Corporate Level Strategy and Long Term Profitability

6-2 Concentrating on a Single Industry  The acquisition of additional business activities at the same level of the value chain is referred to as horizontal integration. This form of expansion contrasts with vertical integration by which the firm expands into upstream or downstream activities. Horizontal growth can be achieved by internal expansion or by external expansion through mergers and acquisitions of firms offering similar products and services.

6-3

6-4 Advantages of Horizontal Integration  Economies of scale - achieved by selling more of the same product, for example, by geographic expansion.  Economies of scope - achieved by sharing resources common to different products. Commonly referred to as "synergies."  Increased market power (over suppliers and downstream channel members)  Reduction in the cost of international trade by operating factories in foreign markets.

6-5 Disadvantages of Horizontal Integration  Horizontal integration by acquisition of a competitor will increase a firm's market share. However, if the industry concentration increases significantly then anti-trust issues may arise.  Aside from legal issues, another concern is whether the anticipated economic gains will materialize.  Finally, even when the potential benefits of horizontal integration exist, they do not materialize spontaneously.

6-6 BCG Growth-Share Matrix  The BCG Growth-Share Matrix is a portfolio planning model developed by Bruce Henderson of the Boston Consulting Group in the early 1970's. It is based on the observation that a company's business units can be classified into four categories based on combinations of market growth and market share relative to the largest competitor, hence the name "growth- share".

6-7  Market growth serves as a proxy for industry attractiveness, and relative market share serves as a proxy for competitive advantage. The growth-share matrix thus maps the business unit positions within these two important determinants of profitability.

6-8 BCG Growth-Share Matrix

6-9 Stars  High Market Share / High Market Growth  The company is well-established, and growth is exciting! There should be some strong opportunities here, and you should work hard to realize them.  For example, Apple Computer has a large share in the rapidly growing market for portable digital music players.

6-10 Cows  High Market Share / Low Market Growth The company is well-established so it's easier to get attention and exploit new opportunities. However it's only worth expending a certain amount of effort, because the market isn't growing, and your opportunities are limited.  Example: Microsoft Softwares

6-11 Question Marks  Low Market Share / High Market Growth These are the opportunities no one knows what to do with. They aren't generating much revenue right now because you don't have a large market share. But, they are in high growth markets so the potential to make money is there.  Hewlett-Packard’s small share of the digital camera market, behind industry leader Canon. However, this is a rapidly growing market.

6-12 Dogs  In these areas, the company’s market presence is weak, so it's going to take a lot of hard work to get noticed. The company won't enjoy the scale economies of the larger players, so it's going to be difficult to make a profit. And because market growth is low, it's going to take a lot of hard work to improve the situation.  Example is RC Cola

6-13 Business Strategy Choices to Complement the Company’s Competitive Approach  Strategy considerations in rounding out the company’s overall business strategy include Whether to enter into strategic alliances or partnerships Whether to pursue mergers or acquisitions Whether to integrate backward or forward into more stages of the industry value chain

6-14 Business Strategy Choices to Complement the Company’s Competitive Approach Whether to outsource certain value chain activities Whether and when to initiate offensive strategies to improve the company’s market position Whether and when to employ defensive strategies to protect the company’s market position Choosing when to undertake strategic moves—whether to be a first-mover, fast follower or a late-mover

6-15 Strategic Alliances and Collaborative Partnerships  Strategic Alliance - formal collaborative arrangements where two or more companies join forces to achieve mutually beneficial strategic outcomes Strategically relevant collaboration joint contribution of resources shared risk shared control mutual dependence

6-16 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 companies into a single entity, with the newly created company often taking on a new name Acquisition -- is a combination in which one company, the acquirer, purchases and absorbs the operations of another, the acquired

6-17 Vertical Integration: Operating Across More Industry Value Chain Segments  Extend a firm’s competitive 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

6-18  Crude oil deposits  Drilling and extracting crude  Transporting it around the world  Refining it into petroleum products such as petrol/gasoline  Distributing to company-owned retail stations

6-19 Outsourcing Strategies: Narrowing the Boundaries of the Business  Outsourcing is a consideration when Activity can be performed better or more cheaply by outside specialists Activity is not crucial to achieve a sustainable competitive advantage It improves firm’s ability to innovate Firm can concentrate on core value chain activities and leverage its resource strengths

6-20 Strategic Options to Improve a Company’s Market Position—The Use of Strategic Offensives  Strategic offensives are called for when a company Spots opportunities to gain profitable market share at the expense of rivals or Has no choice but to try to whittle away at a strong rival’s competitive advantage  The best offensives use resource strengths to attack rivals where they are weak

6-21 Choosing the Basis for Competitive Attack Primary offensive strategy options  Attack the competitive weaknesses of rivals  Offer a lower price for an equally good or better product  Pursue continuous product innovation  Leapfrog competitors by being the first to market with next generation technology or products

6-22 Choosing the Basis for Competitive Attack  Adopt and improve on good ideas of other companies  Attack market segments where a key rival make big profits  Maneuver around competitors to capture unoccupied or less contested market territory  Using hit-and-run or guerilla warfare tactics to grab sales and market share from complacent or distracted rivals

6-23 Choosing the Basis for Competitive Attack  Capture a rare opportunity or secure an industry’s limited resources Secure the best distributors in a particular geographic region or country Secure the most favorable retail locations Tie up the most reliable, high-quality suppliers via exclusive partnerships, long- term contracts, or even acquisition

6-24 Blue Ocean Strategy—A Special Kind of Offensive  Blue ocean strategies offer growth in revenues and profits by discovering or inventing new industry segments that create altogether new demand Cirque du Soleil has attracted 10 million people annually to its shows by “reinventing the circus” - its audience typically doesn’t attend circus events

6-25 Strategic Options to Protect a Company’s Market Position—The Use of Defensive Strategies  Defensive strategies help fortify a competitive position Lower the risk of being attacked Weaken the impact of any attack that occurs Influence challengers to aim their efforts at other rivals  Good defensive strategies help protect competitive advantage but rarely are the basis for creating it

6-26 Timing A Company’s 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 produce an absolute cost advantage over rivals First-time customers remain strongly loyal in making repeat purchases Constitutes a preemptive strike, making imitation extra hard or unlikely

6-27 Late-Mover Advantages and First- Mover Disadvantages  Moving early can be a disadvantage (or fail to produce an advantage) when When pioneering leadership is more costly than imitation When innovators’ products are primitive, not living up to buyer expectations When the demand side of the market is skeptical about the benefits of new technology/product of a first-mover When rapid technological change allows followers to leapfrog pioneers