Crafting a Strategy

Outline Collaborative Strategies: Strategic Alliances and Partnerships Merger and Acquisition Strategies Vertical Integration Strategies Outsourcing Strategies Offensive Strategies Defensive Strategies Web Site Strategies

A Company’s Menu of Strategy Options

What Is “Competitive Strategy”? Deals with a company’s business plans to compete successfully Specific efforts to please customers Offensive and defensive moves to counter maneuvers of rivals Responses to prevailing market conditions Initiatives to strengthen its market position

Strategy and Competitive Advantage Convince customers firm’s product / service offers superior value An acceptable product at a bargain price A superior product worth paying more for A more-value-for-the-money product (an upscale product at a “low” price

The Five Generic Competitive Strategies

Low-Cost Provider Strategies Include features and services in product offering that buyers consider essential Find approaches to achieve a cost advantage in ways difficult for rivals to copy or match

The Two Options for Turning a Low-Cost Advantage into Higher Profits Option 1: Use lower-cost edge to under-price competitors Attract price-sensitive buyers in enough numbers to increase total profits despite a lower profit margin on each unit sold Option 2: Maintain present price, be content with present market share, and use lower-cost edge to Earn a higher profit margin on each unit sold, thereby increasing total profits

Keys to Success in Achieving Low-Cost Leadership Scrutinize each value chain activity to identify what factors drive the costs of performing the activity Identify cost drivers Find ways to restructure value chain to eliminate nonessential work steps and low-value activities Pursue investments in resources and capabilities that promise to drive costs out of the business

Characteristics of a Low-Cost Provider Cost conscious corporate culture Broad employee participation in cost-control efforts Ongoing efforts to benchmark costs Intensive scrutiny of budget requests Programs promoting continuous cost improvement

Differentiation Strategies Incorporate differentiating features that cause buyers to prefer firm’s product or service over brands of rivals Finding ways to differentiate that create value for buyers and that are not easily matched or cheaply copied by rivals Not spending more to achieve differentiation than the price premium that customers are willing to pay for all the differentiating extras

Types of Differentiation Themes Multiple features – Microsoft Windows and Office Wide selection and one-stop shopping – Home Depot and Amazon.com Engineering design and performance – Mercedes and BMW Prestige – Rolex Product reliability – Johnson & Johnson Technological leadership – 3M Corporation Top-of-line image – Ralph Lauren and Starbucks

Where to Find Differentiation Opportunities in the Value Chain Product R&D and product design activities Production process / technology-related activities Manufacturing / production activities Distribution-related activities Marketing, sales, and customer service activitiesPurchasing and procurement activities Activities, Costs, & Margins of Forward Channel Allies Internally Performed Margins Suppliers Buyer/User Value Chains

When Does a Differentiation Strategy Work Best? There are many ways to differentiate a product that have value and please customers Buyer needs and uses are diverse Few rivals are following a similar differentiation approach Technological change and product innovation are fast-paced, thus opening up an ongoing stream of new ways to differentiate

Best-Cost Provider Strategies Combine a strategic emphasis on low-cost with a strategic emphasis on differentiation Make an upscale product at a lower cost Give customers more value for the money Deliver superior value by meeting or exceeding buyer expectations on product attributes and beating their expectations on what price they will have to pay Be the low-cost provider of a product with good-to-excellent product attributes, then use cost advantage to underprice comparable brands

Focus / Niche Strategies Involve concentrated attention on a narrow piece of the total market Serve needs of niche buyers better than rivals Choose a market niche where buyers have distinctive preferences, special requirements, or unique needs Develop unique capabilities and product attributes to serve needs of target buyer segment

Approaches to Defining a Market Niche Geographic uniqueness Specialized requirements in using product/service Special product attributes appealing only to niche buyers

Examples of Focus Strategies eBay Online auctions Porsche Sports cars

Collaborative Strategies: Strategic Alliances and Partnerships Companies sometimes use 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 formal joint venture.

Why Cooperative Strategies Are Integral to a Firm’s Competitiveness Two demanding competitive challenges are faced by many companies Global race to build a market presence in many different national markets Race 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

Purposes of Strategic Alliances To acquire or improve market access via joint marketing agreements To pursue joint sales or distribution To gain economies of scale in production To collaborate on the design of new products To engage in joint research and development To form technology licensing agreements

Merger and Acquisition Strategies Merger – Involves a 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 Characteristics of mergers and acquisitions 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 pave way for acquiring firm to gain more market share and create a more 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

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 Performed Activities, Costs, & Margins Margins of Suppliers Buyer/User Value Chains Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners

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 Involves withdrawing from certain value chain activities and relying on outsiders to supply needed products, support services, or functional activities Internally Performed Activities Suppliers Support Services Functional Activities Distributors or Retailers

Offensive Strategies Purposes of offensive strategies Improve market position Build a competitive advantage or widen an existing one Whittle away at a strong rival’s competitive advantage Gain profitable market share at the expense of rivals despite their resource strengths and capabilities

Types of Offensive Strategies 1. Offering an equally good or better product at a lower price 2. Leapfrogging competitors by being First adopter of next-generation technologies or First to market with next-generation products 3. Adopting and improving on good ideas of other companies 4. Attacking market segments where a key rival makes big profits 5. Attacking competitive weaknesses of rivals 6. Maneuvering around competitors and concentrating on capturing unoccupied or less contested market territory 7. Using hit-and-run tactics to grab market share from rivals 8. Launching a preemptive strike to secure an advantageous position that rivals are prevented from duplicating

Defensive Strategies Purposes of defensive strategies Lesson risk of being attacked Blunt impact of any attack that occurs Influence challengers to aim attacks at other rivals Defend a firm’s competitive position / advantage Protect valuable resources and capabilities from imitation Types of defensive strategies Block avenues open to challengers Signal challengers vigorous retaliation is likely

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

First-Mover Disadvantages Moving early can be a disadvantage (or fail to produce an advantage) when Costs of pioneering are sizable and loyalty of first time buyers is weak Innovator’s products are primitive, not living up to buyer expectations Rapid technological change allows followers to leapfrog pioneers