Competitive Strategy and Tailoring Strategy to Fit

In this lecture, we focus

• Cooperative Strategy: Horizontal and
Vertical Integration
• Tailoring Strategy to Fit Industry

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 Horizontal and Vertical Integration
Horizontal integration

– The process of acquiring or merging with

industry competitors

• Acquisition and merger

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 Horizontal Integration
• Due to intense competition, a single firm often
finds itself in disadvantageous condition in terms
of resources, capabilities, and competitiveness
on its own ability alone.
• Company often decides to form alliances with
partners
Merger and Acquisition
• ANZ Grindlays and Standard Chartered Bank
merged
• HP acquired Compaq

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 Benefits of Horizontal Integration
Purpose of Horizontal integration
• Reducing costs

• Increasing value
– Product bundling
– Cross selling

• Managing industry rivalry

• Increasing bargaining power

– Market power (monopoly power)
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 Limits of Horizontal Integration
• Majority of mergers and acquisitions do
not create value

• Implementing a horizontal integration

strategy is not easy

• Mergers and acquisitions often fail to

produce the anticipated gains

• Can bring the company into conflict with

antitrust law 5
 Entry Strategy: Acquisitions—Attractions
Purpose of Acquisition

• To achieve diversification when the company lacks

important competencies

• To move quickly

• Perceived as less risky than internal new ventures

• When the new industry is well established and

enterprises enjoy protection from barriers to entry
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 Entry Strategy: Acquisitions—Pitfalls
• Difficulty with post-acquisition integration

• Overestimating economic benefits

• The expense of acquisitions

• Inadequate pre-acquisition screening

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 Guidelines for Successful Acquisition
• Target identification and pre-acquisition
screening

• Bidding strategy
– Hostile vs. friendly takeover

• Integration

• Learning from experience

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Entry Strategy: Joint Ventures—Attractions

• Helps avoid the risks and costs of building

a new operation up from the ground floor

• Teaming with another company that has

complementary skills and assets may
increase the probability of success

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 Entry Strategy: Joint Ventures—Pitfalls
• Requires the sharing of profits if the new
business succeeds

• Venture partners must share control;

conflicts on how to run the joint venture
can cause failure

• Runs the risk of giving critical know-how

away to joint venture partner
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 Vertical Integration
• Vertical integration
– Expanding operations backward into an industry that
produces inputs for the company or forward into an industry
that distributes the company’s products
• When the firm is doing well, managers can add more
value by producing its own inputs or distributing its
products.
– Backward vertical integration: the firm produces its own
inputs.
• KFC grows its own potatoes.
• Can lower the cost of supplies.
– Forward vertical integration: the firm distributes its outputs
or products.
• NIKE shoe company can establish their own retail outlet
• Firm can lower costs and ensure final quality.
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Vertical Integration: Stages

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Consumer Value Chain: Personal Computer Industry

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Full and Taper Integration

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 Profitability Through Vertical Integration
• Building barriers to entry

• Facilitating investments in specialized assets

• Protecting product quality

• Improved scheduling

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 Against Vertical Integration
• Cost disadvantages
– Company-owned suppliers that have higher
costs than external suppliers
• Rapid technological change
– Tying a company to an obsolescent technology
• Demand unpredictability
– Difficulty of achieving close coordination among
vertically integrated activities
• Bureaucratic costs

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 Alternatives to Vertical Integration: Cooperative Relationships

• Short-term contracts and competitive bidding

• Strategic alliances and long-term contracting

• Building long-term cooperative relationship

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 Horizontal and Vertical Integration
• Vertical disintegration
– Recent business trend is vertical disintegration, i.e.,
outsourcing rather vertical integration.
– This is the era of specialization. So, firms are more
interested in outsourcing of some parts of the total
value creation process to other specialized firms.
• Example: IBM
Strategic outsourcing
– Letting some value creation activities within a
business be performed by an independent entity
– Effective supply chain/network is the key success
factor for outsourcing
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Strategic Outsourcing of Primary Value Creation Functions

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 Benefits of Outsourcing
• Reducing costs
– The specialist company is less than what it would cost to
perform the activity internally

• Differentiation
– The quality of the activity performed by the specialist is
greater than if the activity were performed by the company

• Focus
– Distractions are removed; the company can focus attention
and resources on activities important for value creation and
competitive advantage

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 Managing Risks of Outsourcing
• Holdup
– The company can become too dependent on
provider of outsourced activity so that provider
can raise prices

• Scheduling of activities
– Loss of control can result in distorted signals in
the supply chain

• Loss of information
– Contact with the customer may be lost
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 Tailoring Strategy to Specific Industry
• Positioning a company to sustain
competitive advantage over time in different
kinds of industry environments

• Different industry environments present

different opportunities and threats

• A company’s business model has to change

to meet the environment

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 Tailoring Strategy to Specific Industry
• Strategy for competing in emerging industry

• Strategy for competing in turbulent, high velocity market

• Strategy for competing in maturing industry

• Strategy for competing in stagnant or declining industry

• Strategy for competing in fragmented industry

• Strategy for industry leader

• Strategy for weak and crisis-ridden industry

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 Tailoring Strategy to Specific Industry
Strategy depends on

•Competitive conditions
•Own resource strengths and weaknesses, competitive
capabilities, opportunities and threats

However it also depends on

•Industry structure
•Industry growth
•Industry competition
•Industry risk
•Industry profitability

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 Strategy for competing in emerging industry
Characteristics
• An emerging industry is one which is in premature,
early, and formative stage and waiting for proliferation

• Strategy making in an unpredictable world

• Environmental uncertainty (forecasting/

scenario)

• Lack of consensus regarding winning

technology

• Lack of established rules of game 25

 Strategy for competing in emerging industry
Characteristics …………….continued
• Since the market is unproven, speculation is
important to realize the market and set strategy

• Freedom for experiment

• Entry barrier is low

• Troubles in acquiring raw materials,

components, and technologies

• Wireless communication, Internet banking,

Retail Superstore etc in Bangladesh
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 Strategy for competing in emerging industry
Strategies to be followed (one or more)
• Try to win early race for leadership with risk
• Push to perfect technology improve product
quality and develop additional attractive
performance features
• As technological uncertainty clears,
dominant technology emerges, adopt it
quickly
• Form strategic alliances with key suppliers
• Try to capture any first-mover advantages 27
 Strategy for competing in turbulent, high velocity market

This market is characterized by

• rapid technological change
• short product life cycle
• entry of new rivals
• frequent new competitive moves of rivals
• mergers and acquisitions to build a strong market
position
• Rapid change of customers behavior or demand
• Frequent replacement products etc.
Example: Kids games, computer hardware and
software, drugs etc.
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 Strategy for competing in turbulent, high velocity market

Strategies to be followed (one or more)

• It can react to change to rival’s new product with a
better product
• It can anticipate change enough before to dictate
and lead the change
To do this
• Invest aggressively in R & D to stay on the leading
edge of technological know-how
• Develop and maintain the organizational capability
to respond quickly to the moves of rivals
• Rely on strategic partnerships with outside
suppliers
• Initiate proactive actions very often not just when a
competitive response is needed 29
 Strategy for competing in maturing industry
 A matured industry is that which is moving from
rapid growth to significantly slower growth.
 Nearly all potential buyers are already users of the
products/service of the industry.
Example: consumer goods (Like sugar, tea, soap,
soft drinks)
 This market is characterized by slowing growth in
buyer demand generates more head-to-head
competition for market share
 Competition often produces greater emphasis on
cost and service
 The strong growth in sales diminishes.
 International competition increases
 Competition may appear with similar products
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 Strategy for competing in maturing industry
Strategies to be followed (one or more)
• The primary objective at this point is to defend
market share while maximizing profit.

• More emphasis on value-chain innovation to

get more capability on better quality and short
design-to-market cycle

• Product features may be enhanced to

differentiate product from that of competitors.
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 Strategy for competing in maturing industry
Strategies to be followed (one or more).. Cont..
• Pricing may be lower because of the new
competition.

• Distribution becomes more intensive, and

incentives may be offered to encourage
preference over competing products.

• Promotion emphasizes product differentiation.

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Strategy for competing in maturing industry
Strategies for deterring entry of rivals

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 Strategy for competing in maturing industry
Product Proliferation

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 Strategy for competing in maturing industry
Pricing Games
• Predatory pricing
– Using revenue generated in one product
market to support pricing below the company’s
costs of production in another to drive rivals
out
• Limit pricing
– The established companies charge a price
below the profit-maximizing quantity and price
that is below the average cost structure of new
entrants but above their own average cost
structure 35
Strategy for competing in maturing industry
Maintaining Excess Capacity

• Maintaining the physical capability to

produce more of a product than what is in
demand to warn potential entrants that if
they enter, output can be increased and
prices driven down

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 Strategy for competing in maturing industry

Strategies to Manage Rivalry in Mature

Industries
• Price signaling
– Tit-for-tat strategy

• Price leadership

• Nonprice competition
– Product differentiation
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 Strategy for competing in maturing industry
Four Non-price Competitive Strategies (Kazi regular tea to Kazi Green
tea)

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 Strategy for competing in maturing industry
• Market penetration
– Expanding market share in existing markets

• Product development
– Creating new or improved products to replace
existing ones (from regular tea to green tea)

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 Strategy for competing in maturing industry

• Market development
– Finding new market segments for a company’s
products

• Product proliferation
– Large companies in an industry all have a
product in each market segment; competition
is based on product differentiation (Suppose
Unilever, Bangladesh has different kinds of
cosmetics for different demographic people) 40
 Strategy for competing in stagnant or declining industry

Industry where sales decline, firm has several options:

(Like plastic products)
• Stress differentiation by adding new features and
product innovation.
• Offer it, possibly to a loyal niche segment (focus
strategy) or which is rapidly growing segment within
the industry.
• Strive to cost down and become low-cost leader
within industry
• Discontinue the product, liquidating remaining
inventory or selling it to another firm that is willing to
continue the product.
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 Strategy for competing in fragmented industry

• An industry composed of a large

number of small and medium-
sized companies where none of
them has substantial market
share
– No market leader

• Examples: apparel company, real estate,

health care, banks, furniture etc.

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 Strategy for competing in fragmented industry

• Reasons for fragmented industries

– Low barriers to entry due to lack of economies of
scale

– Diseconomies of scale (furniture)

– Low entry barriers permit constant entry by new

companies

– Specialized customers require small job from lots

of products; no room for a mass-production
operation (furniture)
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 Strategy for competing in fragmented industry
Strategies to be followed (one or more)
• Establishing networks of linked merchandising
outlets that function as one large business entity
(like apartments, land developing, cement, steel
company etc…..)
• Acquiring or merging with industry competitors
(Jamuna-Bashundhara real estate)
• Using new technology to develop new business
mode (environment friendly houses, earth quake
resisting)
• Pursuing a cost-leadership or differentiation strategy
(or both) (Low cost apartments for service holders
and high class apartments with swimming pool and
other exclusive features for rich people)
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 Strategy for competing in fragmented industry

Strategies to be followed (one or more)…cont..

• Focusing a limited geographic area (apartments only

in Gazipur and Dhaka city periphery)

• Specializing by product type customer type (for

different group of customers, different apartments
with different features)

• Constructing and operating “formula” facilities

– Often use in restaurant and retailing business
• It involves opening multiple outlets in multiple favorable locations
at minimum cost and operate them super efficiently like fast food 45
 Strategy for industry leader
• The competitive position of industry leader
normally stronger than average to powerful
• Leaders are well known and characterized by
either low-cost or differentiation or both
• Examples: Microsoft (software), McDonald
(fast food), Wal-Mart (retail)
• The main strategic concern for leaders is to
strengthen defend its leadership to become
dominant leader (Microsoft) as opposed to
just a leader (GM in automobile)
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 Strategy for industry leader
Strategies to be followed (one or more)
• Stay-on-the-offensive strategy — become always a
first mover, create a change and new era

• Fortify and defend strategy — make it harder for

challengers to gain around ( return policy, Wal-Mart)

• Muscle-flexing strategy — it should be ethical and

legal (all continental products, Wal-Mart, Microsoft)

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Strategy for weak and crisis-ridden Industry

• A weak or crisis-ridden industry has four basic

strategic options:
(Example: Jute industry)
• Offensive turnaround strategy
– Diagnose root of poor performance
– Arrest and reverse source of competitive and financial
weakness as quickly as possible (may be weak
economy, ill-chosen strategy, overload of debt etc.)
– Strategy revision
– Invest more capital
– Selling off unnecessary less productive assets

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 Strategy for weak and crisis-ridden Industry

• Fortify and defend strategy

– Use variations in present strategy and fight hard
to keep sales, market shares, competitive position
at current levels
– Making current value-chain more efficient
• Liquidation or abandoned strategy
– Just close the business
• End-game strategy
• Sequentially exit market by reinvesting
minimum for long term and maximize short
term cash flows
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