chapter
6
SUPPLEMENTING
THE CHOSEN
COMPETITIVE
STRATEGY—
OTHER IMPORTANT
STRATEGY CHOICES
Student Version
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Choosing Strategy Actions
that Complement a Firm’s
Competitive Approach

Decisions regarding the firm’s operating scope and
how to best strengthen its market standing must be
made:
 Whether and when to go on the offensive and initiate aggressive
strategic moves to improve the firm’s market position.
 Whether and when to employ defensive strategies to protect the
firm’s market position.
 When to undertake strategic moves based upon whether it is
advantageous to be a first mover or a fast follower or a late
mover.
6-2
Choosing Strategy Actions
that Complement a Firm’s
Competitive Approach (cont’d)

Decisions regarding the firm’s operating scope and
how to best strengthen its market standing must be
made:
 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.
6-3
Launching Strategic Offensives to
Improve a Company’s Market Position
 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.
6-4
Blue Ocean Strategy—
A Special Kind of Offensive
 Involves
a firm seeking sizable and durable
competitive advantage by abandoning its
existing markets and, then, inventing a new
industry or distinctive market segment in
which that firm has exclusive access to new
demand.
 By “reinventing the circus,” Cirque du Soleil annually
attracts an audience of millions of people who typically
do not attend circus events.
6-5
Using Defensive Strategies to Protect
a Company’s Market Position and
Competitive Advantage
 Defensive
strategies help 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.
6-6
Signaling Challengers that
Retaliation Is Likely
 Publicly
announce management’s strong
commitment to maintain the firm’s present
market share
 Publicly commit firm to policy of
matching rivals’ terms or prices
 Maintain war chest of cash reserves
 Make occasional counterresponse
to moves of weaker rivals
6-7
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
6-8
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 change or buyer needs
allow followers to leapfrog pioneers
6-9
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?
6-10
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
6-11
Integrating Backward to Achieve
Greater Competitiveness
 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
6-12
When Backward Vertical Integration
Becomes a Consideration
 Potential
situations that create opportunities
for cost reduction through backward vertical
integration:
 When suppliers have large profit margins
 Where the item being supplied is a major cost
component
 Where the requisite technological skills are easily
mastered or acquired
 When powerful suppliers are inclined to raise prices at
every opportunity
6-13
Integrating Forward to Enhance
Competitiveness
 Gain
better access to end users
 Improve market visibility
 Include the purchasing experience as a
differentiating feature
6-14
Forward Vertical Integration
and Internet Retailing
 Direct
selling and Internet retailing have
appeal when there is 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.
6-15
Disadvantages of a Vertical
Integration Strategy
 Boosts capital investment in the
industry
 Increases business risk if industry
growth and profits sour
 May slow technological advances if
the vertically integrated company is
saddled with older technology
 Poses all types of capacity-matching
problems
 May require radically different skills
and business capabilities
6-16
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.
6-17
Outsourcing Strategies: Narrowing
the Scope of Operations (cont’d)
 The
Big Risk of Outsourcing:
 Farming out the wrong types of activities
 Hollowing out strategically important capabilities
ultimately damages a firm’s competitiveness and longterm success in the marketplace
6-18
Strategic Alliances and Partnerships
 Strategic
Alliance
 Is 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.
6-19
Reasons for Firms to Enter
into Strategic Alliances

To expedite development of new technologies or
products

To overcome deficits in technical or manufacturing
expertise

To bring together personnel of each partner 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 through joint
marketing agreements
6-20
Reasons for Firms to Continue
in Strategic Alliances
 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, perhaps because new
opportunities for learning are emerging.
 Experience
indicates that:
 Alliances stand a reasonable chance of helping a
firm reduce its competitive disadvantage but very
rarely have alliances proved a strategic option for
gaining a durable competitive edge over rivals.
6-21
Failed Strategic Alliances and
Cooperative Partnerships
 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
6-22
Merger and Acquisition Strategies
 An
attractive strategic option for achieving
operating economies, strengthening
competencies, and opening avenues to new
market opportunities:
 Merger
 The
combining of two or more firms into a single entity, with the
newly created firm often taking on a new name
 Acquisition
 The
combination in which one firm, the acquirer, purchases
and absorbs the operations of another, the acquired firm
6-23
Typical Objectives of Mergers
and Acquisitions
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
6-24