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. 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 access to new global markets Gain knowledge about unfamiliar markets or cultures Gain knowledge about unfamiliar markets or cultures Gain access or master new technologies Gain access or master new technologies Gain access to complementary resources Gain access to complementary resources

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

Who Makes a Geo? Geo Storm was actually manufactured by Isuzu. The Storm is the Isuzu Impulse. Geo Prizm = Toyota Corolla Geo Tracker = Suzuki Sidekick Geo Metro = Suzuki Esteem or Swift w/hatchback No Geo cars were actually made by General Motors. They were all imported from foreign manufacturers.

Vertical Integration Operating in more than one stage of the industry value chain partial/taper or full integration partial/taper or full integration forward or backward forward or backwardBenefits can not be held hostage – reduces buyer/supplier power can not be held hostage – reduces buyer/supplier power greater control over operations greater control over operations access to new business/technologies access to new business/technologies reduce procurement and sales efforts reduce procurement and sales effortsRisks increased overhead, capital and administrative costs increased overhead, capital and administrative costs loss of flexibility loss of flexibility different competencies may be requires different competencies may be requires unbalanced capacities and increased risk unbalanced capacities and increased risk reaction of competitors reaction of competitors

Vertical Integration Will add value when: Will add value when: Enhance critical activities that lower costs or increase differentiation Enhance critical activities that lower costs or increase differentiation Benefits exceed the costs Benefits exceed the costs Enhances competitive capabilities Enhances competitive capabilities

Outsourcing Farming out specific activities to others, allowing the firm to focus on more critical activities and core competencies 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 Others can do it better and cheaper Not a core competency Not a core competency Reduces the companies’ risk to technology changes Reduces the companies’ risk to technology changes Improves the company’s innovation Improves the company’s innovation Streamlines operations and increases flexibility Streamlines operations and increases flexibility Assemble diverse expertise 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

Monday October 27 th WSJ Bank of American – Boston Fleet Financial Bank of American – Boston Fleet Financial BoA down $8.29, or 10%, BFF rose 23% BoA down $8.29, or 10%, BFF rose 23% Anthem – WellPoint Health Networks Anthem – WellPoint Health Networks Anthem down 8.2%, WellPoint up 8.8% Anthem down 8.2%, WellPoint up 8.8% United Health – MidAtlantic Med Services United Health – MidAtlantic Med Services UH down 4.9%, MAMS up 9.7% UH down 4.9%, MAMS up 9.7%

Failures of Acquisitions % average acquisition premium Acquiring firm’s value drops 4% in the 3 months following acquisitions % 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 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) Acquired - larger firms harder to acquire 1) Acquired - larger firms harder to acquire 2) Performing poorly - employment risk is reduced as returns are less volatile 2) Performing poorly - employment risk is reduced as returns are less volatile

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

Offensive Options Equal or better product at a lower price Equal or better product at a lower price First mover or next generation First mover or next generation Continuous product innovation Continuous product innovation Adopting and improving on a rivals idea Adopting and improving on a rivals idea Attacking rival’s high margin segments Attacking rival’s high margin segments Attacking rival’s weaknesses Attacking rival’s weaknesses Tapping uncontested markets Tapping uncontested markets Guerrilla warfare tactics Guerrilla warfare tactics Pre-emptive strikes – tying up distribution, location, suppliers, or acquiring distressed rivals 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 Inventing new industry/segment that renders existing competitors irrelevant and helps create new demand Ebay Ebay Cirque du Soleil Cirque du Soleil Netflix 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… Rivalry Competitive Dynamics

Competition in the Pharmaceutical Industry Reps quadrupled to 120K last yearsReps quadrupled to 120K last years 12B on sales force, 2.76B on ads12B on sales force, 2.76B on ads Managed care bet – Pfizer from 14 th to 1 stManaged care bet – Pfizer from 14 th to 1 st 529 visits yearly, average length – 2.5 min529 visits yearly, average length – 2.5 min 8% remember 8% remember Glaxo can reach 80% of the Drs in a weekGlaxo can reach 80% of the Drs in a week “Is this necessary. No, but if my competitors do it and I can’t, then I’m at a disadvantage. This has been an arms race in the worst possible manner.”“Is this necessary. No, but if my competitors do it and I can’t, then I’m at a disadvantage. This has been an arms race in the worst possible manner.”

Types of Competitive Responses First Movers - initial competitive action First Movers - initial competitive action advantages and disadvantages advantages and disadvantages Fast Followers or Capable Competitors- respond quickly to first movers Fast Followers or Capable Competitors- respond quickly to first movers Late Entrants - day late and a dollar short Late Entrants - day late and a dollar short