Business Strategies

Within the strategic management framework, an organization must define and continue to
improve its generic, business-level strategy. A generic, business-level strategy is also called its
generic competitive strategy, because it defines how a firm competes head-to-head against
similar products and services in the marketplace.

Five main types of business-level strategies:

1.​ broad cost leadership - aims to become the lowest cost producer in the industry,
achieving high efficiency and minimizing production costs to offer products at a lower
price point.
2.​ broad differentiation - focuses on creating a unique product or service that stands out
from competitors by offering superior quality, features, or design, allowing for premium
pricing.
3.​ focused cost leadership - targets a specific niche market with a low-cost strategy,
concentrating on providing cost-effective products to a particular customer segment.
4.​ focused differentiation - serves a specific niche market by offering highly differentiated
products or services tailored to their unique needs.
5.​ best cost strategies - attempts to combine elements of both cost leadership and
differentiation, aiming to provide a relatively low-cost product with differentiated features.

The two primary decisions in a generic business strategy are:

Will the intent of the strategy be on a broad or focused target audience, and simultaneously,
does the firm organize around a cost or differentiation approach?

1.​ Target Market Scope - A company must decide whether to serve a broad market or a
narrow market.
2.​ Competitive Approach - A company must choose whether to compete based on cost
leadership or differentiation.

Why Examine Generic Strategies?

Business-level strategy addresses the question of how a firm will compete in a particular
industry. This seems to be a simple question on the surface, but it is actually quite complex. The
reason is that there are a great many possible answers to the question.

The solution is to think about business-level strategy in terms of generic strategies. A generic
business-level strategy is a general way of positioning a firm within an industry. Focusing on
generic strategies allows executives to concentrate on the core elements of firms’
business-level strategies. The most popular set of generic strategies is based on the work of
Professor Michael Porter of the Harvard Business School and subsequent researchers that
have built on Porter’s initial ideas.
Firms compete on two general dimensions—the source of competitive advantage (cost or
differentiation) and the scope of operations (broad or narrow). Four possible generic
business-level strategies emerge from these decisions.

According to Porter, two competitive dimensions are the keys to business-level strategy.

●​ The first dimension is a firm’s source of competitive advantage. This dimension

involves whether a firm tries to gain an edge on rivals by keeping costs down or by
offering something unique in the market.
●​ The second dimension is a firms’ scope of operations. This dimension involves whether
a firm tries to target customers in general or whether it seeks to attract just a narrow
segment of customers.

Four generic business-level strategies emerge from these decisions:

(1) broad cost leadership
(2) broad differentiation
(3) focused cost leadership, and
(4) focused differentiation.

In rare cases, firms are able to offer both low prices and unique features that customers find
desirable. These firms are following a best-cost strategy. Firms that are not able to offer low
prices or appealing unique features are referred to as “stuck in the middle.”

Cost Leadership

Firms that compete based on price and target a broad target market are following a broad
cost leadership strategy.

The Nature of the Cost Leadership Strategy

It is tempting to think of cost leaders as companies that sell inferior, poor-quality goods and
services for rock bottom prices. This is not necessarily true, but some companies get this
reputation. While some companies cut corners, many reduce costs through streamlined
production, bulk purchasing, and optimized supply chains without sacrificing quality. IKEA,
Toyota, and Southwest Airlines, for example, keep prices low while maintaining strong product
value. However, businesses that cut costs too aggressively may develop a reputation for poor
quality over time.

Cost leaders tend to share some important characteristics. The ability to charge low prices and
still make a profit is challenging. Cost leaders manage to do so by emphasizing efficiency. They
streamline operations, reduce waste, optimize supply chains, and leverage economies of scale
to lower costs without sacrificing value. By focusing on cost-effective strategies, they maintain
competitive pricing while sustaining profitability.

Many cost leaders rely on economies of scale to achieve efficiency. Economies of scale are
created when the costs of offering goods and services decreases as a firm is able to sell more
items. This occurs because expenses are distributed across a greater number of items. By
producing and selling in large quantities, firms can spread fixed costs over more units, negotiate
better deals with suppliers, and optimize operations. This allows them to lower prices while
maintaining profitability, giving them a competitive edge in the market.

Advantages and Disadvantages of Cost Leadership

Advantages:
●​ High profits can be enjoyed if a cost leader has a high market share. An example is
Kampgrounds of America, a chain of nearly 500 low cost camping franchises in the
United States.
●​ Low-cost firms such as many municipal golf courses can withstand price wars because
high-priced competitors will not want to compete directly with a more efficient rival.

Disadvantages:
●​ If perceptions of quality become too low, business will suffer.
●​ Large volumes of sales are a must because margins are slim.
●​ The need to keep expenses low might lead cost leaders to be late in detecting key
environment trends.
●​ Low-cost firms’ emphasis on efficiency makes it difficult for them to change quickly if
needed.

Beyond existing competitors, a cost leadership strategy also creates benefits relative to
potential new entrants. Specifically, the presence of a cost leader in an industry tends to
discourage new firms from entering the business because a new firm would struggle to attract
customers by undercutting the cost leaders’ prices. Thus, a cost leadership strategy helps
create barriers to entry that protect the firm—and its existing rivals—from new competition.

In many settings, cost leaders attract a large market share because a large portion of potential
customers find paying low prices for goods and services of acceptable quality to be very
appealing.

In some settings, the need for high sales volume is a critical disadvantage of a cost leadership
strategy. Highly fragmented markets and markets that involve a lot of brand loyalty may not offer
much of an opportunity to attract a large segment of customers. In both the soft drink and
cigarette industries, for example, customers appear to be willing to pay a little extra to enjoy the
brand of their choice. Lower-end brands of soda and cigarettes appeal to a minority of
consumers, but famous brands such as Coca-Cola, Pepsi, Marlboro, and Camel still dominate
these markets. A related concern is that achieving a high sales volume usually requires
significant upfront investments in production and/or distribution capacity. Not every firm is willing
and able to make such investments.
Due to the need for cost leaders to have high volumes and slim margins, a focused cost
leadership strategy is difficult to achieve. By definition, a focused approach is directed at a
narrow, niche segment of the market. This means lower volumes, therefore contrary to the
normal cost leadership strategy.

Cost leaders tend to keep their costs low by minimizing advertising, market research, and
research and development, but this approach can prove to be expensive in the long run. A
relative lack of market research can lead cost leaders to be less skilled than other firms at
detecting important environmental changes. Meanwhile, downplaying research and
development can slow cost leaders’ ability to respond to changes once they are detected.
Lagging rivals in terms of detecting and reacting to external shifts can prove to be a deadly
combination that leaves cost leaders out of touch with the market and out of answers.

Differentiation

Firms that compete on uniqueness and target a broad market are following a
differentiation strategy.

The Nature of the Differentiation Strategy

A firm following a differentiation strategy attempts to convince customers to pay a premium price
for its goods or services by providing unique and desirable features. The message that such a
firm conveys to customers is that you will pay a little bit more for our offerings, but you will
receive a good value overall because our offerings provide something special.

In terms of the two competitive dimensions described by Michael Porter, using a differentiation
strategy means that a firm is competing based on uniqueness rather than price and is seeking
to attract a broad market (Porter, 1980).

Successful use of a differentiation strategy depends on not only offering unique features but
also communicating the value of these features to potential customers. As a result, advertising
in general and brand building in particular are important to this strategy.

Advantages and Disadvantages of Differentiation

Advantages:
●​ Ability to Charge Premium Prices: Differentiation allows firms to set higher prices for
unique products, leading to strong profit margins.
●​ Strong Profit Margins: Due to premium pricing, firms can enjoy higher profit margins
without needing a large customer base.
 ●​ Customer Loyalty: Effective differentiation can build strong customer loyalty, making
customers less price-sensitive and reducing the risk of losing them to competitors.
●​ Reduced Price Sensitivity: Loyal customers are unlikely to switch to competitors, even
when they offer lower prices, helping maintain steady revenue.

Disadvantages:
●​ High Costs: Differentiating products often requires significant investments in quality,
innovation, and marketing, which can increase costs.
●​ Vulnerability to Imitation: Competitors may replicate the unique aspects of the
differentiated product, reducing its uniqueness and value.
●​ Narrower Market: Premium pricing can limit the customer base, as only certain
consumers are willing to pay higher prices.
●​ Risk of Changing Preferences: If customer preferences shift, the differentiated product
may no longer meet their needs, leading to a decline in sales.

Focused Cost Leadership Strategy

A focused cost leadership strategy requires competing based on price to target a narrow
market. A firm that follows this strategy does not necessarily charge the lowest prices in the
industry. Instead, it charges low prices relative to other firms that compete within the target
market.

Advantages of Focused Cost Leadership

1.​ Lower Competition
○​ The company avoids competing directly with large, industry-wide cost leaders.
Instead, it only competes with businesses that serve the same niche.

2.​ Strong Customer Loyalty

○​ When a business consistently offers affordable prices within a niche, customers
see it as the best choice and keep coming back.

3.​ Higher Profit Margins in the Niche

○​ It can dominate the market and make good profits.

4.​ Operational Efficiency

○​ To maintain low costs, the company optimizes its operations. This could mean
bulk purchasing, smaller store formats, self-service models, or low-cost
production methods

Disadvantages of Focused Cost Leadership

1.​ Limited Market Size
 ○​ Since the business only targets a specific group, its potential for expansion is
limited. If the niche doesn’t grow, the company might struggle to increase its
profits.

2.​ Risk of Price Wars

○​ If a competitor enters the niche and undercuts the company’s prices, a price war
could start. The company might be forced to lower prices further, reducing its
profit margins.

3.​ Dependence on Cost Control

○​ The company must constantly find ways to reduce costs. If production, supply, or
operational costs increase, it may be difficult to maintain low prices.

4.​ Vulnerability to Industry Changes

○​ If customer preferences shift, the niche may shrink or become less profitable.
Businesses that fail to adapt quickly may lose customers.

Focused Differentiation Strategy

Focused differentiation is the second of the two focused strategies. A focused differentiation
strategy requires offering unique features that fulfill the demands of a narrow market. As with a
focused low-cost strategy, narrow markets are defined in different ways in different settings.
Some firms using a focused differentiation strategy concentrate their efforts on a particular sales
channel, such as selling over the internet only. Others target particular demographic groups.

Advantages of Focused Differentiation

1.​ Ability to Charge Higher Prices
○​ Since the product is exclusive or premium, customers are willing to pay more for
its unique features.

2.​ Strong Brand Loyalty

○​ Customers in the niche market feel a deep connection with the brand, leading to
repeat purchases and long-term loyalty.

3.​ Reduced Direct Competition

○​ Because the company caters to a specific niche, it faces less competition
compared to mass-market businesses.

4.​ Strong Brand Identity and Reputation

○​ The company is seen as a leader in its niche, helping it build a recognizable and
respected brand.
 5.​ Greater Customer Satisfaction
○​ Because the brand tailors its products to specific customer needs, buyers feel
valued, leading to positive reviews and word-of-mouth recommendations.

Disadvantages of Focused Differentiation

1.​ Limited Market Size
○​ Since the business only appeals to a specific group of customers, its growth
potential is smaller than companies that serve the mass market.

2.​ High Production and Marketing Costs

○​ Producing high-quality, unique products often requires expensive raw materials,
skilled labor, and specialized marketing, which can reduce profit margins.

3.​ Risk of Changing Consumer Preferences

○​ If trends shift, demand for the company’s niche product may decline, making it
hard to sustain sales.

4.​ Threat from Larger Competitors

○​ If the niche becomes highly profitable, big companies with more resources may
enter the market and outcompete the smaller, original players.

5.​ Difficulty in Scaling the Business

○​ Since the company is so specialized, it can be difficult to expand to new locations
or appeal to a wider audience without losing its brand identity.

Best-Cost Strategy

Firms that charge relatively low prices and offer substantial differentiation are following a
best-cost strategy. This strategy is difficult to execute, but it is also potentially very rewarding.
Several examples of firms pursuing a best cost strategy are illustrated below.

The Challenge of Following a Best-Cost Strategy

Some executives are not content to have their firms compete based on offering low prices or
unique features. They want it all! Firms that charge relatively low prices and offer substantial
differentiation are following a best-cost strategy. This strategy is difficult to execute in part
because creating unique features and communicating to customers why these features are
useful generally raises a firm’s costs of doing business. Product development and advertising
can both be quite expensive. However, firms that manage to implement an effective best-cost
strategy are often very successful.
Pursuing the Best-Cost Strategy through a Low-Overhead Business Model
One route toward a best-cost strategy is for a firm to adopt a business model whose fixed costs
and overhead are very low relative to the costs that competitors are absorbing. The internet has
helped make this possible for some firms.

Moving toward a best-cost strategy by dramatically reducing expenses is also possible for firms
that cannot rely on the internet as a sales channel. Owning a restaurant requires significant
overhead costs, such as rent and utilities. Some talented chefs are escaping these costs by
taking their food to the streets. Food trucks that serve high-end specialty dishes at very
economical prices are becoming a popular trend in cities around the country.

A best cost strategy offers some important advantages and disadvantages.

Advantages
1.​ Best cost can attract both the cost-conscientious buyer and one looking for better quality
than the low cost leader.
2.​ Best cost can also result in the best value for the buyer.

Disadvantages
1.​ Trying to achieve the best cost can result in not having low enough prices to attract the
cost-conscious buyer.
2.​ Neither achieving a low enough price nor sufficient differentiation can result in
accomplishing neither, and getting
“stuck in the middle.”

Stuck in the Middle: Neither Inexpensive nor Differentiated

Some firms fail to effectively pursue one of the generic strategies. A firm is said to be stuck in
the middle if it does not offer features that are unique enough to convince customers to buy its
offerings, and its prices are too high to compete effectively based on price. Firms that are stuck
in the middle generally perform poorly because they lack a clear market or competitive pricing.

Doing Everything Means Doing Nothing Well

Michael Porter has noted that strategy is as much about executives deciding what a firm is not
going to do as it is about deciding what the firm is going to do. In other words, a firm’s
business-level strategy should not involve trying to serve the varied needs of different segments
of customers in an industry. No firm could possibly pull this off.

Innovation Strategies
A firm’s philosophy toward innovation greatly impacts the business-level/competitive strategies
that it pursues.

Entrepreneurial Orientation
Entrepreneurial orientation (EO) is a key concept when executives are crafting strategies in the
hopes of doing something new and exploiting opportunities that other organizations cannot
exploit. EO refers to the processes, practices, and decision-making styles of organizations that
act entrepreneurially. Any organization’s level of EO can be understood by examining how it
stacks up relative to three dimensions: (1) innovativeness, (2) proactiveness, (3) and risk taking.
These dimensions are also relevant to individuals.

Entrepreneurial orientation (EO) is measured at both the organizational

and the individual levels. The characteristics of entrepreneurial companies also apply to
individuals. Those individuals
who are less risk averse, innovative thinkers, and competitive tend to have a higher EO and
greater success at starting a business. Online EO assessment tools exist for those wishing to
determine their EO. It is important to note that EO is not only related to high tech start-ups.
Starting a lawn care business or a beauty shop are very valid and necessary entrepreneurial
ventures, and will have a better chance of success if an entrepreneur possesses a higher EO.

Innovativeness
Innovativeness is the tendency to pursue creativity and experimentation. Some innovations
build on existing skills to create incremental improvements, while more radical innovations
require brand-new skills and may make existing skills obsolete. Either way, innovativeness is
aimed at developing new products, services, and processes. Those organizations that are
successful in their innovation efforts tend to enjoy stronger performance than those that do not.

Proactiveness
Proactiveness is the tendency to anticipate and act on future needs rather than reacting to
events after they unfold. A proactive organization is one that adopts an opportunity-seeking
perspective. Such organizations act in advance of shifting market demand and are often either
the first to enter new markets or “fast followers” that improve on the initial efforts of first movers.

Risk Taking
Risk taking refers to the tendency to engage in bold rather than cautious actions.
Although a common belief about entrepreneurs is that they are chronic risk takers,
research suggests that entrepreneurs do not perceive their actions as risky; most take
action only after using planning and forecasting to reduce uncertainty. However,
uncertainty seldom can be fully eliminated.

Building an Entrepreneurial Orientation

For Executives:

●​ Design systems and policies that support EO’s three dimensions: risk-taking,
innovativeness, and proactiveness.
 ●​ Structure compensation to reward sensible risk-taking, even if risks do not
always pay off.
●​ Assess corporate debt levels to determine their impact on innovation and
risk-taking.
●​ Measure EO through performance indicators such as:
○​ Employee satisfaction surveys and turnover rates (to assess autonomy).
○​ Number of new products/services developed and patents obtained (to
assess innovativeness).

For Individuals:

●​ Align attitudes and behaviors with EO principles.

●​ Make proactive rather than reactive decisions.
●​ Stay competitive by analyzing market trends and competitor strategies.
●​ Contribute new ideas for products, services, or processes that add value.

Why Innovate?

Innovate to Capture Markets

Innovation can be a key strategy to stay ahead of the competition. Firms who sit still,
perhaps satisfied with their success, will find themselves outsmarted and left behind,
with the competition winning over their customers. An innovation strategy coupled with
an entrepreneurial orientation will help keep customers buying.

Blue Ocean Strategy

A blue ocean strategy involves creating a new, untapped market rather than competing
with rivals in an existing market (Kim & Mauborgne, 2004). Instead of trying to
outmaneuver its competition, a firm using a blue ocean strategy tries to make the
competition irrelevant.

Firms that create blue oceans experience a temporary competitive advantage. How long
“temporary competitive advantage lasts” in a blue ocean strategy depends on the
particular combination of internal and external factors that create the opportunity in the
first place. Needless to say, the more successful a company is with a blue ocean
strategy, the more attention they will receive from potential competitors who want to get
into a position to benefit from those same advantages.

Being a First Mover: Advantages and Disadvantages

Advantage
●​ A first-mover advantage exists when making the initial move into a market allows
a firm to establish a dominant position that other firms struggle to overcome.

Disadvantage
●​ A first mover cannot be sure that customers will embrace its offering, making a
first move inherently risky.
●​ The first mover also bears the costs of developing the product and educating
customers. Others may learn from the first mover’s successes and failures,
allowing them to cheaply copy or improve the product. For example, Sony,
Samsung, and others have built on Apple’s knowledge and creation of Airpods to
offer competing products. In many industries, knowledge diffusion and
public-information requirements make such imitation increasingly easy.

Types of Innovation

1.​ Incremental Innovation

Incremental innovation can be described as making improvements on an existing

product or service. The improvements are based on using existing technology and are
directed at the existing market. For example, In the automobile industry, the
improvements made each year to the newest model of car are incremental innovations.
No new markets are formed, and existing technology is used to make the car better.

2.​ Disruptive Innovation

An innovation that conflicts with, and threatens to replace, traditional approaches to

competing within an industry. Disruptive innovation occurs when a new product or
service engages the existing market with a new technology. For example, the iPad has
proved to be a disruptive innovation since its introduction by Apple in 2010. Many
individuals quickly abandoned clunky laptop computers in favor of the sleek tablet
format offered by the iPad. And as a first mover, Apple was able to claim a large share
of the market. Disruptive innovations occur when firms introduce offerings that are so
unique and superior that they threaten to replace traditional approaches. Existing
markets are disrupted by new technology. Sometimes a disruption is so significant that it
may create a “blue ocean” by finding a new market while disrupting an existing one.
Executives who are deciding whether to pursue a disruptive innovation must first make
sure that their firm can sustain itself during an initial period of slow growth.
 3.​ Architectural Innovation

Architectural innovation occurs when new products or services use existing technology
to create new markets and/or new consumers that did not purchase that item before.
For example, the smart watch used existing cell phone technology and was repackaged
into a watch. This opened up a new market of purchasers by repackaging an existing
technology. Typically, firms alter the architecture of the product to create a new
product that opens up sales to new markets.

4.​ Radical Innovation

Innovation that uses new technology to reach new consumers is radical innovation.
Firms who are successful with a new product of service using radical innovation may
then employ a strategy of incremental innovation to continually improve the product or
service and generate more sales. The airplane is a good example of a radical
innovation. It used an entirely new aeronautical technology to open up a whole new
market for people traveling. Traveling across the country was unthinkable for most
people, when it would take weeks to go from New York to San Francisco by car or train.

The type of innovation is dependent on two factors:

1. Market – does the innovation create a new market, or address the existing market?
2. Technology – does the innovation use a new technology or an existing technology?

Footholds

A foothold is a small position that a firm intentionally establishes within a market in

which it does not yet compete (Upson et al., 2012). Swedish furniture seller IKEA is a
firm that relies on footholds. When IKEA enters a new country, it opens just one store.
This store is then used as a showcase to establish IKEA’s brand. Once IKEA gains
brand recognition in a country, more stores are established (Hambrick & Fredrickson,
2005).

Implementing Innovation

Product Life Cycle and Crossing the Chasm

When innovation creates a new product, it typically goes through four stages within the
marketplace. The four stages are:
1. Introduction: The product is launched, with the hopes that it catches on. Sales are
low.
2. Growth: The product catches on, and sales increase with time. Competitors jump in,
but the rivalry among competitors is not really strong yet, and there are plenty of sales
for all.
3. Maturity: Sales begin to level out, growth slows, and competition increases.
Shake-out occurs, with some competitors leaving the market or being acquired by
others.
4. Decline: Sales start declining. More consolidation occurs, with firms looking for exit
strategies. A few firms remain.

Figure 7.5: Product Life Cycle

Figure.7.5 illustrates these four stages over time. To prevent the decline of their product
after the maturity stage, firms will often “relaunch” their product with a new and
improved model. Innovation again plays a role, making improvements to the product, so
that consumers will purchase the latest model. Prime examples of incremental
innovation strategy are Apple’s iPhone and car manufacturers, such as Ford and
Toyota. In essence, the new model starts the product life cycle all over again. Figure 7.6
illustrates this concept.

Figure 7.6: Product Life Cycle Extension

Profits generated during the product life cycle also usually follow a traditional pattern.
During the research and development phase of the product, the firm is investing funds
into the product, generating a negative profit. Losses continue during the introduction
phase, when sales are low and marketing expenses are high. Firms tend to recoup their
investment in R&D and marketing during the growth phase, with maximum profits at the
beginning of the maturity phase. Once competition heats up in the maturity phase, price
competition kicks in, and lower prices mean lower profits. Figure 7.7 illustrates the
profits during the four phases of the product life cycle.

Figure 7.7: Profits During the Product Life Cycle

Another phenomenon that occurs in the innovation process with new technology is
called “crossing the chasm.” When a new technology is launched, often there are
technology innovators/enthusiasts who will purchase the new technology to check it out.
A few more, called early adopters, will also want to try out the new product. But how
does the firm get the product into the mainstream market? How do they get it to catch
on? This can often be challenging. Can the product make the leap to the mainstream?
This is called “crossing the chasm,” and often requires a different marketing
approach.

Figure 7.6 illustrates this concept, breaking down the market into customer segments.
Innovators and early adopters make up about 15% of the market. Firms must determine
a business strategy for each segment of the market. If they cannot convince the early
majority to buy their product, the product fails. Google Glass is an example of a product
that did not cross the chasm. Eyeglasses connected to the internet were quite an
innovative product, projecting internet sites in front of the eyes, or allowing the wearer to
take pictures. Its true usefulness, however, was questionable, and aside from some
early adopters, it failed.

Figure 7.8: Technology Adoption Life Cycle

New products and services typically follow a predictable product life cycle, and must be
able to “cross the chasm” to attract buyers beyond the early adopters.

Making Cooperative Moves

Four commonly used cooperative moves used by firms.

 1.​ Joint Ventures

A joint venture is a cooperative arrangement that involves two or more organizations

with each contributing to the creation of a new entity. The partners in a joint venture
share decision-making authority, control of the operation, and any profits that the joint
venture earns. Sometimes two firms create a joint venture to deal with a shared
opportunity. In other cases, a joint venture is designed to counter a shared threat.

2.​ Strategic Alliances

A strategic alliance is a cooperative arrangement between two or more organizations

that does not involve the creation of a new entity. For example, Twitter formed a
strategic alliance with Yahoo! Japan. The alliance involved relevant Tweets appearing
within various functions offered by Yahoo! Japan (Rao, 2011). The alliance simply
involves the two firms collaborating through a contractual relationship as opposed to
creating a new entity together.

3.​ Mergers and Acquisitions

Another way for firms to cooperate to the advantage of both firms and their stockholders
is through mergers. Two firms decide to combine into one entity, often gaining strength
in the market.

Whereas mergers typically occur with like-size companies, acquisitions are usually
done by the larger firm acquiring the smaller firm. The end result is basically the same,
with two companies combining into one. Sometimes the acquired firm is absorbed into
the acquiring company, but sometime it retains its identity. Besides combining the
strengths of both organizations with the intent of having a stronger performing company,
mergers and acquisitions reduce the number of competitors in the industry.

4.​ Internal Development

Another method to expand a firm is through internal development. If a firm wants to add
a new product or service line, rather than acquire that expertise by buying a company,
the firm can develop that capability themselves. Although this is more of a competitive
rather than a cooperative move, this is where a firm’s strength of entrepreneurial
orientation (EO) comes into play, and when intrapreneurship is important.
In addition to competitive moves, firms can benefit from cooperating with one another.
Cooperative moves such as forming joint ventures and strategic alliances may allow
firms to enjoy successes that might not otherwise be reached. This is because
cooperation enables firms to share rather than duplicate resources and to learn from
one another’s strengths. Firms that enter cooperative relationships take on risks,
however, including the loss of control over operations, possible transfer of valuable
secrets to other firms, and possibly being taken advantage of by partners.

Responding to Innovation in the Market

Executives in many markets must cope with a rapid-fire barrage of attacks from rivals,
such as head-to-head advertising campaigns, price cuts, and attempts to grab key
customers. If a firm is going to respond to a competitor’s move, doing so quickly is
important. If there is a long delay between an attack and a response, this generally
provides the attacker with an edge.

Multi-point competition adds complexity to decisions about whether to respond to a

rival’s moves. With multi-point competition, a firm faces the same rival in more than one
market. If rivals are able to establish mutual forbearance, then multi-point competition
can help them be successful. Mutual forbearance occurs when rivals do not act
aggressively because each recognizes that the other can retaliate in multiple markets.

Responding to a Disruptive Innovation

When a rival introduces a disruptive innovation that conflicts with the industry’s current
competitive practices, such as the emergence of online stock trading, executives
choose from among three main responses. First, executives may believe that the
innovation will not replace established offerings entirely and thus, may choose to focus
on their traditional modes of business while ignoring the disruption. Second, a firm can
counter the challenge by attacking along a different dimension. The third possible
response is to simply match the competitor’s move.

Fighting Brands: Get Ready to Rumble

A firm’s success can be undermined when a competitor tries to lure away its customers
by charging lower prices for its goods or services. Such a scenario is especially scary if
the quality of the competitor’s offerings is reasonably comparable to the firm’s. One
possible response would be for the firm to lower its prices to prevent customers from
abandoning it. This can be effective in the short term, but it creates a long-term
problem. Specifically, the firm will have trouble increasing its prices back to their original
level in the future because charging lower prices for a time will devalue the firm’s brand
and make customers question why they should accept price increases.

The creation of a fighting brand is a move that can prevent this problem. A fighting
brand is a lower-end brand that a firm introduces to try to protect the firm’s market
share without damaging the firm’s existing brands.

Co-location

Co-location occurs when goods and services offered under different brands are located
close to one another. In many cities, for example, theaters and art galleries are
clustered together in one neighborhood. Auto malls that contain several different car
dealerships are found in many areas.

Co-opetition

Co-opetition is a term that refers to the blending of competition and cooperation

between two firms.