Strengthening a Company's Competitive Position: Strategic Moves, Timing, and Scope of Operations (Ch 6)

Once a company has settled on which of the five generic competitive strategies to employ, attention turns to how strategic choices regarding...

(1) competitive actions, (2) timing of those actions, and (3) scope of operations can complement its competitive approach and maximize the power of its overall strategy.

Outsourcing certain value chain activities makes strategic sense whenever:

- An activity can be performed better or more cheaply by outside specialists. A company should generally not perform any value chain activity internally that can be performed more efficiently or effectively by outsiders—the chief exception occurs when a particular activity is strategically crucial and internal control over that activity is deemed essential. - The activity is not crucial to the firm's ability to achieve sustainable competitive advantage. Outsourcing of support activities such as maintenance services, data process- ing, data storage, fringe-benefit management, and website operations has become commonplace. Many smaller companies, for example, find it advantages to out- source HR activities such as benefit administration, training, recruiting, hiring and payroll to specialist - The outsourcing improves organizational flexibility and speeds time to market. Outsourcing gives a company the flexibility to switch suppliers in the event that its present supplier falls behind competing suppliers. Moreover, seeking out new suppliers with the needed capabilities already in place is frequently quicker, easier, less risky, and cheaper than hurriedly retooling internal operations to replace obsolete capabilities or trying to install and master new technologies. - It reduces the company's risk exposure to changing technology and buyer preferences. When a company outsources certain parts, components, and services, its suppliers must bear the burden of incorporating state-of-the-art technologies and/or under- taking redesigns and upgrades to accommodate a company's plans to introduce next-generation products. If what a supplier provides falls out of favor with buyers, or is rendered unnecessary by technological change, it is the supplier's business that suffers rather than the company's. - It allows a company to concentrate on its core business, leverage its key resources, and do even better what it already does best. A company is better able to enhance its own capabilities when it concentrates its full resources and energies on performing only those activities.

Horizontal merger: Risks

- Cost savings may prove smaller than expected. - Gains in competitive capabilities may take substantially longer to realize or, worse, may never materialize at all. - Efforts to mesh the corporate cultures can stall due to formidable resistance from organization members. - Key employees at the acquired company can quickly become disenchanted and leave; the morale of company personnel who remain can drop to disturbingly low levels because they disagree with newly instituted changes. - Differences in management styles and operating procedures can prove hard to resolve. In addition, the managers appointed to oversee the integration of a newly acquired company can make mistakes in deciding which activities to leave alone and which activities to meld into their own operations and systems.

Late-mover advantages (first-mover disadvantages)

- Costs of pioneering are very high (late followers can achieve similar benefits with lower costs) - Product does not live up to expectations (followers can have better-performing products) - Rapid market evolution (due to fast-paced changes in either tech or buyer needs, may give second movers the opening to leapfrog a first mover's products with more attractive next-version products. - Market uncertainties (what will eventually succeed? Allows late movers to wait until these needs are clarified) - Low customer loyalty (skills and actions easily copied or even surpassed) - First mover makes risky investment (which are lower for followers)

First-mover advantages (late-mover disadvantages)

- Create reputation and strong brand loyalty - Customers face high switching costs thereafter - Property rights are important - Scale of economies - Set technical standards for the industry - Strong network effects (e.g., FaceTime)

To be a first mover or not - hard questions the company needs to ask

- 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? When the answers to any of these questions are yes, then a company must be careful not to pour too many resources into getting ahead of the market opportunity—the race is likely going to be closer to a 10-year marathon than a sprint. On the other hand, if the market is a winner-take-all type of market, where powerful first-mover advantages insulate early entrants from competition and prevent later movers from making any headway, then it may be best to move quickly despite the risk

Vertical integration: BENEFITS OF Integrating Forward to Enhance Competitiveness

- Forward integration involves entry into value chain system activities closer to the end user. - On the cost side, forward integration can lower costs by increasing efficiency and reducing or eliminating the bargaining power of companies that had wielded such power further along the value system chain. - It can allow manufacturers to gain better access to end users, improve market visibility, and enhance brand name awareness. - Consumer-goods companies like Coach, Under Armour, Pepperidge Farm, Bath & Body Works, Nike, Tommy Hilfiger, and Ann Taylor have integrated forward into retailing and operate their own branded stores in factory outlet malls, enabling them to move overstocked items, slow-selling items, and seconds. - Some producers have opted to integrate forward by selling directly to customers at the company's website

Dimensions of firm scope

- Horizontal scope is the range of product and service segments that a firm serves within its focal market. - Vertical scope is the extent to which a firm's internal activities encompass the range of activities that make up an industry's entire value chain system, from raw- material production to final sales and service activities. - Outsourcing decisions concern another dimension of scope since they involve narrowing the firm's boundaries with respect to its participation in value chain activities. - Strategic alliances and partnerships provide an alternative to vertical integration and acquisition strategies and are some- times used to facilitate outsourcing (cooperative arrangements of this nature). - Two additional dimensions of a firm's scope; Chapter 7 focuses on international expansion—a matter of extending the company's geographic scope into foreign markets; Chapter 8 takes up the topic of corporate strategy, which concerns diversifying into a mix of different businesses. Scope issues are at the very heart of corporate-level strategy.

DISADVANTAGES of a Vertical strategy

- Vertical integration raises a firm's capital investment in the industry, thereby increasing business risk (what if industry growth and profitability unexpectedly go sour?). - often slow to adopt technological advances or more efficient production methods when they are saddled with older technology or facilities. A company that obtains parts and components from outside suppliers can always shop the market for the newest, best, and cheapest parts, whereas a vertically integrated firm with older plants and technology may choose to continue making suboptimal parts rather than face the high costs of writing off undepreciated assets. - Vertical integration can result in less flexibility in accommodating shifting buyer preferences. It is one thing to eliminate use of a component made by a supplier and another to stop using a component being made in-house (which can mean laying off employees and writing off the associated investment in equipment and facilities). Integrating forward or backward locks a firm into relying on its own in-house activities and sources of supply. Most of the world's automakers, despite their manufacturing expertise, have concluded that purchasing a majority of their parts and components from best-in-class suppliers results in greater design flexibility, higher quality, and lower costs than producing parts or components in-house. - Vertical integration may not enable a company to realize economies of scale if its production levels are below the minimum efficient scale. Small companies in particular are likely to suffer a cost disadvantage by producing in-house. - Vertical integration poses all kinds of capacity-matching problems. In motor vehicle manufacturing, for example, the most efficient scale of operation for making axles is different from the most economic volume for radiators, and different yet again for both engines and transmissions. Building the capacity to produce just the right number of axles, radiators, engines, and transmissions in-house—and doing so at the lowest unit costs for each—poses significant challenges and operating complications. - Integration forward or backward typically calls for developing new types of resources and capabilities. Parts and components manufacturing, assembly operations, wholesale distribution and retailing, and direct sales via the Internet represent different kinds of businesses, operating in different types of industries, with different key success factors. Many manufacturers learn the hard way that company-owned wholesale and retail networks require skills that they lack, fit poorly with what they do best, and detract from their overall profit performance. Similarly, a company that tries to produce many components in-house is likely to find itself very hard- pressed to keep up with technological advances and cutting-edge production practices for each component used in making its product.

Capturing the benefits of Strategic Alliances

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. Alliances are more 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; and (3) both parties conclude that continued collaboration is in their mutual interest, perhaps because new opportunities for learning are emerging.

Blue-Ocean Strategy (a Special Kind of Offensive)

A blue-ocean strategy seeks to gain a dramatic competitive advantage by abandoning efforts to beat out competitors in existing markets and, instead, inventing a new market segment that allows a company to create and capture altogether new demand • Hence, a blue-ocean strategy offers growth in revenues and profits by discovering or inventing new industry segments that create altogether new demand. • The market space is a "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. The "blue ocean" represents wide-open opportunity, offering smooth sailing in uncontested waters for the company first to venture out upon it. • E.g., Ebay (online auction) • 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. • A blue-ocean strategy offers growth in revenues and profits by discovering or inventing new industry segments that create altogether new demand. • Market space "blue ocean": where the industry does not really exist yet, is untainted by competition, and offers wide-open opportunity.

The risk of Outsourcing Value Chain activities

A company must guard against outsourcing activities that hollow out the resources and capabilities that it needs to be a master of its own destiny. - The biggest danger of outsourcing is that a company will farm out the wrong types of activities and thereby hollow out its own capabilities - While some companies have apparently been able to lower their operating costs by outsourcing these functions to outsiders, their ability to lead the development of innovative new products is weakened because so many of the cutting-edge ideas and technologies for next-generation products come from outsiders. - Another risk of outsourcing comes from the lack of direct control. It may be difficult to monitor, control, and coordinate the activities of outside parties via contracts and arm's-length transactions alone. Unanticipated problems may arise that cause delays or cost overruns and become hard to resolve amicably.

Ways a firm can firm can pursue vertical integration

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. Vertical integration strategies can aim at -full integration (participating in all stages of the vertical chain) or -partial integration (building positions in selected stages of the vertical chain). - or can engage in tapered integration strategies, which involve a mix of in-house and outsourced activity in any given stage of the vertical chain.

Joint venture

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

Stategic alliances and partnerships

A strategic alliance is a formal agreement between two or more separate companies in which they agree to work cooperatively toward some common objective. Strategic alliances and cooperative partnerships provide one way to gain some of the benefits offered by vertical integration, outsourcing, and horizontal merg- ers and acquisitions while minimizing the associated problems. They serve as an alternative to vertical integration and mergers and acquisitions, and as a supplement to outsourcing, allowing more control relative to outsourcing via arm's-length transactions.

Weighing the pros and cons of Vertical Integration

All in all, therefore, a strategy of vertical integration can have both strengths and weak- nesses. The tip of the scales 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; and (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. 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. Absent solid benefits, integrating forward or backward is not likely to be an attractive strategy option.

When is an alliance strategic?

An alliance becomes "strategic," as opposed to just a convenient business arrangement, when it serves any of the following purposes: 1. It facilitates achievement of an important business objective (like lowering costs or delivering more value to customers in the form of better quality, added features, and greater durability). 2. It helps build, strengthen, or sustain a core competence or competitive advantage. 3. It helps remedy an important resource deficiency or competitive weakness. 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.

Backward integration vs forward integration

Backward integration involves entry into activities previously performed by sup- pliers 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.

Why is the timing of strategic moves important?

Because of first-mover advantages and disadvantages, competitive advantage can spring from when a move is made as well as from what move is made. When to make a strategic move is often as crucial as what move to make. Important to identify when being a first mover, a fast fol- lower, or a late mover is most advantageous. Moving first is no guarantee of success, however, since first movers also face some significant disadvantages. Indeed, there are circumstances in which it is more advantageous to be a fast follower or even a late mover. Because the timing of strategic moves can be consequential, it is important for company strategists to be aware of the nature of first-mover advantages and disadvantages and the conditions favoring each type of move.

How to make Strategic alliances Work

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

VERTICAL INTEGRATION STRATEGIES

Expanding the firm's vertical scope by means of a vertical integration strategy provides another possible way to strengthen the company's position in its core market. A vertically integrated firm is one that participates in multiple stages of an industry's value chain system. Thus, if a manufacturer invests in facilities to produce component parts that it had formerly purchased from suppliers, or if it opens its own chain of retail stores to bypass its former distributors, it is engaging in vertical integration. Vertical integration has no real payoff strategy-wise or profit-wise unless the extra investment can be justified by compensating improvements in company costs, differentiation, or competitive strength.

Vertical integration: BENEFITS OF Integrating Backward to achieve Greater Competitiveness

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 and (2) match or beat suppliers' production efficiency with no drop-off in quality. Neither outcome is easily achieved. However, There are several ways that backward vertical integration can contribute to a cost-based competitive advantage. When there are few suppliers and when the item being supplied is a major component, vertical integration can lower costs by limiting supplier power. Can also lower costs by 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. Hence. 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. On occasion, integrating into more stages along the industry value chain system can add to a company's differentiation capabilities by allowing it to strengthen its core competencies, better master key skills or strategy-critical technologies, or add features that deliver greater customer value.

HORIZONTAL MERGER AND ACQUISITION STRATEGIES

Horizontal mergers and acquisitions, which 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.

Blocking the Avenues Open to Challenger

Involves actions that restrict a challenger's options for initiating a competitive attack. Can involve introducing new features, adding new models, or broadening its product line to close off gaps and vacant niches to opportunity-seeking chal- lengers. It can thwart rivals' efforts to attack with a lower price by maintaining its own lineup of economy-priced options. It can discourage buyers from trying competitors' brands by lengthening warranties, making early announcements about impending new products or price changes, offering free training and support services, or providing coupons and sample giveaways to buyers most prone to experiment. It can induce potential buyers to reconsider switching. It can challenge the quality or safety of rivals' products. Finally, a defender can grant volume discounts or better financing terms to dealers and distributors to discourage them from experimenting with other suppliers, or it can convince them to handle its product line exclusively and force com- petitors to use other distribution outlets.

Signaling Challengers that Retaliation is Likely

Letting challengers know the battle will cost more than it is worth. 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 war 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. To be an effective defensive strategy signaling needs to be accompanied by a credible commitment to follow through.

Horizontal merger: BENEFITS.

Merger and acquisition strategies typically set sights on achieving any of five objectives: 1. Creating a more cost-efficient operation out 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.

What is the purpose of outsourcing strategies?

NARROWING THE SCOPE OF OPERATIONS. Outsourcing involves contracting out certain value chain activities that are normally performed in-house to outside vendors.

What is the purpose of defensive strategies, and what are the two forms they typically take?

PROTECTING MARKET POSITION AND COMPETITIVE ADVANTAGE. The purposes of defensive strategies are to lower the risk of being attacked, weaken the impact of any attack that occurs, and influence challengers to aim their efforts at other rivals. Defensive strategies to protect a company's position usually take one of two forms: (1) actions to block challengers or (2) actions to signal the likelihood of strong retaliation. (Good defensive strategies can help protect a competitive advantage but rarely are the basis for creating one.)

Strategic offensives

Strategic offensives are called for when a company spots opportunities to gain profitable market share at its rivals' expense or when a company has no choice but to try to whittle away at a strong rival's competitive advantage. Strategic offensives should, as a general rule, be grounded in a company's strategic assets and employ a company's strengths to attack rivals in the competitive areas where they are weakest. In other words, the best offensives use a company's most powerful resources and capabilities to attack rivals in the areas where they are competitively weakest.

What is the purpose of launching strategic offensives?

TO IMPROVE A COMPANY'S MARKET POSITION

Strategic Alliances and Their Relative Advantages over vertical integration or horizontal mergers and acquisitions

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 pool- ing and risk sharing. This can be particularly important when investment needs and uncertainty are high, such as when a dominant technology standard has not yet emerged. 2. They are more flexible organizational forms and allow for a more adaptive response to changing conditions. Flexibility is essential when environmental conditions or technologies are changing rapidly. Moreover, strategic alliances under such circumstances may enable the development of each partner's dynamic capabilities. 3. They are more rapidly deployed—a critical factor when speed is of the essence. Speed is of the essence when there is a winner-take-all type of competitive situation, such as the race for a dominant technological design or a race down a steep experience curve, where there is a large first-mover advantage. The 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 and (2) a greater willingness for the partners to make relationship- specific investments.

The scope of the firm

The scope of the firm refers to the range of activities that the firm performs internally, the breadth of its product and service offerings, the extent of its geographic market presence, and its mix of businesses. Several dimensions of firm scope have relevance for business-level strategy in terms of their capacity to strengthen a company's position in a given market.

The best targets for offensive attacks (Choosing which Rivals to Attack).

• Market leaders that are vulnerable. Offensive attacks make good sense when a company that leads in terms of market share is not a true leader in terms of serving the market well. Signs of leader vulnerability include unhappy buyers, an inferior product line, aging technology or outdated plants and equipment, a preoccupation with diversification into other industries, and financial problems. Caution is well advised in challenging strong market leaders. • Runner-up firms with weaknesses in areas where the challenger is strong. Runner-up firms are an especially attractive target when a challenger's resources and capabili- ties are well suited to exploiting their weaknesses. • Struggling enterprises that are on the verge of going under. Challenging a hard-pressed rival in ways that further sap its financial strength and competitive position can weaken its resolve and hasten its exit from the market. In this type of situation, it makes sense to attack the rival in the market segments where it makes the most profits, since this will threaten its survival the most. • Small local and regional firms with limited capabilities. Because small firms typically have limited expertise and resources, a challenger with broader and/or deeper capabilities is well positioned to raid their biggest and best customers—particularly those that are growing rapidly, have increasingly sophisticated requirements, and may already be thinking about switching to a supplier with a more full-service capability.

The principal offensive strategy options

• Offering an equally good or better product at a lower price. (Price-cutting offen- sives should be initiated only by companies that have first achieved a cost advantage) • Leapfrogging competitors by being first to market with next-generation products. (In technology-based industries, the opportune time to overtake an entrenched com- petitor is when there is a shift to the next generation of the technology) • Pursuing continuous product innovation to draw sales and market share away from less innovative rivals (Ongoing introductions of new and improved products can put rivals under tremendous competitive pressure, especially when rivals' new product develop- ment capabilities are weak. But such offensives can be sustained only if a company can keep its pipeline full with new product offerings that spark buyer enthusiasm.) • Pursuing disruptive product innovations to create new markets (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. Examples include online universities, Bumble) • Adopting and improving on the good ideas of other companies (rivals or otherwise) (Offensive-minded companies are often quick to adopt any good idea (not nailed down by a patent or other legal protection) and build on it to create competitive advantage for themselves.) • Using hit-and-run or guerrilla warfare tactics to grab market share from complacent or distracted rivals (to steal sales away from unsuspecting rivals. Guerrilla offensives are particularly well suited to small challengers that have neither the resources nor the market visibility to mount a full-fledged attack on industry leaders.) • Launching a preemptive strike to secure an industry's limited resources or capture a rare opportunity (What makes a move preemptive is its one-of-a-kind nature—whoever strikes first stands to acquire competitive assets that rivals can't readily match.)