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

6–1
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.

6–2
 GOING ON THE OFFENSIVE—
STRATEGIC OPTIONS TO IMPROVE
A FIRM’S MARKET POSITION

 Strategic Offensive Principles:

● Focus on relentlessly building competitive advantage
and then converting it into sustainable advantage.
● 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.
● Display a strong bias for swift, decisive, and
overwhelming actions to overpower rivals.

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 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.

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 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.
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 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

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 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.

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CORE CONCEPT

♦ A blue-ocean strategy offers growth in

revenues and profits by discovering or
inventing new industry segments that create
altogether new demand.

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STRATEGIC MANAGEMENT PRINCIPLE

♦ Good defensive strategies can help protect a

competitive advantage but rarely are the basis
for creating one.

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 DEFENSIVE STRATEGIES—
PROTECTING MARKET POSITION
AND COMPETITIVE ADVANTAGE

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

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 BLOCKING THE AVENUES
OPEN TO CHALLENGERS

 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.
 Discourage buyers from trying competitors’ brands.
 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.

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 SIGNALING CHALLENGERS THAT
RETALIATION IS LIKELY

 Signaling is an effective defensive strategy

if 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.

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CORE CONCEPT

♦ 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.

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 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 must be carefully weighed.

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 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.

6–15
 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.

6–16
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?

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 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

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CORE CONCEPTS

♦ 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.

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 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.

6–20
 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

6–21
 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
complementary resources and capabilities.
 Leading the convergence of industries whose
boundaries are being blurred by changing
technologies and new market opportunities.
6–22
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.
6–23
CORE CONCEPT

♦ A vertically integrated firm is one that

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

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VERTICAL INTEGRATION STRATEGIES

 Vertically Integrated Firm

● Is 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 and/or forward toward end
users of its products.

6–25
 TYPES OF VERTICAL
INTEGRATION STRATEGIES

Vertical Integration
Choices

Full Partial Tapered

Integration Integration Integration

6–26
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.

6–27
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

6–28
CORE CONCEPTS

♦ 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

6–29
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

6–30
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.

6–31
 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.

6–32
 WEIGHING THE PROS AND CONS
OF VERTICAL INTEGRATION

 Can vertical integration enhance the performance of

strategy-critical activities in ways that lower cost, build
expertise, protect proprietary know-how, or increase
differentiation?
 What is the impact of vertical integration on investment
costs, flexibility and response times, and administrative
costs of coordinating operations across more vertical
chain activities?
 How difficult it will be for the firm to acquire the set of
skills and capabilities needed to operate in another
stage of the vertical chain?

6–33
CORE CONCEPTS

♦ 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.

6–34
 FACTORS THAT MAKE AN ALLIANCE
“STRATEGIC”

1. It facilitates achievement of an important business

objective.
2. It helps build, sustain, or enhance a core competence
or competitive advantage.
3. It helps block a competitive threat.
4. It helps remedy an important resource deficiency or
competitive weakness.
5. It increases the bargaining power of alliance members
over suppliers or buyers.
6. It helps open up important new market opportunities.
7. It mitigates a significant risk to a firm’s business.
6–35
BENEFITS OF STRATEGIC ALLIANCES
AND PARTNERSHIPS

 Minimizes the problems associated with vertical

integration, outsourcing, and mergers and acquisitions.
 Useful in extending to extend the scope of operations
via international expansion and diversification
strategies.
 Reduces the need to be independent and self-sufficient
when strengthening the firm’s competitive position.
 Offers greater flexibility should a firm’s resource
requirements or goals change over time.
 Are useful when industries are experiencing high-
velocity technological advances simultaneously.
6–36
WHY AND HOW STRATEGIC ALLIANCES
ARE ADVANTAGEOUS

 They expedite the development of promising

new technologies or products.
 They help overcome deficits in technical and
manufacturing expertise.
 They bring together the personnel and expertise
needed to create new skill sets and capabilities.
 They improve supply chain efficiency.
 They help partners allocate venture risk sharing.
 They allow firms to gain economies of scale.
 They provide new market access for partners.

6–37
STRATEGIC MANAGEMENT PRINCIPLE

♦ The best alliances are highly selective,

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

6–38
 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.

6–39
 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

Ensuring both Adjusting the

parties keep their agreement over
commitments time to fit new
Structuring the circumstances
decision-making
process for swift
actions

6–40
 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.

6–41
 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.

6–42
 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.

6–43
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.

6–44