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Block 5 Strengthening a Company’s Competitive

Position: Strategic Moves, Timing, and Scope of
Operations.
LO1: Whether and when to pursue offensive or defensive strategic moves to improve
a firm’s market position.
Offensive Strategic Moves: Called for when a company spots opportunities to gain
profitable market share at its rivals’ expense or when a company has no choice but to try to
whittle away at a strong rival’s competitive advantage.
Strategic offensive principles:

 Focusing relentlessly on building competitive advantage and then striving to convert it

into a sustainable advantage.
 Applying resources where rivals are least able to defend themselves.
 Employing the element of surprise as opposed to doing what rivals expect and are
prepared for.
 Displaying a capacity for swift and decisive actions to overwhelm rivals.

Maximising the power of a strategy

Considering strategy-enhancing measures

1. Whether and when to go on the offensive strategically.
2. Whether and when to employ defensive strategies.
3. When to undertake strategic moves-first mover, a fast follower, or a late mover.
4. Whether to merge with or acquire another firm.
5. Whether to integrate backward or forward into more stages of the industry’s activity
chain.
6. Which value chain activities, if any, should be outsourced.
7. Whether to enter strategic alliances or partnership arrangements.
Launching strategic offensives to improve a company’s market position.
Strategic offensive principles

 Focusing relentlessly on building competitive advantage and then striving to convert it

into sustainable advantage.
 Applying resources where rivals are least able to defend themselves.

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 Employing the element of surprise as opposed to doing what rivals expect and are
prepared for.
 Displaying a capacity for swift, decisive, and overwhelming actions to overpower rivals.
Sometimes a company’s best strategic option is to seize the initiative, go on the attack, and
launch a strategic offensive to improve its market position.
Choosing the basis for competitive attack

 Strategic offensives should exploit the power of a company’s strongest competitive

assets. Company’s most valuable resources and capabilities, consider both strengths
and weaknesses.
 Avoid directly challenging a targeted competitor where it is strongest.
 Use the firm’s strongest strategic assets to attack a competitor’s weaknesses.
 The offensive may not yield immediate results if market rivals are strong competitors.
 Be prepared for the threatened competitor’s counter response.
Principal offensive strategy options
 Offering an equally good or better product at a lower price: Lower prices can
produce market share gains if competitors don't respond with price cuts of their own and
if the challenger convinces buyers that its product is just as good or better.
 Leapfrogging competitors by being first to market with next-generation products.
 Pursuing continuous product innovation to draw sales and market share away
from less innovative rivals: Ongoing introductions of new and improved products can
put rivals under tremendous competitive pressure, especially when rivals' new product
development capabilities are weak.
 Pursuing disruptive product innovations to create new markets: While this strategy
can be riskier and more costly than a strategy of continuous innovation, it can be a game
changer if successful.
 Adopting and improving on the good ideas of other companies (rivals or
otherwise).
 Using hit-and-run (e.g., selling onesies for a short time) or guerrilla marketing
tactics to grab market share from complacent or distracted rivals: Options for
"guerrilla offensives" include occasionally lowballing on price (to win a big order or steal a
key account from a rival), surprising rivals with sporadic but intense bursts of promotional
activity (offering a discounted trial offer to draw customers away from rival brands), or
undertaking special campaigns to attract the customers of rivals plagued with a strike or
problems in meeting buyer demand Guerrilla offensives are particularly well suited to
small challengers that have neither the resources nor the market visibility to mount a full-
fledged attack on industry leaders.
 Launching a pre-emptive strike to secure an industry’s limited resources or
capture a rare opportunity: What makes a move preemptive is its one-of-a-kind nature
whoever strikes first stands to acquire competitive assets that rivals can't readily match.
Examples include securing the best distributors in a particular geographic region or
country, obtaining the most favorable site at a new interchange or intersection, in a new
shopping mall. and so on; tying up the most reliable, high-quality suppliers via exclusive
partnerships. long-term contracts. or acquisition; and moving swiftly to acquire the assets
of distressed rivals at bargain prices. To be successful, a preemptive move doesn't have
to totally block rivals from following: it merely needs to give a firm a prime position that is
not easily circumvented.

Choosing which rivals to attack

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‒ Market leaders that are vulnerable: Signs of leader vulnerability include unhappy
buyers, an inferior product line, aging technology or outdated plants and equipment, a
preoccupation with diversification into other industries, and financial problems.
‒ Runner-up firms with weaknesses in areas where the challenger is strong:
especially attractive target when a challenger's resources and capabilities are well suited
to exploiting their weaknesses.
‒ Struggling enterprises that are on the verge of going under: Challenging a hard-
pressed rival in ways that further sap its financial strength and competitive position can
weaken its resolve and hasten its exit from the market.
‒ Small local and regional firms with limited capabilities: Because small firms typically
have limited expertise and resources, a challenger with broader and/or deeper
capabilities is well positioned to raid their biggest and best customers particularly those
that are growing rapidly, have increasingly sophisticated requirements, and may already
be thinking about switching to a supplier with a more full-service capability.

A blue-ocean strategy offers growth in revenues and profits by discovering or inventing new
industry segments that create altogether new demand. Seeks to gain a dramatic and durable
competitive advantage by abandoning efforts to beat competitors in existing markets and
instead inventing a new market segment that renders existing competitors irrelevant and
allows a company to create and capture new demand.
The business universe is divided into:
 An existing market with boundaries and rules in which rival firms compete.
 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: protecting market position and competitive advantage.

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Defensive strategies can take either of two forms.

 Actions to block challengers.
 Actions to signal the likelihood of strong retaliation.
Good defensive strategies can help protect a competitive advantage but rarely are the basis
for creating one.
Blocking the avenues open to challengers:
 Introduce new features and models to broaden product lines to close off gaps and vacant
niches.
 Maintain economy-pricing (lower prices due to low production costs) to thwart lower price
attacks.
 Discourage buyers from trying competitors’ brands.
 Make early announcements about new products or price changes to induce buyers to
postpone switching.
 Offer support and special inducements (persuasion) to customers to reduce
attractiveness of switching.
 Challenge quality and safety of competitor’s products.
 Grant discounts or better terms to intermediaries who handle the firm’s product line
exclusively.
Signalling challengers that retaliation is likely.
Signalling is an effective defensive strategy when the firm follows through by:
‒ Publicly announcing its commitment to maintaining its 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.
To be an effective defensive strategy, signalling needs to be accompanied by a credible
commitment to follow through.
LO2: When being a first mover or a fast follower or a late mover is most
advantageous.
Timing a firm’s offensive and defensive strategic moves.
first-mover advantages and disadvantages: Because of first-mover advantages and
disadvantages, competitive advantage can spring from when a move is made as well as
from what move is made.
Timing’s importance:

 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 versus being a fast follower or
even a late mover must be carefully weighed.
Conditions that lead to first mover advantage:

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 When pioneering helps build a firm’s reputation and creates strong brand loyalty:
Customer loyalty to an early mover's brand can create a tie that binds, limiting the
success of later entrants' attempts to poach from the early mover's customer base and
steal market share.
 When a first mover’s customers will thereafter face significant switching costs:
Switching costs can protect first movers when consumers make large investments in
learning how to use a specific company's product or in purchasing complementary
products that are also brand specific. Switching costs can also arise from loyalty
programs or long-term contracts that give customers incentives to remain with an initial
provider.
 When property rights protections thwart rapid imitation of the initial move: In
certain industries, property rights protections in the form of patents, copyrights, and
trademarks prevent the ready imitation of an early mover's initial moves.
 When an early lead enables movement down the learning curve ahead of rivals:
When there is a steep learning curve and when learning can be kept proprietary, a first
mover can benefit from volume-based cost advantages that grow ever larger as its
experience accumulates and its scale of operations increases.
 When a first mover can set the technical standard for the industry: In many
technology-based industries, the market will converge around a single technical
standard. By establishing the industry standard, a first mover can gain a powerful
advantage that, like experience-based advantages, builds over time. The lure of such an
advantage can result in standard wars among early movers, as each strives to set the
industry standard.
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.
 When customer loyalty is low and first mover’s skills, know-how, and actions are easily
copied or surpassed.
To be a first mover or not depends on the following:

 Does market take-off 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 behaviours?
 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?
LO3: The strategic benefits and risks of expanding a firm’s horizontal scope through
mergers and acquisitions.
Strengthening a firm’s market posi on via its scope of opera ons

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Scope of the firm: Refers to the range of ac vi es that the firm performs internally, the breadth of its
product and service offerings, the extent of its geographic market presence, and its mix of
businesses.

Horizontal scope is the range of product and service segments that a firm serves within its focal
market.

Ver cal scope is the extent to which a firm’s internal ac vi es encompass one, some, many, or all
the ac vi es that make up an industry’s en re value chain system, ranging from raw- material
produc on to final sales and service ac vi es.

Horizontal merger & acquisition strategies

Merger: Is the combining of two or more firms into a single corporate en ty that o en takes on a
new name.

Acquisi on: Is a combina on in which one firm (the "acquirer") purchases and absorbs the
opera ons of another firm (the "acquired").

Horizontal mergers and acquisi ons provide an effec ve means for firms to rapidly increase the scale
and horizontal scope of their core business.

Strategic objec ves for horizontal mergers and acquisi ons

 Crea ng a more cost-efficient opera on out of the combined companies: When a company
acquires another company in the same industry, there's usually enough overlap in operations that less
efficient plants can be closed or distribution and sales activities partly combined and downsized.
 Expanding the firm’s geographic coverage: One of the best and quickest ways to expand a company's
geographic coverage is to acquire rivals with operations in the desired locations. Since a company's size
increases with its geographic scope, another benefit is increased bargaining power with the company’s
suppliers or buyers. Greater geographic coverage can also contribute to product differentiation by enhancing
a company's name recognition and brand awareness.
 Extending the firm’s business into new product categories: Many times, a company has gaps in its
product line that need to be filled to offer customers a more effective product bundle or the benefits of one-
stop shopping.
 Gaining quick access to new technologies or other resources and capabili es: Making acquisitions
to bolster a company's technological know-how or to expand its skills and capabilities allows a company to
bypass a time-consuming and expensive internal effort to build desirable new resources and capabilities.
 Leading the convergence of industries whose boundaries are being blurred by changing
technologies and new market opportunities: In fast-cycle industries or industries whose boundaries
are changing, companies can use acquisition strategies to hedge their bets about the direction that an
industry will take, to increase their capacity to meet changing demands, and to respond flexibly to changing
buyer needs and technological demands.

Benefits of increasing horizontal scope

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 Improving the efficiency of its opera ons.

 Heightening its product differen a on.
 Reducing market rivalry.
 Increasing the firm’s bargaining power over suppliers and buyers.
 Enhancing its flexibility and dynamic capabili es.
Why mergers and acquisi ons some mes fail to produce an cipated results.

Strategic issues:

 Cost savings may prove smaller than expected.

 Gains in compe ve capabili es take longer to realise or never materialise at all.

Organisa onal issues:

 Cultures, opera ng systems, and management styles fail to mesh.

 Key employees at the acquired firm are lost.
 Managers overseeing integra on make mistakes in melding the acquired firm into their own.

LO4: The advantages and disadvantages of extending the company’s scope of

operations via vertical integration.
Vertically integrated firm: A vertically integrated firm is one that performs value chain
activities along more than one stage of an industry’s value chain system.
Backward integration: Involves entry into ac vi es previously performed by suppliers or other
enterprises posi oned along earlier stages of the industry value chain system.
Ver cal integra on strategies

Ver cally integrated firm par cipates in mul ple segments or stages of an industry’s overall value
chain (they don’t rely on external suppliers in the produc on process).

Ver cal integra on strategy can expand the firm’s range of ac vi es backward into its sources of
supply or forward toward end users of its products.

Types of ver cal integra on strategies:

 Full integra on is when a firm par cipates in all stages of the ver cal chain.
 Par al integra on is when a firm builds posi ons only in selected stages of the ver cal chain.
 Tapered integra on is when a firm uses a mix of in-house and outsources ac vity in any
given stage of the ver cal chain.

The advantages of a ver cal integra on strategy

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Integra ng Forward to Enhance Compe veness

Like backward integra on, forward integra on can lower costs by increasing efficiency and
bargaining power. In addi on, it can allow manufacturers to gain be er access to end users, improve
market visibility, and enhance brand name awareness.

Disadvantages of a ver cal integra on strategy

 Increased business risk due to large capital investment.

 Slow acceptance of technological advances or more efficient produc on methods.
 Less flexibility in accommoda ng shi ing buyer preferences that require non-internally produced
parts.
 Internal produc on levels may not reach volumes that create economies of scale.
 Efficient produc on of internally produced components and parts hampered by capacity
matching problems.
 New or different resources and capabili es requirements.
Weighing the Pros and Cons of Vertical Integration
Strategy of vertical integration can have both strengths and weaknesses. The tip of the scales depends on
 Whether vertical integration can enhance the performance of strategy-critical activities in ways that lower
cost. build expertise, protect proprietary know-how, or increase differentiation.
 What impact vertical integration will have on investment costs, flexibility, and response times.
 What administrative costs will be incurred by coordinating operations across more vertical chain activities:
and
 How difficult it will be for the company to acquire the set of skills and capabilities needed to operate in
another stage of the vertical chain.
Vertical integration strategies have merit according to which capabilities and value-adding activities truly need to
be performed in-house and which can be performed better or cheaper by outsiders. Absent solid benefits,
integrating forward or backward is not likely to be an attractive strategy option.

LO5: The conditions that favour outsourcing certain value chain activities to outside
parties.
Outsourcing: Involves contrac ng out certain value chain ac vi es that are normally performed in-
house to outside vendors. Outsourcing strategies help narrow the scope of a business’s opera ons in
terms of what ac vi es are performed internally.

Outsource an ac vity if it:

o Can be performed be er or more cheaply by outside specialists: Don’t perform value chain
ac vity if it can be more effec vely or efficiently be performed by outsiders.
o Is not crucial to achieving sustainable compe ve advantage: Outsource support ac vi es such
as maintenance.
o Improves organisa onal flexibility and speeds me to market: Gives company flexibility to
switch between suppliers.
o Reduces risk exposure due to new technology or buyer preferences: Don’t have to do redesign
or upgrades to newer technologies if outsourcing takes place.
o Allows the firm to concentrate on its core business, leverage key resources, and do even be er
what it already does best: Enhance own capabili es when concentra ng full resources and
energy on those ac vi es.

The big risks of outsourcing.

‒ Company will farm out the wrong types of ac vi es and thereby hollow out its own capabili es.

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‒ Loss of direct 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.
LO6: When and how strategic alliances can substitute for horizontal mergers and
acquisitions or vertical integration and how they can facilitate outsourcing.

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

companies in which they agree to work cooperatively toward some common
objective.
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.
Factors that make an alliance “strategic”.
1. Facilitates achievement of an important business objective.
2. Helps build, sustain, or enhance a core competence or competitive advantage.
3. Helps remedy an important resource deficiency or competitive weakness.
4. Helps defend against a competitive threat or mitigates a significant risk to a
company’s business.
5. Increases the bargaining power over suppliers or buyers.
6. Helps open important new market opportunities.
7. Speeds development of new technologies or product innovations.
Benefits of strategic alliances and partnerships

o Minimize the problems associated with ver cal integra on, outsourcing, and mergers and
acquisi ons.
o Are useful in extending the scope of opera ons via interna onal expansion and diversifica on
strategies.
o Reduce the need to be independent and self-sufficient when strengthening the firm’s
compe ve posi on.
o Offer greater flexibility should a firm’s resource requirements or goals change over me.
o Are useful when industries are experiencing high velocity technological advances simultaneously.
Capturing the benefits of strategic alliance Strategic alliance factors:
(1) picking a good partner – A good partner must bring complementary strengths to the rela onship.
A good partner needs to share the company’s vision about the overall purpose of the alliance and to
have specific goals that either match or complement those of the company. Strong partnerships also
depend on good chemistry among key personnel and compa ble views about how the alliance
should be structured and managed.

(2) being sensi ve to cultural differences – Unless there is respect among all the par es for cultural
differences, produc ve working rela onships are unlikely to emerge.

(3) recognising that the alliance must benefit both sides – Informa on must be shared and gained
and the rela onship must remain forthright and trus ul.

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(4) ensuring that both par es live up to their commitments – Both par es must deliver on their
commitments for the alliance to produce the intended benefits. The division of the work must be
perceived as appor oned, and the calibre of the benefits received on both sides has to be perceived
as adequate.

(5) structuring the decision-making process so that ac ons can be taken swi ly when needed –
Par es need to keep up with the fast pace of technological and compe ve changes.

(6) managing the learning process and then adjus ng the alliance agreement over me to fit new
circumstances – One of the keys to long-las ng success is adap ng the nature and structure of the
alliance to be responsive to shi ing market condi ons, emerging technologies, and changing
customer requirements.

Reasons for entering strategic alliances:

When seeking global market leadership:

o Enter cri cal country markets quickly.

o Gain inside knowledge about unfamiliar markets and cultures through alliances with local
partners.
o Provide access to valuable skills and competencies concentrated geographic loca ons.
When staking out a strong industry posi on:

o Establish a stronger beachhead in target industry.

o Master new technologies and build exper se and competencies.
o Open broader opportuni es in the target industry.
Principle advantages of strategic alliances

 They lower investment costs and risks for each partner by facilita ng resource pooling and risk
sharing.
 They are more flexible organisa onal forms and allow for a more adap ve response to changing
condi ons.
 They are more rapidly deployed- a cri cal factor when speed is of the essence.

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The drawbacks of strategic alliances and partnerships.

‒ Culture clash and integra on problems due to different management styles and business
prac ces.
‒ An cipated gains not materialising due to an overly op mis c view of the poten al for synergies
or the unforeseen poor fit of partners’ resources and capabili es.
‒ Risk of becoming dependent on partner firms for essen al exper se and capabili es.
‒ Protec on of proprietary technologies, knowledge bases, or trade secrets from partners who are
rivals.

The advantages of strategic alliances over ver cal integra on or horizontal mergers and
acquisi ons are:

 They lower investment costs and risks for each partner by facilita ng resource pooling and risk
sharing.
 They are more flexible organisa onal forms and allow for a more adap ve response to changing
condi ons.
 They are more rapidly developed.

The advantages of using strategic alliances rather than arm’s-length transac ons to manage
outsourcing are:

 The increased ability to exercise control over the partners’ ac vi es.

 A greater willingness for the partners to make rela onship-specific investments.
 The success of an alliance depends on how well the partners work together; their capacity to
respond and adapt to changing internal and external condi ons; and their willingness to
renego ate the bargain if circumstances so warrant.

How to make strategic alliances work:

 Companies need to create a system for managing their alliances.

 Companies need to build rela onships with their partners and establish trust.
 Companies need to protect themselves from the threat of opportunism by se ng up contractual
safeguards such as noncompete clauses.
 Companies need to make commitments to their partners and see that their partners do the
same.

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 Companies need to make learning a rou ne part of the management process.

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