Strengthning a Company’s Competitive Position

LEARNING OBJECTIVES
 Learn whether and when to pursue offensive or defensive strategic moves to improve
a firm’s market position.
 Recognize when being a first mover or a fast follower or a late mover is most
advantageous.
 Become aware of the strategic benefits and risks of expanding a firm’s horizontal
scope through mergers and acquisitions.
 Learn the advantages and disadvantages of extending the firm’s scope of operations
via vertical integration.
 Become aware of the conditions that favor farming out certain value chain activities
to outside parties.
 Understand when and how strategic alliances can substitute for horizontal mergers
and acquisitions or vertical integration and how they can facilitate outsourcing.

1
MAXIMIZING THE POWER OF A STRATEGY

Making choices that complement

a competitive approach and
maximize the power of strategy

Offensive and Competitive Scope of

Defensive Dynamics and the Operations along
Competitive Timing of Strategic the Industry’s
Actions Moves Value Chain

CONSIDERING STRATEGY-ENHANCING MEASURES

 Whether and when to go on the offensive.
 Whether and when to employ defensive strategies.
 When to undertake strategic moves—first mover,
a fast follower, or a late mover.
 Whether to merge with or acquire another firm.
 Whether to integrate backward or forward into more stages of the
industry’s activity chain.
 Which value chain activities, if any, should be outsourced.
 Whether to enter into strategic alliances or
partnership arrangements.

2
PRINCIPAL OFFENSIVE STRATEGY OPTIONS

 Offer an equally good or better value product at a lower price as a cost-

based advantage to attack competitors.
 Leapfrog competitors by being first to market with next-generation
products.
 Pursue continuous product innovation to draw sales and market share
away from less innovative rivals.
 Adopt and improve on the good ideas of any other firms.
 Use hit-and-run or guerrilla warfare tactics to grab sales
and market share from complacent or distracted rivals.
 Launch a preemptive strike to secure an advantageous market position
that rivals cannot easily duplicate.

 Strategic Offensive Principles:

 Strategic offensives should, as a general rule, be
based on a company’s strongest competitive assets.
 Apply resources where rivals are least able to defend
themselves.
 Employ the element of surprise as opposed to doing
what rivals expect and are prepared for.

3
BLUE-OCEAN STRATEGY — A SPECIAL KIND OF
OFFENSIVE
 The business universe is divided into:
 An existing market with boundaries and rules in which rival
firms compete for advantage.

 A “blue ocean” market space, where the industry has not yet
taken shape, with no rivals and wide-open long-term growth
and profit potential for a firm that can create demand for new
types of products.

Defensive Strategies

Purposes of Defensive Strategies

Weaken the impact Influence challengers

Lower the firm’s risk
of an attack to aim their efforts
of being attacked
that does occur at other rivals

6–8

4
BLOCKING THE AVENUES OPEN TO CHALLENGERS (cont’d)

 Adopt alternative technologies as a hedge against rivals attacking with

a new or better technology.
 Introduce new features and models to broaden product lines to close
gaps and vacant niches.
 Maintain economy-pricing to thwart lower price attacks.
 Make early announcements about new products or price changes to
induce buyers to postpone switching.
 Challenge quality and safety of competitor’s products.
 Grant discounts or better terms to intermediaries who handle the
firm’s product line exclusively.

SIGNALING CHALLENGERS THAT RETALIATION IS LIKELY

Signaling is an effective defensive strategy.

 Publicly announcing its commitment to maintaining the firm’s present market

share.

 Publicly committing to a policy of matching competitors’ terms or prices.

 Maintaining a war chest of cash and marketable securities.

 Making a strong counter-response to the moves of weaker rivals to enhance its

tough defender image.

5
TIMING A FIRM’S OFFENSIVE AND DEFENSIVE STRATEGIC MOVES

 Knowing when to make a strategic move is as crucial as knowing

what move to make.

 Moving first is no guarantee of success or competitive advantage.

 The risks of moving first to stake out a monopoly position must

be carefully weighed.

CONDITIONS THAT LEAD TO FIRST-MOVER

ADVANTAGES
 When pioneering helps build a firm’s reputation and creates strong
brand loyalty.
 When a first mover’s customers will thereafter face significant
switching costs.
 When property rights protections thwart rapid imitation of the
initial move.
 When an early lead enables movement down the learning curve
ahead of rivals.
 When a first mover can set the technical standard for the industry.

6
THE POTENTIAL FOR LATE-MOVER ADVANTAGES OR
FIRST-MOVER DISADVANTAGES
 When pioneering is more costly than imitating and offers negligible experience or
learning-curve benefits.

 When the products of an innovator are somewhat primitive and do not live up to
buyer expectations.

 When rapid market evolution allows fast followers to leapfrog a first mover’s
products with more attractive next-version products.

 When market uncertainties make it difficult to ascertain what will eventually

succeed.

TO BE A FIRST MOVER OR NOT

 Does market takeoff depend on complementary products or services that
currently are not 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 in moving to the newly
introduced product or service?
 Are there influential competitors in a position to delay or derail the
efforts of a first mover?

7
STRENGTHENING A FIRM’S MARKET POSITION VIA
ITS SCOPE OF OPERATIONS

Defining the Scope of

the Firm’s Operations

Extent of its
Size of its
Range of its geographic
Breadth of its competitive footprint
activities market
product and on
performed presence and
service offerings its market
internally its mix of
or industry
businesses

 Horizontal scope is the range of product and service segments that a

firm serves within its focal market.

 Vertical scope is the extent to which a firm’s internal activities

encompass one, some, many, or all of the activities that make up an
industry’s entire value chain system, ranging from raw-material
production to final sales and service activities.

8
HORIZONTAL MERGER AND ACQUISITION STRATEGIES

 Merger
 Is the combining of two or more firms into a single
corporate entity that often takes on a new name.

 Acquisition
 Is a combination in which one firm, the acquirer, purchases
and absorbs the operations of another firm, the acquired.

STRATEGIC OBJECTIVES FOR HORIZONTAL

MERGERS AND ACQUISITIONS
 Creating a more cost-efficient operation out of the combined
companies.
 Expanding the firm’s geographic coverage.
 Extending the firm’s business into new product categories.
 Gaining quick access to new technologies or complementary
resources and capabilities.
 Leading the convergence of industries whose boundaries are being
blurred by changing technologies and new market opportunities.

9
WHY MERGERS AND ACQUISITIONS SOMETIMES FAIL
TO PRODUCE ANTICIPATED RESULTS

 Strategic Issues:
 Cost savings may prove smaller than expected.
 Gains in competitive capabilities take longer to realize or never materialize at
all.

 Organizational Issues
 Cultures, operating systems and management styles fail to mesh due to
resistance to change from organization members.
 Loss of key employees at the acquired firm.
 Managers overseeing integration make mistakes in melding the acquired firm
into their own.

A vertically integrated firm is one that performs value

chain activities along more than one stage of an
industry’s value chain system.

10
TYPES OF VERTICAL INTEGRATION STRATEGIES
 Full Integration
 A firm participates in all stages of the vertical activity chain.
 Partial Integration
 A firm builds positions only in selected stages of the vertical
chain.
 Tapered Integration
 Involves a mix of in-house and outsourced activity in any
stage of the vertical chain.

 Backward integration involves entry into activities previously

performed by suppliers or other enterprises positioned along
earlier stages of the industry value chain system

 Forward integration involves entry into value chain system

activities closer to the end user

11
Reasons for Integrating Backwards

 Reduction of supplier power

 Reduction in costs of major inputs
 Assurance of the supply and flow of critical inputs
 Protection of proprietary know-how

Reasons for Integrating Forward

 To lower overall costs by increasing channel activity efficiencies
relative to competitors.
 To increase bargaining power through control of channel
activities.
 To gain better access to end users.
 To strengthen and reinforce brand awareness.
 To increase product differentiation.

12
DISADVANTAGES OF A VERTICAL INTEGRATION STRATEGY

 Increased business risk due to large capital investment.

 Slow acceptance of technological advances or more efficient
production methods.
 Less flexibility in accommodating shifting buyer preferences that
require non-internally produced parts.
 Internal production levels may not be of sufficient volumes to allow
for economies of scale.
 Capacity matching problems for efficient production of internally-
produced components and parts.
 Requirements for different resources and capabilities.

OUTSOURCING STRATEGIES: NARROWING THE SCOPE OF OPERATIONS

 Outsourcing
 Involves farming out value chain activities to outside vendors.

 Outsource an activity if it:

 Can be performed better or more cheaply by outside specialists.
 Is not crucial to achieving sustainable competitive advantage.
 Improves organizational flexibility and speeds time to market.
 Reduces risks due to new technology and/or buyer preferences.
 Assembles diverse kinds of expertise speedily and efficiently.
 Allows the firm to concentrate on its core business, leverage key resources, and do
even better what it does best.

13
 THE BIG RISKS OF OUTSOURCING VALUE CHAIN ACTIVITIES

 Hollowing out resources and capabilities that the firm needs to be a

master of its own destiny.

 Loss of control when monitoring, controlling, and coordinating activities

of outside parties by means of contracts and arm’s-length transactions.

 Lack of incentives for outside parties to make investments specific to the

needs of the outsourcing firm’s value chain.

 A strategic alliance is a formal agreement between two or more separate

companies in which they agree to work cooperatively toward some common
objective.

14
 A joint venture is a partnership involving the establishment of an
independent corporate entity that the partners own and control jointly,
sharing in its revenues and expenses.

REASONS FOR ENTERING INTO STRATEGIC ALLIANCES

When seeking global market leadership:
 Enter into critical country markets quickly.
 Gain inside knowledge about unfamiliar markets and cultures through alliances
with local partners.
 Provide access to valuable skills and competencies concentrated in particular
geographic locations.

When staking out a strong industry position:

 Master new technologies and build expertise and competencies.
 Open up broader opportunities in the target industry.

15
CAPTURING THE BENEFITS OF STRATEGIC ALLIANCES

Being sensitive
to cultural
differences
Recognizing
that the alliance
Picking a good must benefit
partner both sides

Strategic
Alliance
Factors
Adjusting the
agreement over
Ensuring both time to fit new
parties keep circumstances
their
commitments
Structuring the
decision-making
process for swift
actions

THE DRAWBACKS OF STRATEGIC ALLIANCES AND

PARTNERSHIPS

 Culture clash and integration problems due to different management styles

and business practices.
 Anticipated gains do not materialize due to an overly optimistic view of the
synergies or a poor fit of partners’ resources and capabilities.
 Risk of becoming dependent on partner firms for essential expertise and
capabilities.
 Protection of proprietary technologies, knowledge bases, or trade secrets
from partners who are rivals.

16
HOW TO MAKE STRATEGIC ALLIANCES
WORK
 Create a system for managing the alliance.
 Build trusting relationships with partners.
 Set up safeguards to protect from the threat of
opportunism by partners.
 Make commitments to partners and see that
partners do the same.
 Make learning a routine part of the management
process.

17