Other Strategic Choices

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Other Strategic Choices

• Chapter 6

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Chapter Outline

• Strategic alliances and collaborative
  partnerships
• Mergers and acquisitions
• Integration backward or forward into more stages
  of the industry value chain
• Outsource value chain activities or perform in
  house
• Employ offensive and defensive moves
• Blue Ocean strategies
• First mover advantages and disadvantages

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Strategic alliances and collaborative partnerships

• Companies sometimes use strategic alliances or
  collaborative partnerships to complement their
  own strategic initiatives and strengthen their
  competitiveness. Such cooperative strategies go
  beyond normal company-to-company dealings but
  fall short of merger or formal joint venture.

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Why cooperative strategies?

• Collaborative arrangements can help a company
  lower its costs or gain access to needed
  expertise and capabilities
• Firms often lack the resources and competitive
  skills to be successful in very demanding
  competitive races
• Allies can be useful in helping a company
  establish a stronger presence in global markets
  and helping it win the race for global market
  leadership
• Allies with competitively useful technological
  know-how or expertise can greatly aid a company
  racing against rivals for leadership in the
  industries of the future now being created by
  todays technological and information age
  revolution e.g IT
• Collaborative arrangements with foreign partners
  is helpful in pursuing opportunities in
  unfamiliar national markets

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Advantages of strategic alliances

• The best alliances are highly selective,
  focusing on particular value chain activities and
  on obtaining a particular competitive benefit
• If the combined resources give an edge over
  rivals, competitive advantage will emerge
• Strategic cooperation is favored and even
  necessary in industries where technological
  developments are occurring at a fast pace along
  many avenues and where the technology will affect
  each other
• Allies can perform joint research which may even
  allow them to pursue other opportunities on their
  own
• Alliances along different stages e.g with
  suppliers of component parts for better supply
  chain management

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Pitfalls of strategic alliances

• The value of strategic alliances stem from the
  capacity of partners to defuse frictions,
  collaborate effectively, work their ways through
  technological changes, competitive challenges,
  market developments and changes in their
  priorities and competitive circumstances
• The danger of alliances and cooperative
  strategies is becoming too dependent on the other
  companies for essential expertise and
  capabilities
• To become market leader, a company must develop
  its own capabilities
• In some alliances, a partner may guard its most
  valuable skills and expertise, acquisitions or
  mergers may be better

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Why alliances fail?

• Ability of an alliance to endure depends on
• How well partners work together
• Success of partners in responding and adapting
  to changing conditions
• Willingness of partners to renegotiate the
  bargain
• Reasons for alliance failure include
• Diverging objectives and priorities of partners
• Inability of partners to work well together
• Emergence of more attractive technological paths
• Marketplace rivalry between one or more allies

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Merger and acquisition strategies

• A merger is a pooling of equals with the newly
  formed entity often taking on a new name
• An acquisition is a combination in which one
  company, the acquirer purchases and absorbs the
  operations of another, the acquired
• The difference between a merger and an
  acquisition relates to details of ownership,
  management control but the resources,
  competencies and competitive advantage end up
  much the same whether its a merger or an
  acquisition
• Ownership ties allow operations of the
  participants to be more tightly integrated and
  creates more control and autonomy as compared to
  a partnership

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Benefits of mergers and acquisitions

• Mergers and acquisitions may be used to
  achieve one of these objectives
• To gain more market share and create more
  efficient operation out of combined companies by
  closing high cost plants and eliminating surplus
  capacity in the industry e.g DaimlerChrysler
• To expand a companys geographic market
• To extend the companys business into new
  product categories or international markets e.g
  Nestle, Unilever, Procter Gamble
• To gain quick access to new technologies and
  avoid the need for time consuming RD
• To try to create a new industry due to changing
  technologies and new market opportunities

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Vertical Integration

• VI extends a firms competitive scope within the
  same ind.
• Backward
• Forward
• Horizontal Integration

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Outsourcing/Unbundling

• De-Integration or unbundling involves narrowing
  the scope of the firms operations, focusing on
  performing certain core value chain activities
  and relying on outsiders to perform the remaining
  value chain activities

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When does Outsourcing make Strategic Sense?

• Activity can be performed better or more cheaply
  by outside specialists
• Activity is not crucial to achieve a sustainable
  competitive advantage
• Risk exposure to changing technology and/or
  changing buyer preferences is reduced
• Operations are streamlined to
• Cut cycle time
• Speed decision-making
• Reduce coordination costs
• Firm can concentrate on doing those core value
  chain activities that best suit its resource
  strengths and capabilities

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Strategic advantages of Outsourcing

• Improves firms ability to obtain high quality
  and/or cheaper components or services
• Improves firms ability to innovate by
  interacting with best-in-world suppliers
• Enhances firms flexibility should customer needs
  and market conditions suddenly shift
• Increases firms ability to assemble diverse
  kinds of expertise speedily and efficiently
• Allows firm to concentrate its resources on
  performing those activities internally which it
  can perform better than outsiders

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Pitfalls of Outsourcing

• Lose control
• Farming out too many or the wrong activities,
  thus
• Hollowing out its capabilities
• Losing touch with activities and expertise that
  determine its overall long-term success

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Offensive strategies

• Competitive advantage is usually achieved by
  successful offensive moves that yield
• yield a cost advantage
• a differentiation advantage
• a resource advantage
• An offensive strategy can create an edge quickly
  if resources and capabilities can be deployed
  fast or if buyers respond immediately
• a dramatic price cut
• an imaginative ad campaign
• an appealing new product

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Offensive strategies (cont)

• Securing competitive edge can take longer if
• consumer acceptance of new product will take
  time
• firm needs time to debug new technology or
  increase production capacity
• Ideally, an offensive strategy should build
  competitive advantage quickly, the longer it
  takes, the more likely the rivals will counteract
• Counter offensives by rivals by be swift e.g in
  textile sector or take longer e.g pharmaceutical
  products
• To sustain initial competitive advantage won,
  the firm should have follow on offensive and
  defensive moves
• Unless firms initiates offensive and defensives
  moves one after the other to protect market
  position and retain customers, its market will
  erode

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Types of offensive strategies

• 6 basic types of offensive strategies
• Initiatives to match or exceed competitor
  strength
• Initiatives to capitalize on competitor
  weaknesses
• Simultaneous initiatives on many fronts
• End run offensives
• Guerilla offensives
• Preemptive strikes

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Initiatives to match or exceed competitor
strengths

• 2 instances
• the firm has no choice but to try to match a
  strong rivals competitive advantage when rival
  has superior product offering or superior
  organisational resources and capabilities
• when it is possible to gain market share at
  expense of rivals despite the resource strengths
  and capabilities they have
• Classic approach is to attack a strong rival
  with an equally good product but at a lower price
• A more sustainable approach is to achieve cost
  advantage first and then launch a price
  aggressive challenge

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Initiatives to match or exceed competitor
strengths (cont)

• Other strategic options include
• Leapfrogging into next generation technologies
  to make rival products obsolete
• Adding new products that will appeal to rivals
  customers
• Comparison ads
• Matching rival model for model
• Developing customer capabilities rival does not
  have
• Challenging rival in its geographic market
• Challenging a rival on grounds where it is
  strong can be a difficult and long struggle
• If the prospects for profitability and a more
  solid competitive position are absent, such head
  on offensive strategies are ill-advised

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Initiative to capitalise on competitor weaknesses

• Strategies that exploit competitor weaknesses
  stand a better chance of succeeding than
  challenging competitor strengths
• Especially if weaknesses represent important
  vulnerabilities and rival is caught by surprise
  with no ready defense
• Options include
• going after rivals customers whose products lag
  on quality, features or product performance
• trying to attract rivals customers who provide
  subpar customer service
• trying to win customers from rivals with weak
  brand recognition
• trying to increase sales to buyers in geographic
  areas where rivals have weak market share or
  exerting less effort
• paying attention to buyer segments that rivals
  neglecting or not well equipped to serve

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Simultaneous initiatives on many fronts

• Company may launch a grand offensive involving
  multiple initiatives price cuts, increased
  advertising, additional features, new models and
  styles, customer service improvements and
  promotions) launched more or less concurrently
• Such campaigns can force rivals into defensive
  actions to protect different segments of its
  customer base simultaneously and divide its
  attention
• Best chance of success an attractive product or
  service and brand awareness created with
  advertising and special deals and distribution
  channels support

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End run offensives

• An end-run offensive is maneuvering around
  competitors, capture unoccupied or less contested
  market territory and changing the rules of the
  competitive game in the aggressors favour
• Examples include
• introducing new products that define the market
  and the terms of competition e.g digital cameras,
  mobile phones
• launching initiatives to build strong positions
  in geographic areas where rivals have little or
  no market presence
• trying to create new segments by introducing
  products with different attributes and
  performance features to better meet needs of
  selected buyers
• leapfrogging into next generation technologies
  to supplant existing technologies, products
  and/or services e.g LCD screens

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Guerilla offensives

• Guerilla offensives well suited for small
  challengers who do not have the resources to
  mount a full fledged attack on industry leaders
• Guerilla offensives use the hit and run
  principle, trying to grab sales and market share
  wherever and whenever it can by spotting an
  opening through which to lure customers
• Guerilla moves include making scattered, random
  raids on leaders customers
• lowering price to win a big order or key account
• surprising rivals with a short burst of intense
  promotional activity e.g 20 discount for a week
• promote the quality of their products or
  announce guaranteed delivery times if customers
  tend to be dissatisfied with these issues with
  rivals

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Preemptive strikes

• Preemptive strategies involve moving first to
  secure an advantageous position that rivals are
  prevented or discouraged from duplicating
• by securing exclusive or dominant access to the
  best distributors in a particular geographic
  region or country
• moving to obtain the most favorable site along a
  heavily traveled route e.g at a new intersection,
  new shopping centre, in a natural beauty spot,
  close to raw materials supply or markets
• tying up the most reliable or high quality
  suppliers via an exclusive partnership, long term
  contract or acquisition
• Preemptive strategies are of one of its kind
  nature
• To be successful, it does not have to totally
  block rivals from following or copying, merely
  gives firm a prime location

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Choosing which rivals to attack

• The best targets for offensive attacks are
• Market leaders that are vulnerable when
  company that leads in terms of size and market
  share is not serving the market well. Challenger
  can simply win by becoming stronger runner up.
  There is also risk of a wasteful loss of
  resources in a profitless battle for market share
• Runner-up firms with weaknesses where the
  challenger is strong when challengers resource
  strengths and competitive capabilities are well
  suited to exploit their weaknesses
• Struggling enterprises that are on the verge of
  going under this can further sap the firms
  financial strength and competitive position and
  hasten its exit from the market
• Small local and regional firms with limited
  capabilities a challenger with broader
  capabilities can raid their bigger and best
  customers e.g those who have more sophisticated
  needs or need more full service capability

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Choosing the basis for attack

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

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Defensive Strategies

• In a competitive market, all firms are prey to
  offensive moves from rivals
• Defensive strategies
• lower the risk of being attacked
• weaken the impact of any attack that occurs
• influence challengers to aim their efforts at
  other rivals
• Defensive strategies do not usually enhance a
  firms competitive, they
• help to fortify competitive position
• protect its valuable resources and capabilities
  from imitation
• defend whatever competitive advantage firm might
  have

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Types of defensive strategies

• 2 basic types of defensive strategies
• Blocking challengers
• Signaling the likelihood of strong retaliation

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Blocking the avenues open to challengers

• The most frequently employed approach are
  actions that restrict a challengers options for
  initiating competitive attack
• Participating in alternative technologies to
  reduce threat that rivals can attack with better
  technology
• Introducing new features, adding new models,
  broadening its product line to close off gaps and
  vacant niches
• Thwarting of lower priced rivals with economy
  priced options
• Lengthening warranty coverages, offering free
  training and support services, delivering spare
  parts faster than rivals
• Providing coupons and sample giveaways to induce
  buyers to experiment

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Blocking the avenues open to challengers (cont)

• Make early announcements about impending new
  products or price changes to induce potential
  buyers to avoid switching
• Granting a dealer and a distributor volume
  discounts or better financing terms to discourage
  them to experiment with other suppliers
• Convince distributors to handle product line
  exclusively and force competitors to use other
  distribution outlets

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Signaling challengers that retaliation is likely

• The aim of signaling challengers that strong
  retaliation is likely is
• to dissuade challengers from attacking at all
• or divert them to less threatening options
• Goal is achieved by letting rivals know that the
  battle will cost more than it is worth
• Some signals are
• Publicly announcing management commitment to
  maintain firms present market share
• Publicly committing the company to match
  competitors terms or prices
• Maintaining a war chest of cash and marketable
  securities
• Making an occasional strong counter-response to
  the moves of weak competitors to enhance the
  firms image as a tough defender

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First mover advantages and disadvantages

• When to make a strategic move is often as
  crucial as what move to make
• Timing is especially important when fist mover
  advantages or disadvantages exist
• Being first to initiate a strategic move can
  have a high payoff in terms of strengthening
  market position and competitiveness when
• pioneering helps build firms image and
  reputation with buyers
• early commitments to new technologies, new style
  components, distribution channels and produce
  cost advantage
• first time customers remain strongly loyal to
  pioneering firms in making repeat purchases
• moving first constitutes a preemptive strike,
  making imitation extra hard or likely

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First mover advantages and disadvantages (cont)

• The bigger the first mover advantages, the more
  attractive making the first move becomes
• Example internet rush era, several firms that
  were first with new technologies have enjoyed
  lasting first mover advantages in gaining
  visibility and reputation to emerge as market
  leaders Amazon.com, Yahoo, eBay
• firm mover needs to be a fast learner to sustain
  its advantage
• not just about being the first company to do
  something but rather to be the first competitor
  to put together a combination that that gives it
  an edge over rivals
• Being a fast follower or even adopting a wait
  and see later mover strategy is another
  option.At times a first movers skills and
  know-how can be easily copied or even surpassed
  allowing late movers to catch up or overtake fist
  mover in a relatively short period

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First mover disadvantages

• Sometimes there are advantages to being a
  follower than a first mover.
• Late mover advantages (first mover
  disadvantages) arise when
• pioneering efforts are more costly than
  imitative followership
• only negligible experience or learning curve
  benefits accrue to the leader
• products of innovator are primitive and do not
  live up to buyers expectation allowing follower
  to win customers with better performing next
  generation products
• Technology is advancing rapidly allowing fast
  followers to leapfrog first movers products with
  more attractive second and third generation
  products

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• A company that seeks competitive advantage by
  being a first mover should ask the following
  questions
• does market takeoff depend on the development of
  complementary products or services that are
  currently not available?
• is new infrastructure required before buyer
  demand can surge?
• will buyers need to learn new skills or adopt
  new behaviours?
• will buyers encounter high switching costs?
• are there influential competitors in a position
  to derail the efforts of a first mover?
• when the answer to any of the above question is
  yes, then the firm must be careful not put too
  many resources into getting ahead of the market
  opportunity

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• An adept fast follower the advantages of being
  less risky and skirting the costs of pioneering
• Habitual late movers are usually fighting to
  retain their customers and scrambling to keep
  pace with more progressive and innovative rivals
• For a habitual late mover to catch up
• first movers should be slow movers
• buyers will be sow to gravitate to the products
  of first movers
• must have competencies and capabilities that are
  sufficiently strong to allow it to close the gap
  fairly quickly once it makes its move
• Counting on these factors can put the late
  movers competitive position at risk

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The Blue Ocean strategy

• Research work----