Other Strategic Choices

Chapter 6

Chapter Outline

• Strategic alliances and collaborative partnerships

• Mergers and acquisitions

• Integration backward or forward into more stages of the industry value chain

• Outsource value chain activities or perform in house

• Employ offensive and defensive moves

• Blue Ocean strategies

• First mover advantages and disadvantages

Strategic alliances and collaborative 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 formal joint venture.

Why cooperative strategies?

Collaborative arrangements can help a company lower its costs or gain access to needed expertise and capabilities

Firms often lack the resources and competitive skills to be successful in very demanding competitive races

Allies can be useful in helping a company establish a stronger presence in global markets and helping it win the race for global market leadership

Allies with competitively useful technological know-how or expertise can greatly aid a company racing against rivals for leadership in the “industries of the future” now being created by today’s technological and information age revolution e.g IT

Collaborative arrangements with foreign partners is helpful in pursuing opportunities in unfamiliar national markets

Advantages of strategic alliances The best alliances are highly selective, focusing on particular value chain activities and on obtaining a particular competitive benefit

If the combined resources give an edge over rivals, competitive advantage will emerge

Strategic cooperation is favored and even necessary in industries where technological developments are occurring at a fast pace along many avenues and where the technology will affect each other

Allies can perform joint research which may even allow them to pursue other opportunities on their own

Alliances along different stages e.g with suppliers of component parts for better supply chain management

Pitfalls of strategic alliances

The value of strategic alliances stem from the capacity of partners to defuse frictions, collaborate effectively, work their ways through technological changes, competitive challenges, market developments and changes in their priorities and competitive circumstances

The danger of alliances and cooperative strategies is becoming too dependent on the other companies for essential expertise and capabilities

To become market leader, a company must develop its own capabilities

In some alliances, a partner may guard its most valuable skills and expertise, acquisitions or mergers may be better

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 include

Diverging objectives and priorities of partners

Inability of partners to work well together

Emergence of more attractive technological paths

Marketplace rivalry between one or more allies

Merger and acquisition strategies A merger is a pooling of equals with the newly formed entity often taking on a new name

An acquisition is a combination in which one company, the acquirer purchases and absorbs the operations of another, the acquired

The difference between a merger and an acquisition relates to details of ownership, management control but the resources, competencies and competitive advantage end up much the same whether it’s a merger or an acquisition

Ownership ties allow operations of the participants to be more tightly integrated and creates more control and autonomy as compared to a partnership

Benefits of mergers and acquisitions Mergers and acquisitions may be used to achieve one of these objectives:

To gain more market share and create more efficient operation out of combined companies by closing high cost plants and eliminating surplus capacity in the industry e.g DaimlerChrysler

To expand a company’s geographic market

To extend the company’s business into new product categories or international markets e.g Nestle, Unilever, Procter & Gamble

To gain quick access to new technologies and avoid the need for time consuming R&D

To try to create a new industry due to changing technologies and new market opportunities

Vertical Integration

VI extends a firm’s competitive scope within the same ind.

Backward Forward

Horizontal Integration

Outsourcing/Unbundling

De-Integration or unbundling involves narrowing the scope of the firm’s operations, focusing on performing certain “core” value chain activities and relying on outsiders to perform the remaining value chain activities

When does Outsourcing 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 Operations are streamlined to

Cut cycle time Speed decision-making Reduce coordination costs

Firm can concentrate on doing those “core” value chain activities that best suit its resource strengths and capabilities

Strategic advantages of Outsourcing Improves firm’s ability to obtain high quality and/or cheaper

components or services Improves firm’s ability to innovate by interacting with “best-in-world”

suppliers Enhances firm’s flexibility should customer needs and market

conditions suddenly shift Increases firm’s ability to assemble diverse kinds of expertise

speedily and efficiently Allows firm to concentrate its resources on performing those

activities internally which it can perform better than outsiders

Pitfalls of Outsourcing

Lose control

Farming out too many or the wrong activities, thus Hollowing out its capabilities Losing touch with activities and

expertise that determine its overall long-term success

Offensive strategies

Competitive advantage is usually achieved by successful offensive moves that yield

yield a cost advantage

a differentiation advantage

a resource advantage

An offensive strategy can create an edge quickly if resources and capabilities can be deployed fast or if buyers respond immediately

a dramatic price cut

an imaginative ad campaign

an appealing new product

Offensive strategies (cont)

Securing competitive edge can take longer if

consumer acceptance of new product will take time

firm needs time to debug new technology or increase production capacity

Ideally, an offensive strategy should build competitive advantage quickly, the longer it takes, the more likely the rivals will counteract

Counter offensives by rivals by be swift e.g in textile sector or take longer e.g pharmaceutical products

To sustain initial competitive advantage won, the firm should have follow on offensive and defensive moves

Unless firms initiates offensive and defensives moves one after the other to protect market position and retain customers, its market will erode

Types of offensive strategies

6 basic types of offensive strategies:

Initiatives to match or exceed competitor strength

Initiatives to capitalize on competitor weaknesses

Simultaneous initiatives on many fronts

End run offensives

Guerilla offensives

Preemptive strikes

Initiatives to match or exceed competitor strengths

2 instances :

the firm has no choice but to try to match a strong rival’s competitive advantage – when rival has superior product offering or superior organisational resources and capabilities

when it is possible to gain market share at expense of rivals despite the resource strengths and capabilities they have

Classic approach is to attack a strong rival with an equally good product but at a lower price

A more sustainable approach is to achieve cost advantage first and then launch a price aggressive challenge

Initiatives to match or exceed competitor strengths (cont)

Other strategic options include:

Leapfrogging into next generation technologies to make rival products obsolete

Adding new products that will appeal to rival’s customers

Comparison ads

Matching rival model for model

Developing customer capabilities rival does not have

Challenging rival in its geographic market

Challenging a rival on grounds where it is strong can be a difficult and long struggle

If the prospects for profitability and a more solid competitive position are absent, such head on offensive strategies are ill-advised

Initiative to capitalise on competitor weaknesses

Strategies that exploit competitor weaknesses stand a better chance of succeeding than challenging competitor strengths

Especially if weaknesses represent important vulnerabilities and rival is caught by surprise with no ready defense

Options include:

going after rivals’ customers whose products lag on quality, features or product performance

trying to attract rivals’ customers who provide subpar customer service

trying to win customers from rivals with weak brand recognition

trying to increase sales to buyers in geographic areas where rivals have weak market share or exerting less effort

paying attention to buyer segments that rivals neglecting or not well equipped to serve

Simultaneous initiatives on many fronts

Company may launch a grand offensive involving multiple initiatives – price cuts, increased advertising, additional features, new models and styles, customer service improvements and promotions) launched more or less concurrently

Such campaigns can force rivals into defensive actions to protect different segments of its customer base simultaneously and divide its attention

Best chance of success: an attractive product or service and brand awareness created with advertising and special deals and distribution channels support

End run offensives

An end-run offensive is maneuvering around competitors, capture unoccupied or less contested market territory and changing the rules of the competitive game in the aggressor’s favour

Examples include:

introducing new products that define the market and the terms of competition e.g digital cameras, mobile phones

launching initiatives to build strong positions in geographic areas where rivals have little or no market presence

trying to create new segments by introducing products with different attributes and performance features to better meet needs of selected buyers

leapfrogging into next generation technologies to supplant existing technologies, products and/or services e.g LCD screens

Guerilla offensives

Guerilla offensives well suited for small challengers who do not have the resources to mount a full fledged attack on industry leaders

Guerilla offensives use the hit and run principle, trying to grab sales and market share wherever and whenever it can by spotting an opening through which to lure customers

Guerilla moves include making scattered, random raids on leader’s customers:

lowering price to win a big order or key account

surprising rivals with a short burst of intense promotional activity e.g 20% discount for a week

promote the quality of their products or announce guaranteed delivery times if customers tend to be dissatisfied with these issues with rivals

Preemptive strikes Preemptive strategies involve moving first to secure an advantageous position that rivals are prevented or discouraged from duplicating:

by securing exclusive or dominant access to the best distributors in a particular geographic region or country

moving to obtain the most favorable site along a heavily traveled route e.g at a new intersection, new shopping centre, in a natural beauty spot, close to raw materials supply or markets

tying up the most reliable or high quality suppliers via an exclusive partnership, long term contract or acquisition

Preemptive strategies are of one of its kind nature

To be successful, it does not have to totally block rivals from following or copying, merely gives firm a prime location

Choosing which rivals to attack The best targets for offensive attacks are:

Market leaders that are vulnerable – when company that leads in terms of size and market share is not serving the market well. Challenger can simply win by becoming stronger runner up. There is also risk of a wasteful loss of resources in a profitless battle for market share

Runner-up firms with weaknesses where the challenger is strong – when challenger’s resource strengths and competitive capabilities are well suited to exploit their weaknesses

Struggling enterprises that are on the verge of going under – this can further sap the firm’s financial strength and competitive position and hasten its exit from the market

Small local and regional firms with limited capabilities – a challenger with broader capabilities can raid their bigger and best customers e.g those who have more sophisticated needs or need more full service capability

Choosing the basis for attack

• Firm’s strategic offensive should be tied to what it does best- its core competencies, resource strengths and competitive capabilities

Defensive Strategies

In a competitive market, all firms are prey to offensive moves from rivals

Defensive strategies

lower the risk of being attacked

weaken the impact of any attack that occurs

influence challengers to aim their efforts at other rivals

Defensive strategies do not usually enhance a firm’s competitive, they

help to fortify competitive position

protect its valuable resources and capabilities from imitation

defend whatever competitive advantage firm might have

Types of defensive strategies

2 basic types of defensive strategies:

Blocking challengers

Signaling the likelihood of strong retaliation

Blocking the avenues open to challengers

The most frequently employed approach are actions that restrict a challenger’s options for initiating competitive attack:

Participating in alternative technologies to reduce threat that rivals can attack with better technology

Introducing new features, adding new models, broadening its product line to close off gaps and vacant niches

Thwarting of lower priced rivals with economy priced options

Lengthening warranty coverages, offering free training and support services, delivering spare parts faster than rivals

Providing coupons and sample giveaways to induce buyers to experiment

Blocking the avenues open to challengers (cont)

Make early announcements about impending new products or price changes to induce potential buyers to avoid switching

Granting a dealer and a distributor volume discounts or better financing terms to discourage them to experiment with other suppliers

Convince distributors to handle product line exclusively and force competitors to use other distribution outlets

Signaling challengers that retaliation is likely The aim of signaling challengers that strong retaliation is likely is:

to dissuade challengers from attacking at all

or divert them to less threatening options

Goal is achieved by letting rivals know that the battle will cost more than it is worth

Some signals are:

Publicly announcing management commitment to maintain firm’s present market share

Publicly committing the company to match competitors’ terms or prices

Maintaining a war chest of cash and marketable securities

Making an occasional strong counter-response to the moves of weak competitors to enhance the firm’s image as a tough defender

First mover advantages and disadvantages When to make a strategic move is often as crucial as what move to make

Timing is especially important when fist mover advantages or disadvantages exist

Being first to initiate a strategic move can have a high payoff in terms of strengthening market position and competitiveness when:

pioneering helps build firm’s image and reputation with buyers

early commitments to new technologies, new style components, distribution channels and produce cost advantage

first time customers remain strongly loyal to pioneering firms in making repeat purchases

moving first constitutes a preemptive strike, making imitation extra hard or likely

First mover advantages and disadvantages (cont)

The bigger the first mover advantages, the more attractive making the first move becomes

Example: internet rush era, several firms that were first with new technologies have enjoyed lasting first mover advantages in gaining visibility and reputation to emerge as market leaders – Amazon.com, Yahoo, eBay

firm mover needs to be a fast learner to sustain its advantage

not just about being the first company to do something but rather to be the first competitor to put together a combination that that gives it an edge over rivals

Being a fast follower or even adopting a wait and see later mover strategy is another option.At times a first mover’s skills and know-how can be easily copied or even surpassed allowing late movers to catch up or overtake fist mover in a relatively short period

First mover disadvantages

Sometimes there are advantages to being a follower than a first mover.

Late mover advantages (first mover disadvantages) arise when:

pioneering efforts are more costly than imitative followership

only negligible experience or learning curve benefits accrue to the leader

products of innovator are primitive and do not live up to buyers’ expectation allowing follower to win customers with better performing next generation products

Technology is advancing rapidly allowing fast followers to leapfrog first mover’s products with more attractive second and third generation products

A company that seeks competitive advantage by being a first mover should ask the following questions:

does market takeoff 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 behaviours?

will buyers encounter high switching costs?

are there influential competitors in a position to derail the efforts of a first mover?

when the answer to any of the above question is yes, then the firm must be careful not put too many resources into getting ahead of the market opportunity

An adept fast follower the advantages of being less risky and skirting the costs of pioneering

Habitual late movers are usually fighting to retain their customers and scrambling to keep pace with more progressive and innovative rivals

For a habitual late mover to catch up:

first movers should be slow movers

buyers will be sow to gravitate to the products of first movers

must have competencies and capabilities that are sufficiently strong to allow it to close the gap fairly quickly once it makes its move

Counting on these factors can put the late mover’s competitive position at risk

The Blue Ocean strategy

Research work----