Chapter 6: Supplementing the

Chosen Competitive Strategy: Other

Important Business Strategy Choices

Screen graphics created by:

Jana F. Kuzmicki, Ph.D.
Troy University

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Learning Objectives
1. Gain an understanding of how strategic alliances and
collaborative partnerships can bolster a company’s
competitive capabilities and resource strengths.
2. Become aware of the strategic benefits of mergers and
acquisitions.
3. Understand when a company should consider using a
vertical integration strategy to extend its operations to
more stages of the overall industry value chain.
4. Understand the conditions that favor farming out certain
value chain activities to vendors and strategic allies.
5. Recognize how and why different types of market
situations shape business strategy choices.
6. Understand when being a first-mover or a fast-follower or
a late-mover can lead to competitive advantage.
6-2
 Chapter Roadmap
 Strategic Alliances and Partnerships
 Merger and Acquisition Strategies
 Vertical Integration Strategies: Operating
Across More Stages of the Industry Value
Chain
 Outsourcing Strategies: Narrowing the
Boundaries of the Business
 Business Strategy Choices for Specific
Market Situations
 Timing Strategic Moves – To be an Early
Mover of a Late
6-3
Strategic Alliances and Partnerships

Companies sometimes use

strategic alliances or
collaborative partnerships to
complement their own strategic
initiatives and strengthen their
competitiveness. Such
cooperative strategies go
beyond normal company-to-
company dealings but fall short
of merger or full joint venture
partnership.
6-4
Characteristics of a Strategic Alliance

 Strategic alliance – A formal agreement between

two or more separate companies where there is
 Strategically relevant collaboration of some sort
 Joint contribution of resources
 Shared risk
 Shared control
 Mutual dependence
 Alliances often involve
 Joint marketing
 Joint sales or distribution
 Joint production
 Design collaboration
 Joint research
 Projects to jointly develop new technologies or
products
6-5
What Factors Make an Alliance Strategic?

 It is critical to a company’s achievement of an

important objective

 It helps build, sustain, or enhance a core

competence or competitive advantage

 It helps block a competitive threat

 It helps open up important

market opportunities

 It mitigates a significant risk

to a company’s business
6-6
Why Are Strategic Alliances Formed?

 To collaborate on technology development or

new product development
 To fill gaps in technical or manufacturing
expertise
 To create new skill sets and capabilities
 To improve supply chain efficiency
 To gain economies of scale in
production and/or marketing
 To acquire or improve market
access via joint marketing agreements
6-7
 Alliances Can Enhance a
Firm’s Competitiveness
 Alliances and partnerships can help companies
cope with two demanding competitive
challenges
Racing against rivals to build a
market presence in many
different national markets
Racing against rivals to seize
opportunities on the frontiers
of advancing technology
 Collaborative arrangements can help a
company lower its costs and/or gain access
to needed expertise and capabilities
6-8
 Potential Benefits of Alliances to
Achieve Global and Industry Leadership
 Get into critical country markets quickly to
accelerate process of building a global presence
 Gain inside knowledge about unfamiliar markets
and cultures
 Access valuable skills and competencies
concentrated in particular geographic locations
 Establish a beachhead to participate in target
industry
 Master new technologies and build new expertise
faster than would be possible internally
 Open up expanded opportunities in target industry
by combining firm’s capabilities with resources of
partners
6-9
 Capturing the Benefits
of Strategic Alliances
 Benefits from forming partnerships are a
function of
 Picking a good partner
 Being sensitive to cultural differences
 Recognizing an alliance
must benefit both parties
 Ensuring both parties live
up to their commitments
 Structuring the decision-making process
so actions can be taken swiftly when needed
 Managing the learning process and then
adjusting the alliance agreement over time to fit
new circumstances
6-10
 Why Alliances Fail
 Ability of an alliance to endure depends on
 How well partners work together
 Success of partners in responding
and adapting to changing conditions
 Willingness of partners to
renegotiate the bargain
 Reasons for alliance failure
 Diverging objectives and priorities of partners
 Inability of partners to work well together
 Changing conditions rendering purpose of alliance
obsolete
 Emergence of more attractive technological paths
 Marketplace rivalry between one or more allies
6-11
Merger and Acquisition Strategies

 Merger – Combination and pooling of equals,

with newly created firm often taking on a new
name
 Acquisition – One firm, the acquirer,
purchases and absorbs operations of
another, the acquired
 Merger-acquisition strategy
 Much-used strategic option
 Especially suited for situations where alliances do not
provide a firm with needed capabilities or cost-
reducing opportunities
 Ownership allows for tightly integrated operations,
creating more control and autonomy than alliances
6-12
Objectives of Mergers and Acquisitions

 To create a more cost-efficient operation

 To expand a firm’s geographic coverage

 To extend a firm’s business into new

product categories or international markets
 To gain quick access to new technologies
or competitive capabilities
 To invent a new industry and lead
the convergence of industries whose
boundaries are blurred by changing
technologies and new market opportunities
6-13
Pitfalls of Mergers and Acquisitions
 Combining operations may result in

 Resistance from rank-and-file employees

 Hard-to-resolve conflicts in management

styles and corporate cultures

 Tough problems of integration

 Greater-than-anticipated difficulties in
 Achieving expected cost-savings
 Sharing of expertise
 Achieving enhanced competitive capabilities
6-14
Vertical Integration Strategies
 Extend a firm’s competitive scope within
same industry
Backward into sources of supply
Forward toward end-users of final product

 Can aim at either full or partial integration

Internally Activities, Costs,

Activities,
Performed & Margins of Buyer/User
Costs, &
Activities, Forward Channel Value
Margins of
Costs, & Allies & Chains
Suppliers
Margins Strategic Partners

6-15
 Strategic Advantages
of Backward Integration
 Generates cost savings only if
volume needed is big enough
to capture efficiencies of suppliers
 Potential to reduce costs exists when
 Suppliers have sizable profit margins
 Item supplied is a major cost component
 Resource requirements are easily met
 Can produce a differentiation-based competitive
advantage when it results in a better quality part
 Reduces risk of depending on suppliers of crucial
raw materials / parts / components
6-16
 Strategic Advantages
of Forward Integration
 To gain better access to end
users and better market visibility
 To compensate for undependable distribution
channels which undermine steady operations
 To offset the lack of a broad product line, a firm
may sell directly to end users
 To bypass regular distribution channels in favor
of direct sales and Internet retailing which may
 Lower distribution costs
 Produce a relative cost advantage over rivals
 Enable lower selling prices to end users
6-17
 Strategic Disadvantages
of Vertical Integration
 Boosts resource requirements
 Locks firm deeper into same industry
 Results in fixed sources of supply and
less flexibility in accommodating buyer
demands for product variety
 Poses all types of
capacity-matching problems
 May require radically different
skills / capabilities
 Reduces flexibility to make changes in
component parts which may lengthen design
time and ability to introduce new products
6-18
 Outsourcing Strategies

Concept
Outsourcing involves having outsiders
perform certain value chain activities rather
than performing them internally

Internally
Performed
Activities
Contract Distributors
Manufacturers or Retailers

Vendors with
specialized
expertise
6-19
When Does Outsourcing an Activity
Make Strategic Sense?
 Activity can be performed better or more cheaply by
outside specialists
 Activity is not crucial to achieve a sustainable
competitive advantage
 Risk exposure to changing technology and/or
changing buyer preferences is reduced
 It improves firm’s ability to innovate
 Operations are streamlined to
 Improve flexibility
 Cut time to get new products into the market
 It increases firm’s ability to assemble diverse kinds of
expertise speedily and efficiently
 Firm can concentrate on “core” value chain activities
that best suit its resource strengths
6-20
The Big Risk of Outsourcing

 Farming out too many or the wrong

activities, thus
 Hollowing out capabilities

 Losing touch with activities and expertise

that determine overall long-term success

6-21
 Matching Strategy to
a Company’s Situation

Nature of industry
and competitive
Most important
conditions
drivers shaping a
firm’s strategic
options fall into
Firm’s internal
two categories
resource strengths
and weaknesses

6-22
 Matching a Company’s Strategy
to Different Market Conditions

Freshly
Fragmented
Emerging
Markets
Markets

Rapidly
Turbulent
Growing
Markets
Markets

Stagnant or Mature, Slow-

Declining Growth
Markets Markets
6-23
Features of an Emerging Industry
 New and unproven market
 Proprietary technology
 Lack of consensus regarding which of
several competing technologies will win out
 Low entry barriers
 Experience curve effects may permit
cost reductions as volume builds
 Buyers are first-time users and marketing involves
inducing initial purchase and overcoming customer
concerns
 First-generation products are expected to be rapidly
improved so buyers delay purchase until technology
matures
 Possible difficulties in securing raw materials
 Firms struggle to fund R&D, operations and build
resource capabilities for rapid growth
6-24
Strategy Options for Competing
in Emerging Industries
 Win early race for industry leadership by employing a
bold, creative strategy
 Push hard to perfect technology,
improve product quality, and develop
attractive performance features
 Consider merging with or
acquiring another firm to
 Gain added expertise
 Pool resource strengths
 When technological uncertainty clears and a
dominant technology emerges, try to capture any
first-mover advantages by moving quickly
 Form strategic alliances with
 Companies having related technological expertise or
 Key suppliers
6-25
Strategy Options for Competing
in Emerging Industries (continued)
 Pursue new customers and user
applications
 Enter new geographical areas
 Make it easy and cheap for
first-time buyers to try product
 Focus advertising emphasis on
 Increasing frequency of use
 Creating brand loyalty
 Use price cuts to attract price-sensitive
buyers
6-26
 What Is the Key to Success for
Competing in Rapidly Growing Markets?

A company needs a strategy

predicated on growing faster than
the market average so it
 Can boost its market share and
 Improve its competitive standing vis-à-
vis rivals

6-27
Strategy Options for Competing
in Rapidly Growing Markets
 Drive down costs per unit to enable price
reductions that attract droves of new customers
 Pursue rapid product innovation to
 Set a company’s product offering apart from rivals
 Incorporate attributes to appeal to
growing numbers of customers
 Gain access to additional distribution
channels and sales outlets
 Expand a company’s geographic coverage
 Expand product line to add models/styles to
appeal to a wider range of buyers
6-28
Industry Maturity: The Standout Features

 Slowing demand breeds stiffer competition

 More sophisticated buyers demand bargains
 Greater emphasis on cost and service
 “Topping out” problem in adding
production capacity
 Product innovation and new
end uses harder to come by
 International competition increases
 Industry profitability falls
 Mergers and acquisitions reduce
number of rivals
6-29
 Strategy Options for
Competing in a Mature Industry
 Prune marginal products and models

 Emphasize innovation in the value chain

 Strong focus on cost reduction

 Increase sales to present customers

 Purchase rivals at bargain prices

 Expand internationally

 Build new, more flexible

competitive capabilities
6-30
Strategic Pitfalls in a Maturing Industry
 Employing a ho-hum strategy with no distinctive
features thus leaving firm “stuck in the middle”
 Being slow to mount a defense against stiffening
competitive pressures
 Concentrating on short-term profits rather than
strengthening long-term competitiveness
 Being slow to respond to price-cutting
 Having too much excess capacity
 Overspending on marketing efforts
 Failing to aggressively
 Invest in product / process innovations
 Pursue cost reductions
6-31
Stagnant or Declining Industries:
The Standout Features
 Demand grows more slowly than economy
as a whole (or even declines)
 Advancing technology gives rise to better-
performing substitute products or lower costs
 Customer group shrinks

 Changing lifestyles and buyer tastes

 Rising costs of complementary products

 Competitive battle ensues among industry

members for the available business
6-32
 Strategy Options for Competing
in a Stagnant or Declining Industry
 Pursue focus strategy aimed at
fastest growing market segments
 Stress differentiation based on quality
improvement or product innovation
 Work diligently to drive costs down
 Cut marginal activities from value chain
 Use outsourcing
 Redesign internal processes
to exploit e-commerce
 Consolidate under-utilized production facilities
 Add more distribution channels
 Close low-volume, high-cost distribution outlets
 Prune marginal products
6-33
 End-Game Strategies
for Declining Industries
 An end-game strategy can take either of
two paths

 Slow-exit strategy involving

 Gradual phasing down of operations

 Getting the most cash flow from the business

 Fast-exit strategy involving

 Disengaging from an industry
during early stages of decline

 Quick recovery of as much of a

company’s investment as possible
6-34
Features of Turbulent Markets

 Rapid-fire technological change

 Short product life-cycles

 Entry of important new rivals

 Frequent launches of
new competitive moves

 Rapidly evolving
customer expectations
6-35
Strategy Options for Competing
in High-Velocity Markets
 Invest aggressively in R&D
 Keep products/services fresh and exciting
 Develop quick response capabilities
 Shift resources
 Adapt competencies
 Create new competitive capabilities
 Speed new products to market
 Use strategic partnerships to develop
specialized expertise and capabilities
 Initiate fresh actions every few months
6-36
Keys to Success in Competing
in High Velocity Markets
 Cutting-edge expertise

 Speed in responding to new developments

 Collaboration with others

 Agility

 Innovativeness

 Opportunism

 Resource flexibility

 First-to-market capabilities
6-37
 Competitive Features
of a Fragmented Industry
 Absence of market leaders with large market shares or
widespread buyer recognition
 Product/service is delivered to neighborhood
locations to be convenient to local residents
 Buyer demand is so diverse that many
firms are required to satisfy buyer needs
 Low entry barriers
 Absence of scale economies
 Market for industry’s product/service may be globalizing,
thus putting many companies across the world in same
market arena
 Exploding technologies force firms to specialize just to
keep up in their area of expertise
 Industry is young and crowded with aspiring contenders,
with no firm having yet developed recognition to command
a large market share
6-38
Competing in a Fragmented Industry:
The Strategy Options

 Construct and operate “formula” facilities

 Become a low-cost operator

 Specialize by product type

 Specialize by customer type

 Focus on limited geographic area

6-39
 First-Mover Advantages

 When to make a strategic move is often as

crucial as what move to make
 First-mover advantages arise when

 Pioneering helps build firm’s image and

reputation

 Early commitments to new technologies,

new-style components, and distribution
channels can produce cost advantage

 Loyalty of first time buyers is high

 Moving first can be a preemptive strike
6-40
What Is a Blue Ocean Strategy?

 Seeks to gain a dramatic, durable

competitive advantage by

Abandoning efforts to beat out

competitors in existing markets and

Inventing a new industry or distinctive

market segment to render existing
competitors largely irrelevant and

Allowing a company to create and

capture altogether new demand

6-41
What Is Different About a Blue Ocean?
Typical Market Space
 Industry boundaries are
defined and accepted
 Competitive rules are well
understood by all rivals
 Companies try to
outperform rivals by
capturing a bigger share of
existing demand
Blue Ocean Market Space
 Industry does not exist yet
 Industry is untainted
by competition
 Industry offers wide-open
opportunities if a firm has a
product and strategy
allowing it to
 Create new demand and
 Avoid fighting over existing
demand
6-42
 First-Mover Disadvantages
 Moving early can be a disadvantage (or fail
to produce an advantage) when
 When costs of pioneering are more than being an
imitative follower and only negligible
learning/experience curve benefits accrue to the
leader
 Innovator’s products are primitive, not living up to
buyer expectations
 Demand side of the market is skeptical about the
benefits of new technology/product of a first-
mover
 Rapid technological change allows followers to
leapfrog pioneers
6-43
To Be a First-Mover or Not?

 Key issue – Is the race to market leadership in

an industry a marathon or a sprint?
 Seeking a competitive advantage by being a
first-mover involves addressing several
questions
 Does market takeoff depend on development of
complementary products or services not currently
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?
6-44