McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved Chapter 6: Supplementing the Chosen Competitive Strategy Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University

“The sure path to oblivion is to stay where you are.” Bernard Fauber

“Successful business strategy is about actively shaping the game you play, not just playing the game you find.” Adam M. Brandenburger and Barry J. Nalebuff

1-4 Chapter Learning Objectives 1. Gain an understanding of how strategic alliances and collaborative partnerships can bolster a company’s competitive capabilities and resource strengths. 2. Become aware of the strategic benefits of mergers and acquisitions. 3. Understand when a company should consider using a vertical integration strategy to extend its operations to more stages of the overall industry value chain. 4. Understand the conditions that favor farming out certain value chain activities to vendors and strategic allies. 5. Recognize how and why different types of market situations shape business strategy choices. 6. Understand when being a first-mover or a fast-follower or a late-mover can lead to competitive advantage.

1-5 Chapter Roadmap Strategic Alliances and Partnerships Merger and Acquisition Strategies Vertical Integration Strategies: Operating Across More Stages of the Industry Value Chain Outsourcing Strategies: Narrowing the Boundaries of the Business Business Strategy Choices for Specific Market Situations Timing Strategic Moves – To be an Early Mover of a Late

1-6 Companies sometimes use strategic alliances or 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 full joint venture partnership. Strategic Alliances and Partnerships

1-7 Characteristics of a Strategic Alliance Strategic alliance – A formal agreement between two or more separate companies where there is  Strategically relevant collaboration of some sort  Joint contribution of resources  Shared risk  Shared control  Mutual dependence Alliances often involve  Joint marketing  Joint sales or distribution  Joint production  Design collaboration  Joint research  Projects to jointly develop new technologies or products

1-8 What Factors Make an Alliance Strategic? It is critical to a company’s achievement of an important objective It helps build, sustain, or enhance a core competence or competitive advantage It helps block a competitive threat It helps open up important market opportunities It mitigates a significant risk to a company’s business

1-9 To collaborate on technology development or new product development To fill gaps in technical or manufacturing expertise 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 via joint marketing agreements Why Are Strategic Alliances Formed?

1-10 Alliances Can Enhance a Firm’s Competitiveness Alliances and partnerships can help companies cope with two demanding competitive challenges  Racing against rivals to build a market presence in many different national markets  Racing against rivals 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

1-11 Get into critical country markets quickly to accelerate process of building a global presence Gain inside knowledge about unfamiliar markets and cultures Access valuable skills and competencies concentrated in particular geographic locations Establish a beachhead to participate in target industry Master new technologies and build new expertise faster than would be possible internally Open up expanded opportunities in target industry by combining firm’s capabilities with resources of partners Potential Benefits of Alliances to Achieve Global and Industry Leadership

1-12 Capturing the Benefits of Strategic Alliances Benefits from forming partnerships are a function of  Picking a good partner  Being sensitive to cultural differences  Recognizing an alliance must benefit both parties  Ensuring both parties live up to their commitments  Structuring the decision-making process so actions can be taken swiftly when needed  Managing the learning process and then adjusting the alliance agreement over time to fit new circumstances

1-13 Why Alliances Fail Ability of an alliance to endure depends on  How well partners work together  Success of partners in responding and adapting to changing conditions  Willingness of partners to renegotiate the bargain Reasons for alliance failure  Diverging objectives and priorities of partners  Inability of partners to work well together  Changing conditions rendering purpose of alliance obsolete  Emergence of more attractive technological paths  Marketplace rivalry between one or more allies

1-14 Test Your Knowledge Which one of the following is not a factor that makes an alliance “strategic” as opposed to just a convenient business arrangement? A. The alliance involves joint contribution of resources, shared risk, and is mutually beneficial. B. The alliance helps block a competitive threat or open up new market opportunities. C.The alliance helps mitigate a significant risk to a company’s business. D. The alliance helps build, enhance, or sustain a core competence or competitive advantage. E. The alliance is critical to the company’s achievement of an important objective.

1-15 Merger – Combination and 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 Merger-acquisition strategy  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 Merger and Acquisition Strategies

1-16 To create a more cost-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 or competitive capabilities To invent a new industry and lead the convergence of industries whose boundaries are blurred by changing technologies and new market opportunities Objectives of Mergers and Acquisitions

1-17 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 Pitfalls of Mergers and Acquisitions

1-18 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 Activities, Costs, & Margins of Suppliers Buyer/User Value Chains Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners

1-19 Strategic Advantages of Backward Integration Generates cost savings only if volume needed is big enough to capture efficiencies of suppliers Potential to reduce costs exists when  Suppliers have sizable profit margins  Item supplied is a major cost component  Resource requirements are easily met Can produce a differentiation-based competitive advantage when it results in a better quality part Reduces risk of depending on suppliers of crucial raw materials / parts / components

1-20 Strategic Advantages of Forward Integration To gain better access to end users and better market visibility To compensate for undependable distribution channels which undermine steady operations To offset the lack of a broad product line, a firm may sell directly to end users To bypass regular distribution channels in favor of direct sales and Internet retailing which may  Lower distribution costs  Produce a relative cost advantage over rivals  Enable lower selling prices to end users

1-21 Strategic Disadvantages of Vertical Integration Boosts resource requirements Locks firm deeper into same industry Results in fixed sources of supply and less flexibility in accommodating buyer demands for product variety Poses all types of capacity-matching problems May require radically different skills / capabilities Reduces flexibility to make changes in component parts which may lengthen design time and ability to introduce new products

1-22 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 Pros and Cons of Integration vs. De-Integration Many companies are finding that de-integrating value chain activities is a more flexible, economic strategic option!

1-23 Outsourcing Strategies Outsourcing involves having outsiders perform certain value chain activities rather than performing them internally Internally Performed Activities Contract Manufacturers Vendors with specialized expertise Distributors or Retailers Concept

1-24 Activity can be performed better or more cheaply by outside specialists Activity is not crucial to achieve a sustainable competitive advantage Risk exposure to changing technology and/or changing buyer preferences is reduced It improves firm’s ability to innovate Operations are streamlined to  Improve flexibility  Cut time to get new products into the market It increases firm’s ability to assemble diverse kinds of expertise speedily and efficiently Firm can concentrate on “core” value chain activities that best suit its resource strengths When Does Outsourcing an Activity Make Strategic Sense?

1-25 Farming out too many or the wrong activities, thus  Hollowing out capabilities  Losing touch with activities and expertise that determine overall long-term success The Big Risk of Outsourcing

Matching Strategy to a Company’s Situation Most important drivers shaping a firm’s strategic options fall into two categories Firm’s internal resource strengths and weaknesses Nature of industry and competitive conditions

Matching a Company’s Strategy to Different Market Conditions Fragmented Markets Turbulent Markets Freshly Emerging Markets Rapidly Growing Markets Mature, Slow- Growth Markets Stagnant or Declining Markets

1-28 New and unproven market Proprietary technology Lack of consensus regarding which of several competing technologies will win out Low entry barriers Experience curve effects may permit cost reductions as volume builds Buyers are first-time users and marketing involves inducing initial purchase and overcoming customer concerns First-generation products are expected to be rapidly improved so buyers delay purchase until technology matures Possible difficulties in securing raw materials Firms struggle to fund R&D, operations and build resource capabilities for rapid growth Features of an Emerging Industry

1-29 Strategy Options for Competing in Emerging Industries Win early race for industry leadership by employing a bold, creative strategy Push hard to perfect technology, improve product quality, and develop attractive performance features Consider merging with or acquiring another firm to  Gain added expertise  Pool resource strengths When technological uncertainty clears and a dominant technology emerges, try to capture any first-mover advantages by moving quickly Form strategic alliances with  Companies having related technological expertise or  Key suppliers

1-30 Strategy Options for Competing in Emerging Industries (continued) Pursue new customers and user applications Enter new geographical areas Make it easy and cheap for first-time buyers to try product Focus advertising emphasis on  Increasing frequency of use  Creating brand loyalty Use price cuts to attract price-sensitive buyers

1-31 Strategic Hurdles for Companies in Emerging Industries Raising capital to finance initial operations until  Sales and revenues take off  Profits appear  Cash flows turn positive Developing a strategy to ride the wave of industry growth  What market segments to pursue  What competitive advantages to go after Managing the rapid expansion of facilities and sales to position a company to contend for industry leadership Defending against competitors trying to horn in on the company’s success

1-32 What Is the Key to Success for Competing in Rapidly Growing Markets? A company needs a strategy predicated on growing faster than the market average so it Can boost its market share and Improve its competitive standing vis-à- vis rivals

1-33 Strategy Options for Competing in Rapidly Growing Markets Drive down costs per unit to enable price reductions that attract droves of new customers Pursue rapid product innovation to  Set a company’s product offering apart from rivals  Incorporate attributes to appeal to growing numbers of customers Gain access to additional distribution channels and sales outlets Expand a company’s geographic coverage Expand product line to add models/styles to appeal to a wider range of buyers

1-34 Test Your Knowledge Which one of the following is not likely to be a suitable strategy option for companies competing in rapid-growth industries? A. Driving down costs per unit so as to enable price reductions that attract droves of new customers B. Pursuing rapid product innovation, both to set a company’s product offering apart from rivals and to incorporate attributes that appeal to growing numbers of customers C. Gaining access to additional distributional channels and sales outlets D. Expanding the product line to add models/styles that appeal to a wider range of buyers E. Putting top priority on heavy advertising and other marketing-related actions calculated to strongly differentiate its product offering from rivals

1-35 Slowing demand breeds stiffer competition More sophisticated buyers demand bargains Greater emphasis on cost and service “Topping out” problem in adding production capacity Product innovation and new end uses harder to come by International competition increases Industry profitability falls Mergers and acquisitions reduce number of rivals Industry Maturity: The Standout Features

1-36 Strategy Options for Competing in a Mature Industry Prune marginal products and models Emphasize innovation in the value chain Strong focus on cost reduction Increase sales to present customers Purchase rivals at bargain prices Expand internationally Build new, more flexible competitive capabilities

1-37 Strategic Pitfalls in a Maturing Industry Employing a ho-hum strategy with no distinctive features thus leaving firm “stuck in the middle” Being slow to mount a defense against stiffening competitive pressures Concentrating on short-term profits rather than strengthening long-term competitiveness Being slow to respond to price-cutting Having too much excess capacity Overspending on marketing efforts Failing to aggressively  Invest in product / process innovations  Pursue cost reductions

1-38 Stagnant or Declining Industries: The Standout Features Demand grows more slowly than economy as a whole (or even declines) Advancing technology gives rise to better- performing substitute products or lower costs Customer group shrinks Changing lifestyles and buyer tastes Rising costs of complementary products Competitive battle ensues among industry members for the available business

1-39 Pursue focus strategy aimed at fastest growing market segments Stress differentiation based on quality improvement or product innovation Work diligently to drive costs down  Cut marginal activities from value chain  Use outsourcing  Redesign internal processes to exploit e-commerce  Consolidate under-utilized production facilities  Add more distribution channels  Close low-volume, high-cost distribution outlets  Prune marginal products Strategy Options for Competing in a Stagnant or Declining Industry

1-40 End-Game Strategies for Declining Industries An end-game strategy can take either of two paths  Slow-exit strategy involving  Gradual phasing down of operations  Getting the most cash flow from the business  Fast-exit strategy involving  Disengaging from an industry during early stages of decline  Quick recovery of as much of a company’s investment as possible

1-41 Features of Turbulent Markets Rapid-fire technological change Short product life-cycles Entry of important new rivals Frequent launches of new competitive moves Rapidly evolving customer expectations

Figure 6.1: Meeting the Challenge of High-Velocity Change

1-43 Invest aggressively in R&D Keep products/services fresh and exciting Develop quick response capabilities  Shift resources  Adapt competencies  Create new competitive capabilities  Speed new products to market Use strategic partnerships to develop specialized expertise and capabilities Initiate fresh actions every few months Strategy Options for Competing in High-Velocity Markets

1-44 Cutting-edge expertise Speed in responding to new developments Collaboration with others Agility Innovativeness Opportunism Resource flexibility First-to-market capabilities Keys to Success in Competing in High Velocity Markets

1-45 Competitive Features of a Fragmented Industry Absence of market leaders with large market shares or widespread buyer recognition Product/service is delivered to neighborhood locations to be convenient to local residents Buyer demand is so diverse that many firms are required to satisfy buyer needs Low entry barriers Absence of scale economies Market for industry’s product/service may be globalizing, thus putting many companies across the world in same market arena Exploding technologies force firms to specialize just to keep up in their area of expertise Industry is young and crowded with aspiring contenders, with no firm having yet developed recognition to command a large market share

1-46 Examples of Fragmented Industries Book publishing Landscaping and plant nurseries Auto repair Restaurants and fast food Public accounting Apparel manufacturing and retailing Hotels and motels Health and medical care Paperboard boxes Furniture

1-47 Competing in a Fragmented Industry: The Strategy Options Construct and operate “formula” facilities Become a low-cost operator Specialize by product type Specialize by customer type Focus on limited geographic area

1-48 Test Your Knowledge Which of the following is unlikely to be a promising option for competing in a fragmented industry? A. Employing deep price discounting, extensive advertising, and other muscle-flexing maneuvers to gain market dominance in a select few country markets B. Specializing by product type or becoming a low-cost operator C. Specializing by customer type D. Focusing on a limited geographic area E. Constructing and operating "formula" facilities at many different locations

1-49 For Discussion: Your Opinion What classification would you assign to each of the following industries—emerging, rapid- growth, mature/slow-growth, stagnant/declining, high-velocity/turbulent, or fragmented? A. Dry cleaning industry B. Beef industry C. Mobile phone industry D. Computer software industry E. Solar energy production industry

1-50 For Discussion: Your Opinion Assume you are charged with crafting a strategy for XM Satellite Radio. What strategy alternatives would you be inclined to give strong consideration? What strategy alternatives would you be inclined to reject as unsuitable? Justify your answer.

1-51 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 Advantages

1-52 What Is a Blue Ocean Strategy? Seeks to gain a dramatic, durable competitive advantage by  Abandoning efforts to beat out competitors in existing markets and  Inventing a new industry or distinctive market segment to render existing competitors largely irrelevant and  Allowing a company to create and capture altogether new demand

What Is Different About a Blue Ocean? Typical Market Space Industry boundaries are defined and accepted Competitive rules are well understood by all rivals Companies try to outperform rivals by capturing a bigger share of existing demand Blue Ocean Market Space Industry does not exist yet Industry is untainted by competition Industry offers wide-open opportunities if a firm has a product and strategy allowing it to  Create new demand and  Avoid fighting over existing demand

1-54 For Discussion: Your Opinion Which of the following is the best example of a blue ocean strategy — Apple’s entry into digital music players its iPod models or Starbuck’s entry into breakfast foods or Audi’s recent move to bring out a luxury SUV? Explain.

1-55 First-Mover Disadvantages Moving early can be a disadvantage (or fail to produce an advantage) when  When costs of pioneering are more than being an imitative follower and only negligible learning/experience curve benefits accrue to the leader  Innovator’s products are primitive, not living up to buyer expectations  Demand side of the market is skeptical about the benefits of new technology/product of a first- mover  Rapid technological change allows followers to leapfrog pioneers

1-56 To Be a First-Mover or Not? Key issue – Is the race to market leadership in an industry a marathon or a sprint? Seeking a competitive advantage by being a first-mover 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?  Will buyers encounter high switching costs?  Are there influential competitors in a position to delay or derail the efforts of a first-mover?