Chapter 6: Strengthening a Company's Competitive Position

Rule for choosing the Basis for Competitive Attack

- Challenging rivals on competitive grounds where they are strong is an uphill struggle - Offensive initiatives that exploit competitor weaknesses stand a better chance of succeeding than do those that challenge competitor strengths (especially if the weaknesses represent important vulnerabilities and weak rivals can be caught by surprise with no ready defense)

How long it takes for an offensive action to yield good results

- Depends in part on whether market rivals recognize the threat and begin a counter-response - Whether the rivals will respond depends on whether they are capable of making an effective response and if they believe that a counterattack is worth the expense and the distraction

The goal of signaling challenges that strong retaliation is likely in the event of an attack is either to:

- Dissuade challenges from attacking at all - Divert them to less threatening options

Any company that seeks competitive advantage by being a first mover needs to ask the following hard questions:

- Does market takeoff depend on the development of complementary products or services that currently are not 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 in moving to the newly introduced product or service? - Are there influential competitors in a position to delay or derail the efforts of a first mover?

The Potential for First-Mover Advantages

- First movers typically bear greater risks and greater development costs than firms that move later - If the market responds well to its initial move, the pioneer will benefit from a monopoly position - If the firm's pioneering move gives it a competitive advantage that can be sustained even after other firms enter the market space, its first-mover advantage will be greater still.

Defensive Strategies Help to

- Fortify the firm's competitive position - Protect its most valuable resources and capabilities from imitation - Defend whatever competitive advantage it might have

When Blocking the Avenues Open to Challengers, a Defender Can:

- Introduce new features and models to broaden product lines to close off gaps and vacant niches. - Maintain economy-pricing to thwart lower price attacks. - Discourage buyers from trying competitors' brands. - Make early announcements about new products or price changes to induce buyers to postpone switching. - Offer support and special inducements to current customers to reduce the attractiveness of switching. - Challenge quality and safety of competitor's products. - Grant discounts or better terms to intermediaries who handle the firm's product line exclusively.

Purpose of Defensive Strategies

- Lower the firm's risk of being attacked - Weaken the impact of an attack that does occur - Influence challengers to aim their efforts at other rivals

Options for "guerrilla offensives" include...

- Occasionally lowballing on price (to win a big order or steal a key account from a rival) - Surprising rivals with sporadic but intense bursts of promotional activity (offering a discounted trial offer to draw customers away from rival brands) - Undertaking special campaigns to attract the customers of rivals plagued with a strike or problems in meeting buyer demand

Signals to would-be challengers can be given by:

- Publicly announcing management's commitment to maintaining the firm's present market share - Publicly committing the company to a policy of matching competitors' terms or prices - Maintaining a way chest of cash and marketable securities - Making an occasional strong counter-response to the moves of weak competitors to enhance the firm's image as a tough defender

Examples of preemptive moves include...

- Securing the best distributors in a particular geographic region or country - Obtaining the most favorable site at a new interchange or intersection, in a new shopping mall, and so on - Tying up the most reliable, high-quality suppliers via exclusive partnerships, long-term contracts, or acquisition - Moving swiftly to acquire the assets of distressed rivals at bargain prices

Other risks of outsourcing

- Their ability to lead development of innovative new products is weakened because so many of the cutting-edge ideas and technologies for next-generation products come from outsiders - Lack of direct control - May be difficult to monitor, control ,and coordinate activites - Unanticipated problems may arise and become hard to resolve - Outside parties lack incentives to make investments specific to the needs of the outsourcing company's internal value chain.

How backward vertical integration can contribute to a cost-based competitive advantage:

- When there are few suppliers and when the items being supplied is a major component, vertical integration can lower costs by limiting supplier power. - Facilitating the coordination of production flows and avoiding bottlenecks and delays that disrupt production schedules - When a company has proprietary know-how that it wants to keep from rivals, then in-house performance of value-adding activities related to this know-how is beneficial even if such activities could otherwise be performed by outsiders.

Decisions regarding the scope of the firm focus on:

- Which activities a firm will perform internally and which it will not - These decisions also concern which segments of the market to serve - decisions that can include geographic market segments as well as product and service segments. - Determine where the boundaries of a firm lie and the degree to which operations within those boundaries cohere as well as the direction and extent of a business's growth

Forms of Defensive Strategies

-actions to block challengers -actions to signal the likelihood of strong retaliation

For backward integration to be a cost-saving and profitable strategy, a company must be able to:

1. Achieve the same scale economies as outside suppliers 2. Match or beat suppliers' production efficiency with no drop-off in quantity

Outsourcing certain value chain activities make strategic sense whenever:

1. An activity can be performed better or more cheaply by outside specialists 2. The activity is not crucial to the firm's ability to achieve sustainable competitive advantage 3. The outsourcing improves organizational flexibility and speeds time to market 4. It reduces the company's risk exposure to changing technology and buyer preferences 5. It allows a company to concentrate on its core business, leverage its key resources, and do even better what it does.

Why mergers and acquisitions sometimes fail to produce anticipated results

1. Cost savings may prove smaller than expected 2. Gains in competitive capabilities may take longer to realize or may never materialize at all 3. Efforts to mesh corporate cultures can stall due to resistance from organization members 4. Key employees at the acquired company can quickly become disenchanted and leave 5. Morale of remining company personnel can drop to low levels due to disagreement with newly instituted changes 6. Differences in management styles and operating procedures can prove hard to resolve 7. Managers appointed to oversee the integration of a newly acquired company can make mistakes in deciding which activities to leave along and which activities to meld into their own operations and systems

Merger and acquisition strategies typically set sights on achieving any of five objectives:

1. Creating a more cost-efficient operation our of the combined companies 2. Expanding a company's geographic coverage 3. Extending the company's business into new product categories 4. Gaining quick access to new technologies or other resources and capabilities 5. Leading the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunities

The best offensives tend to incorporate several principles:

1. Focusing relentlessly on building competitive advantage and then striving to convert it into a sustainable advantage 2. Applying the resources where rivals are least able to defend themselves 3. Employing the element of surprise as opposed to doing what rivals expect and are prepared for 4. Displaying a capacity for swift and decisive actions to overwhelm rivals

The blue-ocean strategy views the business universe as consisting of the following two distinct types of market space:

1. Industry boundaries are well defined, the competitive rules of the game are understood, and companies try to outperform rivals by capturing a bigger share of existing demand. 2. "Blue Ocean", where the industry does not really exist yet, is untainted by competition, and offers wide-open opportunity for profitable and rapid growth if a company can create new demand with a new type of product offering.

An alliance becomes "strategic" as opposed to just a convenient business arrangement when it serves any of the following purposes:

1. It facilities achievement of an important business objective 2. It helps build, strengthen, or sustain a core competence or competitive advantage 3. It helps remedy an important resource deficiency or competitive advantage 4. It helps defend against a competitive threat, or mitigates a significant risk to a company's business 5. It increases bargaining power over suppliers or buyers 6. It helps open up important new market opportunities 7. It speeds the development of new technologies and/or product innovations

The following are the best targets for offensive attacks:

1. Market leaders that are vulnerable 2. Runner-up firms with weaknesses in areas where the challenger is strong 3. Struggling enterprises that are on the verge of going under 4. Small local and regional firms with limited capabilities

The principal offensive strategy options include the following:

1. Offering an equally good or better product at a lower price 2. Leapfrogging competitors by being first to market with next-generation products 3. Pursuing continuous product innovation to draw sales and market share away from less innovative rivals 4. Pursing disruptive product innovations to create new markets 5. Adopting and improving on the the good ideas of other companies (rivals or otherwise) 6. Using hit-and-run or guerrilla warfare tactics to grab market share from complacent or distracted rivals 7. Launching a preemptive strike to secure an industry's limited resources or capture a rare opportunity

The extent to which companies benefit from entering into alliances and partnerships seems to be a function of six factors:

1. Picking a good partner 2. Being sensitive to cultural differences 3. Recognizing that the alliance must benefit both sides 4. Ensuring that both parties live up to their commitments 5. Structuring the decision-making process so that actions can be taken swiftly when needed 6. Managing the learning process and then adjusting the alliance agreement over time to fit new circumstances.

Key advantages of using strategic alliances rather than arm's-length transactions to manage outsourcing are:

1. The increased ability to exercise control over the partners' activities 2. A greater willingness for the partners to make relationship-specific investments

Companies that have greater success in managing their strategic alliances and partnerships often credit the following factors:

1. They create a system for managing their alliances 2. They build relationships with their partners and establish trust 3. They protect themselves from the threat of opportunism by setting up safeguards 4. They make commitments to their partners and see that their partners do the same 5. They make learning a routine part of the management process.

Alliances are most likely to be long-lasting when:

1. They involve collaboration with partners that do not compete directly, such as suppliers or distribution allies 2. A trusting relationship has been established 3. Both parties conclude that continued collaboration is in their mutual interest

The principal advantages of strategic alliances over vertical integration or horizontal mergers and acquisitions are threefold:

1. They lower investment costs and risks for each partner by facilitating resource pooling and risk sharing 2. They are more flexible organizational forms and allow for a more adaptive response to changing conditions 3. They are more rapidly deployed-a critical factor when speed is of the essence

The most serious drawbacks to vertical integration include the following concerns:

1. Vertical integration raises a firm's capital investment in the industry, thereby increasing business risk 2. Vertically integrated companies are often slow to adopt technological advances or more efficient production methods when they are saddled with older technology or facilities 3. Vertical integration can result in less flexibilities in accommodating shifting buyer preferences 4. Vertical integration may not enable a company to realize economies of scale if its production levels are below the minimum efficient scale 5. Vertical integration poses all kinds of capacity-matching problems 6. Integration forward or backward typically calls for developing new types of resources and capabilities

Six conditions in which first-mover advantages are most likely to arise

1. When pioneering helps build a firm's reputation and creates strong brand loyalty 2. When a first mover's customers will thereafter face significant switching costs 3. When property rights protections thwart rapid imitation of the initial move 4. When an early lead enables the first mover to reap scale economies or move down the learning curve ahead of rivals 5. When a first mover can set the technical standard for the industry 6. When strong network effects compel increasingly more consumers to choose the first mover's product or service

Late-mover advantages (or first-mover disadvantages) arise in 6 instances:

1. When the costs of pioneering are high relative to the benefits accrued and imitative followers can achieve similar benefits with far less costs 2. When an innovator's products are somewhat primitive and do not live up to buyer expectations, thus allowing a follower with better-performing products to win disenchanted buyers away from the leader 3. When rapid market evolution gives second movers the opening to leapfrog a first mover's products with more attractive next-version products 4. When market uncertainties make it difficult to ascertain what will eventually succeed, allowing late movers to wait until these needs are clarified 5. When customer loyalty to the pioneer is low and a first mover's skills, know-how, and actions are easily copied or even surpassed 6. When the first mover must make a risky investment in complementary assets or infrastructure

When weight the pros and cons of vertical integration, the tip of the scale depends on

1. Whether vertical integration can enhance the performance of strategy-critical activities in ways that lower cost, build expertise, protect proprietary know-how, or increase differentiation 2. What impact vertical integration will have on investment costs, flexibility, and response times 3. What administrative costs will be incurred by coordinating operations across more vertical chain activities 4. How difficult it will be for the company to acquire the set of skills and capabilities needed to operate in another stage of the vertical chain.

Blue-Ocean Market Space Examples

1. eBay in the online auction industry 2. NetJets in fractional jet ownership 3. Drybar in hair blowouts 4. Tune Hotels in limited service "backpacker" hotels 5. Uber & Lyft in ride-sharing services 6. Cirque du Soleil in live entertainment

Acquisition

A combination in which one company, the acquirer, purchases and absorbs the operations of another, the acquired,

Continuous product innovation offensives can only be sustained if....

A company can keep its pipeline full with new product offerings that spark buyer enthusiasm

Strategic offensives are called for when...

A company spots opportunities to gain profitable market share at the expense of rivals or when a company has no choice but to try to whittle away at a strong rival's competitive advantage

To be an effective defensive strategy, signaling needs to be accompanies by:

A credible commitment to follow through

Are Blue-Ocean strategies good short-term or long-term?

Blue-ocean strategies provide a company with a great opportunity in the short run. But they don't guarantee a company's long-term success, which depends more on whether a company can protect the market position it opened up and sustain its early advantage.

Merger

Combination of two or more companies into a single firm

A company that is vigorously pursing online sales to consumers at the same time that it is also heavily promoting sales to consumers through its network of wholesalers and retailers is:

Competing directly against distribution allies. Such actions constitute channel conflict and create a tricky route to negotiate.

Forward integration can enhance:

Competitiveness and contribute to competitive advantage on the cost side as well as the differentiation (or value) side.

Outsourcing Decisions

Concern another dimension of scope since they involve narrowing the firm's boundaries with respect to its participation in value chain activities.

A vertical integration strategy can:

Expand the firm's range of activities backward into sources of supply and/or forward toward end users

Strategic offensives should...

Exploit the power of a company's strongest competitive assets

Price-cutting offensives should be initiated only by companies that have....

First achieved a cost advantage

Timing a company's strategic moves is especially important when...

First-mover advantage and disadvantages exist

Joint venture

a partnership involving the establishment of an independent corporate entity that the partners own and control jointly, sharing in its revenues and expenses

Forward integration can lower costs by

Increasing efficiency and reducing or eliminating the bargaining power of companies that had wielded such power along the value system chain

Horizontal Mergers and Acquisitions

Involve combining the operations of firms within the same product or service market - Provide an effective means for firms to rapidly increase the scale and horizontal scope of their core business.

Tapered integration

Involves a mix of in-house and outsourced activity in any stage of the vertical chain.

Outsourcing

Involves contracting out certain value chain activities that are normally performed in-house to outside vendors

Full integration

Participating in all stages of the vertical chain

Disruptive innovation involves...

Perfecting a new product with a few trial users and then quickly rolling it out to the whole market in an attempt to get many buyers to embrace an altogether new and better value proposition quickly.

Backward vertical integration can support a differentiation-based competitive advantage when:

Performing activities internally contributes to a better-quality product or service offering, improves the caliber of customer service, or in other ways enhances the performance of the final product.

Guerrilla offensives are particularly well suited to...

Small challenges that have neither the resources nor the market visibility to mount a full-fledged attack on industry leaders

A firm can pursue vertical integration by:

Starting its own operations in other stages of the vertical activity chain or by acquiring a company already performing the activities it wants to bring in-house

The biggest danger of outsourcing is:

That a company will farm out the wrong types of activities and thereby hollow out its own capabilities

Vertical integration strategies have merit according to:

Which capabilities and value-adding activities truly need to be performed in-house and which can be performed better or cheaper by outsiders.

Strategic alliance

a formal agreement between two or more separate companies in which they agree to work cooperatively toward some common objective - Typically involves shared financial responsibility, join contribution of resources and capabilities, shared risk, shared control, and mutual dependence. - Characterized by cooperative marketing, sales, distribution; join production; design collaboration; or projects to jointly develop new technologies or products.

Partial integration

building positions in selected stages of the vertical chain

Backward integration

involves entry into activities previously performed by suppliers or other enterprises positioned along earlier stages of the industry value chain system

Forward integration

involves entry into value chain system activities closer to the end user

In industries where the strong support and goodwill of dealer networks is essential, companies may conclude that:

it is important to avoid channel conflict and that their websites should be designed to partner with dealers rather than compete against them.

Vertically Integrated Firm

one that participates in multiple stages of an industry's value chain system

Strategic Alliances and Partnerships

provide an alternative to vertical integration and acquisition strategies and are sometimes used to facilitate outsourcing

Blue-Ocean Strategy

seeks to gain a dramatic and durable competitive advantage by abandoning efforts to beat out competitors in existing markets and, instead, inventing a new industry or distinctive market segment that renders existing competitors largely irrelevant and allows a company to create and capture altogether new demand.

Vertical Scope

the extent to which the firm engages in the various activities that make up the industry's entire value chain system, from initial activities such as raw-material production all the way to retailing and after-sale service activities.

Horizontal Scope

the range of product and service segments that a firm serves within its product or service market. Example: Mergers and acquisitions involving other market participants provide a means for a company to expand its horizontal scope