CHAPTER 6

STRENGTHENING A COMPANY’S
COMPETITIVE POSITION:
STRATEGIC MOVES, TIMING,
AND SCOPE OF OPERATIONS
THIS CHAPTER WILL HELP YOU UNDERSTAND:
LO 1 Whether and when to pursue offensive or defensive
strategic moves to improve a company’s market position.
LO 2 When being a first mover or a fast follower or a late mover
is most advantageous.
LO 3 The strategic benefits and risks of expanding a company’s
horizontal scope through mergers and acquisitions.
LO 4 The advantages and disadvantages of extending the
company’s scope of operations via vertical integration.
LO 5 The conditions that favor outsourcing certain value chain
activities to outside parties.
LO 6 When and how strategic alliances can substitute for
horizontal mergers and acquisitions or vertical integration
and how they can facilitate outsourcing.
CONSIDERING STRATEGY-ENHANCING
MEASURES

 Whether and when to go on the offensive strategically.

 Whether and when to employ defensive strategies.
 When to undertake strategic moves—first mover,
a fast follower, or a late mover.
 Whether to merge with or acquire another firm.
 Whether to integrate backward or forward into more
stages of the industry’s activity chain.
 Which value chain activities, if any, should be outsourced.
 Whether to enter into strategic alliances or
partnership arrangements.
LAUNCHING STRATEGIC OFFENSIVES TO
IMPROVE A COMPANY’S MARKET POSITION

 Strategic Offensive Principles:

● Focusing relentlessly on building competitive
advantage and then striving to convert it into
sustainable advantage.
● Applying resources where rivals are least able to
defend themselves.
● Employing the element of surprise as opposed to
doing what rivals expect and are prepared for.
● Displaying a capacity for swift, decisive, and
overwhelming actions to overpower rivals.
PRINCIPAL OFFENSIVE STRATEGY OPTIONS

1. Offer an equally good or better product at a lower price.

2. Leapfrog competitors by being first to market with next-generation
products.
3. Pursue continuous product innovation to draw sales and market
share away from less innovative rivals.
4. Pursue disruptive product innovations to create new markets.
5. Adopt and improve on the good ideas of other companies (rivals or
otherwise).
6. Use hit-and-run or guerrilla marketing tactics to grab market share
from complacent or distracted rivals.
7. Launch a preemptive strike to secure an industry’s limited
resources or capture a rare opportunity
CHOOSING WHICH RIVALS TO ATTACK

Best Targets for

Offensive Attacks

Market leaders Runner-up firms

Struggling Small local
that are in with weaknesses
enterprises on and regional
vulnerable in areas where
the verge of firms with limited
competitive the challenger
going under capabilities
positions is strong
 BLUE-OCEAN STRATEGY—
A SPECIAL KIND OF OFFENSIVE
 A blue-ocean strategy offers growth in revenues and
profits by discovering or inventing new industry
segments that create altogether new demand.
 The business universe is divided into:
● An existing market with boundaries and rules in
which rival firms compete for advantage.
● A “blue ocean” market space, where the industry
has not yet taken shape, with no rivals and wide-
open long-term growth and profit potential for a
firm that can create demand for new types of
products.
DEFENSIVE STRATEGIES—PROTECTING
MARKET POSITION AND COMPETITIVE
ADVANTAGE

Purposes of
Defensive Strategies

Influence
Lower the firm’s Weaken the impact
challengers to
risk of being of an attack
aim their efforts
attacked that does occur
at other rivals
BLOCKING THE AVENUES
OPEN TO CHALLENGERS

 Adopt alternative technologies as a hedge against rivals

attacking with a new or better technology.
 Introduce new features and models to broaden product
lines to close gaps and vacant niches.
 Maintain economy-pricing to thwart lower price attacks.
 Discourage buyers from trying competitors’ brands.
 Make early announcements about new products or price
changes to induce buyers to postpone switching.
 Challenge quality and safety of competitor’s products.
 Grant discounts or better terms to intermediaries who
handle the firm’s product line exclusively.
SIGNALING CHALLENGERS THAT RETALIATION IS
LIKELY

 Signaling is an effective defensive strategy

when the firm follows through by:
● Publicly announcing its commitment to maintaining
the firm’s present market share.
● Publicly committing to a policy of matching
competitors’ terms or prices.
● Maintaining a war chest of cash and marketable
securities.
● Making a strong counter-response to the moves of
weaker rivals to enhance its tough defender image.
TIMING A FIRM’S OFFENSIVE AND DEFENSIVE
STRATEGIC MOVES

 Timing’s Importance:
● Knowing when to make a strategic move is as
crucial as knowing what move to make.
● Moving first is no guarantee of success or
competitive advantage.
● The risks of moving first to stake out a
monopoly position must be carefully weighed.
CONDITIONS THAT LEAD TO
FIRST-MOVER ADVANTAGES

1. When pioneering helps build a firm’s reputation and

creates strong brand loyalty.
2. When a first mover’s customers will thereafter face
significant switching costs.
3. When property rights protections thwart rapid imitation
of the initial move.
4. When an early lead enables movement down the
learning curve ahead of rivals.
5. When a first mover can set the technical standard for
the industry.
THE POTENTIAL FOR LATE-MOVER ADVANTAGES
OR FIRST-MOVER DISADVANTAGES

 When pioneering is more costly than imitating and offers

negligible experience or learning-curve benefits.
 When the products of an innovator are somewhat
primitive and do not live up to buyer expectations.
 When rapid market evolution allows fast followers to
leapfrog a first mover’s products with more attractive
next-version products.
 When market uncertainties make it difficult to ascertain
what will eventually succeed.
 When customer loyalty is low and first mover’s skills,
know-how, and actions are easily copied or surpassed
TO BE A FIRST MOVER OR NOT

 Does market takeoff depend on complementary

products or services that currently are not available?
 Is new infrastructure required before buyer demand can
surge?
 Will buyers need to learn new skills or adopt new
behaviors?
 Will buyers encounter high switching costs in moving to
the newly introduced product or service?
 Are there influential competitors in a position to delay or
derail the efforts of a first mover?
STRENGTHENING A FIRM’S MARKET POSITION
VIA ITS SCOPE OF OPERATIONS

Defining the Scope of

the Firm’s Operations

Extent of its
Size of its
Range of its geographic
Breadth of its competitive
activities market
product and footprint on
performed presence and
service offerings its market
internally its mix of
or industry
businesses
HORIZONTAL MERGER AND
ACQUISITION STRATEGIES

 Merger
● Is the combining of two or more firms
into a single corporate entity that often
takes on a new name.
 Acquisition
● Is a combination in which one firm, the
acquirer, purchases and absorbs the
operations of another firm, the acquired.
STRATEGIC OJECTIVES FOR HORIZONTAL
MERGERS AND ACQUISITIONS

1. Creating a more cost-efficient operation out

of the combined companies.
2. Expanding the firm’s geographic coverage.
3. Extending the firm’s business into new
product categories.
4. Gaining quick access to new technologies or
other resources and capabilities.
5. Leading the convergence of industries whose
boundaries are being blurred by changing
technologies and new market opportunities.
BENEFITS OF INCREASING HORIZONTAL SCOPE

 Increasing a firm’s horizontal scope strengthens

its business and increases its profitability by:
● Improving the efficiency of its operations
● Heightening its product differentiation
● Reducing market rivalry
● Increasing the firm’s bargaining power over
suppliers and buyers
● Enhancing its flexibility and dynamic
capabilities
WHY MERGERS AND ACQUISITIONS SOMETIMES
FAIL TO PRODUCE ANTICIPATED RESULTS

 Strategic Issues:
● Cost savings may prove smaller than expected.
● Gains in competitive capabilities take longer to
realize or never materialize at all.
 Organizational Issues
● Cultures, operating systems and management
styles fail to mesh due to resistance to change
from organization members.
● Loss of key employees at the acquired firm.
● Managers overseeing integration make mistakes
in melding the acquired firm into their own.
VERTICAL INTEGRATION STRATEGIES

 Vertically Integrated Firm

● Is one that participates in multiple segments
or stages of an industry’s overall value chain.
 Vertical Integration Strategy
● Can expand the firm’s range of activities
backward into its sources of supply and/or
forward toward end users of its products.
TYPES OF VERTICAL INTEGRATION STRATEGIES

Vertical Integration
Choices

Full Partial Tapered

Integration Integration Integration
TYPES OF VERTICAL INTEGRATION STRATEGIES

 Full Integration
● A firm participates in all stages of the vertical
activity chain.
 Partial Integration
● A firm builds positions only in selected stages
of the vertical chain.
 Tapered Integration
● Involves a mix of in-house and outsourced
activity in any stage of the vertical chain.
THE ADVANTAGES OF A VERTICAL INTEGRATION
STRATEGY

Benefits of a Vertical
Integration Strategy

Add materially Strengthen Boost

to a firm’s the firm’s the firm’s
technological competitive profitability
capabilities position
INTEGRATING BACKWARD TO ACHIEVE
GREATER COMPETITIVENESS

 Integrating Backwards By:

● Achieving same scale economies as outside suppliers—
low-cost based competitive advantage.
● Matching or beating suppliers’ production efficiency with no
drop-off in quality—differentiation-based competitive advantage.
 Reasons for Integrating Backwards:
● Reduction of supplier power
● Reduction in costs of major inputs
● Assurance of the supply and flow of critical inputs
● Protection of proprietary know-how
INTEGRATING FORWARD TO ENHANCE
COMPETITIVENESS

 Reasons for Integrating Forward:

● To lower overall costs by increasing channel
activity efficiencies relative to competitors.
● To increase bargaining power through control
of channel activities.
● To gain better access to end users.
● To strengthen and reinforce brand awareness.
● To increase product differentiation.
DISADVANTAGES OF A VERTICAL
INTEGRATION STRATEGY

 Increased business risk due to large capital investment.

 Slow acceptance of technological advances or more
efficient production methods.
 Less flexibility in accommodating shifting buyer
preferences that require non-internally produced parts.
 Internal production levels may not be reach volumes that
create economies of scale.
 Efficient production of internally-produced components
and parts hampered by capacity matching problems.
 New or different resources and capabilities
requirements .
OUTSOURCING STRATEGIES:
NARROWING THE SCOPE OF OPERATIONS

 Outsource an activity if it:

● Can be performed better or more cheaply by outside specialists.
● Is not crucial to achieving sustainable competitive advantage.
● Improves organizational flexibility and speeds time to market.
● Reduces risk exposure due to new technology and/or buyer
preferences.
● Allows the firm to concentrate on its core business, leverage key
resources, and do even better what it already does best.
THE BIG RISKS OF OUTSOURCING
VALUE CHAIN ACTIVITIES

 Hollowing out resources and capabilities that

the firm needs to be a master of its own destiny.
 Loss of direct control when monitoring,
controlling, and coordinating activities of outside
parties by means of contracts and arm’s-length
transactions.
 Lack of incentives for outside parties to make
investments specific to the needs of the
outsourcing firm’s value chain.
Strategic Alliance

 A strategic Alliance is a formal agreement between two

or more separate companies in with they agree to work
cooperatively toward some common objectives.
FACTORS THAT MAKE AN ALLIANCE “STRATEGIC”

An strategic alliance:
1. Facilitates achievement of an important business objective.
2. Helps build, sustain, or enhance a core competence or
competitive advantage.
3. Helps remedy an important resource deficiency or competitive
weakness.
4. Helps defend against a competitive threat, or mitigates a
significant risk to a company’s business.
5. Increases the bargaining power over suppliers or buyers.
6. Helps open up important new market opportunities.
7. Speeds the development of new technologies and/or product
innovations.
BENEFITS OF STRATEGIC ALLIANCES AND
PARTNERSHIPS

 Minimize the problems associated with vertical

integration, outsourcing, and mergers and acquisitions.
 Are useful in extending the scope of operations via
international expansion and diversification strategies.
 Reduce the need to be independent and self-sufficient
when strengthening the firm’s competitive position.
 Offer greater flexibility should a firm’s resource
requirements or goals change over time.
 Are useful when industries are experiencing high-
velocity technological advances simultaneously.
WHY AND HOW STRATEGIC ALLIANCES
ARE ADVANTAGEOUS

 Strategic Alliances:
● Expedite development of promising new technologies or products.
● Help overcome deficits in technical and manufacturing expertise.
● Bring together the personnel and expertise needed to create new
skill sets and capabilities.
● Improve supply chain efficiency.
● Help partners allocate venture risk sharing.
● Allow firms to gain economies of scale.
● Provide new market access for partners.
CAPTURING THE BENEFITS
OF STRATEGIC ALLIANCES

Being sensitive
to cultural
differences
Recognizing that
Picking a good the alliance must
partner benefit both sides

Strategic
Alliance Factors

Ensuring both Adjusting the

parties keep their agreement over
commitments time to fit new
Structuring the circumstances
decision-making
process for swift
actions
REASONS FOR ENTERING INTO STRATEGIC
ALLIANCES

 When seeking global market leadership:

● Enter into critical country markets quickly.
● Gain inside knowledge about unfamiliar markets and cultures
through alliances with local partners.
● Provide access to valuable skills and competencies
concentrated in particular geographic locations.
 When staking out a strong industry position:
● Establish a stronger beachhead in target industry.
● Master new technologies and build expertise and competencies.
● Open up broader opportunities in the target industry.
PRINCIPLE ADVANTAGES
OF STRATEGIC ALLIANCES

1. They lower investment costs and risks for each

partner by facilitating resource pooling and risk
sharing.
2. They are more flexible organizational forms
and allow for a more adaptive response to
changing conditions.
3. They are more rapidly deployed—a critical
factor when speed is of the essence.
THE DRAWBACKS OF STRATEGIC ALLIANCES
AND PARTNERSHIPS

 Culture clash and integration problems due to different

management styles and business practices.
 Anticipated gains do not materialize due to an overly
optimistic view of the potential for synergies or the
unforeseen poor fit of partners’ resources and
capabilities.
 Risk of becoming dependent on partner firms for
essential expertise and capabilities.
 Protection of proprietary technologies, knowledge
bases, or trade secrets from partners who are rivals.