SUPPLEMENTING THE CHOSEN
COMPETITIVE STRATEGY: OTHER
IMPORTANT STRATEGIC CHOICES
Chapter 6
MGT 4380
Strategic Management Process
Again, what is a competitive strategy?
Competitive Strategy
Concerns management’s "game plan" for competing
successfully and securing a competitive advantage over
rivals (strategy as…PLAN)
Represents the firm’s specific efforts to provide superior
value to customers by offering:
An equally good product at a lower price (low cost)
A superior product with unique features perceived
as worth paying more for (differentiation)
An attractive overall mix of price, features, quality, service, and
other appealing attributes (best cost)
Strategic Actions to Complement a Firm’s
Competitive Strategy
Decisions regarding the firm’s operating scope and how to
best strengthen its market standing must be made:
Whether to initiate an aggressive offensive or defensive strategy to
expand or protect market share
When to undertake strategic moves based upon whether it is
advantageous to be a first mover or a fast follower or a late mover.
Whether to integrate backward or forward into more stages of the
industry value chain.
Which value chain activities, if any, should be outsourced.
Whether to enter into strategic alliances or partnership
arrangements with other enterprises.
Whether to bolster the firm’s market position by merging with or
acquiring another company in the same industry
When to be offensive?
Aggressive strategic offensives are called for when a firm:
Spots opportunities to gain profitable market share at the expense
of rivals
Has no choice but to try to whittle away at a strong rival’s
competitive advantage
Can reap the benefits a competitive edge offers—a leading market
share, excellent profit margins, and rapid growth
The best offensives use a firm’s resource strengths to attack
its rivals’ weaknesses
E.g., David v. Goliath
Choosing the Basis for Competitive Attack
Attack the competitive
weaknesses of rivals
Offer an equal or better
product at a lower price
Adopt and improve on
good ideas of other firms
Principal
Offensive
Strategy
Options
Attack profitable market
segments of key rivals
Pursue continuous
product innovation
Capture unoccupied or
less contested markets
Leapfrog competitors to
be the first to market
Use hit-and-run or guerrilla
marketing tactics
Launch a preemptive strike
on a market opportunity
Choosing Which Rivals to Attack
Market leaders that are vulnerable
Best Targets
for Offensive
Attacks
Runner-up firms with weaknesses in
areas where the challenger is strong
Struggling enterprises that are on
the verge of going under
Small local and regional firms with
limited capabilities
Blue Ocean Strategy—A Special Kind of
Offensive
Discover or invent new industry segments that
create new demand
By “reinventing the circus,” Cirque du Soleil annually
attracts an audience of millions of people who typically
do not attend circus events
An alternative to battling for existing market
share
When to be defensive?
A defensive strategy is appropriate when a
firm anticipates an attack from a rival
Help to fortify a competitive position by:
Lowering the risk of being attacked
Weakening the impact of any attack that occurs
Influencing challengers to redirect their
competitive efforts toward other rivals
Good defensive strategies help protect
competitive advantage but rarely are the basis
for creating it
Blocking the Avenues Open to Challengers
Maintain economypriced models
Introduce new
features
Add new models
Broaden product
line to fill vacant
niches
Defending a
Competitive
Position
Announce new
products or price
changes
Grant volume
discounts or better
financing terms
Signaling Challengers that Retaliation Is
Likely
Publicly announcing management’s
strong commitment to maintain the
firm’s present market share
Dissuading
or diverting
competitors
Publicly committing the firm to a
policy of matching competitors’
terms or prices
Maintaining a war chest of cash
and marketable securities
Making a strong counterresponse to
weak competitor moves to enhance
the firm’s image as a tough defender
Timing a Company’s Offensive and
Defensive Strategic Moves
When to make a strategic move is often as crucial as
what move to make.
First-mover advantages arise when:
Pioneering helps build a firm’s image and reputation with
buyers
Early commitments (technology, market channels)
produce an absolute cost advantage over rivals
First-time customers remain strongly loyal in making
repeat purchases
Moving first constitutes a preemptive strike, making
imitation extra hard or unlikely
The Potential for Late-Mover Advantages
or First-Mover Disadvantages
Moving early can be a disadvantage (or fail to
produce an advantage) when:
Pioneering leadership is more costly than imitation
Innovators’ products are primitive, and do not live up to
buyer expectations
Potential buyers are skeptical about the benefits of new
technology/product of a first mover
Rapid changes in technology or buyer needs allow
followers to leapfrog pioneers
Deciding Whether to Be an Early Mover or
Late Mover
Key Issue:
Is the race to market leadership a marathon or a sprint?
Seeking first-mover competitive advantage
involves addressing several questions:
Does market takeoff depend on development of complementary
products or services not currently available?
Is new infrastructure required before buyer demand can surge?
Will buyers need to learn new skills or adopt new behaviors?
Are there influential competitors in a position to delay or derail the
efforts of a first mover?
Must have the resources and capabilities to move first!
Let’s take a 5 minute break
Vertical Integration: Operating Across
More Industry Value Chain Segments
Involves extending a firm’s competitive and
operating scope within the same industry
Backward into sources of supply
Forward toward end users of final product
Can aim at either full or partial integration
Why Vertically-Integrate?
The two best reasons for vertically integrating
into more value chain segments:
Strengthen the firm’s competitive position
Boost profitability
Backward Integration
For backward integration to boost
profitability a firm must be able to:
Achieve the same scale economies
as outside suppliers
Match or beat suppliers’ production
efficiency with no drop in quality
When to backward integrate?
When suppliers have large
profit margins
Backward
Vertical
Integration
Situations
When the item being supplied
is a major cost component
When the requisite technological skills
are easily mastered or acquired
When powerful suppliers are inclined
to raise prices at every opportunity
Forward Integration
Gain better access to end users
Improve market visibility
Include the purchasing experience as a
differentiating feature
When to forward integrate?
Direct selling and Internet retailing have
appeal when there is no potential to:
Lower distribution costs
Gain a cost advantage over rivals
Produce higher margins
Allow for lower prices charged to end users
Competing directly against distribution allies
can create channel conflict and signal a weak
commitment to dealers.
Disadvantages of a Vertical Integration
Strategy
Increases a firm’s capital investments in its industry
Increases a firm’s business risk if industry growth
and profits sour
Can slow the adoption of technical advances for vertically
integrated firms using older technologies and facilities
Results in less flexibility to accommodate changing buyer
preferences when a new product design requires parts
a firm doesn’t make in-house.
Creates capacity-matching problems among integrated
in-house component manufacturing units
May require development of radically different skills
and business capabilities
Outsourcing Strategies:
Narrowing the Scope of Operations
Outsourcing an activity is a consideration when:
It can be performed better or more cheaply by outside specialists.
It is not crucial to achieve a sustainable competitive advantage and will
not hollow out capabilities, core competencies, or technical know-how of
a firm.
It improves organizational flexibility and speeds time to market.
It reduces a firm’s risk exposure to changing technology and/or buyer
preferences.
It allows a firm to concentrate on its core business, leverage its key
resources and core competencies, and do even better what it already
does best.
Risks of Outsourcing
The Big Risks of Outsourcing:
Farming out the wrong types of activities
Hollowing out strategically important capabilities
ultimately damages a firm’s competitiveness and
long-term success in the marketplace
Can be associated with negative business
practices
Strategic Alliances
Strategic Alliance—a formal collaborative agreement in which
two or more firms join forces to achieve mutually beneficial
strategic outcomes:
A strategically relevant collaboration
A joint contribution of resources
An assumption of a shared risk
An agreement to shared control
A recognition of mutual dependence
Is attractive in that it allows firms to bundle resources and
competencies that are more valuable in a joint effort than
when kept separate
A joint venture is a specific strategic alliance wherein a new
entity is created in partnership with two or more firms
Why enter a strategic alliance?
Expedite development
of new technologies
or products
Overcome technical
or manufacturing
expertise deficits
Bring together personnel
to create new skill sets
and capabilities
Improve supply chain
efficiency
Reasons for
Alliances
Gain economies of
scale in production
and/or marketing
Acquire or improve
market access via joint
marketing agreements
Why continue a strategic alliance?
Alliances are likely to be long-lasting when:
They involve collaboration with suppliers or distribution
allies
Both parties conclude that continued collaboration
is in their mutual interest
Experience indicates that:
Alliances can help reduce a firm’s competitive
disadvantages over rivals
But rarely help a firm gain a competitive advantage over
rivals
Why do strategic alliances fail?
Common causes for the failure of 60–70%
of alliances each year:
Diverging objectives and priorities
An inability to work well together
Changing conditions that make the purpose of the
alliance obsolete
The emergence of more attractive technological paths
Marketplace rivalry between one or more allies
What are the dangers of strategic
alliances?
The Achilles’ heel of alliances and cooperative
partnerships is becoming dependent on other
companies for essential expertise and
capabilities
Ultimately, a firm must develop its own
resources and capabilities to protect its
competitiveness and capabilities to build and
maintain its competitive advantage
Merger & Acquisition Strategies
An attractive strategic option for achieving operating
economies, strengthening competencies, and
opening avenues to new market opportunities:
Merger—combining two or more firms into a
single entity, with the newly created firm often
taking on a new name
Acquisition—combination in which one firm, the
acquirer, purchases and absorbs the operations
of another, the acquired firm
Most mergers are actually acquisitions
What are the typical objectives of M&As?
1. To create a more cost-efficient operation
out of the combined firms
2. To expand a firm’s geographic coverage
3. To extend the firm’s business into new product
categories
4. To gain quick access to new technologies or other
resources and competitive capabilities
5. To lead the convergence of industries whose
boundaries are being blurred by changing
technologies and new market opportunities
Why do some M&As fail?
Cost savings are smaller than expected.
Gains in competitive capabilities take much longer to
realize or may never materialize.
Efforts to mesh the corporate cultures can stall
because of resistance from organization members.
Managers and employees at the acquired company
may continue to do things as they were done prior to
the acquisition.
Key employees of the acquired firm may leave.