Strengthening a Company’s Competitive Position, five strategies to employ
Chapter 6 discusses that once a company has settled on which of the five generic strategies to employ, attention must turn to what other strategic actions can be taken in order to complement the choice of its basic competitive strategy. The three dimensions discussed include offensive and defensive competitive actions, competitive dynamics and the timing of strategic moves, and the breadth of a company’s activities.
These are explored through seven broad categories:
Whether and when to go on the offensive
Whether and when to employ defensive strategies
When to undertake strategic moves
Whether to merge or acquire another firm
Whether to integrate the value chain backward or forward
Whether to outsource certain value chain activities
Whether to enter into strategic alliances.
I. Going on the Offensive – Strategic Options to Improve a Company’s Market Position
1. Regardless of which of the five generic competitive strategies the firm is pursuing, there are times when the company must go on the offensive. The best offensive moves tend to incorporate several key principles:
a. Focusing relentlessly on building competitive advantage and converting it into sustainable advantage
b. creating and deploying company resources in ways that cause rival to struggle to defend themselves
c. Employing the element of surprise as opposed to doing what rivals expect
d. Displaying a strong bias for swift, decisive, and overwhelming actions to overpower rivals
2. Strategic offensives should, as a general rule, be based on exploiting a company’s strongest strategic assets.
a. Using a cost-based advantage to attack competitors on the basis of price or value
b. Leapfrogging competitors by being the first adopter of next-generation technologies or being first to market with next-generation products
c. Pursuing continuous product innovation to draw sales and market share away from less innovative rivals
d. Adopting and improving on the good ideas of other companies
e. Using hit-and-run or guerrilla warfare tactics to grab sales and market share
f. Launching a preemptive strike to secure an advantageous position that rivals are prevented or discouraged from duplicating
3. Firms going on the offensive need to carefully consider which rivals to challenge as well as how to mount the attack. Key targets for an offensive attack include:
a. Market leaders that are vulnerable due to unhappy buyers, an inferior product line, or a weak strategy
b. Runner-up firms with weaknesses in areas where the challenger is strong
c. Struggling enterprises that are on the verge of going under
d. Small local and regional firms with limited capabilities
4. Blue Ocean strategies seek to gain a dramatic and durable competitive advantage by abandoning effort 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.
a. Core Concept: A Blue Ocean strategy is based on discovering or inventing new industry segments that create altogether new demand, thereby positioning the firm in uncontested market space offering superior opportunities for profitability and growth
b. This strategy views the business universe as consisting of two distinct types of market space:
c. 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.
d. 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.
II. Defensive Strategies - Protecting Market Position and Competitive Advantage
1. 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.
2. Blocking the Attack – 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.
3. Signaling Challengers That Retaliation is Likely – The goal is to discourage challengers from attacking, or diverting their attack to another rival. Methods can include public announcements of management’s commitment to the market, public policies for matching rivals terms and prices, and periodic strong responses to the moves of weaker competitors.
III. Timing a Company’s Offensive and Defensive Strategic Moves
1. 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.
2. Core Concept: 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.
3. The Potential for first-mover advantages is great however, first-movers typically bear greater risks and development costs than firms that move later. There are five conditions where first-movers have an advantage:
a. When pioneering helps build a firm’s reputation with buyers and creates brand loyalty – this effectively limits the success of later entrants’ attempts to gain market share.
b. When a first mover’s customers will thereafter face significant switching costs – time invested with product, investments in complementary products, and loyalty programs or long-term contracts.
c. When property rights protections thwart rapid imitation of the initial move – patents, copyrights, and trademarks.
d. When an early lead enables the first mover to move down the learning curve ahead of rivals – this can be a self-feeding cycle where lower costs gain additional market share, further moving the firm down the curve.
e. When a first mover can set the technical standard for the industry – can result in standards wars among early movers.
4. There are circumstances when first movers face disadvantages and it is better to be an adept follower. There are four conditions where late-mover advantages exist:
a. 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.
b. 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.
c. 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.
d. When market uncertainties make it difficult to ascertain what will eventually succeed – in this case, first movers are likely to make mistakes that others can learn from.
5. See Illustration Capsule 6.1 – Amazon.com’s First-Mover Advantage in Online Retailing
a. Discussion Question: 1. Discuss the basis for Amazon.com’s competitive advantage and how they leveraged first-mover advantages.
b. Answer: In 1994 Jeff Bezos noted the tremendous growth in internet use and saw an opportunity to sell products online that could be easily shipped. Books made up the bulk of the firm’s initial product offering and selling them online allowed the firm to quickly gain market share over traditional booksellers with large retail spaces to support. This large volume and large customer base translated into strong brand recognition and allowed the firm to spread to other product lines and further grow market share. By moving down the learning curve quickly and well ahead of their rivals, Amazon.com was able to develop further competitive advantage and stay ahead of new entrants.
6. 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.
a. 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)
b. Any company that seeks competitive advantage by being a first-mover thus needs to ask some hard questions:
i. Does market takeoff depend on the development of complementary products of services that currently are not available?
ii. Is new infrastructure required before buyer demand can surge?
iii. Will buyers need to learn new skills or adopt new behaviors? Will buyers encounter high switching costs?
iv. Are there influential competitors in a position to delay or derail the efforts of a first-mover?
c. 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.
d. Being first off the starting block turns out to be competitively important only when pioneering early introduction of a technology or product delivers clear and substantial benefits to early adopters and buyers.
IV. Strengthening A Company’s Market Position Via Its Scope Of Operations
1. 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.
2. Core Concept: The scope of the firm refers to the range of activities which the firm performs internally, the breadth of its product and service offerings, the extent of its geographic market presence, and its mix of businesses.
3. There are several dimensions of firm scope that are relevant to business level strategy. The two primary dimensions are horizontal and vertical scope.
4. Core Concepts
a. Horizontal scope is the range of product and service segments that a firm serves within its focal market.
b. Vertical scope is 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.
V. 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.
4. Many horizontal mergers and acquisitions are driven by strategies to achieve one of five strategic objectives:
a. Increasing the company’s scale of operations and market share.
b. Expanding a company’s geographic coverage.
c. Extend a company’s business into new product categories.
d. Gaining quick access to new technologies or complementary resources and capabilities.
e. Leading the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunities.
f. Many mergers and acquisitions do not always produce the hoped for outcomes.
g. A number of previously applauded mergers/acquisitions have yet to live up to expectations, including: Ford and Jaguar, AOL and Time Warner and Daimler Benz and Chrysler to name a few.
VI. Vertical Integration Strategies
1. 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.
2. Vertical integration strategies can aim at full integration or partial integration.
3. See Illustration Capsule 6.2 – Clear Channel Communications: Using Mergers and Acquisitions to Become a Global Market Leader
a. Discussion Question: 1. Discuss the impact that the loosening of rules by the FCC had on Clear Channel’s business strategy. Describe how acquisitions benefited this company.
b. 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.
4. The Advantages of a Vertical Integration Strategy
a. The two best reasons for investing company resources in vertical integration are to strengthen the firm’s competitive position and/or boost its profitability,
b. CORE CONCEPT: A vertical integrated firm is one that performs value chain activities along several portions or stages of an industry’s overall value chain, which begins with the production of raw materials or initial inputs and culminates in final sales and service to the end consumer.
5. Integrating Backward to Achieve Greater Competitiveness: For backward integration to be a viable and profitable strategy, a company must be able to:
a. achieve the same scale economies as outside suppliers and
b. match or beat supplier’s production efficiency with no drop-off in quality.
6. Core Concept: 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.
a. Backward integration is most likely to reduce costs when:
i. The firm can achieve the same scale economies as outside suppliers.
ii. The firm can match or beat suppliers’ production efficiency with no drop-off in quality.
iii. The needed technological skills and product capability are easily mastered or can be gained by acquiring a supplier with desired expertise
b. 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.
c. Other potential advantages of backward integration include:
i. Decreasing the company’s dependence on suppliers of crucial components
ii. Lessening the company’s vulnerability to powerful suppliers inclined to raise prices at every opportunity
7. Integrating Forward to Enhance Competitiveness: The strategic impetus for forward integration is to gain better access to end-users and better market visibility.
8. The Vertical integration has some substantial drawbacks:
a. It raises a firm’s capital investment in the industry, increasing business risk
b. Vertically integrated companies are often slow to embrace technological advances
c. It can impair a company’s operating flexibility
d. It can result in less flexibility in accommodating shifting buyer preferences.
e. It may not be able to achieve economies of scale
f. It poses all kinds of capacity-matching problems
g. It often calls for radical changes in skills and business capabilities
9. Weighing the Pros and Cons of Vertical Integration
a. A strategy of vertical integration can have both important strengths and weaknesses. The tip of the scales depends on:
i. Whether vertical integration can enhance the performance of strategy-critical activities in ways that lower cost, build expertise, or increase differentiation
ii. The impact of vertical integration on investments costs, flexibility and response time, and administrative costs of coordinating operations across more value chain activities
iii. How difficult it will be for the company to acquire the set of skills and capabilities needed
b. Vertical integration strategies have merit according to which capabilities and value chain activities truly need to be performed in-house and which can be performed better or cheaper by outsiders.
c. Absent solid benefits, integrating forward or backward is not likely to be an attractive competitive strategy option.
d. See Illustration Capsule 6.3 – American Apparel’s Vertical Integration Strategy
i. Discussion Question: How has American Apparel used forward and backward integration as a central part of their overall strategy?
ii. Answer: American Apparel has moved backward into the industry value chain by doing its own fabric cutting and sewing and also owns its own knitting and dying facilities. It also does its own clothing design, marketing, and advertising. Through this ‘end to end’ approach, the company is better able to respond to changes in the market and reduce inventory problems. It can also leverage its integrated operations by marketing its products as ‘sweatshop free’.
VII. Outsourcing Strategies: Narrowing the Boundaries of the Business
a. Core Concept: Outsourcing involves farming out certain value chain activities to outside vendors.
b. The two driving themes behind outsourcing are that outsiders can often perform certain activities better or cheaper and that outsourcing allows a firm to focus its entire energies on its core business.
c. When Outsourcing Strategies are Advantageous
a. Outsourcing pieces of the value chain to narrow the boundaries of a firm’s business makes strategic sense whenever:
i. An activity can be performed better or more cheaply by outside specialist
ii. An activity is not crucial to the firm’s ability to achieve sustainable competitive advantage and will not hollow out its core competencies.
iii. It streamlines company operations in ways that improve organizational flexibility and speed time to market.
iv. It reduces the company’s risk exposure to changing technology and/or changing buyer preferences
v. It allows a company to assemble diverse kinds of expertise speedily and efficiently.
vi. It allows a company to concentrate on its core business, leverage its key resources, and do even better what it already does.
a. The Biggest Risk of Outsourcing Strategy is that a company will farm out too many or the wrong types of activities and thereby hollow out its own capabilities.
VIII. Strategic Alliances and Partnerships
1. Companies in all types of industries and in all parts of the world have elected to form strategic alliances and cooperative partnerships to complement their own strategic initiatives and strengthen their competitiveness in domestic and international markets.
2. Globalization of the world economy, revolutionary advances in technology across a broad front, and untapped opportunities in national markets in Asia, Latin America, and Europe that are opening up, deregulating, and/or undergoing privatization have made partnerships of one kind or another integral to competing on a broad geographic scale.
3. Many companies now find themselves thrust in the midst of two very demanding competitive races:
a. The global race to build a presence in many different national markets
b. The race to seize opportunities on the frontiers of advancing technology
4. Companies may form strategic alliances or collaborative partnerships in which two or more companies join forces to achieve mutually beneficial strategic outcomes.
a. Strategic alliances go beyond normal company-to-company dealings but fall short of merger or full joint venture partnership with full ownership ties.
b. A special type of strategic alliances is a joint venture in which one or more allies have ownership in certain of the other alliance members.
5. Core Concept: A Strategic alliance is a formal agreement between two or more separate companies in which they agree to work cooperatively toward some common objective.
6. Core Concept: A joint venture is a type of strategic alliance in which the partners set up an independent corporate entity that they own and control jointly, sharing in its revenues and expenses.
7. Five factors make an alliance “strategic” as opposed to just a convenient business arrangement.
a. It helps build, sustain or enhance a core competence or competitive advantage
b. It helps block a competitive threat.
c. It increases the bargaining power of alliance members over suppliers or buyers
d. It helps open up important new market opportunities.
e. It mitigates a significant risk
8. Strategic cooperation is a much-favored approach in industries where new technological developments are occurring at a furious pace.
9. Why and How Strategic Alliances are Advantageous
a. The most common reasons why companies enter into strategic alliances are to collaborate on technology or the development of promising new products, to overcome deficits in their technical and manufacturing expertise, to acquire altogether new competencies, to improve supply chain efficiency, to gain economies of scale in production and/or marketing, and to acquire or improve market access through joint marketing agreements.
b. A company that is racing for global market leadership needs alliances to:
i. Get into critical country markets quickly and accelerate the process of building a potent global market presence
ii. Gain inside knowledge about unfamiliar markets and cultures through alliances with local partners
iii. Access valuable skills and competencies that are concentrated in particular geographic locations
c. A company that is racing to stake out a strong position in a technology or industry of the future needs alliances to:
i. Establish a stronger beachhead for participating in the target technology or industry
ii. Master new technologies and build new expertise and competencies faster than would be possible through internal efforts
iii. Open up broader opportunities in the target industry by melding the firm’s own capabilities with the expertise and resources of partners
d. Allies can learn much from one another in performing joint research, sharing technological know-how, and collaborating on complementary new technologies and products – sometimes enough to enable them to pursue other new opportunities on their own.
10. Capturing the Benefits of Strategic Alliances
a. The extent to which companies benefit from entering into alliances and collaborative partnerships seem to be a function of six factors:
i. Picking a good partner
ii. Being sensitive to cultural differences
iii. Recognizing that the alliance must benefit both sides
iv. Ensuring that both parties live up to their commitments
v. Structuring the decision-making process so that actions can be taken swiftly when needed
vi. Managing the learning process and then adjusting the alliance agreement over time to fit new circumstance
b. Alliances are more likely to be long lasting when they involve collaboration with partners that do not compete, or a trusting relationship has been established, and both parties conclude that continued collaboration is in their mutual interest.
11. The Drawbacks of Strategic Alliances and Partnerships
a. Potential drawbacks to strategic alliances and partnerships can be widespread ranging from culture clashes between the partners to the risk of losing control of valuable intellectual property. It is also possible that the partnership will simply fail to measure up to its performance expectations.
b. Managers must carefully weigh the potential costs and potential benefits of strategic alliances over vertical integration or horizontal mergers/acquisitions. There are three advantages of strategic alliances to consider.
i. They lower investment costs and risks for each partner.
ii. They are more flexible organizational forms and allow for faster market response.
iii. They are faster to deploy.
c. They key advantages to using strategic alliances are the increased ability to exercise control over the partner’s activities and a greater willingness for the partners to make relationship specific investments.
12. How to Make Strategic Alliances Work
a. The stability of an alliance depends on how well the partners work together, their success in adapting to changing internal and external conditions, and their willingness to renegotiate the bargain if circumstances so warrant.
b. A surprisingly large number of alliances never live up to expectations. An article (2007) from the Harvard Business Review found that even though the number of alliances increases by about 25 percent annually, about 60 to 70 percent continue to fail each year.
c. 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.
d. Companies that have created effective strategic alliances often credit the following factors:
i. They create a system for managing their alliances.
ii. They build relationships with their partners and establish trust.
iii. They protect themse4lves from the threat of opportunism by setting up safeguards.
iv. They make commitments to their partners and see that their partners do the same.
v. They make learning a routine part of the management process.
e. Managers must realize that alliance management is an organizational capability and develop it over time to become another source of competitive advantage.