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Chapter Summary

Supplementing the Chosen Competitive Strategy Other Important Strategy Choices

Chapter Six identies that once a company has settled on which of the ve basic competitive strategies to employ, attention must turn to what other strategic actions can be taken in order to complement its competitive approach and round out its business strategy. As discussed in earlier chapters, a companys overall business strategy includes not only the details of its competitive strategy, but also other strategic initiatives that can promote competitive advantage. Several measures to enhance a companys strategy have to be considered: Whether to enter into strategic alliances or partnerships arrangements with other enterprises. Whether to bolster the companys market position via merger or acquisition. Whether to integrate backward or forward into more stages of the industry value chain. Which value chain activities, if any, should be outsourced. Whether and when to go on the offensive and initiate aggressive strategic moves to improve the companys market position. Whether and when to employ defensive strategies to protect the companys market porisiton. When to undertake strategic moveswhether it is advantageous to be a rst-mover or a fast follower or a late-mover. to expedite the development of promising new technologies or products, to overcome decits in their own technical and manufacturing expertise This chapter presents the pros and cons of each of these business strategy choices.

Lecture Outline
I. Strategic Alliances and Collaborative Partnerships 1. Companies in all types of industries and have elected to form strategic alliances and partnerships to add to their accumulation of resources and competitive capabilities and strengthen their competitiveness in domestic and international markets. 2. The most common reasons why companies enter into strategic alliances are: to expedite the development of promising new technologies or products, to overcome decits in their own technical and manufacturing expertise
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to bring together the personnel and expertise needed to create desirable new skill sets and capabilities, to improve supply chain efciencies, to gain economies of scale in production and/or marketing, and to acquire or improve market access through joint marketing agreements. Core Concept
Strategic alliances are collaborative arrangements where two or more companies join forces to achieve mutually benecial strategic outcomes. The competitive attraction of alliances is in allowing companies to bundle competencies and resources that are more valuable in a joint effort than when kept separate.

A. Failed Strategic Alliances and Cooperative Partnerships 1. Alliances are more likely to be long lasting when (a) they involve collaboration with suppliers or distribution allies, or (b) both parties conclude that continued collaboration is in their mutual interest, perhaps because new opportunities for learning are emerging. 2. A surprisingly large number of alliances never live up to expectations. An article (2007) from the Harvard Business Review reported that even though the number of alliances increases by about 25 percent annually, about 60 to 70 percent continue to fail each year. 3. Experience indicates that alliances stand a reasonable chance of helping a company reduce competitive disadvantage but rarely have they proved a durable competitive edge over rivals. B. The Strategic Dangers of Relying on Alliances for Essential Resources and Capabilities 1. The Achilles heel of alliances and cooperative strategies is dependence on another company for essential expertise and capabilities. II. Merger and Acquisition Strategies 1. Mergers and acquisitions are especially suited for situations where alliances or partnerships do not go far enough in providing a company with access to the needed resources and capabilities. Core Concept
Combining the operations of two companies, via merger or acquisition, is an attractive strategic option for achieving operating economies, strengthening the resulting companys competencies and competitiveness, and opening up avenues of new market opportunity.

2. A merger is the combining of two or more companies into a single entity. An acquisition is a combination in which one company, the acquirer, purchases and absorbs the operations of another, the acquired. 3. The difference between a merger and an acquisition relates more to the details of ownership, management control, and nancial 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. 4. Many mergers and acquisitions are driven by strategies to achieve one of ve strategic objectives: To create a more cost-efcient operation out of the combined companies.

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To expand a companys geographic coverage. To extend the companys business into new product categories or international markets. To gain quick access to new technologies or other resources and competitive capabilities. To try to invent a new industry and lead the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunities. 5. Concepts & Connections 6.1 describe how Clear Channel Communications has used acquisitions to build a leading global position in outdoor advertising and radio broadcasting. C. 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 substantially longer to realize, or worse, may never materialize at all. 3. Efforts to mesh the corporate cultures can stall out due to formidable resistance from organization members. 4. Managers and employees at the acquired company may argue forcefully for continuing to do certain things the way they were done prior to the acquisition. 5. Key employees at the acquired company can quickly become disenchanted and leave.

Illustration Capsule 6.1, Clear Channel CommunicationsUsing Mergers and Acquisitions to Become a Global Market Leader
Discussion Question: Discuss the impact that the loosening of rules by the FCC had on Clear Channels business strategy. Describe how acquisitions beneted this company. Answer: In the late 1980s, following the decision by the FCC to loosen rules regarding the ability of one company to own both radio and TV stations, Clear Channel broadened its strategy and began acquiring small, struggling TV stations. Its new strategy was to buy radio, TV, and outdoor advertising properties with operations in many of the same local markets, share facilities and staffs to cut costs, improve programming, and sell advertising for all three media simultaneously. By 1998, Clear Channel had used acquisitions to build a leading position in radio and television stations. In 2003, this company owned radio and television stations, outdoor advertising, and entertainment venues in 66 countries around the world.

III. Vertical Integration Strategies: Operating Across More Industry Value Chain Segments 1. Vertical integration strategies can aim at full integration or partial integration. Core Concept
A vertical integration strategy has appeal only if it signicantly strengthens a rms competitive position and/or boosts its protability.

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A. The Advantages of a Vertical Integration Strategy 1. The two best reasons for investing company resources in vertical integration are to strengthen the rms competitive position and/or boost its protability, 2. Integrating Backward to Achieve Greater Competitiveness: For backward integration to be a viable and protable strategy, a company must be able to 1) achieve the same scale economies as outside suppliers, and 2) match or beat suppliers production efciency with no drop-off in quality.

3. Backward integration is most likely to reduce costs when: a. Suppliers have very large prot margins b. The item being supplied is a major cost component c. The requisite technological skills are easily mastered or can be gained or acquired. 4. Backward vertical integration can produce a differentiation-based competitive advantage when performing activities internally contributes to a better quality product/service offering, improves the caliber of customer service, or in other ways enhances the performance of its nal product. 5. Integrating Forward to Enhance Competitiveness allows manufacturers to gain better access to end users, improve market visibility, and include the end users purchasing experience as a differentiating experience. 6. Forward vertical integration 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. B. The Disadvantages of a Vertical Integration Strategy 1. Vertical integration has some substantial drawbacks: It boosts a rms capital investment in the industry. Integrating into more industry value chain segments increases business risk if industry growth and protability sour. Vertically integrated companies are often slow to embrace technological advances or more efcient productions methods when they are saddled with older technology or facilities Integrating backward potentially results in less exibility in accommodating shifting buyer preferences when a new product design doesnt include parts and components that the company makes in-house. Vertical integration poses all kinds of capacity matching problems. Integrating across several production stages in ways that achieve the lowest feasible costs can be a monumental challenge. Integration forward or backward often requires the development of new skills and business capabilities.

Core Concept
In todays world of close relationships with suppliers and efcient supply chain management, very few businesses can make a case for integrating backward into the business of suppliers.

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C. Outsourcing Strategies: Narrowing the Boundaries of the Business 1. Outsourcing makes sense whenever: An activity can be performed better or more cheaply by outside specialists. The activity is not crucial to the rms ability to achieve sustainable competitive advantage and wont hollow out its capabilities, core competencies, or technical know-how. It improves a companys ability to innovate. It allows a company to concentrate on its core business, leverage its key resources and core competencies, and do even better what it already does best. Core Concept
A company should generally not perform any value chain activity internally that can be performed more efciently or effectively by outsiderthe chief exception is when a particular activity is strategically crucial.

2. The risk of an outsourcing strategy is that a company will farm out the wrong types of activities and thereby hallow out its own capabilities. IV. Strategic Options to Improve a Companys Market Position the Use of Strategic Offences 1. There are times when a company should be aggressive and go on the offensive. Strategic offences are called for when a company spots opportunities to gain protable market share at the expense of rivals or when a company has no choice but to try to whittle away at a strong rivals competitive advantage. A. Choosing the Basis for Competitive Attack 1. As a general rule, strategic offenses should be grounded in a companys competitive assets and strong points, and exploit competitor weaknesses. 2. 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 rst to market the 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 prots.

g. Maneuvering around competitors to capture unoccupied or less contested market territory. h. Using hit-and run 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 industrys limited resources.

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B. Choosing Which Rivals to Attack 1. Offensive-minded rms need to analyze which of their rivals to challenge as well as how to mount that challenge. The following are the best targets for offensive attacks: Market leaders that are vulnerable Runner-up rms with weaknesses in areas where the challenger is strong Struggling enterprises that are on the verge of going under Small local and regional rms with limited capabilities C. Blue Ocean Strategy -- A Special Kind of Offensive 1. 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. 2. This strategy views the business universe as consisting of two distinct types of market space: a. Industry boundaries are dened 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 companys prospects for rapid growth and superior protability 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 protable and rapid growth if a company can come up with a product offering and strategy that allows it to create new demand rather than ght over existing demand. Examples include Cirque du Soleil, which re-invented the circus, and eBay. V. Strategy Options to Protect a Companys Market Position and Competitive Advantage The Use of Defensive Strategies 1. In a competitive market, all rms are subject to offensive challenges from rivals. The purposes of defensive strategies are to lower the risk of being attacked, weaken the impact of any attack that occurs, and inuence challengers to aim their efforts at other rivals. Core Concept
Great defensive strategies can help protect competitive advantage but rarely are the basis for creating it.

A. Blocking the Avenues Open to Challengers 1. There are any number of obstacles that can be put in the path of would-be challengers. 2. A defender can introduce new features, add new model, or broaden its product line to close off vacant niches to opportunity-seeking challengers. 3. It can try to discourage buyers from trying competitors brands. 4. A defender can grant volume discounts or better nancing terms to discourage experimenting with other suppliers.

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B. Signaling Challengers that Retaliation is Likely Publicly announcing managements commitment to maintain the rms 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 rms image as a tough defender. VI. Timing a Companys Strategic Moves 1. Timing is especially important when rst-mover advantages or disadvantages exist. 2. Sometimes markets are slow to accept the innovative product offering of a rst-mover, in which case a fast follower with substantial resources and marketing muscle can overtake a rst mover. 3. To sustain any advantage that may initially accrue to a pioneer, a rst-mover needs to be a fast learner sand continue to move aggressively to capitalize on any initial pioneering advantage. Core Concept
Because of rst-mover advantages and disadvantages, competitive advantage can spring from when a move is made as well as from what move is made.

A. The Potential For Late-Mover Advantages or First-Mover Disadvantages 1. When pioneering leadership is more costly than imitating followership and only negligible learning/experience curve benets accrue to the leadera condition that allows a to end up with lower costs than the rst-mover. 2. 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. 3. When the demand side of the marketplace is skeptical about the benets of a new technology or product being pioneered by a rst-mover. 4. When rapid market evolution (due to fast paced changes in either technology or buyer needs and expectations) gives fast-followers and maybe even cautious late-movers the opening to leapfrog a rst-movers products with more attractive next version products. 5. Concepts & Connections 6.2 describes how amazon.com achieved a rst-mover advantage in online retailing.

Illustration Capsule 6.2, Amazon.Coms First-Mover Advantage in Online Retailing

Discussion Question: Jeff Bezos, Founder and CEO of Amazon.com can be credited with rst-mover advantage in several instances of Amazon.coms amazing growth. Discuss.

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B. Deciding Whether to Be an Early-Mover or Late Mover 1. In weighing the pros and cons of being a rst-mover versus a fast follower versus a slow mover, it matters whether the race to market leadership in a particular industry is a marathon or a spring. 2. Any company that seeks competitive advantage by being a rst-mover needs to ask some hard questions. Does market take-off depend on the development of complementary products or services that are currently 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 higher switching costs? Are there inuential competitors in a position to delay or derail the efforts of a rst mover? 3. When the answer to any of the questions are yes, then a company must be careful not to pour too many resources into getting ahead of the market opportunitythe race is likely going to be more of a 10-year marathon than a two-year sprint.

Assurance of Learning Exercises

1. Using your university librarys subscription to Lexis-Nexis, EBSCO, or a similar database, perform a search on acquisition strategy. Identify at least two companies in different industries that are using acquisitions to strengthen their market positions. How have these acquisitions enhanced the acquiring companies resource strengths and competitive capabilities? The vast amount of choices should permit students to offer extensive, well-developed answers to this question. Suggested student responses may identify the following examples. The rst example is SCM Microsystems, Inc.s merger with Hirsch Electronics Corporation. Following the merger, revenue more than doubled, reecting the success of the Companys strategy to increase its revenue by expanding its customer base and market reach through acquisitions and market investment. According to Felix Marx, chief executive ofcer of SCM Microsystems, The integration of Hirsch and SCM has proceeded rapidly as we have focused on creating synergies within our sales and marketing organizations to accelerate the acquisition of new customers, expand our mutual distribution channels and introduce new products in target markets. A second example is Nucor Corporations acquisition of Harris Steel. This acquisition was based on Nucors desire to achieve vertical integration both upstream for lower cost raw materials and downstream for a higher valueadded product mix and diversication. 2. Go to www.bridgestone.co.jp/english/info and review information about Bridgestone Corporations Tire and Raw Materials operations under the Corporate Information and Data Library links. To what extent is the company vertically integrated? What segments of the industry value chain has the company chosen to perform? What are the benets and liabilities of Bridgestones vertical integration strategy? NOTE: Entering the above link will take students to www.bridgestone.com. After reviewing the Web site, information related to the companys vertical integration strategy can be found in the following areas. (1) Click on Corporate, click on Prole, click on Total Optimization and (2) Click on Responsibilities, click on Programs.

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Bridgestone Tire Co., Ltd. was established in 1931. As Japans automobile industry grew, The Bridgestone Group expanded to become Japans largest tire manufacturer. The company also actively expanded overseas, particularly in Asia. In 1988, the company acquired The Firestone Tire & Rubber Company, a global corporation, and this transformed Bridgestone into one of the worlds largest tire and rubber companies. Based on the information provided, the company is denitely vertically integrated to include development, manufacturing, marketing, and distribution of tires. The companys operations include, Tires and tubes for passenger cars, trucks and buses, construction and mining vehicles, industrial machinery, agricultural machinery, aircrafts, motorcycles and scooters, and other automotive parts, retreading materials and services, automotive maintenance and repair services, raw materials for tires, and other products. The Bridgestone Group currently operates 179 production facilities located in 25 countries. The company sells products in more than 150 countries around the world. The sales network is one of the largest in the world. The company strives to provide direct, personalized sales and technical service to customers across the globe. The segments of the industry value chain the company performs is best summarized as follows, Bridgestone Group operations span upstream and downstream activities, committing us to the deployment of extensive resources on a global basis to build a business that stretches from sourcing of raw materials to the sale of nal products. The effective and efcient management of these resources enables us to develop products and supply services which are highly competitive in the global marketplace and provide our customers with the quality that they have come to expect from Bridgestone. According to the company, a key issue for the future will be focusing resources on a single goal, creating systems capable of supplying customers with high quality products and services as efciently as possible. This challenge is known as total optimization. The company is working on strengthening all aspects of the supply chain, from product planning and business development to raw material and equipment procurement, production and distribution. Another critical aspect of the companys efforts to achieve total optimization is to boost its competitiveness through ongoing investments in the skills of its employees, regardless of where they work in the Bridgestone Group. The company is also committed to having a coordinated program of activities is to reduce the environmental impact of business processes associated with its vertical integration strategy. 3. Go to www.google.com and do a search on outsourcing. Identify at least two companies in different industries that have entered into outsourcing agreements with rms with specialized services. In addition, describe what value chain activities the companies have chosen to outsource. Do any of these outsourcing agreements seem likely to threaten any of the companies competitive capabilities? There are numerous choices that should allow students to provide extensive, well-developed answers to this question. Suggested student responses may identify the following examples. The rst example is IBM and Grupo Gigante, one of Mexicos leading business groups. The companies have extended their business contract for ve additional years through a series of outsourcing agreements. IBM will be responsible for fully managing and monitoring the information technology (IT) infrastructure under two managed service modes, applications and infrastructure. IBMs outsourcing solution for Grupo Gigante includes infrastructure services components for equipment and server hosting, help desk activation, distributed computing services, on-site support services, data center security and disaster recovery planning. Grupo Gigante will strategically retain a team of experts to manage the main IT applications that support the business which will enable the company to keep in-house the value of the key human capital it has developed over time. This provides the company with opportunities to test new solutions that facilitate strategic business decision-making and will bring more efciency to day-to-day operations. The value chain activity involved is a support activity, i.e. information technology. A second example involves a three-year

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ATM-outsourcing agreement between NCR Corporation and Co-op Financial Services that enables Co-ops credit-union members to lease instead of buy new ATMs to reduce participating credit unions capital expenses. According to Bill Allen, NCRs marketing director, Leasing ATMs is a lot more attractive for some nancial institutions because leasing agreements are not carried on the books as a capital expense. Co-op ATM Managed Services, a unit of Co-op Financial Services, will manage credit-union members leased ATMs. NCR will provide rst- and second-line maintenance on all of the leased machines so if the ATM breaks down, NCR xes it. It does not appear these outsourcing agreements are likely to threaten the competitive capabilities of these companies.