options

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 Collaborative Strategies:
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-to-company
dealings but fall short of merger
or full joint venture partnership.
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 Alliances Can Enhance a
Firms Competitiveness
Alliancesand 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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 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?

Itis critical to a companys achievement of an

important objective
Ithelps build, sustain, or enhance a core
competence or competitive advantage
It helps block a competitive threat
It
helps open up important
market opportunities
Itmitigates a significant risk
to a companys business
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 Why Are Strategic Alliances Formed?
Tocollaborate 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
Togain economies of scale in
production and/or marketing
Toacquire or improve market access
via joint marketing agreements
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 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
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 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
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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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 Test Your Knowledge
Which one of the following is not a factor that makes an
alliance strategic as opposed to just a convenient business
arrangement?
A. The alliance involves joint contribution of resources, shared
risk, and is mutually beneficial.
B. The alliance helps block a competitive threat or open up new
market opportunities.
C. The alliance helps mitigate a significant risk to a companys
business.
D. The alliance helps build, enhance, or sustain a core
competence or competitive advantage.
E. The alliance is critical to the companys achievement of an
important objective.

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 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 cost-reducing opportunities
Ownership allows for tightly integrated operations,
creating more control and autonomy than alliances
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 Objectives of Mergers and Acquisitions
To create a more cost-efficient operation
To expand a firms geographic coverage
Toextend a firms business into new
product categories or international markets
Togain quick access to new technologies
or competitive capabilities
Toinvent a new industry and lead the
convergence of industries whose boundaries
are blurred by changing technologies and
new market opportunities
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 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
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 Vertical Integration Strategies
Extenda 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

Internally Activities, Costs,

Activities,
Performed & Margins of Buyer/User
Costs, &
Activities, Forward Channel Value
Margins of
Costs, & Allies & Chains
Suppliers
Margins Strategic Partners

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 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
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 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
Tobypass 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 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
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 Pros and Cons of
Integration vs. De-Integration
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 activities
Impact on investment cost, flexibility,
and administrative overhead
Contribution to enhancing a firms competitiveness

Many companies are finding that

de-integrating value chain activities is a
more flexible, economic strategic option!
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 Outsourcing Strategies

Concept
Outsourcing involves withdrawing from
certain value chain activities and relying
on outsiders to supply needed products,
support services, or functional activities
Internally
Performed
Activities Functional
Suppliers
Activities

Support Distributors
Services or Retailers

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 When Does Outsourcing
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
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 Risk of an Outsourcing Strategy
Farming out too many or the wrong activities,
thus
Hollowing out capabilities

Losing touch with activities and expertise that

determine overall long-term success

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 Offensive and Defensive Strategies

Offensive Strategies Defensive Strategies

Used to build new Used to protect
or stronger market competitive advantage
position and/or create (rarely lead to creating
competitive advantage advantage)

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 Principles of Offensive Strategies
Focus relentlessly on
Building competitive advantage and
Striving to convert it into decisive advantage
Employthe element of surprise as
opposed to doing what rivals expect
Apply
resources where rivals are least able to
defend themselves
Be impatient with the status quo and display a
strong bias for swift, decisive actions to boost a
firms competitive position vis--vis rivals
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 Types of Offensive Strategy Options

1. Offer an equally good or better product at a lower

price
2. Leapfrog competitors by being
First adopter of next-generation technologies or
First to market with next-generation products
3. Pursue continuous product innovation
to draw sales and market share away
from less innovative rivals
4. Adopt and improve on the
good ideas of other companies
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Types of Offensive Strategy Options (cont)

5. Deliberately attack market segments where a key

rival makes big profits
6. Attack competitive weaknesses of rivals
7. Maneuver around competitors and
concentrate on capturing unoccupied
or less contested market territory
8. Use hit-and-run or guerrilla warfare tactics to grab
sales and market share from complacent rivals
9. Launch a preemptive strike to secure an
advantageous position that rivals are prevented
from duplicating
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 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
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 Type of Markets: Blue Ocean Strategy
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
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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
 For Discussion: Your Opinion

Which of the following is the best example of a blue

ocean strategy Apples entry into MP3 players with
its iPod models or Dells entry into LCD TVs or Audis
recent move to bring out a luxury SUV? Explain.

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 Choosing Rivals to Attack
Fourtypes of firms can be the target of a fresh
offensive

Vulnerable market leaders

Runner-up firms with weaknesses

where challenger is strong

Struggling rivals on
verge of going under

Small local or regional

firms with limited capabilities
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 Using Offensive Strategy to
Achieve Competitive Advantage
Strategicoffensives offering strongest basis for
competitive advantage entail
An important core competence
A unique competitive capability
A better-known brand name
A cost advantage in manufacturing
or distribution
Technological superiority
A superior product
6-34
 Test Your Knowledge
Which one of the following is not a good type of rival for
an offensive-minded company to target?

A. Market leaders that are vulnerable

B. Runner-up firms with weaknesses in areas where the

challenger is strong.

C. Small local and regional companies with limited

capabilities

D. Companies with lower costs and lower prices

E. Struggling enterprises that are on the verge of going

under

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 Defensive Strategy

Objectives
Lessen risk of being attacked
Blunt impact of any attack that occurs
Influence challengers to aim attacks at other rivals
Approaches
Block avenues open to challengers
Signal challengers vigorous
retaliation is likely
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 Block Avenues Open to Challengers
Participate in alternative technologies
Introduce new features, add new models, or broaden
product line to close gaps rivals may pursue
Maintain economy-priced models
Increase warranty coverage
Offer free training and support services
Reduce delivery times for spare parts
Make early announcements about new
products or price changes
Challenge quality or safety of rivals products
using legal tactics
Sign exclusive agreements with distributors
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 Signal Challengers Retaliation Is Likely

Publicly
announce managements strong
commitment to maintain present market share

Publicly
commit firm to policy of
matching rivals terms or prices

Maintain war chest of cash reserves

Make occasional counter-response

to moves of weaker rivals
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 Web Site Strategies
Strategic Challenge What use of the Internet
should a company make in staking out its position
in the marketplace?
Five Web site approaches
Use 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 customers
Use as primary distribution channel to access buyers
Use as exclusive channel to transact sales with
customers
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 Using the Internet to
Disseminate Product Information
Approach Website used to provide product
information of manufacturers or wholesalers
Relies on click-throughs to websites of
dealers for sales transactions
Informs end-users of location of retail stores
Issues Pursuing online sales may
Signal weak strategic commitment to dealers
Signal willingness to cannibalize dealers sales
Prompt dealers to aggressively market rivals brands
Avoids channel conflict with dealers Important
where strong support of dealer networks is
essential
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 Using the Internet as a
Minor Distribution Channel
Approach Use online sales to
Achieve incremental sales

Gain online sales experience

Conduct marketing research

Learn more about buyer tastes and preferences

Test reactions to new products

Create added market buzz about products

Unlikely to provoke much outcry from dealers

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 Reasons to Use the Internet
as a Minor Distribution Channel
Manufacturers profit margin from
online sales is bigger than that from
sales through traditional channels

Encouraging buyers to visit a firms

website educates them to the ease
and convenience of purchasing online

Selling directly to end users allows a

manufacturer to make greater use of
build-to-order manufacturing and assembly
6-42
 Brick-and-Click Strategies:
An Appealing Middle Ground Approach
Approach
Sell directly to consumers and
Use traditional wholesale/retail channels
Strategic appeal for wholesalers and retailers
Economic means of expanding a companys economic
reach
Provide both existing and potential customers another
choice of how to
Communicate with a company
Shop for product information
Make purchases
Resolve customer service problems
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 Strategies for Online Enterprises
Approach Use Internet as the exclusive channel for
all buyer-seller contact and transactions
Strategic issues for an online company
How to deliver unique value to buyers
Whether it will pursue competitive advantage based on lower
costs, differentiation, or better value for the money
Whether it will have a broad or narrow product offering
Whether to perform order fulfillment activities internally or to
outsource them
How it will draw traffic to its Web site and then convert page
views into revenues
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 Test Your Knowledge
One very important advantage of a product-information-
only Web site strategy is
A. lower advertising costs.
B. avoiding the extra costs associated with operating Web
site e-stores.
C. avoiding channel conflicttrying to sell online in direct
competition with retail dealers signals both a weak
strategic commitment to dealers and a willingness to
cannibalize dealers sales and growth potential.
D. added ability to create a positive image of the company.
E. lower sales force costs.

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 For Discussion: Your Opinion

Suppose that you are a retailer of athletic footwear

and one of the major brands you stock in your store is
New Balance. What would be your reaction if you
learned that New Balance announced that it would
soon begin selling its footwear online at the
companys Web site? What actions would you
consider taking?

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 Choosing Appropriate
Functional-Area Strategies
Involvesstrategic choices about how functional
areas are managed to support competitive
strategy and other strategic moves
Functional strategies include
Research and development
Production
Human resources
Sales and marketing
Finance

Tailoring functional-area strategies to

support key business-level strategies is critical!
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 First-Mover Advantages
Whento 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
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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
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 first-mover
Rapid technological change allows followers to leapfrog
pioneers
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 Strategic Issues:
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?
6-50