Supplementing the Chosen Competitive Strategy Chapter 6 Supplementing the Chosen Competitive Strategy

Cooperative Strategies Strategic Alliance – formal agreement between two or more companies in which there is a strategically relevant collaboration.

Advantages of Alliances 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 Success Picking the right partner Sensitivity to cultural differences Must be win-win Mutual commitment Swift decision making structures Managing the learning process Maintaining flexibility

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 requires unbalanced capacities and increased risk reaction of competitors

Vertical Integration Will add value when: Enhance critical activities that lower costs or increase differentiation Benefits exceed the costs 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 and increases flexibility Assemble diverse expertise

Mergers and Acquisitions Reasons of Acquisitions Cost Efficiencies Geographic Expansion Product/Market Extensions Increased Speed Lower Risk New Technologies Invest in New Industry or Create Convergence

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

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) 2)

Offensive Strategies Successful offensive strategies require: Relentless focus on advantages Element of surprise Apply resources where rivals have limitations Swift and decisive actions to break the status quo

Offensive Options Equal or better product at a lower price First mover or next generation Continuous product innovation Adopting and improving on a rivals idea Attacking rival’s high margin segments Attacking rival’s weaknesses Tapping uncontested markets Guerrilla warfare tactics Pre-emptive strikes – tying up distribution, location, suppliers, or acquiring distressed rivals

Blue Ocean Strategy Inventing new industry/segment that renders existing competitors irrelevant and helps create new demand Ebay Cirque du Soleil Netflix

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

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