Supplementing the Chosen Competitive Strategy

Strategic Alliances Joint Ventures Vertical Integration Outsourcing Mergers & Acquisitions

Cooperative Strategies Strategic Alliance – formal agreement between two or more companies in which there is a strategically relevant collaboration. Joint Venture – when two or more firms contribute resources to the creation of a third organization in an effort to pursue some mutually beneficial activity.

Advantages of Alliances/JVs Gain access to new global markets Gain knowledge about unfamiliar markets or cultures Gain access or master new technologies Gain access to complementary resources

Keys to Alliance/JV Success Picking the right partner Sensitivity to cultural differences Must be win-win Managing the learning process Maintaining flexibility

Who Makes a Geo? Geo Storm was actually manufactured by Isuzu. The Storm is the Isuzu Impulse. Geo Prizm = Toyota Corolla Geo Tracker = Suzuki Sidekick Geo Metro = Suzuki Esteem or Swift w/hatchback No Geo cars were actually made by General Motors. They were all imported from foreign manufacturers.

Vertical Integration Operating in more than one stage of the industry value chain partial/taper or full integration forward or backward Benefits can not be held hostage – reduces buyer/supplier power greater control over operations access to new business/technologies reduce procurement and sales efforts Risks increased overhead, capital and administrative costs loss of flexibility different competencies may be required unbalanced capacities and increased risk

Vertical Integration Will add value when: Enhance critical activities that lower costs or increase differentiation Benefits exceed the costs and enhances competitive capabilities

Outsourcing Farming out specific activities to others, allowing the firm to focus on more critical activities and core competencies

Outsourcing Works When: Others can do it better and cheaper Not a core competency Reduces the companies’ risk to technology changes Improves the company’s innovation Streamlines operations

Mergers and Acquisitions Reasons of Acquisitions Cost Efficiencies Geographic Expansion Product/Market Extensions Increased Speed Lower Risk

Mergers and Acquisitions Problems with Acquisitions Integration of two firms Overpayment/Debt Overestimation of Synergy Overdiversification Managerial energy absorption Become too large Substitute for innovation

Mergers and Acquisitions Results Poor Performance Who Wins? Acquired Firm Shareholders

Monday October 27th WSJ Bank of American – Boston Fleet Financial BoA down $8.29, or 10%, BFF rose 23% Anthem – WellPoint Health Networks Anthem down 8.2%, WellPoint up 8.8% United Health – MidAtlantic Med Services UH down 4.9%, MAMS up 9.7%

Failures of Acquisitions 30 - 40% average acquisition premium Acquiring firm’s value drops 4% in the 3 months following acquisitions 30 - 50% of acquisitions are later divested Acquirers underperform S&P by 14%, peers by 4% 3 month performance before and after 30% substantial losses, 20% some losses, 33% marginal returns, 17% substantial returns

Why, then, do executives acquire? Often, for personal reasons Firm size and executive compensation are related When do executives loss their jobs? 1) Acquired - larger firms harder to acquire 2) Performing poorly - employment risk is reduced as returns are less volatile

Competitive Dynamics Competitive action within an industry Strategic and tactical action does not occur within a vacuum What industries have high competitive dynamics? What sort of actions/tactics are taken?

Drivers of Competitive Dynamics numerous/equally balanced competitors slow growth high fixed/storage costs lack of differentiation/switching costs high exit barriers Etc… Competitive Dynamics Rivalry

Competition in the Pharmaceutical Industry Reps quadrupled to 120K last 10-15 years 12B on sales force, 2.76B on ads Managed care bet – Pfizer from 14th to 1st 529 visits yearly, average length – 2.5 min 8% remember Glaxo can reach 80% of the Drs in a week “Is this necessary. No, but if my competitors do it and I can’t, then I’m at a disadvantage. This has been an arms race in the worst possible manner.”

Types of Competitive Responses First Movers - initial competitive action advantages and disadvantages Fast Followers or Capable Competitors- respond quickly to first movers Late Entrants - day late and a dollar short