Write two initial reaction posts (one to each primary question prompt) each with a 100-word minimum. The post is listed below. Both initial reaction posts must be posted by Thursday.
1. What is your personal strategy?
2. How do you plan to compete in today’s marketplace?
A) Writing has to be Original
B) No less than 100 words
C) NO PLAGARISM
D) Answer the 2 questions within your discussion
In addition, to the first part of this assignment, you must read and respond to two other students’ initial reaction post (100-word minimum each).
Supplementing the Chosen Competitive Strategy— Other Important Strategy Choices 122
Copyright © 2020 by Arthur A. Thompson. All rights reserved. Reproduction and distribution of the contents are expressly prohibited without the author’s written permission
Strategy: Core Concepts and Analytical Approaches
An e-book published by McGraw-Hill Education
Arthur A. Thompson, The University of Alabama 6th Edition, 2020-2021
chapter 6 Supplementing the Chosen Competitive Strategy— Other Important Strategy Choices Winners in business play rough and don’t apologize for it. The nicest part of playing hardball is watching your competitors squirm. —George Stalk, Jr. and Rob Lachenauer
Whenever you look at any potential merger or acquisi tion, you look at the potential to create value for your shareholders. —Dilip Shanghvi, Founder and managing director of Sun Pharmaceuticals
Don’t form an alliance to correct a weakness and don’t ally with a partner that is trying to correct a weakness of its own. The only result from a marriage of weaknesses is the creation of even more weaknesses. —Michel Robert
Think of your priorities not in terms of what activities you do, but when you do them. Timing is everything. —Dan Millman
Once a company has settled on which of the five generic competitive strategies to employ, attention turns to what other strategic actions it can take to complement its competitive approach and maximize the power of its overall strategy. Several decisions must be made: n Whether to go on the offensive and initiate aggressive strategic moves to improve the company’s market
n Whether to employ defensive strategies to protect the company’s market position.
n What role the company’s website should play in its overall strategy to be a successful performer.
n Whether to outsource certain value chain activities or perform them in-house.
n Whether to integrate backward or forward into more stages of the industry value chain.
n Whether to enter into strategic alliances or partnership arrangements with other enterprises.
n Whether to bolster the company’s market position via mergers or acquisitions.
Chapter 6 • Supplementing the Chosen Competitive Strategy—Other Important Strategy Choices 123
Copyright © 2020 by Arthur A. Thompson. All rights reserved. Reproduction and distribution of the contents are expressly prohibited without the author’s written permission
n When to undertake strategic moves—whether advantage or disadvantage lies in being a first mover, a fast follower, or a late mover.
This chapter presents the pros and cons of each of these strategy-enhancing measures.
Figure 6.1 shows the menu of strategic options a company has in crafting a comprehensive set of strategic actions and the in which the choices should generally be made. The portion of Figure 6.1 below the five generic competitive strategy options illustrates the structure of this chapter and the topics that will be covered.
Figure 6.1 A Company’s Menu of Strategy Options
First Mover? Fast-Follower? Late-Mover?
Generic Competitive Strategy Options
What type of website strategy to employ?
Whether to outsource selected value chain activities?
Initiate offensive strategic moves?
Employ defensive strategic moves?
Employ backward or forward vertical integration strategies?
Enter into strategic alliances and partnerships?
Use merger and acquisition strategies to strengthen competitiveness?
Focused Low Cost?
(A company’s first strategic choice)
Complementary Strategy Options (A company’s second set of strategic choices)
R&D Engineering Production
Marketing & Sales
Human Resources Finance
Functional Area Strategies to Support the Above Strategic Choices
Timing a Company’s Strategic Moves in the Marketplace
(When to initiate actions to pursue or make adjustments in any of the above strategic choices—timing matters!)
(A company’s third set of strategic choices)
Chapter 6 • Supplementing the Chosen Competitive Strategy—Other Important Strategy Choices 124
Copyright © 2020 by Arthur A. Thompson. All rights reserved. Reproduction and distribution of the contents are expressly prohibited without the author’s written permission
Going on the Offensive—Strategic Options to Improve a Company’s Market Position
No matter which of the five generic competitive strategies a company employs, there are times when it makes sense for a company to go on the offensive to improve its market position and business performance. Strategic offensives are called for when a company sees opportunities to gain profitable market share at rivals’ expense, when a company should strive to whittle away at a strong rival’s competitive advantage, and when a company opts to pursue newly emerging market opportunities. Companies like Google, Amazon, Apple, and Facebook play hardball, aggressively pursuing competitive advantage and trying to reap the benefits a competitive edge offers—a leading market share, excellent profit margins, rapid growth (as compared to rivals), and the reputational rewards of being known as a company on the move.1 The best offensives tend to incorporate several behaviors and principles: (1) focusing relentlessly on building competitive advantage and then striving to convert competitive advantage into decisive advantage, (2) employing the element of surprise as opposed to doing what rivals expect and are prepared for, (3) applying resources where rivals are least able to defend themselves, and (4) being impatient with the status quo and displaying a strong bias for swift and decisive actions to overwhelm rivals.2
Choosing the Basis for Competitive Attack As a rule, challenging rivals on competitive grounds where they are strong is an uphill struggle.3 Offensive initiatives that exploit competitor weaknesses stand a better chance of succeeding than do those that challenge competitor strengths, especially if the weaknesses represent important vulnerabilities and weak rivals can be caught by surprise with no ready defense.4
A company’s strategic offensives should be powered by competitively powerful resources and capabilities—such as a better-known brand name, lower production and/or distribution costs, better technological capability, or a core or distinctive competence in designing and producing superior performing products. Designing a strategic offensive spearheaded by relatively weak company resources and capabilities is like marching into battle with a popgun—the prospects for success are dim. For instance, it is foolish for a company with relatively high costs to employ a price-cutting offensive. Price-cutting offensives are best left to financially strong companies whose costs are relatively low in comparison to those of the companies being attacked. Likewise, it is ill-advised to pursue a product innovation offensive without proven expertise in R&D, new product development, and speeding new or improved products to market.
The principal offensive strategy options include the following:
n Offering an equally good or better product at a lower price. Lower prices can produce market share gains if competitors don’t respond with price cuts of their own and if the challenger convinces buyers that its product is just as good or better. However, such a strategy increases total profits only if the gains in additional unit sales are enough to offset the impact of thinner margins per unit sold. Price- cutting offensives generally work best when a company first achieves a cost advantage and then hits competitors with a lower price.5
CORE CONCEPT Sometimes a company’s best strategic option is to seize the initiative, go on the attack, and launch a strategic offensive to improve its market position. It takes successful offensive strategies to build competitive advantage, widen an existing advantage, or narrow the advantage held by a strong competitor.
CORE CONCEPT The best offensives use a company’s most potent resources and capabilities to attack rivals where they are competitively weakest.
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n Leapfrogging competitors by being the first adopter of next-generation technologies or being first to market with next-generation products. In technology-based industries, the opportune time to launch an offensive against rivals is by leading the way in introducing a next-generation technology or product. Amazon got its Alexa-enabled Amazon Echo into the smart-home controls market about two years ahead of Google’s Google Home device. But in 2019 both rivals were racing to introduce next-generation versions with wider-ranging features and capabilities. Two other brands, the Sonos One from Sonos, and Anker’s Eufy Genie, were also trying to gain buyer favor. The pace at which next-version products with ever more appealing capabilities and useful functions would be introduced was expected to produce a formidable leapfrogging battle.
n Pursuing continuous product innovation to draw sales and market share away from rivals with comparatively weak product innovation capabilities. Ongoing introductions of new/improved products can put rivals with deficient product innovation capabilities under tremendous competitive pressure. But such offensives can be sustained only if a company can keep its product development pipeline full of new and improved products that spark buyer enthusiasm.6
n Pursuing disruptive product innovation to create new markets. While this strategy can be riskier and more costly than continuous product innovation, “big bang” disruptive product innovation can be a game changer if successful.7 Disruptive innovation involves perfecting a new product with a few trial users, then quickly rolling it out to the whole market in an attempt to get many buyers to embrace an altogether new and better value proposition quickly. Examples include online degree programs, self- driving capabilities for motor vehicles, Apple Music, and Amazon’s Kindle (which undercut the sales of hardcopy fiction and non-fiction books).
n Adopting and improving on the good ideas of other companies (rivals or otherwise).8 The idea of warehouse home improvement centers did not originate with The Home Depot cofounders Arthur Blank and Bernie Marcus. They got the “big box” concept from their former employer Handy Dan Home Improvement. But they were quick to improve on Handy Dan’s business model and strategy and take The Home Depot to the next plateau in terms of product line breadth and customer service. Offense- minded companies are often quick to adopt any good idea (not nailed down by a patent or other legal protection) in an effort to create competitive advantage for themselves.9
n Deliberately attacking those market segments where a key rival makes big profits.10 Long a dominant force in small automobiles, Toyota launched a hardball attack on General Motors, Ford, and Chrysler in the U.S. market for light trucks and SUVs, the very market segments where the Detroit automakers historically earned big profits (roughly $10,000 to $15,000 per vehicle). Toyota now offers equivalent vehicles, earns handsome profits of its own in these two market segments, and has stolen sales and market share from its U.S.-based rivals. Dell opted to introduce its own brand of printers and printing supplies in the 1990s because its principal rival in desktop and laptop computers was Hewlett-Packard, which made its biggest profits in printing and printing supplies; by attacking H-P in the market for printers, Dell sought to force H-P to devote management attention and resources to defending its printing business and distract its attention away from trying to wrest market leadership away from Dell in the PC market.
n Attacking the competitive weaknesses of rivals. Such offensives present many options. One is to go after the customers of those rivals whose products lag on quality, features, or product performance. If a company has especially good customer service capabilities, it can make special sales pitches to the customers of those rivals who provide subpar customer service. Aggressors with a recognized brand name and strong marketing skills can launch efforts to win customers away from rivals with weak brand recognition. There is considerable appeal in emphasizing sales to buyers in geographic regions where several rivals have low market shares or are less well-equipped to serve. If the attacker’s most potent resources and capabilities should prove powerful enough to outcompete the targeted rivals and result in competitive advantage, so much the better.
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n Maneuvering around competitors and concentrating on capturing unoccupied or less contested market territory. Examples include launching initiatives to build strong positions in geographic areas or market segments where close rivals have little or no market presence. Southwest Airlines became a major carrier not by invading the turf where big airlines had their “hubs”—like Chicago O’Hare, Dallas-Fort Worth, Los Angeles, and New York LaGuardia, but by scheduling point-to-point flights to lesser-sized airports (Las Vegas, Baltimore-Washington, Chicago Midway, and Fort Lauderdale) where relatively weak competition enabled it to gain the leading market share in a fairly short time. Going into 2016, Southwest commanded the biggest share of passenger traffic in over 60 of the 84 airports it served in the United States.
n Using hit-and-run or guerrilla warfare tactics to grab sales and market share from complacent or distracted rivals. Options for “guerrilla offensives” include occasional low-balling on price (to win a big or steal a key account from a rival); surprising key rivals with sporadic but intense bursts of promotional activity (offering a 20 percent discount for one week to draw customers away from rival brands); or undertaking special campaigns to attract buyers away from rivals plagued with a strike or problems in meeting buyer demand.11 Guerrilla offensives are particularly well suited to small challengers who have neither the resources nor the market visibility to mount a full-fledged attack on industry leaders.
n Launching a preemptive strike to secure an advantageous position that rivals are prevented or discouraged from duplicating.12 What makes a move preemptive is its one-of-a-kind nature— whoever strikes first stands to acquire competitive assets that rivals can’t readily match. Examples of preemptive moves include (1) securing the best distributors in a particular geographic region or country; (2) obtaining the most favorable site along a heavily traveled thoroughfare, at a new interchange or intersection, in a new shopping mall, in a natural beauty spot, close to cheap transportation or raw material supplies or market outlets, and so on; (3) tying up the most reliable, high-quality suppliers via exclusive partnerships, long-term contracts, or even acquisition; and (4) moving swiftly to acquire the assets of distressed rivals at bargain prices. To be successful, a preemptive move doesn’t have to totally block rivals from following or copying; it merely needs to give a firm a prime position that is not easily circumvented.
How long it takes for an offensive to yield good results varies with the competitive circumstances.13 It can be short if buyers respond immediately (as can occur with a dramatic price cut, an imaginative ad campaign, or an especially appealing new product). Securing a competitive edge can take much longer if winning consumer acceptance of the company’s product will take some time or if the firm may need several years to debug a new technology or put new production capacity in place. But how long it takes for an offensive move to improve a company’s market standing—and whether the move will prove successful—depends in part on whether and how quickly rivals recognize the threat and begin a counter-response. And any responses on the part of rivals hinge on whether (1) they have effective countermoves in their arsenal of strategic options and (2) they believe that a counterattack is worth the expense and the distraction.14
Blue Ocean Strategy—A Special Kind of Offensive A blue ocean strategy seeks to gain a dramatic and durable competitive advantage by abandoning efforts 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.14 This strategy views the business universe as consisting of two distinct types of market space. One is where industry boundaries are defined and accepted, the competitive rules of the game are well understood and accepted by all industry members, and companies use their resources and capabilities to compete against rivals and achieve satisfactory or better performance. In such markets, lively competition constrains a company’s prospects for rapid growth and superior profitability since rivals move quickly to either imitate or counter the successes of competitors. The second type of market space is a “blue ocean” where the industry does not really exist yet, is untainted by competition, and offers wide open opportunity for profitable and rapid growth if a
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company can come up with an innovative new product offering and strategy that allow it to create new demand rather than fight over existing demand. Companies that create blue ocean market spaces can often sustain their initially won competitive advantage without encountering a major competitive challenge for 10 to 15 years provided their blue ocean strategy translates into strong brand name awareness and there are other high barriers to imitating its product offering.
A terrific example of blue ocean market creation is the online auction market that eBay created and now dominates. Other examples of companies that have created blue ocean market spaces include NetJets in fractional jet ownership, Drybar in hair blowouts, Uber and Lyft in ride-hailing services, Amazon’s Alexa-based Echo smart- home device, and Cirque du Soleil in live entertainment. Cirque du Soleil “reinvented the circus” by creating a distinctly different market space for its performances (Las Vegas night clubs and theater settings) and pulling in a whole new group of customers—adults and corporate clients—who not only were noncustomers of traditional circuses (like Ringling Brothers, the legendary industry leader), but were also willing to pay several times more than the price of a conventional circus ticket to have an “entertainment experience” featuring sophisticated clowns and star-quality acrobatic acts in a comfortable atmosphere.
Choosing Which Rivals to Attack Offensive-minded firms need to analyze which of their rivals to challenge as well as how to mount that challenge. The following are the best targets for offensive attacks:15
n Market leaders that are vulnerable. Offensive attacks make good sense when a company that leads in size and market share is not a true leader in serving the market well. Signs of leader vulnerability include unhappy buyers, an inferior product line, a weak competitive strategy with regard to low-cost leadership or differentiation, strong emotional commitment to an aging technology the leader has pioneered, outdated plants and equipment, a preoccupation with diversification into other industries, and mediocre or declining profitability. Offensives to erode the positions of market leaders have real promise when the challenger is able to revamp its value chain or innovate to gain a fresh cost-based or differentiation-based competitive advantage.16 To be judged successful, attacks on leaders don’t have to result in making the aggressor the new leader; a challenger may “win” by simply becoming a stronger runner-up. Caution is well advised in challenging strong market leaders—there is a significant risk of squandering valuable resources in a futile effort or precipitating a fierce and profitless industry-wide battle for market share.
n Runner-up firms with weaknesses in areas where the challenger is strong. Runner-up firms are an especially attractive target when a challenger’s resource strengths and competitive capabilities are well suited to exploiting their weaknesses.
n Struggling enterprises on the verge of going under. Challenging a hard-pressed rival in ways that further deplete its financial strength and competitive position can weaken its resolve and hasten its exit from the market. It often makes sense to attack a struggling enterprise in its most profitable market segments, since this will threaten its survival the most.
n Small local and regional firms with limited resources and/or capabilities. Because small firms typically have limited expertise and resources, a challenger with broader and/or deeper capabilities is well positioned to raid their biggest and best customers—particularly those customers that are growing rapidly, have increasingly sophisticated requirements, and may already be thinking about switching to a supplier with more full-service capability.
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Defensive Strategies—Protecting Market Position and Competitive Advantage
In a competitive market, all firms are subject to offensive challenges from rivals. The purposes of defensive strategies are to lower the risk of being attacked, weaken the impact of any attack that occurs, and induce challengers to aim their offensive initiatives at other rivals. While defensive strategies usually don’t enhance a firm’s competitive advantage, they can definitely help fortify its competitive position, protect its most valuable resources and capabilities from imitation, and defend whatever competitive advantage it might have. Defensive strategies can take either of two forms: actions to block challengers and actions to signal the likelihood of strong retaliation.
Blocking the Avenues Open to Challengers The most frequently employed approach to defending a company’s present position involves actions that restrict a challenger’s options for initiating competitive attack. There are any number of obstacles that can be put in the path of would-be challengers.17 A defender can participate in alternative technologies as a hedge against rivals attacking with a new or better technology. A defender can introduce new features, add new models, or broaden its product line to close off gaps and vacant niches to opportunity-seeking challengers. It can thwart rivals’ efforts to attack with a lower price by maintaining a lineup of product selections that includes economy-priced options for price-sensitive buyers. It can try to discourage buyers from trying competitors’ brands by lengthening warranties, offering free training and support services, developing the capability to deliver spare parts to users faster than rivals can, providing coupons and sample giveaways to buyers most prone to experiment, and making early announcements about impending new products or probable price cuts to induce potential buyers to postpone switching. It can challenge the quality or safety of rivals’ products. Finally, a defender can grant volume discounts or better financing terms to dealers and distributors to discourage them from experimenting with other suppliers, or it can convince them to handle its product line exclusively and force competitors to use other distribution outlets.
Signaling Challengers that Retaliation Is Likely The goal of signaling challengers that strong retaliation is likely in the event of an attack is either to dissuade challengers from attacking at all or to divert them to less- threatening options. Either goal can be achieved by letting challengers know the battle will cost more than it is worth. Would-be challengers can be signaled by:18
n Publicly announcing management’s commitment to maintain the firm’s present market share.
n Publicly committing the company to a policy of matching competitors’ prices and terms of sale.
n Maintaining a war chest of cash and marketable securities.
n Making an occasional strong counter-response to the moves of weak competitors to enhance the firm’s image as a tough defender.
For signaling to be effective, however, challengers must believe that the signaler has every intention of pursuing retaliatory actions if attacked.
CORE CONCEPT Good defensive strategies can help protect competitive advantage but rarely are the basis for creating it.
There are many ways to throw obstacles in the path of would-be challengers.
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Every company with a website has to address what role the site should play in the company’s competitive strategy. In particular, to what degree should a company use online sales as a means for selling its products or services direct to users? Should a company use its website only as a means of disseminating information about the company and its products (relying exclusively on its wholesale and retail partners to make all sales to end users)? Or should online sales at the company’s website be (1) a secondary or minor channel for accessing customers, (2) one of several important distribution channels for accessing customers, (3) the primary distribution channel for accessing customers, or (4) the exclusive channel for transacting sales with customers?19 Let’s look at each of these strategic options in turn.
Product Information–Only Strategies—Avoiding Channel Conflict Operating a website that contains extensive product information but relies on click-throughs to the websites of distribution channel partners for sales transactions (or that informs site visitors where nearby retail stores are located) is an attractive option for manufacturers and/or wholesalers that have invested heavily in building and cultivating retail dealer networks to access end users. A company vigorously pursuing online sales to consumers at the same time it is also heavily promoting sales to consumers through its network of wholesalers and retailers is competing directly against its distribution allies. Such actions constitute channel conflict and are a tricky road to negotiate. A company actively trying to grow online sales is signaling a weak strategic commitment to its dealers and a willingness to cannibalize dealers’ sales and growth potential. The likely result is angry dealers and loss of dealer goodwill. Some or many of the company’s dealers may opt to put more effort into marketing the brands of rival manufacturers who don’t sell online or whose online sales effort is passive and nonthreatening. Quite possibly, a company may lose more sales by offending its dealers than it gains from its own online sales effort. Consequently, in industries where the strong support and goodwill of dealer networks is essential, companies may conclude that it is important to avoid channel conflict and their website should be designed to partner with dealers rather than compete with them.
Website Sales as a Minor Distribution Channel A second strategic option is to use online sales as a relatively minor distribution channel for achieving incremental sales, gaining online sales experience, and doing marketing research. If channel conflict poses a big obstacle to online sales, or if only a small fraction of buyers can be attracted to make online purchases, then companies are well advised to pursue online sales with the strategic intent of gaining experience, learning more about buyer tastes and preferences, testing reaction to new products, creating added market buzz about their products, and boosting overall sales volume a few percentage points. Sony and Nike, for example, sell most all of their products at their websites without provoking resistance from their retail dealers—their website prices are the same (sometimes higher) than the prices of their dealers, which gives buyers little incentive to buy online as compared shopping at the stores of local dealers. However, Nike does allow shoppers at its website to custom-designed shoes, which gives Nike valuable insight into buyer fashion preferences and aids the company’s new product development personnel in deciding what new shoe designs, colors, and accents to introduce.
Companies today must wrestle with whether to use their websites just as a means of disseminating information about the company and its product offerings or whether to operate an e-store that sells direct to online shoppers.
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Sometimes, manufacturers are willing to accept the channel conflict problems that arise from selling online in head-to-head competition with distribution channel allies because they expect that over the long term online sales at their websites will become progressively larger and more profitable. A strategy to gradually grow online sales into an important distribution channel can make sense in three instances:
n When profit margins from online sales are bigger than those earned from selling to wholesale/retail customers.
n When encouraging buyers to visit the company’s website helps educate them about the ease and convenience of purchasing online and, over time, prompts more and more buyers to purchase online (where company profit margins are greater)—which makes incurring channel conflict in the short term and competing against traditional distribution allies potentially worthwhile.
n When selling directly to end users allows a manufacturer to make greater use of build-to- manufacturing and assembly, which if met with growing buyer approval would increase the rate at which sales migrate from distribution allies to the company’s website; such migration could lead to streamlining the company’s value chain and boosting its profit margins.
Brick-and-Click Strategies Some companies employ brick-and-click strategies, whereby they sell to consumers both at their own websites and at their own company-owned retail stores (or the stores of independent retailers). Brick-and-click strategies have two big appeals: They are an economic means of expanding a company’s geographic reach, and they give both existing and potential customers another choice of how to communicate with the company, shop for product information, make purchases, or resolve customer service problems. Software developers, for example, have come to rely on the Internet as a highly effective distribution channel to complement sales at brick-and-mortar retailers. Allowing end users to make an online purchase and download it immediately has the big advantage of eliminating the costs of producing and packaging CDs and cutting out the costs and margins of software wholesalers and retailers (often 35 to 50 percent of the retail price). Chain retailers like Walmart and Best operate online stores for their products primarily as a convenience to customers who prefer to buy online and have the items shipped or available for pickup at nearby stores.
Many brick-and-mortar retailers can enter online retailing at relatively low cost—all they need is a web store for displaying products, accepting customer s, and systems for filling and delivering s. Brick-and-mortar retailers (as well as manufacturers with company-owned retail stores) can use personnel at their distribution centers and/or retail stores to fill and ship the s of online buyers, and they can allow online buyers to pick up their s at the nearest local retail store. Walgreens, a leading drugstore chain, lets customers a prescription online and then pick it up at the drive-through window or inside counter of a local store—allowing customers to online and then pick up their s at local stores has become a popular strategy for many retailers because it enables them to better compete with Amazon. In banking, a brick-and-click strategy allows customers to use local branches and ATMs for depositing checks and getting cash while using online systems to pay bills, monitor account balances, and transfer funds. Bed Bath & Beyond uses its web store to display and sell the items stocked in its stores but also to display and sell a wider number of brands, colors, and selections in the same product categories that, for reasons of limited shelf space, are not available in its stores—such a strategy gives customers a much wider selection and boosts its online sales.
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Strategies for Online Enterprises A company that elects to use its website as the exclusive channel for accessing buyers is essentially an online business—all customer-related transactions occur at the company’s website. Thousands of enterprises have chosen this strategic approach, including Netflix, TripAdvisor, Quicken Loans, eBay, and Expedia. For a company to succeed in using online sales as its exclusive distribution channel, its product or service must be one for which buying online holds strong appeal. The strategies adopted by online enterprises must address several issues:
n How it will deliver unique value to buyers. Online businesses must usually attract buyers on the basis of low price, convenience, superior product information, build-to- options, or attentive online service.
n Whether it will pursue competitive advantage based on lower costs, differentiation, or better value for the money. For an online-only sales strategy to succeed in head-to-head competition with brick-and- mortar and brick-and-click rivals, an online seller’s value chain approach must hold potential for a low- cost advantage, competitively valuable differentiating attributes, or a best-cost provider advantage.
n Whether it will have a broad or a narrow product offering. A one-stop shopping strategy like that employed by Amazon.com (which offers “Earth’s Biggest Selection” of items for sale at 13 international websites) has the appealing economics of helping spread fixed operating costs over a wide number of items and a large customer base. Online sellers like Quicken Loans (the largest online provider of home mortgages), and Hotels.com have adopted classic focus strategies and cater to a sharply defined target audience shopping for a particular product or product category.
n Whether to outsource fulfillment activities or perform them internally. Most online sellers find it more economical to outsource fulfillment activities to specialists who make a business of providing warehouse space, stocking inventories, and installing the capabilities to pick, pack, and ship s cost-efficiently for a number of different online retailers. Only very high-volume online retailers can develop and install the capabilities to perform fulfillment activities internally at costs below those of outside specialists. .com, an online superstore with some 30,000 items, obtains products from name brand manufacturers and uses outsiders to stock and ship those products—thus, its focus is not on manufacturing or fulfillment but rather on online sales.
n How it will draw traffic to its website and then convert page views into revenues. Websites must be cleverly marketed. Unless web surfers hear about the site, like what they see on their first visit (and perhaps make a purchase), and are intrigued enough to return again and again to both view information and make purchases, the site is unlikely to generate adequate revenues. The best test of effective marketing and the appeal of an online company’s product offering is the ratio at which page views are converted into revenues (the “look-to-buy” ratio).
Outsourcing strategies involve a conscious decision to abandon or forgo attempts to perform certain value chain activities internally and to instead farm them out to outside specialists and strategic allies.20 Many PC makers, for example, have shifted from assembling units in-house to outsourcing the entire assembly process to manufacturing specialists that assemble many brands of PCs (and thus can capture all the available economies of scale), are better able to bargain down the prices of PC components (by buying in large volumes), and have developed best practice capabilities in performing specific assembly tasks accurately and cheaply. Most all name brand apparel firms have in-house capability to design, market, and distribute their
CORE CONCEPT Outsourcing involves farming out certain value chain activities to outside vendors and narrowing the scope of its internal operations.
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products but they outsource all fabric manufacture and garment-making activities to contract manufacturers in low-wage countries. Starbucks finds purchasing coffee beans from independent growers in most of the world’s coffee-growing regions far more advantageous than having its own coffee-growing operation.
Outsourcing certain value chain activities can be strategically advantageous whenever:
n An activity can be performed better or more cheaply by outside specialists. A company should generally not perform any value chain activity internally that outsiders can perform more efficiently or effectively. The chief exception is when a particular activity is strategically crucial and internal control over that activity is deemed essential. Dolce and Gabbana, for example, outsources manufacture of its brand of sunglasses to Luxottica—a company considered to be the world’s best producer of top-quality fashion sunglasses and high-tech prescription eyewear, known for its Ray-Ban, Oakley, and Oliver Peoples brands.
n The activity is not crucial to the firm’s ability to achieve sustainable competitive advantage. Outsourcing of maintenance services, data processing and data storage, fringe benefit management, website operations, call center operations, and similar administrative support activities to specialists is commonplace. Colgate has reduced its information systems costs by more than 10 percent annually through an outsourcing agreement with IBM.
n It streamlines company operations in ways that improve organizational flexibility or speeds the time to get new products to market. Outsourcing gives a company the flexibility to switch suppliers in the event one or more of its present suppliers fall behind competing suppliers. To the extent that its suppliers can speedily get next-generation parts and components into production, a company can get its own next- generation product offerings into the marketplace quicker. Moreover, seeking new suppliers with the needed capabilities already in place is frequently quicker, easier, less risky, and cheaper—firms that internally produce the parts and components they need are periodically confronted with sometimes formidable costs to update obsolete parts-making capabilities or to install and master new parts-making technologies.
n It reduces the company’s risk exposure to changing technology or shifting buyer preferences. When a company outsources certain parts, components, and services, its suppliers must bear the burden of incorporating state-of-the-art technologies and/or undertaking redesigns and upgrades to accommodate a company’s plans to introduce next-generation products. If what a supplier provides is designed out of next-generation products or rendered unnecessary by technological change, it is the supplier’s business that suffers rather than the company’s.
n It improves a company’s ability to innovate. Collaborative partnerships with world-class suppliers who have cutting-edge intellectual capital and are early adopters of the latest technology give a company access to ever better parts and components—such supplier-driven innovations, when incorporated into a company’s own product offering, fuel a company’s ability to introduce its own new and improved products.
n It allows a company to assemble diverse kinds of expertise speedily and efficiently. A company can nearly always gain quicker access to first-rate capabilities and expertise by partnering with suppliers who already have them in place rather than trying to build them from scratch with its own company personnel.
n It allows a company to concentrate on its core business, leverage its key resources, and do even better what it already does best. A company is better able to build and develop its own competitively valuable competences and capabilities when it concentrates its full resources and energies on performing those value chain activities that it can perform better than outsiders and/or that it needs to have under its direct control. Nike, for example, devotes its energy to designing, marketing, and distributing athletic
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footwear, sports apparel, and sports equipment, while outsourcing the manufacture of all its products to contract factories. Apple outsources production of its iPod, iPhone, and iPad models to Chinese contract manufacturer Foxconn. Recently, Hewlett-Packard and IBM sold some of their manufacturing plants to outsiders and contracted to repurchase the output from the new owners.
The Big Risk of Outsourcing Value Chain Activities The biggest danger of outsourcing is that a company will farm out too many or the wrong types of activities, thereby unduly narrowing the scope of its capabilities in ways that unwittingly reduce its long-term competitiveness.21 For example, in recent years, companies anxious to reduce operating costs have opted to outsource such strategically important activities as product development, engineering design, and sophisticated manufacturing tasks—the very capabilities that underpin a company’s ability to lead sustained product innovation. While these companies have apparently been able to lower their operating costs by outsourcing these functions to outsiders, their ability to lead the development of innovative new products is weakened because so many of the cutting-edge ideas and technologies for next-generation products come from outsiders. For example, most U.S. brands of laptops and cell phones are now not only manufactured but also designed in Asia.22 It is strategically dangerous for a company to be dependent on outsiders to provide it with the skills, knowledge, and capabilities that over the long run heavily influence its competitiveness and market success. Companies like Cisco are alert to the danger of farming out the performance of strategy-critical value chain activities and take actions to protect against being held hostage by outside suppliers. Cisco guards against loss of control and protects its manufacturing expertise by designing the production methods its contract manufacturers must use. Cisco keeps the source code for its designs proprietary, thereby controlling the initiation of all improvements and safeguarding its innovations from imitation. Further, Cisco has developed online systems to monitor the factory operations of contract manufacturers around the clock, so that it knows immediately when problems arise and can decide whether to get involved.
Vertical Integration Strategies: Operating Across More Stages of the Industry Value Chain
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. Thus, if a manufacturer invests in facilities to produce certain component parts that it formerly purchased from outside suppliers, it has engaged in backward vertical integration and extended its competitive scope backward into the production of component parts, but its business remains in the same industry as before. The only change is that it has operations in two stages of the industry value chain. Similarly, if a paint manufacturer—Sherwin-Williams, for example—elects to integrate forward by opening 500 retail stores to market its paint products directly to consumers, its entire business is still in the paint industry even though its competitive scope extends from manufacturing to retailing.
A firm can pursue vertical integration by starting its own operations in other stages in the industry’s activity chain or by acquiring a company already performing the activities it wants to bring in-house. Vertical integration strategies can aim at full integration (participating in all stages of the industry value chain) or partial integration (building positions in selected stages of the industry’s total value chain).
A company must guard against outsourcing activities that can unwittingly degrade its capabilities to be a master of its own destiny.
CORE CONCEPT A vertically integrated firm is one whose business activities extend across several portions or stages of an industry’s overall value chain.
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The Advantages of a Vertical Integration Strategy The two best reasons for investing company resources in vertical integration are to strengthen the firm’s competitive position and/or boost its profitability.23 Vertical integration has no real payoff with respect to profits or strategy unless it produces sufficient cost savings/profit increases to justify the extra investment, adds materially to a company’s competitive strengths, and/or helps differentiate the company’s product offering in ways buyers deem valuable.
Integrating Backward to Achieve Greater Competitiveness It is harder than one might think to generate cost savings or boost profitability by integrating backward into activities such as parts and components manufacture (which could otherwise be purchased from suppliers with specialized expertise in making these parts and components). For backward integration to be a viable and profitable strategy, a company must be able to (1) achieve the same scale economies as outside suppliers and (2) match or beat suppliers’ production efficiency with no drop-off in quality. Neither outcome is a slam dunk. To begin with, a company’s in-house requirements are often too small to reach the optimum size for low-cost operation—for instance, if it takes a minimum production volume of one million units to achieve mass production economies and a company’s in-house requirements are just 250,000 units, then it falls way short of being able to capture the scale economies of outside suppliers (who may readily find buyers for one million or more units). Furthermore, matching the production efficiency of suppliers is fraught with problems when suppliers have high-caliber production capabilities of their own, when the technology they employ has elements that are hard to master, and/or when substantial R&D expertise is required to develop next-version parts and components, or keep pace with advances in parts/components manufacturing processes.
That said, occasions still arise when a company can improve its cost position and competitiveness by performing a broader range of value chain activities internally rather than having some of these activities performed by outside suppliers. The best potential for being able to reduce costs via a backward integration strategy exists in situations where a company must deal with a few suppliers with substantial bargaining power, where suppliers have outsized profit margins, where the item being supplied is a major cost component, and where the requisite technological/production capabilities are easily mastered or can be gained by acquiring a supplier with most or all of the needed capabilities. Situations also arise when integrating backward can enable a company to reduce costs by facilitating the coordination of production flows from one stage to the next and avoiding bottlenecks and delays that disrupt production schedules. Furthermore, if a company has proprietary know-how that it wants to keep from rivals, then in-house performance of value chain activities related to this know-how is beneficial even if outsiders can perform such activities. Backward integration also spares a company the risk of being heavily dependent on suppliers for crucial components or support services and reduces exposure to supplier price increases.
Apple decided to backward into the production of chips and other electronic components and hardware used in its iPhone and computers because they were major cost components, suppliers had bargaining power, and in- house production would help coordinate design tasks and protect Apple’s proprietary technology. International Paper Company backward integrated into pulp mills and located them adjacent to its paper plants to reap the benefits of coordinated production flows, reduced energy usage, and negligible costs of transporting freshly- produced paper pulp directly to the production line in its paper plants.
Backward vertical integration can produce a differentiation-based competitive advantage when a company, by performing activities internally, ends up with a better-quality or better-performing product, improved customer service capabilities, or in other ways is able to deliver added value to customers. On occasion, integrating into more stages along the industry value chain can add to a company’s differentiation capabilities by allowing it to
CORE CONCEPT Backward vertical integration involves entry into activities performed by suppliers or other enterprises positioned in earlier stages of an industry’s overall value chain.
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build or strengthen its core competences, better master strategy-critical capabilities, or add features that deliver greater customer value. Panera Bread has been quite successful with a backward vertical integration strategy to produce fresh dough that company-owned and franchised bakery-cafés use in making baguettes, pastries, bagels, and other types of bread—not only does internally producing fresh dough promote consistent-quality bakery products at Panera’s 2,500 locations and lower store costs for baking, but it has also enhanced Panera’s profitability.
Integrating Forward to Enhance Competitiveness The strategic impetus for forward integration is to gain better access to end users, improve market visibility, and enhance brand name awareness. In many industries, independent sales agents, wholesalers, and retailers handle competing brands of the same product. Because they have no allegiance to any one company’s brand, they concentrate their energies on pushing whatever brand sells and earns them the biggest profits. Independent insurance agencies, for example, represent a number of different insurance companies; in trying to find the best match between a customer’s insurance requirements and the policies of alternative insurance companies, they have the opportunity to promote the policies of certain insurers and downplay the policies of other insurers. Consequently, insurers like State Farm and Allstate have integrated forward and set up local sales offices with local agents to exclusively market and service their insurance policies. Likewise, it can be advantageous for a manufacturer to integrate forward into wholesaling or retailing via company-owned distributorships or a chain of retail stores rather than depend on the marketing and sales efforts of independent distributors/retailers that stock multiple brands and steer customers to those brands earning them the highest profits. To avoid dependence on distributors/dealers with divided loyalties, Goodyear has integrated forward into company-owned and franchised retail tire stores. Consumer-goods companies like Coach, Under Armour, Nike, Tommy Hilfiger, Pepperidge Farm, Samsonite, Ann Taylor, and Polo Ralph Lauren have integrated forward and operate company-operated retail stores as well as their own branded stores in factory outlet malls that enable them to move overstocked items, slow-selling items, and seconds. Growing numbers of producers have integrated forward and begun selling directly to end-users at company websites, thus reducing dependence on traditional wholesale and retail channels.
The Disadvantages of a Vertical Integration Strategy Vertical integration has some important drawbacks, however. The biggest of these include the following:24
n Vertical integration boosts a firm’s capital investment in the industry, thereby increasing business risk (what if industry growth and profitability unexpectedly go sour?).
n Integrating backward or forward creates a vested interest for a firm to continue performing the integrated system of value chain activities it has invested money and effort into establishing (even if internal performance of certain of these value chain activities later becomes suboptimal). Why? Because there are barriers to quickly or easily exiting the performance of value chain activities spanning two or more stages of the industry’s value chain, including facilities shutdowns, costly write-offs of undepreciated assets, employee layoffs, and disrupted performance of related value chain activities. However, a company that obtains parts and components from outside suppliers can always shop the market for the newest, best, or cheapest parts and components. A company that does not have its own network of company-owned distributorships and retail stores can switch distributors and/or distribution channel emphasis whenever it is advantageous to do so.
n Some vertically integrated companies are slow to adopt new technologies or production methods because of reluctance to write off undepreciated assets or because they assign higher priority to spending capital for other company projects or because they see benefits in sticking with the present technology or
CORE CONCEPT Forward vertical integration involves entering into the performance of industry value chain activities located closer to end users.
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production methods a while longer. It is a constant struggle for manufacturers that have integrated backward to keep up with all the ongoing advances in technology and best practice production techniques for each of the many parts and components they make in-house. The faster the pace of change in an industry’s value chain, the bigger the risk of a vertical integration strategy.
n Integrating backward into parts and components manufacture reduces a company’s flexibility to implement a cheaper/better product design or adjust its lineup of product offering in response to shifting buyer preferences. It is one thing to eliminate use of a component made by a supplier and another to stop using a component being made in-house (which can mean laying off employees and writing off the associated investment in equipment and facilities or else making new investments needed to produce the new or cheaper or better part/component). It is more disruptive and costly to delete or add new products when a company not only assembles its own products but also operates facilities to produce many of the associated parts/components. Most of the world’s automakers, despite their manufacturing expertise, have concluded that purchasing a majority of their parts and components from best-in-class suppliers results in greater design flexibility, higher quality, and lower costs than producing parts/components in- house.
n Vertical integration poses all kinds of capacity-matching problems. In motor vehicle manufacturing, for example, the most efficient scale of operation for making axles is different from the most economic volume for radiators, and different yet again for both engines and transmissions. Building the capacity to produce just the right number of axles, radiators, engines, and transmissions in-house—and doing so at the lowest unit costs for each—poses significant challenges in cost-effectively producing each different part/component.
n Integrating forward or backward typically requires new or different skills and business capabilities. Parts and components manufacturing, assembly operations, wholesale distribution, retailing, and direct sales via the Internet involve using different know-how, resources, and capabilities to master the performance of different value chain activities. A manufacturer that integrates backward into parts and components production has to become proficient in different technologies and production methods and very likely source needed materials from different suppliers. A manufacturing company contemplating forward integration needs to consider carefully whether it makes good business sense to invest time and money in developing the expertise and merchandising skills to be successful in wholesaling and/ or retailing. Many manufacturers learn the hard way that company-owned wholesale/retail networks present many headaches, fit poorly with what they do best, and don’t always add the kind of value to their core business as originally planned. Selling to customers via the Internet poses still another set of problems when aiming to achieve proficient performance of strikingly different value chain activities.
In today’s world of close working relationships with suppliers and efficient supply chain management systems, relatively few companies can make a strong economic case for integrating backward into the business of suppliers. The best materials and components suppliers stay abreast of advancing technology and best practices and are adept in making good quality items, delivering them on time, and keeping their costs and prices competitive.
Weighing the Pros and Cons of Vertical Integration All in all, therefore, a strategy of vertical integration can have both important strengths and weaknesses. The tip of the scales depends on (1) the difficulties and costs of acquiring or developing the resources and capabilities needed to operate in another stage of the industry value chain, (2) the size of the benefits vertical integration offers in terms of lowering costs or enhancing differentiation and the value delivered to customers; (3) the impact of vertical integration on investment costs, flexibility, and response times, (4) the administrative costs of coordinating operations across more value chain activities; and (5) whether the integration substantially enhances a company’s competitiveness and profitability. 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. Absent solid benefits in relation to the associated costs and risks, integrating forward or backward is not likely to be an attractive strategy option.
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Strategic Alliances and Partnerships
Companies in all types of industries and in all parts of the world have elected to form strategic alliances and partnerships to complement their own strategic initiatives and strengthen their competitiveness in domestic and international markets. A strategic alliance is a formal agreement between two or more separate companies in which there is strategically relevant collaboration of some sort, joint contribution of resources, shared risk, shared control, and mutual dependence. Collaborative relationships between partners may entail a contractual agreement but they commonly stop short of formal ownership ties (although sometimes an alliance member may have minority ownership of another member).
When an alliance involves formal ownership ties, it is called a joint venture. A joint venture entails forming a new corporate entity that is jointly owned by two or more companies that agree to share in the revenues, expenses, and profits (losses) of the venture according to their ownership percentages. In many joint ventures, it is formally agreed that one of the owners (typically a majority owner) will exercise operating control over the venture. Because a joint venture involves mutual ownership, it tends to be more durable than an alliance where a partner can just abruptly decide to abandon the alliance. A joint venture owner who wants out of the venture must negotiate arrangements to be bought out or else get the other owners to agree to dissolve the venture.
An alliance or joint venture becomes “strategic”—as opposed to just a useful collaborative arrangement—when it serves any of the following purposes or intended outcomes:25
n It facilitates achievement of an important business objective (like reducing risk to a company’s business, lowering costs, or delivering more value to customers in the form of better quality, extra features, and greater durability).
n It helps build or strengthen a company’s competitively valuable resources and capabilities.
n It helps remedy an important resource deficiency or competitive weakness.
n It speeds the development of competitively important new technologies and/or product innovations.
n It facilitates entry into new geographic markets or pursuit of important market opportunities.
n It helps block or defend against a competitive threat or mitigate a significant risk to a company’s business.
n It enhances a company’s bargaining power versus suppliers or buyers.
The current high interest in making strategic alliances a key component of a company’s overall strategy is an about-face from times past, when the vast majority of companies confidently believed they already had or could independently develop whatever resources and capabilities were needed to be successful in their markets. But in today’s world, large corporations—even those that are successful and financially strong—have concluded it doesn’t always make good strategic and economic sense to be totally independent and self-sufficient with regard to every resource and capability it may need or every market opportunity it wants to pursue. Joint ventures are a favored partnership arrangement where two or more companies conclude they each want to pursue an attractive business opportunity but lack the resources and capabilities to do so independently. By joining forces and pooling their resources and capabilities in a joint venture, the resource/capability deficiencies can be readily corrected and overcome; joint pursuit of a mutually attractive business opportunity therefore becomes less risky and more likely to succeed.
CORE CONCEPT Strategic alliances are collaborative arrange- ments where two or more companies join forces to achieve mutually beneficial outcomes.
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Why and How Strategic Alliances Are Advantageous The most common reasons why companies enter into strategic alliances are to expedite the development of promising new technologies or products, to overcome deficits in their own expertise and capabilities, to bring together the personnel and expertise needed to create desirable new skill sets and capabilities, 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.26 When a company needs to correct particular resource/capability gaps or deficiencies, it may be faster and cheaper to partner with other enterprises that have the missing resources and capabilities. Moreover, partnering offers greater flexibility should a company’s competitive requirements later change. Manufacturers frequently pursue alliances with parts and components suppliers to wring cost savings out of supply chain activities, to improve the quality of parts and components, to better assure reliable supplies and on-time deliveries, and to speed new products to market. In industries where technology is advancing rapidly, alliances are all about fast cycles of learning, staying abreast of the latest developments, and gaining quick access to the latest round of technological know-how and capability. In bringing together firms with different skills and intellectual capital, alliances open up learning opportunities that help partner firms strengthen their own portfolios of resources, core competences, and capabilities and thereby become more competitive.27
Companies find strategic alliances particularly valuable in several other instances. A company racing for global market leadership needs alliances to:28
n Get into critical country markets quickly and accelerate the process of building a potent global market presence.
n Gain inside knowledge from local partners about unfamiliar markets and cultures. For example, U.S., European, and Japanese companies wanting to build market footholds in China and other fast-growing Asian markets have pursued local partnership arrangements to help guide them through the maze of government regulations, to supply knowledge of local markets, to provide guidance on adapting their products to better match local buying preferences, to set up local manufacturing capabilities, and/or to assist in distribution, marketing, and promotional activities.
n Access valuable skills and competences that are concentrated in particular geographic locations (such as software design competences in the United States, fashion design skills in Italy, and efficient manufacturing skills in Japan, Taiwan, China, and other Southeast Asian countries).
A company that is racing to stake out a strong position in an industry of the future needs alliances to:29
n Establish a stronger beachhead for participating in the target industry.
n Master new technologies and build valuable expertise and capabilities faster than would be possible through internal efforts alone.
n Open up broader opportunities in the target industry by melding the firm’s own resources and capabilities with the resources and capabilities of partners to create competitively potent resource/capability bundles.
Because of the varied benefits of strategic alliances, many large corporations have become involved in 30 to 50 alliances, and a number have formed hundreds of alliances. Genentech, a leader in biotechnology and human genetics, has formed R&D alliances with more than 30 companies to boost its prospects for developing new cures for various diseases and ailments. Samsung Group, which includes Samsung Electronics, has an ecosystem of over 1,300 alliance partners involving activities pertaining to R&D, global procurement, and local marketing. Increasing numbers of companies with a host of alliances now manage their alliances like a
The best strategic alliances are highly selective, focusing on particular value chain activities and on obtaining a specific competitive benefit. They tend to enable a firm to build on its strengths and learn.
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portfolio—terminating those that no longer serve a useful purpose or that have produced meager results, forming promising new alliances, and restructuring certain existing alliances to correct performance problems and/or redirect the collaborative effort.30
Many Alliances Are Short-Lived or Break Apart Most alliances that aim at technology-sharing or providing market access turn out to be temporary, fulfilling their purpose after a few years because the benefits of mutual learning have occurred and because both partners’ businesses have developed to the point where they are ready to go their own ways. The likelihood that such alliances will be temporary makes it important for each partner to learn thoroughly and rapidly about the other partner’s technology, business practices, and organizational capabilities and then promptly transfer valuable ideas and practices into its own value chain activities. Alliances tend to be longer lasting when (1) they involve collaboration with suppliers or distribution allies, (2) each party’s contribution involves activities in different portions of the industry value chain, or (3) both parties conclude that continued collaboration is in their mutual interest.
Most alliance partners don’t hesitate to terminate their collaboration when the payoffs run out or when alliance members conclude the expected benefits are unlikely to materialize. A 1999 study by Accenture, a global business consulting organization, revealed that 61 percent of alliances were either outright failures or “limping along.” In 2004, McKinsey & Company estimated that the overall success rate of alliances was around 50 percent, based on whether the alliance achieved the stated objectives.31 A 2007 study found that, even though the number of strategic alliances was increasing about 25 percent annually, the failure rate of alliances hovered between 60 to 70 percent.32 The high “divorce rate” among strategic allies has several causes—an inability to work well together, tendencies among alliance members to share only limited information about their valuable skills and expertise (which prevented other members from learning much of value), changing conditions that render the purpose of the alliance obsolete, growing disagreement among alliance members about the purpose, priorities, and/or targeted benefits of the alliance, the emergence of more attractive paths to capture the intended benefits, and emerging marketplace rivalry between certain alliance members.33 Experience indicates that alliances stand a reasonable chance of helping a company reduce competitive disadvantage but rarely can entering into an alliance enable a company to boost the competitive power of its resources and capabilities by enough to outcompete rivals or gain a competitive advantage.
The Strategic Dangers of Relying Heavily on Alliances and Cooperative Partnerships. The Achilles heel of alliances and strategic cooperation is becoming dependent on other companies for essential expertise and capabilities. To be a market leader (and perhaps even a serious market contender), a company must ultimately develop its own capabilities in areas where internal strategic control is pivotal to protecting its competitiveness and building competitive advantage. Moreover, some alliances and cooperative arrangements hold only limited potential when a partner maintains full control over its most valuable skills and expertise and is unwilling to give other alliance members much access to these capabilities. As a consequence, acquiring or merging with a company possessing the needed resources and capabilities is a better solution.
Large numbers of strategic alliances fail to live up to expectations and are dissolved after a few years.
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Merger and Acquisition Strategies
Mergers and acquisitions are especially suited for situations in which strategic alliances or partnerships do not go far enough in providing a company with access to needed resources and capabilities.34 Ownership ties are more permanent than partnership ties, allowing the operations of the merger/acquisition participants to be tightly integrated and creating more in-house control and autonomy. A merger is the combining of two or more companies into a newly created company that usually takes 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 more to the details of ownership, management control, and financial arrangements than to strategy and competitive advantage. The resources and capabilities of the newly created enterprise end up much the same whether the combination is the result of acquisition or merger.
The main impetus for merger and acquisition strategies is to fundamentally alter a company’s trajectory and improve its business outlook. Such strategies typically aim at achieving any of four objectives:35
1. Creating a more cost-efficient operation out of the combined companies. Many mergers and acquisitions are undertaken with the objective of transforming two or more otherwise high-cost companies into one lean competitor with average or below-average costs. When a company acquires another company in the same industry, there’s usually enough overlap in operations that certain inefficient plants can be closed or distribution activities partly combined and downsized (when nearby centers serve some of the same geographic areas) or sales force and marketing activities can be combined and downsized (when each company has salespeople calling on the same customer). The combined companies may also be able to reduce supply chain costs because of buying in greater volume from common suppliers and from closer collaboration with supply chain partners. Likewise, it is usually feasible to squeeze out cost savings in administrative activities, again by combining and downsizing such administrative activities as finance and accounting, information technology, human resources, and so on.
2. Strengthening the resulting company’s resources, capabilities, and competitiveness in important ways. Combining the operations of two or more companies, via merger and/or acquisition, is often aimed at significantly bolstering the competitive power of the resulting company’s resources, know-how, skills and expertise—and doing so quickly (as compared to undertaking a time-consuming and perhaps expensive internal effort to accomplish the same result). From 2000 through February 2019, Cisco Systems purchased 128 companies to give it more technological reach and product breadth, thereby enhancing its standing as the world’s biggest provider of hardware, software, and services for building and operating Internet networks.
3. Expanding a company’s geographic coverage. One of the best and quickest ways to expand a company’s geographic coverage is to acquire rivals with operations in the desired locations. And if there is some geographic overlap, then a side benefit is being able to reduce costs by eliminating duplicate facilities in those geographic areas where undesirable overlap exists. Banks like Wells Fargo and Bank of America have pursued geographic expansion by making a series of acquisitions over the years, enabling them to establish a market presence in an ever-growing number of states and localities. Food products companies
CORE CONCEPT A merger is the combining of two or more companies into a newly created company that usually has a different name. An acquisition is a combination in which one company, the acquirer, purchases and absorbs the operations of another, the acquired.
Combining the operations of two companies, via merger or acquisition, is an attractive strategic option for fundamentally altering a company’s trajectory—achieving operating economies, strengthening the resulting company’s resources, capabilities, and competitiveness in important ways, and opening up avenues of new market opportunity.
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like Nestlé, Kraft, Unilever, and Procter & Gamble have made acquisitions an integral part of their strategies to expand internationally. When China began to liberalize its foreign trade policies, Lenovo (the leading PC maker in China) realized that its long-held position of market dominance in China could not withstand the onslaught of new international entrants such as Dell and HP. Its acquisition of IBM’s PC business allowed Lenovo to gain rapid access to IBM’s globally rec ognized PC brand, its R&D capability, and its existing distribution in developed countries. This allowed Lenovo not only to hold its own against the incursion of global giants into its home market but also to expand into new markets around the world.36
4. Extending the company’s business into new product categories. Many times, a company has gaps in its product line that need to be filled. Acquisition can be a quicker and more potent way to broaden a company’s product line than going through the lengthy exercise of doing the R&D, design and engineering, and testing to put the company in position to prepare to manufacture and then introduce an assortment of new products to grow its lineup of product offerings. PepsiCo acquired Quaker Oats chiefly to bring Gatorade into the Pepsi family of beverages. While Coca-Cola has expanded its beverage lineup by introducing its own new products (like Powerade and Dasani), it has also expanded its lineup by acquiring Minute Maid (juices and juice drinks), Odwalla (juices), Hi-C (ready-to-drink fruit beverages), and dozens of other brands of beverages. Going into 2019, Coca-Cola had a portfolio of over 500 brands and 3,900 choices of beverage products, some internally developed and most the result of an active and longstanding acquisition program.
Many companies have used mergers and acquisitions to catapult themselves from the ranks of the unknown into positions of market prominence. Clear Channel Communications began operations as a single radio station in Texas; after acquiring assorted media assets over four decades, in 2019 Clear Channel (renamed iHeart Media in 2014) was operating 858 broadcast radio stations in the United States with some 250 million monthly listeners, plus it was one of the world’s largest outdoor advertising companies with close to one million displays in over 30 countries.
Many Mergers and Acquisitions Are Not Successful Mergers and acquisitions often do not result in the hoped-for outcomes. The failure rate of mergers and acquisitions is between 70 and 90 percent.37 The reasons are numerous.38 The anticipated revenue growth may not occur. Cost savings may prove smaller than expected. Gains in competitive capabilities may take substantially longer to realize, or worse, never materialize at all. Efforts to mesh the cultures can be defeated by formidable resistance from organizational members. Key employees at the acquired company can become disenchanted with newly instituted changes and leave. Differences in management styles and operating procedures can prove hard to resolve. Personnel at the acquired company may stonewall changes, arguing forcefully for doing certain things the way they were done prior to the acquisition.
Unsuccessful mergers and acquisitions can be costly. Ford reportedly lost over $10 billion trying to make successes of its $2.5 billion acquisition of Jaguar (1989) and $2.7 billion acquisition of Land Rover (2000); frustrated by poor results, Ford sold the operations of both brands to India’s Tata Motors in 2008 for $2.3 billion.39 Bank of America’s supposedly bargain-priced $2.5 billion acquisition of ethically challenged and financially troubled Countrywide Financial in January 2008 was, according to a prominent banking and finance professor, “the worst deal in the history of American finance. Hands down.”40 Countrywide, a big originator of questionable subprime and adjustable-rate mortgages that helped trigger the Fall 2008 collapse of the housing market, cost Bank of America almost $57 billion in real estate losses, settlements with federal and state agencies for selling toxic mortgage loans that were falsely represented as quality investments, and payments for legal fees.41 Google’s $12.5 billion acquisition of struggling smartphone manufacturer Motorola Mobility in 2012 turned out to be minimally beneficial in helping to “supercharge Google’s Android ecosystem” (Google’s stated reason for making the acquisition). When Google’s efforts to rejuvenate Motorola’s smartphone business by spending over $1.3 billion on new product R&D and revamping Motorola’s product line resulted in disappointing sales and huge operating losses, Google sold Motorola Mobility to China-based PC maker, Lenovo, for $2.9 billion in 2014 (however, Google retained ownership of Motorola’s extensive patent portfolio).
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Choosing Appropriate Functional-Area Strategies
A company’s strategy is not complete until company managers have made strategic choices about how the various functional parts of the business—R&D, production, human resources, sales and marketing, finance, and so on—will be managed in support of its basic competitive strategy approach and the other important competitive moves being taken. Normally, functional-area strategy choices rank third on the menu of choosing among the various strategy options, as shown in Figure 6.1. But whether commitments to particular functional strategies are made before or after the choices of complementary strategic options (shown in Figure 6.1) is beside the point—what’s really important is what the functional strategies are and how they mesh to enhance the success of the company’s higher-level strategic thrusts.
In many respects, the nature of functional strategies is dictated by the choice of competitive strategy. For example, a manufacturer employing a low-cost provider strategy needs (1) an R&D and product design strategy that emphasizes cheap-to-incorporate features and facilitates economical assembly, (2) a production strategy that stresses capture of scale economies and actions to achieve low-cost manufacture (such as high labor productivity, efficient supply chain management, and automated production processes), and (3) a low-budget marketing strategy. A business pursuing a high-end differentiation strategy needs a production strategy geared to top-notch quality and product performance, and a marketing strategy aimed at touting differentiating features and using advertising and a trusted brand name to “pull” sales through the chosen distribution channels.
Beyond general prescriptions, it is difficult to say just what the content of the different functional-area strategies should be without first knowing what higher-level strategic choices a company has made, the industry environment in which it operates, the valuable resources and capabilities that can be leveraged, and so on. Suffice it to say here that lower-ranking company personnel who have strategy-making responsibilities must be clear about which higher-level strategies top executives have chosen and then must tailor the company’s functional-area strategies accordingly.
Timing a Company’s Strategic Moves
When to make a strategic move is often as crucial as what move to make. Timing is especially important when first-mover advantages or disadvantages exist.42 Being first to initiate a strategic move can have a high payoff when:
n Pioneering helps build a firm’s image and reputation with buyers and creates strong brand loyalty.
n An early lead enables a first mover to move down the learning curve ahead of rivals and gain an absolute cost advantage over rivals because of greater experience in working with new technologies or because it captures economies of scale sooner and enjoys volume-based cost advantages.
n A first-mover’s customers will thereafter face significant costs in switching to the product offerings of later entrants.
n Moving first constitutes a preemptive strike (like securing an especially favorable location or acquiring an appealing company with uniquely valuable resources or capabilities).
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.
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n A first-mover’s actions are protected by patents, copyrights, or other forms of property rights, thus thwarting a response by would-be followers.
n A first-mover’s actions prove so overwhelmingly popular that its product sets the technical standard for the industry.
Whenever buyers respond well to a pioneer’s initial move, the pioneer may be able to reap temporary monopoly benefits—such as faster recovery of its initial investment and good profits—until rivals are able to enter the same market space. The bigger the first-mover advantages, the more attractive making the first move becomes and the more difficult it becomes for later movers to dislodge the advantages.43
To sustain any advantage that may initially accrue to a pioneer, a first mover must be a fast learner and continue to move aggressively to capitalize on any initial pioneering advantage. It helps immensely if the first mover has deep financial pockets, important competences and competitive capabilities, and astute managers. If a first- mover’s skills, know-how, and actions are easily copied or even surpassed, then followers and even late movers can catch or overtake the first mover in a relatively short period. What makes being a first mover strategically important is not being the first company to do something but rather being the first competitor to put together the precise combination of features, customer value, and sound revenue/cost/profit economics that gives it an edge over rivals in battling for market leadership.44 If the marketplace quickly takes to a first mover’s innovative product offering, a first mover must have large-scale production, marketing, and distribution capabilities if it is to stave off fast followers who possess competitively valuable resources and capabilities. In cases where technology advances at a torrid pace, a first mover cannot hope to sustain an early lead without having strong capabilities in R&D, design, and new product development, along with the financial strength to fund these activities.
Sometimes, though, markets are slow to accept the innovative product offering of a first mover, in which case a fast follower with substantial resources and marketing muscle can overtake a first mover (as Fox News has done in competing against CNN to become the leading cable news network). Sometimes furious technological change or product innovation makes a first mover vulnerable to quickly appearing next-generation technology or products. For instance, former market leaders in cell phones Nokia and BlackBerry have been victimized by Apple’s far more innovative iPhone models and new Samsung smart phones based on Google’s Android operating system. Hence, there are no guarantees that a first mover can sustain an early competitive advantage.45
The Potential for Late-Mover Advantages or First-Mover Disadvantages There are times, however, when being an adept follower rather than a first mover actually has its advantages. Such late-mover advantages (or first-mover disadvantages) arise in five instances:
n When pioneering leadership is more costly than imitating followership, and only negligible experience or learning-curve benefits accrue to the leader—a condition that allows imitative followers to (1) quickly catch up to a first mover by learning from its experience and avoiding its mistakes and (2) achieve lower costs than the first mover.
n When an innovator’s products are somewhat primitive and do not live up to buyer expectations, thus allowing a clever follower with better-performing “next-generation” products to win disenchanted buyers away from the leader.
n When buyers are skeptical about the benefits of a new technology or product being pioneered by a first mover, thus allowing late movers to wait until the needs of buyers and the attributes they prefer are clarified.
Chapter 6 • Supplementing the Chosen Competitive Strategy—Other Important Strategy Choices 144
n When rapid market evolution (due to fast-paced changes in either technology or buyer needs) gives fast followers and maybe even cautious late movers the opening to leapfrog a first-mover’s products with more attractive next-version products.
n When customer loyalty to the pioneer is low and a first-mover’s skills, know-how, and actions are easily copied or even surpassed.
To Be a First Mover or Not In weighing the pros and cons of being a first mover versus a fast follower versus a slow mover, it matters whether the race to market leadership in a particular industry is likely to be closer to a 2-year sprint or a 10-year marathon. Being first out of 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, thus winning their immediate support, perhaps giving the pioneer a reputational head-start advantage, and forcing would-be competitors to quickly follow the pioneer’s lead. In the remaining instances where the race is more of a marathon, the companies that end up dominating new-to-the-world markets are almost never the pioneers that gave birth to brand-new markets—first-mover advantages are fleeting and there is time for resourceful fast followers and sometimes even late movers to overtake the early leaders.46
The first lesson here is that there is a market-penetration curve for every emerging opportunity; typically, the curve has an inflection point at which all pieces of the business model fall into place, buyer demand explodes, and the market takes off. The inflection point can come early on a fast-rising curve (like use of e-mail and watching movies streamed over the Internet) or further on up a slow-rising curve (as with battery-powered motor vehicles, solar and wind power, and digital textbooks for college students). The second lesson is that the timing of strategic moves matters, which makes it important for company strategists to be aware of the nature of first- mover advantages and disadvantages and the conditions favoring each type of move.
Once a company has selected which of the five basic competitive strategies to employ in its quest for competitive advantage, it must decide whether and how to supplement its choice of a basic competitive strategy approach, as shown in Figure 6.1.
Companies have a number of offensive strategy options for improving their market positions and trying to secure a competitive advantage: offering an equal or better product at a lower price, leapfrogging competitors by being the first to adopt next-generation technologies or the first to introduce next-generation products, pursuing sustained product innovation, attacking competitors’ weaknesses, going after less contested or unoccupied market territory, using hit-and-run tactics to steal sales away from unsuspecting rivals, and launching preemptive strikes. A blue ocean type of offensive strategy seeks to gain a dramatic and durable competitive advantage by abandoning efforts 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.
Defensive strategies to protect a company’s position usually take the form of making moves that put obstacles in the path of would-be challengers and fortify the company’s present position while undertaking actions to dissuade rivals from even trying to attack (by signaling that the resulting battle will be more costly to the challenger than it is worth).
Chapter 6 • Supplementing the Chosen Competitive Strategy—Other Important Strategy Choices 145
One of the most pertinent strategic issues that companies face is how to use the Internet in positioning the company in the marketplace—whether to use the Internet as only a means of disseminating product information (with traditional distribution channel partners making all sales to end users), as a secondary or minor channel, as one of several important distribution channels, as the company’s primary distribution channel, or as the company’s exclusive channel for accessing customers.
Outsourcing pieces of the value chain formerly performed in-house can enhance a company’s competitiveness whenever (1) an activity can be performed better or more cheaply by outside specialists; (2) the activity is not crucial to the firm’s ability to achieve sustainable competitive advantage and won’t weaken its ability to be a master of its own destiny by hollowing out the competitive power of its internal resources and capabilities; (3) it reduces the company’s risk exposure to changing technology and/or changing buyer preferences; (4) it streamlines company operations in ways that improve organizational flexibility, cut cycle time, speed decision making, and reduce coordination costs; and/or (5) it allows a company to concentrate on its core business and do what it does best.
Vertically integrating forward or backward makes strategic sense only if it strengthens a company’s position via either cost reduction or creation of a value-enhancing, differentiation-based advantage. Otherwise, the drawbacks of vertical integration (increased investment, greater business risk, increased vulnerability to technological changes, and less flexibility in making product changes in response to shifting buyer preferences) are likely to outweigh any advantages.
Many companies are using strategic alliances, collaborative partnerships, and joint ventures to help them in the race to build a global market presence or be a leader in the industries of the future. These forms of strategic cooperation with other companies can be an attractive, flexible, and often cost-effective means by which companies can gain access to missing technology, expertise, and business capabilities.
Mergers and acquisitions are another attractive strategic option for strengthening a firm’s competitiveness. When the operations of two companies are combined via merger or acquisition, the new company’s competitiveness can be enhanced in any of several ways: lower costs; stronger technological skills; more or better competitive capabilities; a more attractive lineup of products and services; wider geographic coverage; and/or greater financial resources with which to invest in R&D, add capacity, or expand into new areas.
Once all the higher-level strategic choices have been made, company managers can turn to the task of crafting functional and operating-level strategies to flesh out the details of the company’s overall business and competitive strategy.
The timing of strategic moves also has relevance in the quest for competitive advantage. Company managers are obligated to carefully consider the advantages or disadvantages that attach to being a first mover versus a fast follower versus a wait-and-see late mover.
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