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----
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