module 5 - strategy and competitive advantage
TRANSCRIPT
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Module 5
Strategy and Competitive
Advantage
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Module Outline
5 Generic Competitive Strategies
1. Low-Cost Leadership Strategy2. Broad Differentiation Strategies
3. Best-Cost Provider Strategies
4. Focus Strategies Based on Low Cost5. Focus Strategies Based on Differentiation
Offensive Strategies
Defensive Strategies
Vertical Integration Strategies
First-Mover Advantages and Disadvantages
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Strategy and Competitive Advantage
Competitive Advantage exists when firm
has an edge in Defending against competitive forces, and
Securing customer
Key to Success
Convince customers firms product / service
offers superior value Offer buyers a good product at a lower price
Use differentiation to provide a better product
buyer think is worth a premium price
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Competitive Strategy Principle
Successful companies invest aggressively in
creating sustainable competitive advantage,for it is their single most dependable
contributor to above average ROI!
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Ways to Win a Competitive Advantage
Become the low-cost producer
Make the best-made product
Provide customer more value for the money
Save customer money Provide superior customer service
Enhance performance buyer gets
Provide more convenient locations
Make a more reliable an durable product
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Competitive Strategy: Definition
Competitive Strategy consists of moves to
Attract customer Withstand competitive pressures
Strengthen firms market position
Objectives Earn a competitive advantage
Cultivate clientele ofloyal customer
Knock the socks of rivals, ethically and honorably
Competitive Strategy, narrower in scope thanbusiness strategy, focuses on managements
plan to compete successfully
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The 5 Generic Competitive Strategies
Overall Low-
Cost
LeadershipStrategy
Broad
Differentiation
Strategy
Focused Low-
Cost Strategy
Focused
Differentiation
Strategy
Best-Cost
Provider
Strategy
DifferentiationLower Cost
B
road
Ra
ngeof
Buyers
Buyer
Segmentor
Niche
Type of Advantage Sought
MarketTarge
t
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The 5 Generic Competitive Strategies
Low-Cost Leadership
Striving to be the overall lo-cost provider in theindustry
Broad Differentiation
Striving to build customer loyalty bydifferentiating ones product offering from rivalsproduct
Best-Cost Provider Strategy Striving to give customers more value for the
money by combining an emphasis on low costwith an emphasis on upscale differentiation
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The 5 Generic Competitive Strategies
Focus Strategy Based on Low Cost
Concentrating on a narrow buyer segment, out-competing rivals on basis of lower cost
Focus Strategy Based on Differentiation
Offering niche members a product or service
customized to their needs
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Low-Cost Leadership
Objective
Open up a sustainable cost advantage overrivals, using lower-cost edge as basis to
Under-price rivals and reap market share gains,
or
Earn higher profit margin selling at going price
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Low-Cost Leadership
Key to Success
Make achievement of low-cost relative torivals the theme of firms business strategy
Find ways to drive costs out of business
year-after-year
Low-cost leadership means low overallcosts, not just low manufacturing or
production costs!
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Opening Up a Cost Advantage Over
RivalsApproach #1
Do better job of boosting efficiency andcontrolling costs along value chain by out-
managing rivals regarding both structural and
executional cost driversApproach #2
Revamp firms value chain to bypass some cost-
producing activities altogether
Approach #3
A combination of approaches #1 and #2
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Opening Up a Cost Advantage Over
RivalsSuccessful low-cost producers aggressively
pursue cost savings throughout the valuechain.
No area is overlooked!
No cost-saving opportunity is ignored!
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Controlling Structural Cost Drivers
Capture scale economies and avoid scale
diseconomies Capture learning and experience curve
effects
Consider linkage with other activities in chain Find sharing opportunities with other
business units in enterprise
Compare benefits of vertical integration vs.outsourcing
Take advantage of locational variables
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Controlling Executional Cost Drivers
Capitalize on timing considerations
associated with first-mover advantages anddisadvantages
Try to increase capacity utilization
Consider cost impact of strategic choices
and operating decisions
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Revamping the Value Chain
Simplify product design
Offer basic, no-frills product / service Reengineer core business processes
Shift to a simpler, less capital-intensive, or more
streamline technological process Use direct-to-end user sales and marketing
approaches
Relocate facilities closer to suppliers or customers
Pursue more vertical integration relative to rivals
Focus on limited product / service to meet special
needs of target segment
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Characteristics of a Low-Cost Provider
Cost conscious organizational culture
Spartan facilities Limited perks and frills for executives
Intolerance of waste
Intensive screening of budget requests
Employee participation in cost control efforts
Low-cost producers champion frugalitywhile aggressively investing in cost-saving
improvements!
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What Managers Have to Do to Achieve
Low-Cost Leadership? Scrutinize each cost-creating activity,
identifying cost drivers Use knowledge about cost drivers to manage
costs for each activity down further year after
year
Consider fundamentally reengineering how
activities are performed and coordinated Be entrepreneurially creative in cutting some
activities out of value chain system
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Competitive Strengths of a Low-Cost
Provider StrategyProvides defenses against competitive forces:
Rival Competitors Better positioned to compete offensively on basis of price
Buyers Better protected from negotiating power of large
customers Suppliers More insulated than competitors from powerful suppliers
Potential Entrants Low-cost providers pricing power is a significant barrier
Substitutes Better positioned to use low price as a defense against
substitutes
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When a Low-Cost Provider Strategy
Works Best? Price competition among rivals is dominant
competitive force Industrys product is a commodity-type item readily
available
Few ways to achieve product differentiation thathave value to buyers
Most buyers have similar needs / requirements
Buyer incur low switching costs changing sellers Buyers are large and have significant bargaining
power
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Drawbacks to a Low-Cost Provider
Strategy Technical breakthrough open up cost reductions for
rivals, negating a low-cost providers efficiencyadvantages
Rivals find it comparatively easy or inexpensive to
imitate leaders low cost methods Low-cost provider become so fixated on cost
reduction it fails to respond to
Increased buyer desires for added quality or servicefeatures
New developments in related products
Declining buyer sensitivity to price
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Differentiation Strategies
Objective
Incorporate differentiating features to causebuyers to prefer firms product / service over
rivals brand
Key to Success
Find ways to differentiate to create value for
buyers that are not easily copied by rivals Not spending more to differentiate than price
premium to be charged
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Differentiation Strategies
Successful differentiation allows firm to
Command a premium price, and / or Increase unit sales, and / or
Build brand loyalty
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Approaches to Differentiation
Different taste Dr. Pepper
Superior service Federal Express Spare parts availability Caterpillar
More for your money McDonalds, Wal-Mart
Engineering design and performance Mercedes
Prestige Rolex
Quality Honda automobiles
Top-of-the-line image Ralph Lauren
Technological leadership 3M Corporation
Unconditional satisfaction L. L. Bean
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Where to Look for Differentiation
Opportunities? Purchasing and procurement activities
Product-oriented R&D activities Production process-oriented R&D activities
Manufacturing activities Outbound logistic and distribution activities
Marketing, sales, and service activities
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chieving a Differentiation-Based
Competitive AdvantageOption 1
Incorporate product attributes and user featuresthat lower buyers costs in using product
Option 2
Incorporate features that raise performancebuyer gets out of product
Option 3
Incorporate features to enhance buyer
satisfaction in non-economic / intangible ways
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Signals of Value
Buyers often judge value on basis ofsignals
Price where it connotes quality How well known brand is said to be
Whether seller has prestige customers
Signals of value may be as important asactual value when
Differences among competing brands are
subjective Buyer are making first-time purchases
Repurchase is infrequent
Buyers are unsophisticated
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Competitive Strengths of a
Differentiation StrategyProvides defenses against competitive forces
Rival Competitors Buyers develop loyalty to brand they like the best
Buyers Mitigates bargaining power of large buyers since other
products are less attractive
Suppliers Seller may be in better position to withstand efforts of
suppliers to raise prices
Potential Entrants Buyer loyalty acts as entry barrier
Substitutes Better positioned to fend off threats of substitutes based
on customers attachment to differentiating attributes
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What Kind of Differentiation to Pursue?
Most appealing types of differentiation
strategies Those least subject to imitation
Most likely to produce an attractive, longer-
lasting edge when its based on: Technical superiority
Quality
Giving customer more support services
Giving customer more value for money
Core competencies
ff S
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When a Differentiation Strategy Works
Best? There are many ways to differentiate product
/ service and differences are perceived bybuyers to have value
Buyer needs and uses of items are diverse
Not many rivals are following a similar type ofdifferentiation approach
Differentiation strategies are most powerfulwhen buyer needs and preferences are toodiverse to be satisfied by a standardized
product!
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Pitfalls of a Differentiation Strategy
Trying to differentiate on a feature buyer do
not perceive as lowering their cost orenhancing their well-being
Over-differentiating such that product
features exceed buyers needs
Charging need to signal value, depending
only on real bases of differentiation
Not identifying what buyers will consider as
value
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Competitive Strategy Principle
a low-cost producer strategy can defeat a
differentiation strategy when buyers aresatisfied with a standard product and do not
see extra attributes as worth paying
additional money to obtain!
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Best-Cost Producer Strategy
Combines a strategic emphasis on low-cost with astrategic emphasis on differentiation Make an upscale product at a lower cost
Give customers more value for the money
Objective Create superior value by meeting or exceeding
buyer expectations on product attributes and
beating their price expectations Be the low-cost producer of a product with good-
to-excellent product attributes, then use cost
advantage to under-price comparable brands
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Best-Cost Producer Strategy
Key to Success
Matching close rivals on key attributes andbeating them on cost
Expertise in incorporating upscale product
attribute at a lower cost than rivals
Ability to contain costs by providing buyer a
betterproduct
Po er of a Best Cost Prod cer
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Power of a Best-Cost Producer
Strategy Competitive advantage comes from matching
close rivals on key product attributes and beating
them on price
Most successful best-cost producer have skills to
simultaneously manage costs down and product
caliber upward
Best-cost producer can often out-compete both a
low-cost provider and a differentiator where
Buyer diversity makes product differentiation the norm,
and
Many buyers are price and value sensitive
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Competitive Strategy Principle
The most powerful competitive approach a
company can pursue is striving relentlesslyto become a lower and lower cost producer
of a higher and higher caliber product, with
the eventual intent of becoming the industrysabsolute lowest cost producer and,
simultaneously, the producer of the industrys
overall best product!
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Focus / Niche Strategies
Objective
Do a better job of serving buyers in targetmarket niche than rivals
Key to Success
Choose a market niche where buyers have
distinctive preferences, special requirements,
or unique needs Develop a unique ability to serve needs of a
target buyer segment
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Approaches to Focusing
Approach #1
Achieve lower costs than rivals in serving thesegment a low-cost strategy
Approach #2
Offer niche buyers something different fromrivals a differentiation strategy
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Example: Focus Strategies
Rolls Royce
Luxury automobilesApple Computer
Desktop publishing
Fort Howard Paper Paper products for industrial / commercial firms
Commuter Airlines
Link major airports with small population centers
Motel 6
Caters to price-conscious travelers
What Makes a Segment Attractive for
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What Makes a Segment Attractive for
Focusing? Big enough to be profitable
Good growth potential Not crucial to success of major competitors
Focusing firm has resources to effectively
serve segment
Focuser can defend itself against challenger
via customer goodwill and its superior abilityto serve buyers in segment
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Power of a Focus Strategy
Competitive power is greatest when
Industry has fast-growing segments Big enough to be profitable, but
Small enough to be of secondary interest to large
rivals
No other rivals are concentrating on segment
Buyers in segment require
Specialized expertise, or Customized product attributes
Competitive Strengths of a Focus
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Competitive Strengths of a Focus
StrategyProvides defenses against competitive forces
Rival Competitors Rivals do not have ability to meet specialized needs of
target clientele
Potential Entrants
Focusers core competence can act as a barrier Substitutes
Focusers core competence provides obstacles to seller
of substitutes Buyers
Focusers unique ability to meet niche buyers needs canblunt bargaining power of largest niche buyers
When Does a Focus Strategy Work
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When Does a Focus Strategy Work
Best? It is costly or difficult for multi-segment rivals
to serve specialized needs of target niche No other rivals are concentrating on same
segment
Firms resources do not permit it to go after awider portion of market
Industry had many different segments,creating more focusing opportunities
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Risks of a Focus Strategy
Broad-line competitors may find effective
ways to match focused firm in serving targetmarket
Niche buyers preferences may move
towards product attributes desired by marketas a whole
Segment may become co appealing it
becomes crowded with aggressive rivals,
causing segment profits to be split many
ways
Off i d D f i S i
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Offensive and Defensive Strategies
Offensive Strategies
Nearly always result in successful achievementof competitive advantage
Defensive Strategies Can protect competitive advantage, but rarely
are the basis for achieving competitive
advantage
The Building and Eroding of
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The Building and Eroding of
Competitive Advantage
Buildup Period Erosion PeriodBenefit Period
Size ofCompetitive
Advantage
Achieved
Strategic
MovesProduce
Competitive
Advantage
Moves by
RivalsReduce
Competitive
AdvantageSizeofCompetitiveAdvant
age
Time
Building and Eroding of Competitive
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Building and Eroding of Competitive
AdvantageBuildup Period
Offensive strategic moves succeed in producinga competitive advantage ideally, buildup period
is short
Benefit Period Length is governed by how long it takes rivals to
respond effectively enough to close gap
Erosion Period Characterized by launch of counter offensive of
rivals to attack advantage and whittle it away
St t i M t P i i l
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Strategic Management Principle
Any competitive advantage currently held will
eventually be eroded by the actions ofcompetent, resourceful competitors!
Options for Mounting Strategic
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p g g
Offensives Initiatives to match or exceed rivals
strengths Initiatives to capitalize on rivals weaknesses
Simultaneously initiatives on many fronts
End-run offensives
Guerilla warfare tactics
Preemptive strikes
Att ki C tit St th
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Attacking Competitor Strengths
Appeal
Gain market share by out-matching strengthsof weaker rivals
Whittle away at a rivals competitive
advantage
Challenging strong competitors with a lower
price is foolhardy unless aggressor has a
cost advantage or advantage ofgreater
financial strength!
Attacking Competitor Strengths
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Attacking Competitor Strengths
Possible Offensive Options
Under-pricing rivals
Boost advertising
Introduce new features to appeal to rivals customer
Best Options
Attack with equally good product and lower price
Develop low-cost edge, use it to under-price rivals
Attacking Competitor Weaknesses
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Attacking Competitor Weaknesses
Basic Approach
Concentrate ones competitive strengths and
resources directly against rivals weaknesses
Weaknesses to Attack
Concentrate on geographic regions where rival hasweak market share
Go after buyer segments rival is neglecting
Go after more performance-conscious customer ofrivals who lag behind challenger
Attack rivals with weaker advertising and brand
recognition
Competitive Strategy Principle
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Competitive Strategy Principle
Challenging rivals where they are must
vulnerable is more likely to succeed thanchallenging them where they are strongest,
especially when challenger possesses
competitive advantage in areas where rivalsare weak!
Launching Offensives on Many Fronts
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Launching Offensives on Many Fronts
Objective
Launch several major initiatives to Throw rivals off-balance Splinter its attention in many direction, and
Force it to use substantial resources to defend itsposition
Appeal
A challenger with superior resources canoverpower a weaker rival by outspending itacross-the-board long enough to buy its way
into the market
End Run Offensives
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End-Run Offensives
Objective
Dodge head-to-head confrontations thatescalate competitive intensity and riskcutthroat competition attempt to maneuveraround competition
Appeal
Gain first-mover advantage in a new arena
Force competitors into playing catch up Change rules of competition in aggressors
favor
End Run Offensive: Approaches
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End-Run Offensive: Approaches
Move aggressively into new geographic
markets where rivals have no marketpresence
Introduce product with different attributes and
features to better meet buyer needs Introduce next-generation technologies and
leapfrog rivals
Come up with more support services for
customers
Guerilla Offenses
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Guerilla Offenses
Approach
Use principles of surprise and hit-and-run toattack in locations and at times where
conditions are most favorable to initiator
Appeal
Well-suited to small challengers with limited
resources
Guerilla Offenses: Options
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Guerilla Offenses: Options
Focus on narrow target weakly defended byrivals
Challenge rivals where they areoverextended and when they areencountering problems
Make random scattered raids on leaders withtactics such as
Occasional low-balling on price Intense bursts of promotional activity
Legal actions charging antitrust violations, patentinfringements, and unfair advertising
Preemptive Strike
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Preemptive Strike
Approach
Involves moving first to secure anadvantageous position that rivals are
foreclosed or discouraged from duplicating!
Preemptive Strikes: Options
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Preemptive Strikes: Options
Expand capacity ahead of demand in hopesof discouraging rivals from following suit
Tie up best or cheapest sources of essentialraw materials
Move to secure best geographic locations Obtain an image in buyers minds that is
unique and hard to copy
Secure exclusive or dominant access to bestdistributors
Acquire desirable, but struggling, competitor
Choosing Whom to Attack
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Choosing Whom to Attack
4 types of firms at which to aim an offensive
Market leaders Runner-up firms
Struggling rivals on verge of going under
Small local / regional firms not doing the job
Offensive Strategy and Competitive
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Advantage Competitive advantage areas offering
strongest basis for a strategic offensive
Develop lower-cost product design
Make changes in production operations thatlower costs or enhance differentiation
Develop product features that deliver superiorperformance or lower users costs
Give more responsive customer service
Escalate marketing effort
Pioneer new distribution channel
Sell direct to end-users
Offensive Strategy and Competitive
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AdvantageChances for strategic success are improved
when offensive is tied to what firm does best:
Key skill
Strong functional competence
Defensive Strategy
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Defensive Strategy
Objectives
Lessen risk of being attacked Blunt impact of any attack that occurs
Influence challengers to aim attacks at other
rivals
Strengthen firms present position
Help sustain any competitive advantage held
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Vertical Integration Strategies
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g g
Vertical integration extends a firms
competitive scope within same industry
Backward into sources of supply
Forward toward end-users of final product
Moves to vertically integrate can aim at
becoming
Fully integrated
Partially integrated
Competitive Strategy Principle
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p gy p
A vertical integration strategy has appeal
only if it significantly strengthens a firms
competitive position!
Appeal of Backward Integration
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pp g
Generates cost savings only if volume needed is
big enough to capture efficiencies of suppliers
Cost savings potential is strongest when
Suppliers have sizable profit margins
Item being supplied is a major cost component
Necessary technical skills are easily mastered
A differentiation-based competitive advantage
arises when firms ends up with better quality part
Spares firm uncertainty of defending on suppliers of
crucial raw materials
Appeal of Forward Integration
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pp g
Advantageous for firm to set up its own wholesale-
retail distribution network if
Undependable distribution channels undermine steady
production operations
Integration into distribution and retailing may be
cheaper than going through independentdistributors
May help achieve greater product differentiation,
allowing escape from price-oriented competition For manufacturer, may provide better access to
ultimate consumer
Strategic Disadvantages of Vertical
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Integration Boosts capital requirements
Results in fixed sources of supply and less flexibility
in accommodating buyer demands for productvariety
Extends firms scope of activity, locking it deeper
into industry Poses problems of balancing capacity at each
stage of value chain
Requires radically different skills and capabilities Can reduce firms manufacturing flexibility,
lengthening design time and ability to introducenew products
Unbundling and Outsourcing Strategies
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Concept
Involves withdrawing from certain stages invalue chain system and relying on outside
vendors to perform needed activities and
services
Advantages of Outsourcing Strategies
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Activity can be performed better or more cheaply by
outside specialists
Activity is not crucial to achieving competitive
advantage
Reduces firms risk exposure to changing
technology and / or changing buyer preferences
Streamlines firm operations in ways to
Cut cycle time
Speed decision-making
Reduce coordination costs
Allows firm to concentrate on its core business
Pros and Cons of Vertical Integration
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Use of a vertical integration strategy depends
on
If it can enhance performance of strategy-critical
activities to either
Lower costs, or
Increase differentiation
Impact on
Investment costs
Flexibility and response times
Administrative overhead of coordination
If a competitive advantage can be created
First-Mover Advantages
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When to make a strategic move is often as
crucial as what move to make
First-mover advantages arise when
Pioneering helps build firms image and
reputation Early commitments to raw material suppliers,
new technologies, and distribution channels can
produce cost advantage Loyalty of first time buyer is high
Moving first can be a preemptive strike
First-Mover Disadvantages
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Arise when
Costs of pioneering are sizable and loyalty of
first buyers is weak
Rapid technological change allows followers to
leapfrog pioneers
Skills and know-how of pioneers are easily
imitated by late movers
It is easy for latecomers to crack market
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End of Module 5