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

All firms in a competitive market are subject to the offensive challenges created by rival firms. Defensive strategies counter these challenges by

(1) lowering the risk of being attacked, (2) weakening the impact of any attach that occurs, and (3) influencing challengers to aim their attacks at other rivals.

Horizontal Merger and Acquisition Strategies

1. Mergers and acquisitions are a much-used strategic plan. They are especially suited for situations where alliances and partnerships do not go far enough in providing a company with access to the needed resources and capabilities. 2. Combining the operations of two companies within the same industry, via merger or acquisition, is an attractive strategic option for achieving operating economies, strengthening the resulting company's competencies and competitiveness, and opening up avenues of new market opportunity. 3. The difference between a merger and an acquisition relates more to the details of ownership, management control, and financial arrangements than to strategy and competitive advantage. The resources, competencies, and competitive capabilities of the newly created enterprise end up much the same whether the combination is the result of acquisition or merger.

The Disadvantages of a Vertical Integration Strategy - Vertical integration has some substantial drawbacks:

1.It raises a firm's capital investment in the industry 2. It increases business risk by focusing more on one industry 3. Vertically integrated companies are often slow to embrace technological advances 4. It can result in less flexibility in accommodating shifting buyer preferences. 5. It may not be able to achieve economies of scale through capacity-matching problems 6. It often calls for changes in skills and business capabilities

Choosing Which Rivals to Attack - Some rivals offer a more attractive target than others

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

Integrating Backward to Achieve Greater Competitiveness: Integrating Backward to Achieve Greater Competitiveness:

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

When Outsourcing Value Chain Activities Makes Sense:

An activity can be performed better or more cheaply by outside specialist An activity is not crucial to the firm's ability to achieve sustainable competitive advantage and will not hollow out its core competencies. It improves organizational flexibility and speeds time to market. It reduces the company's risk exposure to changing technology and/or changing buyer preferences It allows a company to concentrate on its core business, leverage its key resources, and do even better what it already does.

Timing a Company's Offensive and Defensive Moves When to make a strategic move is often as crucial to success as what strategic move to make. This is especially important when first move advantage or disadvantages exist.

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.

Forward Vertical Integration and Internet Retailing

Bypassing regular wholesale/retail channels in favor of direct sales and Internet retailing can have appeal if it lowers distribution costs, produces a relative cost advantage over certain rivals, offers higher margins, or results in lower selling prices to end users.

Why Mergers and Acquisitions Sometimes Fail to Produce Anticipated Results - Many mergers and acquisitions do not always produce the hoped for outcomes, reasons include

Cost savings may prove smaller than expected. Gains in competitive capabilities may take substantially longer to realize or, worse, may never materialize at all. 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.

Any company that seeks competitive advantage by being a first-mover thus needs to ask some hard questions:

Does market takeoff depend on the development of complementary products of 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? Are there influential competitors in a position to delay or derail the efforts of a first-mover?

Many horizontal mergers and acquisitions are driven by strategies to achieve one of five strategic objectives:

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

Alliances are more likely to fail when

Firms have diverging objectives and priorities. An inability to work well together. Changing conditions that make the purpose of the alliance obsolete. The emergence of more attractive technological paths. Marketplace rivalry between one or more allies. Experience indicates that alliances stand a reasonable chance

Integrating Forward to Enhance Competitiveness: The strategic impetus for forward integration is to gain better access to end-users and better market visibility.

Forward integration can lower costs by increasing efficiency and bargaining power. In addition, it can allow manufacturers to gain better access to end users. Forward integration can improve market visibility and include the end user's purchasing experience as a differentiating feature.

Choosing the basis for competitive attack

Generally, strategic offensives should be grounded in a company's competitive assets and strong points and should be aimed at exploiting competitor weaknesses. Ignoring the need to tie a strategic offensive to a company's competitive strengths is like going to war with a popgun—the prospects for success are dim.

Deciding Whether to be an Early Mover or Late Mover

In weighing the pros and cons of first-mover versus fast-follower, it matter whether the race to market leadership in a particular industry is a marathon or a sprint. In a marathon a slow-mover is not unduly penalized - first mover advantage can be fleeting. The lesson is that there is a market-penetration curve for every emerging opportunity; typically the curve has an inflection point at which all the pieces of the business model fall into place, buyer demand explodes, and the market takes off. It can come early in a fast-rising curve (like e-mail) or farther up on a slow-rising curve (like use of broadband) Any company that seeks competitive advantage by being a first-mover thus needs to ask some hard questions: Does market takeoff depend on the development of complementary products of 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? Are there influential competitors in a position to delay or derail the efforts of a first-mover? When the answer to any of these questions is yes, then a company must be careful not to pour too many resources into getting ahead of the market opportunity - the battle for market leadership is likely going to be more of a 10-year marathon than a short-lived contest.

Failed Strategic Alliances and Cooperative Partnership

Most alliances with an objective of technology sharing or providing market access turn out to be temporary, fulfilling their purpose after a few years because the benefits of mutual learning have occurred.

Launching Strategic Offensives to Improve a Company's Market Position

No matter which of the five generic competitive strategies a company employs, there are times when a company should be aggressive and go on the offensive.

The Potential for first-mover advantages or is great however, there are conditions where first-movers have an advantage:

Pioneering helps build a firm's image and reputation with buyers Early commitments to new technologies, new-style components, new or emerging distribution channels, and so on, can produce an absolute cost advantage over rivals First-time customers remain strongly loyal to pioneering firms in making repeat purchases Moving first constitutes a preemptive strike, making imitation extra hard or unlikely.

Strengthening A Company's Market Position Via Its Scope Of Operations

Separate from competitive moves and timing, managers must also carefully consider the scope of a company's operations. These decisions essentially determine where the boundaries of the firm lie and the degree to which the operations within the boundaries are common.

The Big Risk of Outsourcing Value Chain Activities

The biggest danger of outsourcing is that a company will farm out too many or the wrong types of activities and thereby hollow out its own capabilities. 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.

Vertical scope

The extent to which a firm's internal activities encompass one, some, many, or all of the activities that make up an industry's entire value chain system, ranging from raw-material production to final sales and service activities.

Signaling challengers that retaliation is likely

The goal is to discourage challengers from attacking, or diverting their attack to another rival. Methods can include: Publicly announcing management's commitment to maintain 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

Blocking the Avenues Open to Challengers

The most frequently employed approach to defending a company's present position is to block an attack. Methods can include alternative technology, introduction of new features and models, maintaining economy priced options, enhancing support, and volume discounts to dealers.

Alliances are more likely to be long lasting when:

They involve collaboration with partners that do not compete. A trusting relationship has been established. Both parties conclude that continued collaboration is in their mutual interest

Vertical Integration Strategies

Vertical integration extends a firm's competitive and operating scope within the same industry. It involves expanding the firm's range of activities backward into sources of supply and/or forward toward end users. Vertical integration strategies can aim at full integration or partial integration.

The Potential for Late-Mover Advantages or First-Mover Disadvantages. There are conditions where late-mover advantages exist:

When pioneering leadership is more costly than imitating followership and only negligible learning/experience curve benefits accrue to the leader - a condition that allows a follower to end up with lower costs than the first-mover. When the products of an innovator are somewhat primitive and do not live up to buyer expectations, thus allowing a clever follower to win disenchanted buyers away from the leader with better-performing products. When potential buyers are skeptical about the benefits of a new technology or product being pioneered by a first mover. When rapid market evolution (due to fast-paced changes in either technology or buyer needs or expectations) gives fast followers and maybe even cautious late movers the opening to leapfrog a first mover's products with more attractive nextversion products.

Managers must carefully evaluate and choose from the several measures that can enhance a company's strategy:

Whether and when to go on the offensive and initiate aggressive strategic moves to improve the company's market position. Whether and when to employ defensive strategies to protect the company's market position. When to undertake strategic moves based upon whether it is advantageous to be a first mover or a fast follower or a late mover. Whether to integrate backward or forward into more stages of the industry value chain. Which value chain activities, if any, should be outsourced. Whether to enter into strategic alliances or partnership arrangements with other enterprises. Whether to bolster the company's market position by merging with or acquiring another company in the same industry.

A joint venture

a type of strategic alliance that involves the establishment of an independent corporate entity that is jointly owned and controlled by the two partners.

The principal offensive strategy options include the following:

a. Attacking the competitive weaknesses of rivals b. Offering an equally good or better product at a lower price. c. Pursuing continuous product innovation to draw sales and market share away from less innovative rivals. d. Leapfrogging competitors by being the first to market with next-generation technology or products. e. Adopting and improving on the good ideas of other companies (rivals or otherwise). f. Deliberately attacking those market segments where a key rival makes big profits. g. Maneuvering around competitors to capture unoccupied or less contested market territory h. Using hit-and-run or guerrilla warfare tactics to grab sales and market share from complacent or distracted rivals i. Launching a preemptive strike to capture a rare opportunity or secure an industry's limited resources.

Blue Ocean Strategy Two distinct types of market space

a. Industry boundaries are defined and accepted, the competitive rules of the game are well understood by all industry members, and companies try to outperform rivals by capturing a bigger share of existing demand. In such markets lively competition constrains a company's prospects for rapid growth and superior profitability since rivals move quickly to imitate or counter the successes of competitors. b. Industry does not really exist yet, is untainted by competition, and offers wide open opportunity for profitable and rapid growth if a company can come up with a product offering and strategy that allows it to create new demand rather than fight over existing demand. Examples include Cirque du Soleil, which re-invented the circus, and eBay.

Achilles' heel of alliances and cooperative strategies

becoming dependent on other companies for essential expertise and capabilities.

Backward vertical integration

can produce a differentiation-based competitive advantage when a company, by performing activities in-house that were previously outsourced, ends up with a better quality offering, improves the caliber of its customer service, or in other ways enhances the performance of its final product.

A Strategic alliance

formal agreement between two or more separate companies in which they agree to work cooperatively toward some common objective.

Some alliances

hold only limited potential because the partner guards its most valuable skills and expertise; in such instances, acquiring or merging with a company possessing the desired knowhow and resources is a better solution.

The two primary dimensions are

horizontal and vertical scope.

Outsourcing

involves contracting out certain value chain activities to outside specialists and strategic allies.

Backward integration

involves performing industry value chain activities previously performed by suppliers or other enterprises engaged in earlier stages of the industry value chain; forward integration involves performing industry value chain activities closer to the end user.

Collaborative arrangements

may entail a contractual agreement, but they commonly stop short of formal ownership ties between the partners.

Blue ocean strategies

offer growth in revenues and profits by discovering or inventing new industry segments that create altogether new demand.

A vertically integrated firm is

one that performs value chain activities along more than one stage of an industry's value chain system.

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

The two best reasons for investing company resources in vertical integration are to

strengthen the firm's competitive position and/or boost its profitability,

Horizontal Scope

the range of product and service segments that a firm serves within its focal market

A 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.

Strategic alliances and cooperative partnerships provide one way to gain some of the benefits offered by

vertical integration, outsourcing, and horizontal mergers and acquisitions while minimizing the associated problems.