Supplementing the Chosen

Competitive Strategy: Other

Important Business Strategy Choices
 Chapter Roadmap

◼ Strategic Alliances and Partnerships

◼ Merger and Acquisition Strategies
◼ Vertical Integration Strategies: Operating Across More
Stages of the Industry Value Chain
◼ Outsourcing Strategies: Narrowing the Boundaries of the
Business
◼ Business Strategy Choices for Specific Market Situations
◼ Timing Strategic Moves – To be an Early Mover of a Late
A Company’s Menu of Strategy Options
Strategic Alliances and Partnerships
Strategic Alliances and
Partnerships Companies
sometimes use strategic
alliances or collaborative
partnerships to complement
their own strategic initiatives
and strengthen their
competitiveness. Such
cooperative strategies go
beyond normal company-to-
company dealings but fall
short of merger or full joint
venture
 Characteristics of a Strategic
Alliance
◼ Strategic alliance – A formal agreement between two
or more separate companies where there is
❖ Strategically relevant collaboration of some sort
❖ Joint contribution of resources
❖ Shared risk
❖ Shared control
❖ Mutual dependence
◼ Alliances often involve
❖ Joint marketing
❖ Joint sales or distribution
❖ Joint production
❖ Design collaboration
❖ Joint research
❖ Projects to jointly develop new technologies or products
 What Factors Make an Alliance
Strategic?

◼ It is critical to a company’s achievement of an

important objective
◼ It helps build, sustain, or enhance a core
competence or competitive advantage
◼ It helps block a competitive threat

◼ It helps open up important

market opportunities
◼ It mitigates a significant risk
to a company’s business
 Why Are Strategic Alliances
Formed?
◼ To collaborate on technology development or
new product development
◼ To fill gaps in technical or manufacturing
expertise
◼ To create new skill sets and capabilities
◼ To improve supply chain efficiency
◼ To gain economies of scale in
production and/or marketing
◼ To acquire or improve market
access via joint marketing agreements
 Alliances Can Enhance a Firm’s
Competitiveness
• Alliances and partnerships can help companies cope
with two demanding competitive challenges
• Racing against rivals to build a
market presence in many
different national markets
• Racing against rivals to seize
opportunities on the frontiers
of advancing technology

• Collaborative arrangements can help a company

lower its costs and/or gain access to needed
expertise and capabilities
 Potential Benefits of Alliances to
Achieve Global and Industry
Leadership
◼ Get into critical country markets quickly to accelerate
process of building a global presence
◼ Gain inside knowledge about unfamiliar markets and
cultures
◼ Access valuable skills and competencies concentrated in
particular geographic locations
◼ Establish a beachhead to participate in target industry
◼ Master new technologies and build new expertise faster
than would be possible internally
◼ Open up expanded opportunities in target industry by
combining firm’s capabilities with resources of partners
 Capturing the Benefits of Strategic
Alliances

• Benefits from forming partnerships are a function of

• Picking a good partner
• Being sensitive to cultural differences
• Recognizing an alliance
must benefit both parties
• Ensuring both parties live
up to their commitments
• Structuring the decision-making process
so actions can be taken swiftly when needed
• Managing the learning process and then adjusting the alliance
agreement over time to fit new circumstances
 Why Alliances Fail
◼ Ability of an alliance to endure depends on
❖ How well partners work together
❖ Success of partners in responding
and adapting to changing conditions
❖ Willingness of partners to
renegotiate the bargain
◼ Reasons for alliance failure
❖ Diverging objectives and priorities of partners
❖ Inability of partners to work well together
❖ Changing conditions rendering purpose of alliance
obsolete
❖ Emergence of more attractive technological paths
❖ Marketplace rivalry between one or more allies
 Merger and Acquisition Strategies
◼ Merger
• Combination and pooling of equals, with newly
created firm often taking on a new name
◼ Acquisition
• One firm, the acquirer,
purchases and absorbs operations of
another, the acquired
◼ Merger - Acquisition Strategy
❖ Much-used strategic option
❖ Especially suited for situations where alliances do not
provide a firm with needed capabilities or cost-reducing
opportunities
❖ Ownership allows for tightly integrated operations, creating
more control and autonomy than alliances
 Objectives of Mergers and
Acquisitions
◼ To create a more cost-efficient operation
◼ To expand a firm’s geographic coverage
◼ To extend a firm’s business into new
product categories or international markets
◼ To gain quick access to new technologies
or competitive capabilities
◼ To invent a new industry and lead the
convergence of industries whose boundaries are
blurred by changing technologies and new
market opportunities (Merger of AOL and Time
Warner )
 Pitfalls of Mergers and Acquisitions
◼ Combining operations may result in

❖ Resistance from rank-and-file employees

❖ Hard-to-resolve conflicts in management
styles and corporate cultures
❖ Tough problems of integration
❖ Greater-than-anticipated difficulties in
 Achieving expected cost-savings
 Sharing of expertise
 Achieving enhanced competitive capabilities
 Vertical Integration Strategies
◼ Extend a firm’s competitive scope within
same industry
❖Backward into sources of supply
❖Forward toward end-users of final product

◼ Can aim at either full or partial integration

Internally Activities, Costs,

Activities,
Performed & Margins of Buyer/User
Costs, &
Activities, Forward Channel Value
Margins of
Costs, & Allies & Chains
Suppliers
Margins Strategic Partners
 Strategic Advantages of Backward
Integration
• Generates cost savings only if:
• The volume needed is big enough to capture the scale
economies of the supplier have
• The supplier efficiency can be matched or exceeded with no drop
in quality.
• The potential to reduce costs exists in situations:
• Suppliers have a sizeable profit margin,
• The item being supplied is a major cost component,
• Where needed technological skills are easily mastered
• Backward integration can produce a differentiation
based competitive advantage when a company by
performing activities internally:
• ends up with better quality product/service offering
• improves the caliber of its customer service
• in other ways enhances the performance of its final product
 Strategic Advantages of Backward
Integration

• On occasions integrating into more stages along

industry value chain can add to company’s
differentiation capabilities by
• allowing the company to build or strengthen its core
competencies
• better muster key skills or strategy – critical technologies
• add features that deliver greater customer value
• Other potential advantages of backward integration
are:
• sparing a company of uncertainty of being dependent on
suppliers for crucial components or support services
• lessening a company’s vulnerability to powerful suppliers
inclined to raise prices at every opportunity
 Strategic Advantages of Forward
Integration
◼ To gain better access to end
users and better market visibility
◼ To compensate for undependable distribution
channels which undermine steady operations
◼ To offset the lack of a broad product line, a firm
may sell directly to end users
◼ To bypass regular distribution channels in favor
of direct sales and Internet retailing which may
❖ Lower distribution costs
❖ Produce a relative cost advantage over rivals
❖ Enable lower selling prices to end users
 Strategic Disadvantages of Vertical
Integration
• Boosts resource requirements
• Locks firm deeper into same industry
• Results in fixed sources of supply and
less flexibility in accommodating buyer
demands for product variety
• Poses all types of
capacity-matching problems
• May require radically different
skills / capabilities
• Reduces flexibility to make changes in component parts
which may lengthen design time and ability to introduce
new products
 Pros and Cons of Integration vs.
De-Integration
• Whether vertical integration is a viable
strategic option depends on its
• Ability to lower cost, build expertise,
increase differentiation, or enhance
performance of strategy-critical activities
• Impact on investment cost, flexibility,
and administrative overhead
• Contribution to enhancing a firm’s
competitiveness
 Outsourcing Strategies
Concept

Internally
Performed
Activities Functional
Suppliers
Activities

Support Distributors or
Services Retailers

Outsourcing involves withdrawing from

certain value chain activities and relying
on outsiders to supply needed products,
support services, or functional activities
When Does Outsourcing an Activity
Make Strategic Sense?
◼ Activity can be performed better or more cheaply by
outside specialists
◼ Activity is not crucial to achieve a sustainable competitive
advantage
◼ Risk exposure to changing technology and/or
changing buyer preferences is reduced
◼ It improves firm’s ability to innovate
◼ Operations are streamlined to
❖ Improve flexibility
❖ Cut time to get new products into the market
◼ It increases firm’s ability to assemble diverse kinds of
expertise speedily and efficiently
◼ Firm can concentrate on “core” value chain activities that
best suit its resource strengths
 The Big Risk of Outsourcing
◼ Farming out too many or the wrong
activities, thus
❖ Hollowing out capabilities

❖ Losing touch with activities and expertise

that determine overall long-term success
Matching Strategy to a Company’s Situation

Nature of industry
and competitive
Most important
conditions
drivers shaping a
firm’s strategic
options fall into two
Firm’s internal
categories
resource strengths
and weaknesses

6-24
Matching a Company’s Strategy to Different
Market Conditions

Fragmented Markets Freshly Emerging Markets

Turbulent Markets Rapidly Growing Markets

Stagnant or Declining Mature, Slow-Growth

Markets Markets

6-25
Features of an Emerging Industry
◼ New and unproven market
◼ Proprietary technology
◼ Lack of consensus regarding which of
several competing technologies will win out
◼ Low entry barriers
◼ Experience curve effects may permit
cost reductions as volume builds
◼ Buyers are first-time users and marketing involves
inducing initial purchase and overcoming customer
concerns
◼ First-generation products are expected to be rapidly
improved, so buyers delay purchase until technology
matures
◼ Possible difficulties in securing raw materials
◼ Firms struggle to fund R&D, operations and build
resource capabilities for rapid growth
 Strategy Options For Competing in
Emerging Industries
◼ Win early race for industry leadership by employing a
bold, creative strategy
◼ Push hard to perfect technology,
improve product quality, and develop
attractive performance features
◼ Consider merging with or
acquiring another firm to
❖ Gain added expertise
❖ Pool resource strengths
◼ When technological uncertainty clears and a
dominant technology emerges, try to capture any first-
mover advantages by moving quickly
◼ Form strategic alliances with
❖ Companies having related technological expertise or
❖ Key suppliers
 Strategy Options For Competing in
Emerging Industries
◼ Pursue new customers and user
applications
◼ Enter new geographical areas
◼ Make it easy and cheap for
first-time buyers to try product
◼ Focus advertising emphasis on
❖ Increasing frequency of use
❖ Creating brand loyalty
◼ Use price cuts to attract price-sensitive
buyers
 What is the Key to Success for
Competing in Rapidly Growing Markets?

A company needs a strategy

predicated on growing faster than
the market average so it
◼ Can boost its market share and
◼ Improve its competitive standing vis-à-vis
rivals
 Strategy Options for Competing in
Rapidly Growing Markets
◼ Drive down costs per unit to enable price reductions
that attract droves of new customers
◼ Pursue rapid product innovation to
❖ Set a company’s product offering apart from rivals
❖ Incorporate attributes to appeal to
growing numbers of customers
◼ Gain access to additional distribution
channels and sales outlets
◼ Expand a company’s geographic coverage
◼ Expand product line to add models/styles to appeal
to a wider range of buyers
Industry Maturity: The Standout Features
◼ Slowing demand breeds stiffer competition
◼ More sophisticated buyers demand bargains
◼ Greater emphasis on cost and service
◼ “Topping out” problem in adding
production capacity
◼ Product innovation and new
end uses harder to come by
◼ International competition increases
◼ Industry profitability falls
◼ Mergers and acquisitions reduce
number of rivals
 Strategy Options for Competing in a
Mature Industry
• Prune marginal products and models

• Emphasize innovation in the value chain

• Strong focus on cost reduction

• Increase sales to present customers

• Purchase rivals at bargain prices

• Expand internationally

• Build new, more flexible

competitive capabilities
Strategic Pitfalls in a Maturing Industry

◼ Employing a ho-hum strategy with no distinctive

features thus leaving firm “stuck in the middle”
◼ Being slow to mount a defense against stiffening
competitive pressures
◼ Concentrating on short-term profits rather than
strengthening long-term competitiveness
◼ Being slow to respond to price-cutting
◼ Having too much excess capacity
◼ Overspending on marketing efforts
◼ Failing to aggressively
❖ Invest in product / process innovations
❖ Pursue cost reductions
 Stagnant or Declining Industries:
The Standout Features
◼ Demand grows more slowly than the economy
as a whole (or even declines)
◼ Advancing technology gives rise to better-
performing substitute products or lower costs
◼ Customer group shrinks

◼ Changing lifestyles and buyer tastes

◼ Rising costs of complementary products

◼ Competitive battle ensues among industry

members for the available business
 Strategy Options for Competing in a
Stagnant or Declining Industry
◼ Pursue focus strategy aimed at
fastest growing market segments
◼ Stress differentiation based on quality
improvement or product innovation
◼ Work diligently to drive costs down
❖ Cut marginal activities from value chain
❖ Use outsourcing
❖ Redesign internal processes
to exploit e-commerce
❖ Consolidate under-utilized production facilities
❖ Add more distribution channels
❖ Close low-volume, high-cost distribution outlets
❖ Prune marginal products
End-Game Strategies for Declining Industries

◼ An end-game strategy can take either of two

paths

❖ Slow-exit strategy involving

 Gradual phasing down of operations

 Getting the most cash flow from the business

❖ Fast-exit strategy involving

 Disengaging from an industry
during early stages of decline

 Quick recovery of as much of a

company’s investment as possible
 Features of Turbulent Markets
◼ Rapid-fire technological change

◼ Short product life-cycles

◼ Entry of important new rivals

◼ Frequent launches of
new competitive moves

◼ Rapidly evolving
customer expectations
 Ways to cope with Rapid Change
• A company can assume any of the three strategic
postures
1. It can react to change
• respond to rival’s new product with a better
product
• respond to unexpected changes in buyers
needs and preferences
• shift it advertising emphasis to different
product attributes
• Reacting is defensive strategy it is unlikely create
fresh opportunity, but is nonetheless a necessary
component in company’s arsenal of options
 Ways to cope with Rapid Change
2. It can anticipate change
• anticipating looking ahead to analyze what is likely to
occur and then preparing and positioning for future
• studying buyer’s behavior, buyer’s needs, buyer’s
expectations to get insight of market will evolve
• Anticipating change is fundamentally defensive in that
forces outside the enterprise are in driving seat
• Anticipating change can open up new opportunities and a
better way to manage change than just pure reaction
 Ways to cope with Rapid Change

3. It can lead change

• Entails initiating the market and competitive forces that others must
respond
• It is an offensive strategy aimed at putting the company in the drivers
seat. It means:
• being the first to market a new product or service
• being the technological leader
• rushing next generation products to market ahead of rivals
• having products whose features and attributes shape customer
preferences and expectation
• Company’s approach to manage should ideally incorporate all three
postures
• The best performing companies in high velocity markets consistently
seek to lead change with proactive strategies that entail the
flexibility to pursue several strategic options, depending on how the
market actually evolves
Meeting The Challenge of High-Velocity Change
 Strategy Options for Competing
in High-Velocity Markets
1. Invest aggressively in R&D
• Where technology is the primary driver of change translating technological
advances into innovative new products is necessary
• It is desirable to focus the R&D efforts to critical areas as it:
• avoids stretching the company resources too thin
• deepens the firm’s expertise, master the technology
• fully capture experience/ learning curve effects
• become dominant leader in particular technology or product category
• A fast evolving market environment entails many technological areas and
product categories
• Competitors have to employ some type of focus strategy and
concentrate on being the leader in a particular product/ technology
category
 Strategy Options for Competing
in High-Velocity Markets
2. Keep the company’s products and services fresh and exciting
to stand out in the midst of all change that is taking place
• One risk of rapid change is that products and even companies are lost
in the shuffle
• keep the firm’s products and services in the limelight
• keep them innovative and well matched to the changes that are
occurring in the marketplace
3. Develop quick response capabilities
• Shift resources
• Adapt competencies
• Create new competitive capabilities
• Speed new products to market
 Strategy Options for Competing
in High-Velocity Markets
4. Rely on strategic partnership with outside suppliers and companies making
tie-in products
• In high velocity industries technology branches off to create many new
technologies and product categories
• No company has the resources and competencies to pursue them all
• Desirable strategies are:
• Specialization to promote necessary technical depth
• Focus to preserve organizational agility and leverage firm’s expertise
• Companies build their competitive position by:
• strengthening their own internal resource base
•
partnering with those suppliers making state of the art parts and
components by collaborating closely with both the developers of
related technologies and makers of the tie-in- product
An outsourcing strategy allows the company the flexibility to replace suppliers:
those fall behind on technology or product feature
those that cease to be competitive on price
 Strategy Options for Competing
in High-Velocity Markets

5. Initiate fresh actions every few months, not just when a competitive
response is needed
• Change is partly triggered by passage of time rather than solely by the
occurrence of events
• A company can be proactive by making time-based moves
• introducing a new improved product every four months rather than when the
market tapers off or a rival introduces next generation model
• a company can expand into new geographic market every six months rather than
waiting for new market opportunity present itself
• can refresh existing brands every two years rather than waiting until their
popularity wanes
• The keys to successfully using time pacing as strategic weapons are:
• choosing intervals that make sense internally and externally
• establishing an internal organizational rhythm for change
• choreographing the transitions
 Keys to Success in Competing
in High Velocity Markets
• Cutting-edge expertise
• Speed in responding to new developments
• Collaboration with others
• Agility
• Innovativeness
• Opportunism
• Resource flexibility
• First-to-market capabilities
 Competitive Features of a Fragmented
Industry
◼ Absence of market leaders with large market shares or
widespread buyer recognition
◼ Product/service is delivered to neighborhood
locations to be convenient to local residents
◼ Buyer demand is so diverse that many
firms are required to satisfy buyer needs
◼ Low entry barriers
◼ Absence of scale economies
◼ Market for industry’s product/service may be globalizing, thus
putting many companies across the world in same market
arena
◼ Exploding technologies force firms to specialize just to keep
up in their area of expertise
◼ Industry is young and crowded with aspiring contenders, with
no firm having yet developed recognition to command a large
market share
 Competing in a Fragmented Industry:
The Strategy Options

1. Construct and operate “formula” facilities

• The strategic approach frequently employed in restaurant and retailing
industry
• It involves constructing a standardized outlets in favorable locations and
then operating them cost effectively
2. Become a low-cost operator
• When price competition is intense and profit margins are under
constant pressure, companies can stress no frills operations featuring:
• low overhead
• high productivity/ low-cost labor
• lean capital budget
• dedicated pursuit of total labor operating efficiency
• Successful low-cost producers in in fragmented industry can play
price discounting game and earn profits above the industry average
 Competing in a Fragmented Industry:
The Strategy Options

3. Specialize by product type

• When fragmented industry’s products include a range of styles
or services
• furniture industry
• auto repair
4. Specialize by customer type
• A firm can stake out a market niche by catering to customers:
• interested in low prices
• unique product attributes
• customized features
5. Focus on limited geographic area
• Concentrating company efforts on a limited territory can
produce:
• greater operating efficiency
• speed delivery and customer service
• promote strong brand awareness
• permit saturation advertisement
Examples of Fragmented
Industries

Book publishing
Landscaping and plant nurseries
Auto repair
Restaurant industry
Public accounting
Women’s dresses
Meat packing
Paperboard boxes
Hotels and motels
Furniture
 First-Mover Advantages
◼ When to make a strategic move is often as
crucial as what move to make

◼ First-mover advantages arise when

❖ Pioneering helps build firm’s image and reputation

❖ Early commitments to new technologies,
new-style components, and distribution
channels can produce cost advantage

❖ Loyalty of first-time buyers is high

❖ Moving first can be a preemptive strike
 What is a Blue Ocean Strategy?
◼ Seeks to gain a dramatic, durable
competitive advantage by

❖Abandoning efforts to beat out

competitors in existing markets and

❖Inventing a new industry or distinctive

market segment to render existing
competitors largely irrelevant and

❖Allowing a company to create and

capture altogether new demand
What Is Different About a Blue Ocean?
Typical Market Space Blue Ocean Market Space
◼ Industry boundaries are ◼ Industry does not exist yet
defined and accepted
◼ Industry is untainted
◼ Competitive rules are well by competition
understood by all rivals
◼ Industry offers wide-open
◼ Companies try to outperform opportunities if a firm has a
rivals by capturing a bigger product and strategy allowing
share of existing demand it to
❖ Create new demand and
❖ Avoid fighting over existing
demand

6-53
 First-Mover Disadvantages
◼ Moving early can be a disadvantage (or fail
to produce an advantage) when
❖ When costs of pioneering are more than being
an imitative follower and only negligible
learning/experience curve benefits accrue to the
leader
❖ Innovator’s products are primitive, not living up
to buyer expectations
❖ Demand side of the market is skeptical about the
benefits of new technology/product of a first-
mover
❖ Rapid technological change allows followers to
leapfrog pioneers
 To be a First Mover or Not
• It matters whether the race to market leadership in a
particular industry is a sprint or marathon
• In marathons a slow mover is not unduly penalized
• first mover advantages could be fleeting
• there is ample of time for fast mover followers, sometimes late
movers to play catch up
• The speed at which the pioneering innovation is likely to
catch on matters as companies struggle with whether to
pursue a particular emerging opportunity aggressively or
cautiously
• There is a market penetration curve for every emerging
opportunity
• The curve has an inflection point at which all pieces of the
business model fall into place, buyer demand explodes, and
the market takes off
 To be a First Mover or Not
• The inflection point can come early on a fast-rising curve or
further up on a slow rising curve
• A company that seeks competitive advantage by being first
mover needs to ask:
➢Does market takeoff depend on the development of complementary
products or services that currently are not available?
➢Is new infrastructure required before buyer demand surge?
➢Will buyer need to learn new skills or adopt new behaviors? Will
buyers encounter high switching costs
➢Are there influential competitors in position to delay or derail the
efforts of a first mover
• When the answer to any of these questions are yes, then a
company must e careful not to pour too many resources into
getting ahead of the market opportunity
• The race is going to e a 10-year marathon than a 2–year sprint
 Choosing Appropriate Functional-Area
Strategies
• Involves strategic choices about how functional areas are managed to
support competitive strategy and other strategic moves
• The nature of functional strategies is dictated by the choice of competitive
strategy
• Low cost provider strategy needs:
• R&D and product design strategy that emphasizes cheap-to-incorporate features
and facilitates economical assembly
• production strategy that stresses capture of scale economies, high labor
productivity, efficient supply chain management, automated production
processes
• low budget marketing strategy
• High end differentiation strategy requires:
• production strategy geared to top-notch quality
• marketing strategy aimed at touting differentiating features and using advertising
and a trusted brand name to pull sales through distribution channels