Ch 6: Strengthening a company's competitive position

Timing a company's offensive and defensive strategic moves

-because first mover advantages and disadvantages, competitive advantage can spring from when a move is made as well as from what move is made

Blocking the avenues open to challengers

-introduce new features, add new models, or broaden its product line to close off gaps and vacant niches to opportunity-seeking challengers. -maintaining its own lineup of economy-priced options -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. -induce potential buyers to reconsider switching, challenge the quality or safety of rivals' products, grant volume discounts or better financing terms to dealers and distributors to discourage them from experimenting with other suppliers, can convince them to handle its product line exclusively and force competitors to use other distribution outlets

Choosing which rivals to attack

-market leaders that are vulnerable - unhappy buyers, inferior product line, aging technology, outdated plants and equipment, financial problems. -runner up firms with weaknesses in areas where the challenger is strong -struggling enterprises that are on the verge of going under -small local and regional firms with limited capabilities

Defensive strategies - protecting market position and competitive advantage

-purpose is to lower the risk of being attacked, weaken the impact of any attack that occurs, and induce challengers to aim their efforts at other rivals. Defensive strategies take two forms 1. actions to block challengers 2. actions to signal the likelihood of strong retaliation

Disadvantages of a vertical integration strategy

-vertical integration raises a firm's capital investment in the industry, increasing business risk -vertically integrated companies are often slow to embrace technological advances or more efficient production methods when they are saddled with older technology or facilities. -vertical integration can result in less flexibility in accommodating shifting buyer preferences -may not enable a company to realize economies of scale if its production levels are below the minimum efficient scale -poses all kinds of capacity-matching problems -calls for developing new types of resources and capabilities.

Weighing the pros and cons of vertical integration

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 -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.

Integrating backward to achieve greater competitiveness

Backward integration - involves entry into activities previously performed by suppliers or other enterprises positioned along earlier stages of the industry value chain systems -For it to be a cost saving and profitable strategy, the company must be able to 1. achieve the same scale economies as outside suppliers, and 2. match or beat suppliers' production efficiency with no dropoff in quality. -can improve its cost position and competitiveness by performing a broader range of industry value chain activities in house; few suppliers and items a major component then vertical integration can lower costs by limiting supplier power; lower costs by facilitating the coordination of production flows and avoiding bottleneck problems; proprietary know how.

Capturing the benefits of strategic alliances

Extent to which companies benefit: 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 More likely to be longer lasting when: they involve collaboration with partners that do not compete directly such as suppliers or distribution allies, a trusting relationship has been established, and both parties conclude that continued collaboration is in their mutual interest

The potential for late mover advantages or first mover disadvantages

Four instances: 1. when the costs of pioneering are high relative to the benefits accrued and imitative followers can achieve similar benefits with far lower 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

To be a first mover or not

Marathon - slow mover is not unduly penalized, firs mover advantages can be fleeting and there's ample time for fast followers to catch up Sprint - if the market is a winner take all where powerful first mover advantages insulate early entrants from competition and prevent later movers from making any headway

Horizontal merger and acquisition strategies

Merger - the combining of two or more companies into a single corporate entity, with the newly created company often taking on a new name Acquisition - a combination in which one company, the acquirer, purchases and absorbs the operations of another, the acquired. 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 -can strengthen a firm's competitiveness in five ways: 1. by improving the efficiency of its operations, 2. by heightening its product differentiation, 3. by reducing market rivalry, 4. by increasing the company's bargaining power over suppliers and buyers, and 5. by enhancing its flexibility and dynamic capabilities

Strengthening a company's market position via its scope of operations

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. -Horizontal scope - the range of product and service segments that a firm serves within its focal market -Vertical scope - 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.

Strategic alliances and partnerships

Strategic alliance - a formal agreement between two or more separate companies in which they agree to work cooperatively toward some common objective -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 Alliances become strategic when: 1. it facilitates achievement of an important business objective (lowering costs or delivering more value) 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 -companies that have formed a host of alliances need to manage their alliances like a portfolio -the best alliances are highly selective, focusing on particular value chain activities and on obtaining a specific competitive benefit. They enable a firm to build on its strengths and to learn

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 -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 -lack of direct control

The advantages of a vertical integration strategy

add materially to a company's technological capabilities, strengthen the firms competitive position, and boost its profitability

Integrating forward to enhance competitiveness

can lower costs by increasing efficiency and bargaining power. Allow manufacturers to gain better access to end users, improve market visibility, and include the end user's purchasing experience as a differentiating feature. -involves entry into value chain system activities closer to the end user Ex: Harley's company owned retail stores are essentially little museums,

Why mergers and acquisitions sometimes fail to produce anticipated results

cost savings prove smaller, gains in competitive capabilities take longer, efforts to mesh the corporate cultures can stall, key employees become disenchanted, morale drops, differences in management styles and operating procedures are hard to resolve

The drawbacks of strategic alliances and partnerships

gains may fail to materialize, overly optimistic view, partners will gain access to a company's proprietary knowledge base technologies or trade secrets. 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 - speed is of the essence 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 -arms length transactions discourage such investments because they imply less commitment and do not build trust -mergers and acquisitions are especially suited for situations in which strategic alliances or partnerships do not go far enough in providing a company with access to needed resources and capabilities. -when there is limited property rights protection for valuable know how and when companies fear being taken advantage of by opportunistic partners

Signaling challengers that retaliation is likely

goal is to dissuade challengers from attacking at all or to divert them to less threatening options. Letting them know the battle will cost more than it is worth, signals can be given by: -publicly announcing managements 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 counterresponse to the moves of weak competitors to enhance the firm's image as a tough defender *signaling needs to be accompanied by a credible commitment to follow through

First mover advantages

greater risks and development costs 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 move down the learning curve ahead of rivals 5. when a first mover can set the technical standard for the industry

Outsourcing strategies: narrowing the scope of operations

narrow the scope of a business's operations in terms of what activities are performed internally. Outsourcing - involves contracting out certain value chain activities that are normally performed in house to outside vendors. Makes 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 already does best

Blue Ocean Strategy

offers growth in revenues and profits by discovering or inventing new industry segments that create altogether new demand -seeks to gain a dramatic and durable competitive advantage by abandoning efforts to beat out competitors in existing markets and instead inventing a new market segment that renders existing competitors irrelevant and allows a company to create and capture altogether a new demand -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, it is untainted by competition and offers wide open opportunities for profitable and rapid growth if a company can create new demand with a new type of product offering Ex: online auction industry that eBay created and now dominates. NetJets, Drybar, Cirque de soleil, tune hotels, zipcar

Vertical integration strategies

one that participates in multiple stages of an industry's value chain system - full integration: participating in all stages of the vertical chain) -partial integration (building positions in selected stages of the vertical chain) -tapered integration (in house and outsourced activity in a given stage of the vertical chain

Launching strategic offensives to improve a company's market position

sometimes a company's best strategic option is to seize the initiative, go on the attack, and launch a strategic offensive to improve its market position -The best offensives tend to incorporate principles: 1. focusing relentlessly on building competitive advantage and then striving to convert it into a sustainable advantage, 2. applying 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, and 4. displaying a capacity for swift and decisive actions to overwhelm rivals

Choosing the basis for competitive attack

strategic offensives should exploit the power of a company's strongest competitive assets Offensive strategy options: 1. Offering an equally good or better product at a lower price - should only be initiated by companies that have first achieved a cost advantage. 2. Leapfrogging competitors by being first to market with next generation products - xbox & playstation 3. Pursuing continuous product innovation to draw sales and market share away from less innovative rivals 4. Pursuing disruptive product innovations to create new markets - perfecting new products with a few trial users and then rolling them out into the whole market 5. Adopting and improving on the good ideas of other companies 6. Using hit and run or guerrilla warfare tactics to grab market share from complacent or distracted rivals - lowballing on price, sporadic promotional activity, special campaigns 7. Launching a preemptive strike to secure an industry's limited resources or capture a rare opportunity - Ex: securing the best distributors in a particular geographic region, obtaining the most favorable site at a new interchange, tying up the most reliable high quality suppliers via exclusive partnerships, moving swiftly to acquire the assets of distressed rivals at bargain prices

How to make strategic alliances work

success of the alliance depends on how well the partners work together, their capacity to respond and adapt to changing internal and external conditions, and their willingness to renegotiate the bargain if circumstances so warrant. Factors: 1. they create a system for managing their alliances 2. they build relationships wit 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