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Section 6

Lecture Notes for Chapter 6

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Chapter
Chapter Summary

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Supplementing the Chosen Competitive Strategy – Other Important Strategy Choices
Chapter Six identifies that once a company has settled on which of the five 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 company’s 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 company’s strategy have to be considered:  Whether to enter into strategic alliances or partnerships arrangements with other enterprises.  Whether to bolster the company’s 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 company’s market position.  Whether and when to employ defensive strategies to protect the company’s market porisiton.  When to undertake strategic moves—whether it is advantageous to be a first-mover or a fast follower or a late-mover.  to expedite the development of promising new technologies or products,  to overcome deficits 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 deficits in their own technical and manufacturing expertise
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. 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. B.380 Section 6 Instructor’s Manual for Essentials of Strategic Management  to bring together the personnel and expertise needed to create desirable new skill sets and capabilities. 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. 4. via merger or acquisition. and financial arrangements than to strategy and competitive advantage. and competitive capabilities of the newly created enterprise end up much the same whether the combination is the result of acquisition or merger. Failed Strategic Alliances and Cooperative Partnerships 1. the acquirer. The resources. Core Concept Strategic alliances are collaborative arrangements where two or more companies join forces to achieve mutually beneficial strategic outcomes. Core Concept Combining the operations of two companies.  to gain economies of scale in production and/or marketing. 2. strengthening the resulting company’s competencies and competitiveness. competencies.  to improve supply chain efficiencies. The Strategic Dangers of Relying on Alliances for Essential Resources and Capabilities 1. A. and  to acquire or improve market access through joint marketing agreements. An article (2007) from the Harvard Business Review reported that even though the number of alliances increases by about 25 percent annually. A surprisingly large number of alliances never live up to expectations. and opening up avenues of new market opportunity. management control. The Achilles’ heel of alliances and cooperative strategies is dependence on another company for essential expertise and capabilities. about 60 to 70 percent continue to fail each year. 3. purchases and absorbs the operations of another. 2. II. Merger and Acquisition Strategies 1. or (b) both parties conclude that continued collaboration is in their mutual interest. Many mergers and acquisitions are driven by strategies to achieve one of five strategic objectives:  To create a more cost-efficient operation out of the combined companies. 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. The difference between a merger and an acquisition relates more to the details of ownership. A merger is the combining of two or more companies into a single entity. An acquisition is a combination in which one company. Alliances are more likely to be long lasting when (a) they involve collaboration with suppliers or distribution allies. perhaps because new opportunities for learning are emerging. 3. the acquired. is an attractive strategic option for achieving operating economies.

III. Cost savings may prove smaller than expected. 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. Clear Channel had used acquisitions to build a leading position in radio and television stations.1 describe how Clear Channel Communications has used acquisitions to build a leading global position in outdoor advertising and radio broadcasting. Describe how acquisitions benefited this company. Clear Channel Communications—Using 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 Channel’s business strategy. Vertical Integration Strategies: Operating Across More Industry Value Chain Segments 1. outdoor advertising. and sell advertising for all three media simultaneously.Section 6 Lecture Notes for Chapter 6 381  To expand a company’s geographic coverage. Concepts & Connections 6. improve programming. or worse. Clear Channel broadened its strategy and began acquiring small. this company owned radio and television stations. 3. 4.  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. Illustration Capsule 6. Its new strategy was to buy radio. Core Concept A vertical integration strategy has appeal only if it significantly strengthens a firm’s competitive position and/or boosts its profitability. Vertical integration strategies can aim at full integration or partial integration. . TV. 5. Answer: In the late 1980s. Why Mergers and Acquisitions Sometimes Fail to Produce Anticipated Results 1. C. By 1998.  To gain quick access to new technologies or other resources and competitive capabilities. 5.1. struggling TV stations. In 2003. and outdoor advertising properties with operations in many of the same local markets.  To extend the company’s business into new product categories or international markets. and entertainment venues in 66 countries around the world. 2. share facilities and staffs to cut costs. Key employees at the acquired company can quickly become disenchanted and leave. following the decision by the FCC to loosen rules regarding the ability of one company to own both radio and TV stations. Efforts to mesh the corporate cultures can stall out due to formidable resistance from organization members. Gains in competitive capabilities may take substantially longer to realize. may never materialize at all.

 Integrating into more industry value chain segments increases business risk if industry growth and profitability sour. Integrating across several production stages in ways that achieve the lowest feasible costs can be a monumental challenge. Backward integration is most likely to reduce costs when: a. . 3. Vertical integration has some substantial drawbacks:  It boosts a firm’s capital investment in the industry. very few businesses can make a case for integrating backward into the business of suppliers. or in other ways enhances the performance of its final product. 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. The item being supplied is a major cost component c. The Disadvantages of a Vertical Integration Strategy 1. B.  Integration forward or backward often requires the development of new skills and business capabilities. offers higher margins. Suppliers have very large profit margins b. and 2) match or beat supplier’s production efficiency with no drop-off in quality. 5. Forward vertical integration and internet retailing can have appeal if it lowers distribution costs. a company must be able to 1) achieve the same scale economies as outside suppliers. The Advantages of a Vertical Integration Strategy 1. improve market visibility. or results in lower selling prices to end users. Integrating Forward to Enhance Competitiveness allows manufacturers to gain better access to end users. 2. and include the end user’s purchasing experience as a differentiating experience. 6.382 Section 6 Instructor’s Manual for Essentials of Strategic Management A. Integrating Backward to Achieve Greater Competitiveness: For backward integration to be a viable and profitable strategy. Core Concept In today’s world of close relationships with suppliers and efficient supply chain management.  Vertically integrated companies are often slow to embrace technological advances or more efficient productions methods when they are saddled with older technology or facilities  Integrating backward potentially results in less flexibility in accommodating shifting buyer preferences when a new product design doesn’t include parts and components that the company makes in-house. The requisite technological skills are easily mastered or can be gained or acquired. produces a relative cost advantage over certain rivals. 4. The two best reasons for investing company resources in vertical integration are to strengthen the firm’s competitive position and/or boost its profitability.  Vertical integration poses all kinds of capacity matching problems.

Outsourcing makes sense whenever:  An activity can be performed better or more cheaply by outside specialists. A. . Maneuvering around competitors to capture unoccupied or less contested market territory. leverage its key resources and core competencies. f. g. Outsourcing Strategies: Narrowing the Boundaries of the Business 1. Launching a preemptive strike to capture a rare opportunity or secure an industry’s limited resources. 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 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. and do even better what it already does best. Attacking the competitive weaknesses of rivals. Offering an equally good or better product at a lower price c.  It allows a company to concentrate on its core business.  The activity is not crucial to the firm’s ability to achieve sustainable competitive advantage and won’t hollow out its capabilities. The principal offensive strategy options include the following: a. 2. Using hit-and run guerrilla warfare tactics to grab sales and market share from complacent or distracted rivals. Strategic Options to Improve a Company’s Market Position – the Use of Strategic Offences 1. IV. or technical know-how. Pursuing continuous product innovation to draw sales and market share away from less innovative rivals. and exploit competitor weaknesses. e. Choosing the Basis for Competitive Attack 1. h. 2. strategic offenses should be grounded in a company’s competitive assets and strong points. As a general rule. Core Concept A company should generally not perform any value chain activity internally that can be performed more efficiently or effectively by outsider—the chief exception is when a particular activity is strategically crucial.  It improves a company’s ability to innovate. b.Section 6 Lecture Notes for Chapter 6 383 C. Adopting and improving on the good ideas of other companies (rivals or otherwise). Leapfrogging competitors by being the first to market the next generation technology or products. 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. Deliberately attacking those market segments where a key rival makes big profits. i. d. core competencies.

V. and influence challengers to aim their efforts at other rivals. 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. the competitive rules of the game are well understood by all industry members. This strategy views the business universe as consisting of two distinct types of market space: a. 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. The following are the best targets for offensive attacks:  Market leaders that are vulnerable  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 C.A Special Kind of Offensive 1. Industry boundaries are defined and accepted. all firms are subject to offensive challenges from rivals. or broaden its product line to close off vacant niches to opportunity-seeking challengers. 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. A blue ocean strategy seeks to gain a dramatic and durable competitive advantage by abandoning efforts to beat out competitors in existing markets and. A defender can grant volume discounts or better financing terms to discourage experimenting with other suppliers. Examples include Cirque du Soleil. There are any number of obstacles that can be put in the path of would-be challengers. A defender can introduce new features. 3.384 Section 6 Instructor’s Manual for Essentials of Strategic Management B. 2. Industry does not really exist yet. Core Concept Great defensive strategies can help protect competitive advantage but rarely are the basis for creating it. instead. weaken the impact of any attack that occurs. Choosing Which Rivals to Attack 1. which re-invented the circus. is untainted by competition. It can try to discourage buyers from trying competitors’ brands. Blue Ocean Strategy -. Strategy Options to Protect a Company’s Market Position and Competitive Advantage – The Use of Defensive Strategies 1. add new model. The purposes of defensive strategies are to lower the risk of being attacked. and companies try to outperform rivals by capturing a bigger share of existing demand. Offensive-minded firms need to analyze which of their rivals to challenge as well as how to mount that challenge. A. and eBay. In a competitive market. Blocking the Avenues Open to Challengers 1. 2. 4. .

3. 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 to end up with lower costs than the first-mover. When the demand side of the marketplace is skeptical about the benefits of a new technology or product being pioneered by a first-mover.com’s amazing growth.  Maintaining a war chest of cash and marketable securities. . 4. When the products of an innovator are somewhat primitive and do not live up to buyer expectations.  Publicly committing the company to a policy of matching competitor’s terms or prices. The Potential For Late-Mover Advantages or First-Mover Disadvantages 1. 5. thus allowing a clever follower to win disenchanted buyers away from the leader with better-performing products.  Making an occasional strong counter-response to the moves of weak competitors to enhance the firms image as a tough defender. 2.com can be credited with first-mover advantage in several instances of Amazon. 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 first-mover’s products with more attractive next version products. Amazon. To sustain any advantage that may initially accrue to a pioneer.Section 6 Lecture Notes for Chapter 6 385 B. 3. VI. a first-mover needs to be a fast learner sand continue to move aggressively to capitalize on any initial pioneering advantage.2. Illustration Capsule 6. competitive advantage can spring from when a move is made as well as from what move is made. Discuss. Founder and CEO of Amazon. Concepts & Connections 6.2 describes how amazon. Core Concept Because of first-mover advantages and disadvantages.Com’s First-Mover Advantage in Online Retailing Discussion Question: Jeff Bezos. Sometimes markets are slow to accept the innovative product offering of a first-mover. Signaling Challengers that Retaliation is Likely  Publicly announcing management’s commitment to maintain the firm’s present market share. 2.com achieved a first-mover advantage in online retailing. Timing a Company’s Strategic Moves 1. A. Timing is especially important when first-mover advantages or disadvantages exist. in which case a fast follower with substantial resources and marketing muscle can overtake a first mover.

2. click on Total Optimization and (2) Click on Responsibilities. The first example is SCM Microsystems.bridgestone. 2. . According to Felix Marx.” Identify at least two companies in different industries that are using acquisitions to strengthen their market positions. perform a search on “acquisition strategy.  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 influential competitors in a position to delay or derail the efforts of a first mover? 3. revenue more than doubled. This acquisition was based on Nucor’s desire to achieve vertical integration both upstream for lower cost raw materials and downstream for a higher valueadded product mix and diversification.386 Section 6 Instructor’s Manual for Essentials of Strategic Management B. To what extent is the company vertically integrated? What segments of the industry value chain has the company chosen to perform? What are the benefits and liabilities of Bridgestone’s vertical integration strategy? NOTE: Entering the above link will take students to www.co. or a similar database. reflecting the success of the Company’s strategy to increase its revenue by expanding its customer base and market reach through acquisitions and market investment. Go to www. Suggested student responses may identify the following examples. click on Programs. EBSCO. (1) Click on Corporate. 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 opportunity—the race is likely going to be more of a 10-year marathon than a two-year sprint.’s merger with Hirsch Electronics Corporation.jp/english/info and review information about Bridgestone Corporation’s Tire and Raw Materials operations under the Corporate Information and Data Library links.” A second example is Nucor Corporation’s acquisition of Harris Steel. Assurance of Learning Exercises 1.bridgestone. it matters whether the race to market leadership in a particular industry is a marathon or a spring. Inc. click on Profile. Using your university library’s subscription to Lexis-Nexis. After reviewing the Web site. chief executive officer 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. information related to the company’s vertical integration strategy can be found in the following areas. In weighing the pros and cons of being a first-mover versus a fast follower versus a slow mover. well-developed answers to this question.com. Deciding Whether to Be an Early-Mover or Late Mover 1. expand our mutual distribution channels and introduce new products in target markets. Following the merger. How have these acquisitions enhanced the acquiring companies’ resource strengths and competitive capabilities? The vast amount of choices should permit students to offer extensive. Any company that seeks competitive advantage by being a first-mover needs to ask some hard questions.

help desk activation. and this transformed Bridgestone into one of the world’s largest tire and rubber companies. In 1988. i. Ltd. In addition. 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 challenge is known as “total optimization. The companies have extended their business contract for five additional years through a series of outsourcing agreements. manufacturing. agricultural machinery. and other products. The company also actively expanded overseas. automotive maintenance and repair services.” Identify at least two companies in different industries that have entered into outsourcing agreements with firms with specialized services.” According to the company. distributed computing services. industrial machinery. production and distribution. The company’s operations include. The segments of the industry value chain the company performs is best summarized as follows.com and do a search on “outsourcing. data center security and disaster recovery planning. the company is definitely vertically integrated to include development. 3. “creating systems capable of supplying customers with high quality products and services as efficiently as possible. personalized sales and technical service to customers across the globe. applications and infrastructure.google. The Bridgestone Group expanded to become Japan’s largest tire manufacturer. describe what value chain activities the companies have chosen to outsource. regardless of where they work in the Bridgestone Group. well-developed answers to this question. raw materials for tires. IBM will be responsible for fully managing and monitoring the information technology (IT) infrastructure under two managed service modes. IBM’s outsourcing solution for Grupo Gigante includes infrastructure services components for equipment and server hosting. construction and mining vehicles. Suggested student responses may identify the following examples. 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. aircrafts. one of Mexico’s leading business groups. The first example is IBM and Grupo Gigante. a global corporation. 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. and other automotive parts. marketing. The company sells products in more than 150 countries around the world. The effective and efficient 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. Go to www. “Tires and tubes for passenger cars. 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 final products. information technology. Another critical aspect of the company’s efforts to achieve total optimization is to boost its competitiveness through ongoing investments in the skills of its employees. Based on the information provided. from product planning and business development to raw material and equipment procurement.” The company is working on strengthening all aspects of the supply chain. A second example involves a three-year .Section 6 Lecture Notes for Chapter 6 387 Bridgestone Tire Co. The company strives to provide direct. trucks and buses. “Bridgestone Group operations span upstream and downstream activities. was established in 1931.” The Bridgestone Group currently operates 179 production facilities located in 25 countries. motorcycles and scooters. This provides the company with opportunities to test new solutions that facilitate strategic business decision-making and will bring more efficiency to day-to-day operations. As Japan’s automobile industry grew. particularly in Asia. the company acquired The Firestone Tire & Rubber Company. The sales network is one of the largest in the world.. on-site support services. The value chain activity involved is a support activity. and distribution of tires. a key issue for the future will be focusing resources on a single goal.e. retreading materials and services.

. NCR’s marketing director. It does not appear these outsourcing agreements are likely to threaten the competitive capabilities of these companies. will manage credit-union members’ leased ATMs. “Leasing ATMs is a lot more attractive for some financial institutions because leasing agreements are not carried on the books as a capital expense. NCR will provide first. a unit of Co-op Financial Services.and second-line maintenance on all of the leased machines so if the ATM breaks down.388 Section 6 Instructor’s Manual for Essentials of Strategic Management ATM-outsourcing agreement between NCR Corporation and Co-op Financial Services that enables Co-op’s credit-union members to lease instead of buy new ATMs to reduce participating credit unions’ capital expenses.” Co-op ATM Managed Services. According to Bill Allen. NCR fixes it.