1. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-1

2. Crafting a Strategy Chapter 4 Screen graphics created by: Jana F. Kuzmicki, PhD Troy University - Florida and Western Region

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

4. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-4 Chapter Outline Five Generic Competitive Strategies Collaborative Strategies: Strategic Alliances and Partnerships Merger and Acquisition Strategies Vertical Integration Strategies Outsourcing Strategies Offensive Strategies Defensive Strategies Web Site Strategies Choosing Appropriate Functional-Area Strategies First-Mover Advantages and Disadvantages

5. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-5 Fig. 4.1: A Company’s Menu of Strategy Options

6. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-6 Deals exclusively with a company’s business plans to compete successfully  Specific efforts to please customers  Offensive and defensive moves to counter maneuvers of rivals  Responses to prevailing market conditions  Initiatives to strengthen its market position Narrower in scope than business strategy What Is “Competitive Strategy”?

7. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-7 Strategy and Competitive Advantage Competitive advantage exists when a firm’s strategy gives it an edge in  Attracting customers and  Defending against competitive forces Convince customers firm’s product / service offers superior value  An acceptable product at a bargain price  A superior product worth paying more for  A more-value-for-the-money product (an upscale product at a “low” price Key to Gaining a Competitive Advantage

8. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-8 Fig. 4.2: The Five Generic Competitive Strategies

9. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-9 Make achievement of meaningful lower costs than rivals the theme of firm’s strategy Include features and services in product offering that buyers consider essential Find approaches to achieve a cost advantage in ways difficult for rivals to copy or match Low-cost leadership means low overall costs, not just low manufacturing or production costs! Keys to Success Low-Cost Provider Strategies

10. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-10 The Two Options for Turning a Low-Cost Advantage into Higher Profits Option 1: Use lower-cost edge to under-price competitors  Attract price-sensitive buyers in enough numbers to increase total profits despite a lower profit margin on each unit sold Option 2: Maintain present price, be content with present market share, and use lower-cost edge to  Earn a higher profit margin on each unit sold, thereby increasing total profits

11. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-11 Do a better job than rivals of controlling the costs of performing value chain activities Approach 1 Revamp value chain to eliminate cost- producing activities that add little value from the buyer’s perspective Approach 2 Contro l costs! Eliminate activities! How to Achieve a Cost Advantage

12. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-12 Approach 1: Do a Better Job Than Rivals of Controlling the Cost Drivers Pursue scale economies; avoid scale diseconomies Capture learning and experience curve effects Adopt ways to hold down labor costs Do a better job of supply chain management Invest in low cost technologies Compare cost of doing things in-house vs. outsourcing Fully utilize available production capacity Always strive to perform each value chain activity in the most cost efficient manner

13. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-13 Approach 2: Revamping the Value Chain to Bypass Low-Value Activities Make greater use of Internet technology applications Use direct-to-end-user sales/marketing methods (cut out the “middleman”) Simplify product design Offer a basic, no-frills product/service (cuts out all the value chain activities associated with providing all the extras) Shift to a simpler, less capital-intensive, or more flexible technological process Find ways to bypass use of high-cost materials and components Relocate facilities adjacent to suppliers or customers to cut out shipping Drop “something for everyone” approach and focus on a limited number of models/styles/selection (cuts out all the activities associated with providing slow-selling or less popular items)

14. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-14 Keys to Success in Achieving Low-Cost Leadership Scrutinize each value chain activity to identify what factors drive the costs of performing the activity Use knowledge about cost drivers to manage costs of each activity down year after year Find ways to restructure value chain to eliminate nonessential work steps and low-value activities Aggressively pursue investments in resources and capabilities that promise to drive costs out of the business

15. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-15 Characteristics of a Low-Cost Provider Cost conscious corporate culture Broad employee participation in cost-control efforts Ongoing efforts to benchmark costs Intensive scrutiny of budget requests Programs promoting continuous cost improvement Successful low-cost producers champion frugality but wisely and aggressively invest in cost-saving improvements !

16. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-16 When Does a Low-Cost Strategy Work Best? Price competition is vigorous Product is standardized or readily available from many suppliers There are few ways to achieve differentiation that have value to buyers Most buyers use product in same ways Buyers incur low switching costs Buyers are large and have significant bargaining power Industry newcomers use introductory low prices to attract buyers and build customer base

17. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-17 Cutting price by an amount greater than size of cost advantage (having a $1 cost advantage and cutting price by $2) Low cost methods are easily imitated by rivals Becoming too fixated on reducing costs and ignoring  Buyer interest in additional features  Declining buyer sensitivity to price  Changes in how the product is used Technological breakthroughs open up cost reductions for rivals, thus allowing them to close cost gap Pitfalls of Low-Cost Strategies

18. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-18 Incorporate differentiating features that cause buyers to prefer firm’s product or service over brands of rivals Finding ways to differentiate that create value for buyers and that are not easily matched or cheaply copied by rivals Not spending more to achieve differentiation than the price premium that customers are willing to pay for all the differentiating extras Keys to Success Objective Differentiation Strategies

19. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-19 A product / service with unique, appealing attributes allows a firm to  Command a premium price and/or  Increase unit sales and/or  Build brand loyalty = Competitive Advantage Which hat is unique? Benefits of Successful Differentiation

20. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-20 Types of Differentiation Themes Unique taste – Dr. Pepper and Listerine Multiple features – Microsoft Windows and Office Wide selection and one-stop shopping – Home Depot and Amazon.com Superior service – FedEx Spare parts availability – Caterpillar Engineering design and performance – Mercedes and BMW Prestige – Rolex Product reliability – Johnson & Johnson Quality manufacture – Karastan, Michelin, and Honda Technological leadership – 3M Corporation Complete line of products – Campbell’s Top-of-line image – Ralph Lauren and Starbucks

21. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-21 Sustaining Differentiation: Keys to Competitive Advantage Most appealing approaches to differentiation  Those hardest for rivals to duplicate  Those buyers will find most appealing Best choices to gain a longer-lasting, more profitable competitive edge  New product innovation  Technical superiority  Product quality and reliability  Comprehensive customer service  Unique competitive capabilities

22. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-22 Purchasing and procurement activities Product R&D and product design activities Production process / technology-related activities Manufacturing / production activities Distribution-related activities Marketing, sales, and customer service activities Where to Find Differentiation Opportunities in the Value Chain Activities, Costs, & Margins of Forward Channel Allies Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Suppliers Buyer/User Value Chains

23. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-23 Incorporate product features/attributes that lower buyer’s overall costs of using product Approach 1 Incorporate features/attributes that raise product performance Approach 2 Incorporate features/attributes that enhance buyer satisfaction in non-economic or intangible ways Approach 3 Develop superior competencies and competitive capabilities that rivals don’t have and can’t match Approach 4 How to Achieve a Differentiation-Based Advantage

24. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-24 When Does a Differentiation Strategy Work Best? There are many ways to differentiate a product that have value and please customers Buyer needs and uses are diverse Few rivals are following a similar differentiation approach Technological change and product innovation are fast-paced, thus opening up an ongoing stream of new ways to differentiate

25. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-25 Pitfalls of Differentiation Strategies Buyers see little value in a product’s unique attributes Appealing product features are easily copied by rivals Differentiating on a feature buyers do not perceive as lowering their cost or enhancing their well-being Over-differentiating such that product features exceed buyers’ needs Charging a price premium buyers perceive is too high

26. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-26 Best-Cost Provider Strategies Combine a strategic emphasis on low-cost with a strategic emphasis on differentiation  Make an upscale product at a lower cost  Give customers more value for the money Deliver superior value by meeting or exceeding buyer expectations on product attributes and beating their expectations on what price they will have to pay Be the low-cost provider of a product with good-to- excellent product attributes, then use cost advantage to underprice comparable brands Objectives

27. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-27 Competitive Strength of a Best-Cost Provider Strategy A best-cost provider’s competitive advantage comes from matching close rivals on key product attributes and beating them on price Success depends on having the skills and capabilities to provide attractive performance and features at a lower cost than rivals A best-cost producer can often out-compete both a low-cost provider and a differentiator when  Standardized features/attributes won’t meet diverse needs of buyers  Many buyers are price and value sensitive

28. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-28 A best-cost provider may get squeezed between strategies of firms using low-cost and differentiation strategies  Low-cost leaders may be able to siphon customers away with a lower price  High-end differentiators may be able to steal customers away with better product attributes Risk of a Best-Cost Provider Strategy

29. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-29 Focus / Niche Strategies Involve concentrated attention on a narrow piece of the total market  Serve needs of niche buyers better than rivals Choose a market niche where buyers have distinctive preferences, special requirements, or unique needs Develop unique capabilities and product attributes to serve needs of target buyer segment Objective Keys to Success

30. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-30 Geographic uniqueness Specialized requirements in using product/service Special product attributes appealing only to niche buyers Approaches to Defining a Market Niche

31. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-31 Examples of Focus Strategies eBay  Online auctions Porsche  Sports cars Jiffy Lube International  Quick maintenance for motor vehicles Pottery Barn Kids  Children’s furniture and accessories Bandag  Specialist in truck tire recapping

32. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-32 Achieve lower costs than rivals in serving the segment -- A low-cost strategy Offer niche buyers something different from rivals -- A differentiation strategy Approach 1 Approach 2 Which hat is unique? Focus / Niche Strategies and Competitive Advantage

33. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-33 Big enough to be profitable and offers good growth potential Not crucial to success of industry leaders Costly or difficult for multi-segment competitors to meet specialized needs of niche members Focuser has resources and capabilities to effectively serve an attractive niche Few other rivals are specializing in same niche Focuser can defend against challengers via superior ability to serve niche members What Makes a Niche Attractive for Focusing?

34. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-34 Risks of a Focus Strategy Competitors find effective ways to match a focuser’s capabilities in serving niche Niche buyers’ preferences shift towards product attributes desired by majority of buyers - niche becomes part of overall market Segment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered

35. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-35

36. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-36 Deciding Which Generic Competitive Strategy to Use Each positions a company differently in its market Each establishes a central theme for how a company will endeavor to outcompete rivals Each creates some boundaries for maneuvering as market circumstances unfold Each points to different ways of experimenting with the basics of the strategy Each entails differences in product line, production emphasis, marketing emphasis, and means to sustain the strategy The big risk – Selecting a “stuck in the middle” strategy! This rarely produces a sustainable competitive advantage or a distinctive competitive position!

37. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-37 Collaborative Strategies: Strategic Alliances and Partnerships Companies sometimes use 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 formal joint venture.

38. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-38 Two demanding competitive challenges are faced by many companies  Global race to build a market presence in many different national markets  Race 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 Why Cooperative Strategies Are Integral to a Firm’s Competitiveness

39. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-39 Purposes of Strategic Alliances To acquire or improve market access via joint marketing agreements To pursue joint sales or distribution To gain economies of scale in production To collaborate on the design of new products To engage in joint research and development To form technology licensing agreements

40. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-40 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 new market opportunities It mitigates a significant risk to a company’s business

41. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-41 To expedite development of promising new technologies or products To fill gaps in technical or manufacturing expertise To create desirable 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?

42. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-42 Potential Benefits of Alliances to Achieve Global and Industry Leadership 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

43. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-43 Why Do 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  Emergence of more attractive technological paths  Marketplace rivalry between one or more allies

44. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-44 Merger – Involves a 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 Characteristics of mergers and acquisitions  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

45. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-45 Objectives of Mergers and Acquisitions To pave way for acquiring firm to gain more market share and create a more 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 To invent a new industry and lead the convergence of industries whose boundaries are blurred by  Changing technologies and  New market opportunities

46. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-46 Pitfalls of Mergers and Acquisitions 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

47. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-47 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 Vertical Integration Strategies

48. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-48 Advantages of a Vertical Integration Strategy Two reasons to invest resources in vertical integration  Strengthen a firm’s competitive position and/or  Boost a firm’s profitability Potential benefits of vertical integration  Produces sufficient cost savings and/or profit increases to justify extra investment  Adds materially to a firm’s technological and competitive strengths  Helps differentiate a firm’s product offerings

49. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-49 Strategic Advantages of Backward Integration Generates cost savings only if volume needed is big enough to capture efficiencies equal to that 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 for crucial raw materials / parts / components

50. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-50 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

51. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-51 Strategic Disadvantages of Vertical Integration Boosts resource requirements Locks firm deeper into same industry which may  Result in fixed sources of supply and  Less flexibility in accommodating buyer demand 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  Delay new product introductions

52. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-52 Pros and Cons of Integration vs. De-Integration 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 Many firms are finding de-integrating value chain activities is a more flexible, economic strategic option!

53. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-53 Involves withdrawing from certain value chain activities and relying on outsiders to supply needed products, support services, or functional activities Concept Internally Performed Activities Suppliers Support Services Functional Activities Distributors or Retailers Outsourcing Strategies

54. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-54 What Factors Drive Decisions to Outsource? Outsiders can often perform certain activities better or cheaper Allows a firm to focus its entire energies on activities that are  At the center of its expertise – Core competencies  Most critical to its competitive and financial success

55. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-55 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 Firm’s ability to innovate is improved Operations are streamlined to  Improve flexibility  Cut cycle time Firm can assemble diverse kinds of expertise speedily and efficiently by using capable outside suppliers If it helps a firm concentrate its full energies and resource strengths on better performing “core” value chain activities When Does Outsourcing Make Strategic Sense?

56. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-56 Farming out too many or the wrong activities, thus  Hollowing out capabilities  Losing touch with activities and expertise that determine overall long-term success Pitfalls of Outsourcing

57. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-57 Offensive Strategies Purposes of offensive strategies  Improve market position  Build a competitive advantage or widen an existing one  Whittle away at a strong rival’s competitive advantage  Gain profitable market share at the expense of rivals despite their resource strengths and capabilities

58. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-58 Types of Offensive Strategies 1. Offering an equally good or better product at a lower price 2. Leapfrogging competitors by being  First adopter of next-generation technologies or  First to market with next-generation products 3. Adopting and improving on good ideas of other companies 4. Attacking market segments where a key rival makes big profits 5. Attacking competitive weaknesses of rivals 6. Maneuvering around competitors and concentrating on capturing unoccupied or less contested market territory 7. Using hit-and-run tactics to grab market share from rivals 8. Launching a preemptive strike to secure an advantageous position that rivals are prevented from duplicating

59. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-59 Strategic offensives offering strongest basis for competitive advantage usually entail  Exploiting a competitor’s weaknesses  Concentrating on  An important core competence or  A unique competitive capability  Focusing on key resource strengths  Well-known brand name  A cost advantage in manufacturing or distribution  A new or much-improved product Offensive Strategy as a Basis to Achieve Competitive Advantage

60. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-60 Defensive Strategies Purposes of defensive strategies  Lesson risk of being attacked  Blunt impact of any attack that occurs  Influence challengers to aim attacks at other rivals  Defend a firm’s competitive position / advantage  Protect valuable resources and capabilities from imitation Types of defensive strategies  Block avenues open to challengers  Signal challengers vigorous retaliation is likely

61. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-61 Block Avenues Open to Challengers Participate in alternative technologies Introduce new features, add new models, or broaden product line to close gaps rivals may pursue Maintain economy-priced models Increase warranty coverage Offer free training and support services Reduce delivery times for spare parts Make early announcements about new products or price changes Challenge quality or safety of rivals’ products Sign exclusive agreements with distributors

62. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-62 Signal Challengers Retaliation Is Likely Publicly announce management’s strong commitment to maintain present market share Publicly commit firm to policy of matching rivals’ terms or prices Maintain war chest of cash reserves Make occasional counterresponse to moves of weaker rivals

63. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-63 Web Site Strategies: Which One to Employ? Strategic Issue – What role should a firm’s Web site play in its competitive strategy? Approaches to using the Internet  Solely as a vehicle to disseminate product information  Minor distribution channel  One of several important distribution channels  Primary distribution channel  Exclusive distribution channel

64. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-64 Using the Internet to Disseminate Product Information Approach – Website used to provide product information of manufacturers or wholesalers  Relies on click-throughs to websites of dealers for sales transactions  Informs end-users of location of retail stores Issues – Pursuing online sales may  Signal weak strategic commitment to dealers  Signal willingness to cannibalize dealers’ sales  Prompt dealers to aggressively market rivals’ brands Avoids channel conflict with dealers – important where strong support of dealer networks is essential

65. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-65 Approach – Use online sales to  Achieve incremental sales  Gain online sales experience  Conduct marketing research  Learn more about buyer tastes and preferences  Test reactions to new products  Create added market buzz about products  Boost overall sales a few percentage points Unlikely to provoke much outcry from dealers Web Site E-Stores as a Minor Distribution Channel

66. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-66 Brick-and-Click Strategies: An Appealing Middle Ground Strategy Strategic appeal  Economic means of expanding a firm’s geographic reach  Provide both existing and potential customers with additional ways to  Communicate with firm  Shop for product information  Make purchases  Resolve customer service problems

67. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-67 Strategies for Online Enterprises Approach – Use Internet as exclusive channel of all buyer-seller contact Strategic issues  How a firm will deliver unique value to buyers  Whether a firm pursues competitive advantage based on lower costs, differentiation, or better value for the money  Whether a firm will have a broad or narrow product offering  Whether to perform order fulfillment activities internally or to outsource them  How a firm will draw traffic to its Web site

68. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-68 Involves strategic choices about how functional areas are managed to support competitive strategy and additional strategic moves Functional strategies include  Research and development  Production  Human resources  Sales and marketing  Finance Tailoring functional-area strategies to support key business-level strategies is critical! Choosing Appropriate Functional-Area Strategies

69. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-69 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

70. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-70 Moving early can be a disadvantage (or fail to produce an advantage) when  Costs of pioneering are sizable and loyalty of first time buyers is weak  Innovator’s products are primitive, not living up to buyer expectations  Rapid technological change allows followers to leapfrog pioneers First-Mover Disadvantages

71. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-71 Being a first-mover holds potential for competitive advantage in some cases but not in others Principle 1 Being a fast follower can sometimes yield as good a result as being a first mover Principle 2 Being a late-mover may or may not be fatal -- it varies with the situation Principle 3 Timing and Competitive Advantage