CHAPTER 6

Strengthening a
Company’s
Competitive
Position: Strategic
Moves, Timing, and
Scope of
Operations
 LEARNING OBJECTIVES
THIS CHAPTER WILL HELP YOU UNDERSTAND:
1. Whether and when to pursue offensive or defensive strategic
moves to improve a firm’s market position
2. When being a first mover or a fast follower or a late mover is
most advantageous
3. The strategic benefits and risks of expanding a firm’s horizontal
scope through mergers and acquisitions
4. The advantages and disadvantages of extending the company’s
scope of operations via vertical integration
5. The conditions that favor outsourcing certain value chain
activities to outside parties
6. When and how strategic alliances can substitute for horizontal
mergers and acquisitions or vertical integration and how they
can facilitate outsourcing

© McGraw-Hill Education.
 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

Jump to Appendix 1 long image description

© McGraw-Hill Education.
 CONSIDERING STRATEGY-ENHANCING
MEASURES
♦ Whether and when to go on the offensive strategically
♦ 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

© McGraw-Hill Education.
 LAUNCHING STRATEGIC OFFENSIVES TO
IMPROVE A COMPANY’S MARKET POSITION

♦ Strategic offensive principles

1. Focusing relentlessly on building competitive
advantage and then striving to convert it into
sustainable advantage
2. Applying resources where rivals are least able to
defend themselves
3. Employing the element of surprise as opposed to
doing what rivals expect and are prepared for
4. Displaying a capacity for swift, decisive, and
overwhelming actions to overpower rivals

© McGraw-Hill Education.
 STRATEGIC MANAGEMENT PRINCIPLE (1 of 8)

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.

© McGraw-Hill Education.
 CHOOSING THE BASIS FOR
COMPETITIVE ATTACK
♦ 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.

© McGraw-Hill Education.
 STRATEGIC MANAGEMENT PRINCIPLE (2 of 8)

The best offensives use a company’s most

powerful resources and capabilities to attack rivals
in the areas where they are competitively weakest.

© McGraw-Hill Education.
 PRINCIPAL OFFENSIVE STRATEGY OPTIONS
1. Offering an equally good or better product at a lower price
2. Leapfrogging competitors by being first to market with next-
generation products
3. Pursuing continuous product innovation to draw sales and market
share away from less innovative rivals
4. Pursuing disruptive product innovations to create new markets
5. Adopting and improving on the good ideas of other companies
(rivals or otherwise)
6. Using hit-and-run or guerrilla marketing tactics to grab market share
from complacent or distracted rivals
7. Launching a preemptive strike to secure an industry’s limited
resources or capture a rare opportunity

© McGraw-Hill Education.
 CHOOSING WHICH RIVALS TO ATTACK

Best Targets for

Offensive Attacks

Market leaders Runner-up firms

Struggling Small local
that are in with weaknesses
enterprises on and regional
vulnerable in areas where
the verge of firms with limited
competitive the challenger
going under capabilities
positions is strong

Jump to Appendix 2 long image description

© McGraw-Hill Education.
 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

© McGraw-Hill Education.
 CORE CONCEPT (1 of 8)
A blue-ocean strategy offers growth in revenues
and profits by discovering or inventing new
industry segments that create altogether new
demand.

© McGraw-Hill Education.
 Bonobos’s Blue-Ocean Strategy in the
U.S. Men’s Fashion Retail Industry
♦ Given the rapidity with which most first-mover
advantages based on Internet technologies can be
overcome by competitors, what has Bonobos done to
retain its competitive advantage?
♦ Is Bonobos’s unique focused-differentiation entry into
brick-and-mortar retailing a sufficiently strong strategic
move?
♦ What would you predict is the likelihood of long-term
success for Bonobos in the retail clothing sector?

© McGraw-Hill Education.
 DEFENSIVE STRATEGIES—PROTECTING
MARKET POSITION AND COMPETITIVE
ADVANTAGE

Purposes of
Defensive Strategies

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

Jump to Appendix 3 long image description

© McGraw-Hill Education.
 FORMS OF DEFENSIVE STRATEGIES
Defensive strategies can take
either of two forms
● Actions to block challengers
● Actions to signal the likelihood
of strong retaliation

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 STRATEGIC MANAGEMENT PRINCIPLE (3 of 8)

Good defensive strategies can help protect a

competitive advantage but rarely are the basis for
creating one.

© McGraw-Hill Education.
 STRATEGIC MANAGEMENT PRINCIPLE (4 of 8)

There are many ways to throw obstacles in the

path of would-be challengers.

© McGraw-Hill Education.
 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 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 to current
customers to reduce the 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.

© McGraw-Hill Education.
 SIGNALING CHALLENGERS THAT
RETALIATION IS LIKELY
♦ Signaling is an effective defensive strategy
when the firm follows through by:
● 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

© McGraw-Hill Education.
 STRATEGIC MANAGEMENT PRINCIPLE (5 of 8)

To be an effective defensive strategy, signaling

needs to be accompanied by a credible
commitment to follow through.

© McGraw-Hill Education.
 CORE CONCEPT (2 of 8)
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.

© McGraw-Hill Education.
 TIMING A FIRM’S OFFENSIVE AND
DEFENSIVE STRATEGIC MOVES
♦ 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.

© McGraw-Hill Education.
 CONDITIONS THAT LEAD TO
FIRST-MOVER ADVANTAGES
1. When pioneering helps build a firm’s reputation and
creates strong brand loyalty
2. When a first mover’s customers will thereafter face
significant switching costs
3. When property rights protections thwart rapid imitation
of the initial move
4. When an early lead enables movement down the
learning curve ahead of rivals
5. When a first mover can set the technical standard for
the industry

© McGraw-Hill Education.
 Uber’s First-Mover Advantage in Mobile
Ride-Hailing Services

♦ Which first-mover advantages contributed to Uber’s

domination of the on-demand transportation markets in
its chosen cities?
♦ What first-mover advantages will Uber not have in
entering overseas markets?
♦ How could Uber extend its success into smaller and less
urban markets as user growth in the larger urban
markets peaks?

© McGraw-Hill Education.
 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

© McGraw-Hill Education.
 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?

© McGraw-Hill Education.
 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
activities market
product and footprint on
performed presence and
service offerings its market
internally its mix of
or industry
businesses

Jump to Appendix 4 long image description

© McGraw-Hill Education.
 CORE CONCEPT (3 of 8)
The scope of the firm refers to the range of
activities 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.
Scope issues are at the very heart of corporate-
level strategy.

© McGraw-Hill Education.
 CORE CONCEPTS (4 of 8)
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.

© McGraw-Hill Education.
 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"

© McGraw-Hill Education.
 STRATEGIC OJECTIVES 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
other resources and capabilities
♦ Leading the convergence of industries whose
boundaries are being blurred by changing
technologies and new market opportunities
© McGraw-Hill Education.
 BENEFITS OF INCREASING
HORIZONTAL SCOPE
♦ Increasing a firm’s horizontal scope strengthens
its business and increases its profitability by:
● Improving the efficiency of its operations
● Heightening its product differentiation
● Reducing market rivalry
● Increasing the firm’s bargaining power over
suppliers and buyers
● Enhancing its flexibility and dynamic capabilities

© McGraw-Hill Education.
 Bristol-Myers Squibb’s “String-of-Pearls”
Horizontal Acquisition Strategy

♦ Which strategic outcomes did Bristol-Myers Squibb

pursue through its “string-of-pearls” acquisition strategy?
♦ Why did Bristol-Myers Squibb choose to pursue an
acquisition strategy that was different from its industry
competitors?
♦ How did increasing the horizontal scope of Bristol-Myers
Squibb through acquisitions strengthen its competitive
position and profitability?

© McGraw-Hill Education.
 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.
● Key employees at the acquired firm are lost.
● Managers overseeing integration make mistakes in
melding the acquired firm into their own.
© McGraw-Hill Education.
 CORE CONCEPT (5 of 8)
A vertically integrated firm is one that performs
value chain activities along more than one stage of
an industry’s value chain system.

© McGraw-Hill Education.
 VERTICAL INTEGRATION STRATEGIES
♦ Vertically integrated firm
● One that participates in multiple segments or
stages of an industry’s overall value chain
♦ Vertical integration strategy
● Can expand the firm’s range of activities
backward into its sources of supply or forward
toward end users of its products

© McGraw-Hill Education.
 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
● A firm uses a mix of in-house and outsourced
activity in any stage of the vertical chain.

© McGraw-Hill Education.
 THE ADVANTAGES OF A VERTICAL
INTEGRATION STRATEGY

Benefits of a Vertical
Integration Strategy

Add materially Strengthen Boost

to a firm’s the firm’s the firm’s
technological competitive profitability
capabilities position

Jump to Appendix 5 long image description

© McGraw-Hill Education.
 CORE CONCEPTS (6 of 8)
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.

© McGraw-Hill Education.
 INTEGRATING BACKWARD TO ACHIEVE
GREATER COMPETITIVENESS
♦ Integrating backwards by:
● Achieving same scale economies as outside
suppliers: low-cost based competitive advantage
● Matching or beating suppliers’ production efficiency
with no drop-off in quality: differentiation-based
competitive advantage
♦ 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
© McGraw-Hill Education.
 INTEGRATING FORWARD TO
ENHANCE COMPETITIVENESS
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

© McGraw-Hill Education.
 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 reach volumes that create
economies of scale
♦ Efficient production of internally-produced components and
parts hampered by capacity matching problems
♦ New or different resources and capabilities requirements

© McGraw-Hill Education.
 WEIGHING THE PROS AND CONS
OF VERTICAL INTEGRATION
♦ Will vertical integration enhance the performance of
strategy-critical activities ways that lower cost, build
expertise, protect proprietary know-how, or increase
differentiation?
♦ What impact will vertical integration have on investment
costs, flexibility, and response times?
♦ What administrative costs are incurred by coordinating
operations across more vertical chain activities?
♦ How difficult will it be for the firm to acquire the set of
skills and capabilities needed to operate in another
stage of the vertical chain?

© McGraw-Hill Education.
 Kaiser Permanente’s Vertical
Integration Strategy

♦ What are the most important strategic benefits that Kaiser

Permanente derives from its vertical integration strategy?
♦ Over the long term, how could the vertical scope of Kaiser
Permanente’s operations threaten its competitive position
and profitability?
♦ Why is a vertical integration strategy more appropriate in
some industries than in others?

© McGraw-Hill Education.
 CORE CONCEPT (7 of 8)
Outsourcing involves contracting out certain
value chain activities that are normally performed
in-house to outside vendors.

© McGraw-Hill Education.
 OUTSOURCING STRATEGIES: NARROWING
THE SCOPE OF OPERATIONS
♦ 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 risk exposure due to new technology or
buyer preferences
● Allows the firm to concentrate on its core business,
leverage key resources, and do even better what it
already does best
© McGraw-Hill Education.
 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 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

© McGraw-Hill Education.
 STRATEGIC MANAGEMENT PRINCIPLE (6 of 8)

A company must guard against outsourcing

activities that hollow out the resources and
capabilities that it needs to be a master of its
own destiny.

© McGraw-Hill Education.
 CORE CONCEPTS (8 of 8)
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.

© McGraw-Hill Education.
 FACTORS THAT MAKE AN ALLIANCE
“STRATEGIC”
A strategic alliance:
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 up important new market opportunities
7. Speeds development of new technologies or product
innovations
© McGraw-Hill Education.
 BENEFITS OF STRATEGIC ALLIANCES
AND PARTNERSHIPS
♦ Minimize the problems associated with vertical
integration, outsourcing, and mergers and acquisitions
♦ Are useful in extending the scope of operations via
international expansion and diversification strategies
♦ Reduce the need to be independent and self-sufficient
when strengthening the firm’s competitive position
♦ Offer greater flexibility should a firm’s resource
requirements or goals change over time
♦ Are useful when industries are experiencing high-
velocity technological advances simultaneously

© McGraw-Hill Education.
 STRATEGIC MANAGEMENT PRINCIPLE (7 of 8)

Companies that have formed a host of alliances

need to manage their alliances like a portfolio.

© McGraw-Hill Education.
 WHY AND HOW STRATEGIC
ALLIANCES ARE ADVANTAGEOUS

♦ Strategic Alliances:
● Expedite development of promising new technologies
or products
● Help overcome deficits in technical and manufacturing
expertise
● Bring together the personnel and expertise needed to
create new skill sets and capabilities
● Improve supply chain efficiency
● Help partners allocate venture risk sharing
● Allow firms to gain economies of scale
● Provide new market access for partners

© McGraw-Hill Education.
 CAPTURING THE BENEFITS OF
STRATEGIC ALLIANCES
Being sensitive
to cultural
differences
Recognizing that
Picking a good the alliance must
partner benefit both sides

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

Jump to Appendix 6 long image description

© McGraw-Hill Education.
 STRATEGIC MANAGEMENT PRINCIPLE (8 of 8)

The best alliances are highly selective, focusing on

particular value chain activities and on obtaining a
specific competitive benefit.
Alliances enable a firm to learn and to build on its
strengths.

© McGraw-Hill Education.
 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
● Establish a stronger beachhead in target industry.
● Master new technologies and build expertise and
competencies.
● Open up broader opportunities in the target industry.
© McGraw-Hill Education.
 PRINCIPLE ADVANTAGES OF
STRATEGIC ALLIANCES
1. They lower investment costs and risks
for each partner by facilitating resource
pooling and risk sharing.
2. They are more flexible organizational
forms and allow for a more adaptive
response to changing conditions.
3. They are more rapidly deployed—a
critical factor when speed is of the
essence.
© McGraw-Hill Education.
 STRATEGIC ALLIANCES VERSUS
OUTSOURCING

Key advantages of strategic alliances

● The increased ability to exercise control
over the partners’ activities.
● A greater commitment and willingness of
the partners to make relationship-specific
investments as opposed to arm’s-length
outsourcing transactions.

© McGraw-Hill Education.
 ACHIEVING LONG-LASTING STRATEGIC
ALLIANCE RELATIONSHIPS

Factors Influencing
the Longevity of Alliances

Collaborating Establishing Continuing to

with partners that a permanent collaborate is
do not compete trusting in the parties’
directly relationship mutual interest

Jump to Appendix 7 long image description

© McGraw-Hill Education.
 THE DRAWBACKS OF STRATEGIC
ALLIANCES AND PARTNERSHIPS
♦ Culture clash and integration problems due to different
management styles and business practices
♦ Anticipated gains not materializing due to an overly
optimistic view of the potential for synergies or the
unforeseen 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

© McGraw-Hill Education.
 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.

© McGraw-Hill Education.