SUPPLEMENTING THE CHOSEN COMPETITIVE STRATEGY: OTHER IMPORTANT STRATEGIC CHOICES Chapter 6 MGT 4380

Strategic Management Process

Again, what is a 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 Principal Offensive Strategy Options Adopt and improve on good ideas of other firms Attack profitable market segments of key rivals Capture unoccupied or less contested markets Attack the competitive weaknesses of rivals Offer an equal or better product at a lower price Pursue continuous product innovation 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 Small local and regional firms with limited capabilities Market leaders that are vulnerable Struggling enterprises that are on the verge of going under Runner-up firms with weaknesses in areas where the challenger is strong Best Targets for Offensive Attacks

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 economy-priced models Announce new products or price changes Grant volume discounts or better financing terms Defending a Competitive Position Introduce new features Add new models Broaden product line to fill vacant niches

Signaling Challengers that Retaliation Is Likely Making a strong counterresponse to weak competitor moves to enhance the firm’s image as a tough defender Publicly announcing management’s strong commitment to maintain the firm’s present market share Maintaining a war chest of cash and marketable securities Publicly committing the firm to a policy of matching competitors’ terms or prices Dissuading or diverting competitors

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 powerful suppliers are inclined to raise prices at every opportunity When suppliers have large profit margins When the requisite technological skills are easily mastered or acquired When the item being supplied is a major cost component Backward Vertical Integration Situations

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? Improve supply chain efficiency Gain economies of scale in production and/or marketing Acquire or improve market access via joint marketing agreements Reasons for Alliances Expedite development of new technologies or products Overcome technical or manufacturing expertise deficits Bring together personnel to create new skill sets and capabilities

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? To create a more cost-efficient operation out of the combined firms To expand a firm’s geographic coverage To extend the firm’s business into new product categories To gain quick access to new technologies or other resources and competitive capabilities 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.