2 LO1 Learn whether and when to pursue offensive strategic moves to improve a company’s market position.LO2 Learn whether and when to employ defensive strategies to protect the company’s market position.LO3 Recognize when being a first mover or a fast follower or a late mover can lead to competitive advantage.LO4 Learn the advantages and disadvantages of extending a company’s scope of operations via vertical integration.
3 LO5 Understand the conditions that favor farming out certain value chain activities to outside parties.LO6 Gain an understanding of how strategic alliances and collaborative partnerships can substitute for mergers and acquisitions or vertical integration.LO7 Become aware of the strategic benefits and risks of mergers and acquisitions.
4 Choosing Strategy Actions that Complement a Firm’s Competitive Approach Decisions regarding the firm’s operating scope and how to best strengthen its market standing must be made:Whether and when to go on the offensive and initiate aggressive strategic moves to improve the firm’s market position.Whether and when to employ defensive strategies to protect the firm’s market position.When to undertake strategic moves based upon whether it is advantageous to be a first mover or a fast follower or a late mover.
5 Choosing Strategy Actions that Complement a Firm’s Competitive Approach (cont’d) Decisions regarding the firm’s operating scope and how to best strengthen its market standing must be made:Whether to integrate backward or forward into more stages of the industry value chain.Which value chain activities, if any, should be outsourced.Whether to enter into strategic alliances or partnership arrangements with other enterprises.Whether to bolster the firm’s market position by merging with or acquiring another company in the same industry.
6 Launching Strategic Offensives to Improve a Company’s Market Position Aggressive strategic offensives are called for when a firm:Spots opportunities to gain profitable market share at the expense of rivalsHas no choice but to try to whittle away at a strong rival’s competitive advantageCan reap the benefits a competitive edge offers—a leading market share, excellent profit margins, and rapid growthThe best offensives use a firm’s resource strengths to attack its rivals’ weaknesses.
7 Choosing the Basis for Competitive Attack Principal Offensive Strategy OptionsAdopt and improve on good ideas of other firmsAttack profitable market segments of key rivalsCapture unoccupied or less contested marketsAttack the competitive weaknesses of rivalsOffer an equal or better product at a lower pricePursue continuous product innovationLeapfrog competitors to be the first to marketUse hit-and-run or guerrilla marketing tacticsLaunch a preemptive strike on a market opportunity
8 Principal Offensive Strategy Options Attacking the competitive weaknesses of rivalsOffering an equally good or better product at a lower pricePursuing continuous product innovationLeapfrogging competitors by being the first to market with next generation technology or productsAdopting and improving on the good ideas of other companies (rivals or otherwise)Deliberately attacking those market segments where a key rival makes big profitsManeuvering around competitors to capture unoccupied or less contested market territory
9 Principal Offensive Strategy Options (cont’d) Using hit-and-run or guerrilla warfare tactics to grab sales and market share from complacent or distracted rivalsLaunching a preemptive strike to capture a rare opportunity or secure an industry’s limited resourcesSecure the best distributors in a particular geographic region or countrySecure the most favorable retail locationsTie up the most reliable, high-quality suppliers via exclusive partnerships, long-term contracts, or even acquisition
10 Choosing Which Rivals to Attack Small local and regional firms with limited capabilitiesMarket leaders that are vulnerableStruggling enterprises that are on the verge of going underRunner-up firms with weaknesses in areas where the challenger is strongBest Targets for Offensive Attacks
11 Blue Ocean Strategy— A Special Kind of Offensive Involves a firm seeking sizable and durable competitive advantage by abandoning its existing markets and, then, inventing a new industry or distinctive market segment in which that firm has exclusive access to new demand.By “reinventing the circus,” Cirque du Soleil annually attracts an audience of millions of people who typically do not attend circus events.
12 Blue ocean strategies offer growth in revenues and profits by discovering or inventing new industry segments that create altogether new demand.
13 Using Defensive Strategies to Protect a Company’s Market Position and Competitive Advantage Defensive strategies help fortify a competitive position by:Lowering the risk of being attacked.Weakening the impact of any attack that occurs.Influencing challengers to redirect their competitive efforts toward other rivals.Good defensive strategies help protect competitive advantage but rarely are the basis for creating it.
14 Blocking the Avenues Open to Challengers Maintain economy-priced modelsAnnounce new products or price changesGrant volume discounts or better financing termsDefending a Competitive PositionIntroduce new featuresAdd new modelsBroaden product line to fill vacant niches
15 Blocking the Avenues Open to Challengers Introduce new featuresAdd new modelsBroaden product line to fill vacant nichesMaintain economy-priced modelsMake early announcements about upcoming new products or planned price changesGrant volume discounts or better financing terms to dealers and distributors to discourage them from experimenting with other suppliers
16 Signaling Challengers that Retaliation Is Likely Making a strong counterresponse to weak competitor moves to enhance the firm’s image as a tough defenderPublicly announcing management’s strong commitment to maintain the firm’s present market shareMaintaining a war chest of cash and marketable securitiesPublicly committing the firm to a policy of matching competitors’ terms or pricesDissuading or diverting competitors
17 Signaling Challengers that Retaliation Is Likely Publicly announce management’s strong commitment to maintain the firm’s present market sharePublicly commit firm to policy of matching rivals’ terms or pricesMaintain war chest of cash reservesMake occasional counterresponse to moves of weaker rivals
18 Timing a Company’s Offensive and Defensive Strategic Moves When to make a strategic move is often as crucial as what move to make.First-mover advantages arise when:Pioneering helps build a firm’s image and reputation with buyersEarly commitments (technology, market channels) produce an absolute cost advantage over rivalsFirst-time customers remain strongly loyal in making repeat purchasesMoving first constitutes a preemptive strike, making imitation extra hard or unlikely
19 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.
20 The Potential for Late-Mover Advantages or First-Mover Disadvantages Moving early can be a disadvantage (or fail to produce an advantage) when:Pioneering leadership is more costly than imitationInnovators’ products are primitive, and do not live up to buyer expectationsPotential buyers are skeptical about the benefits of new technology/product of a first moverRapid changes in technology or buyer needs allow followers to leapfrog pioneers
21 Deciding Whether to Be an Early Mover or Late Mover Key Issue:Is the race to market leadership a marathon or a sprint?Seeking first-mover competitive advantage involves addressing several questions:Does market takeoff depend on development of complementary products or services not currently available?Is new infrastructure required before buyer demand can surge?Will buyers need to learn new skills or adopt new behaviors?Are there influential competitors in a position to delay or derail the efforts of a first mover?
22 Concepts and Connections 6. 1 Amazon Concepts and Connections 6.1 Amazon.Com’s First-Mover Advantage in Online Retailing
23 Vertical Integration: Operating Across More Industry Value Chain Segments Involves extending a firm’s competitive and operating scope within the same industryBackward into sources of supplyForward toward end users of final productCan aim at either full or partial integration
24 A vertically integrated firm is one that performs value chain activities along more than one stage of an industry’s overall value chain.A vertical integration strategy has appeal only if it significantly strengthens a firm’s competitive position and/or boosts its profitability
25 Backward integration involves performing industry value chain activities previously performed by suppliers or other enterprises engaged in earlier stages of the industry value chain; forward integration involves performing industry value chain activities closer to the end user.
26 The Advantages of a Vertical Integration Strategy The two best reasons for vertically integrating into more value chain segments:Strengthen the firm’s competitive positionBoost profitability
27 Integrating Backward to Achieve Greater Competitiveness For backward integration to boost profitability a firm must be able to:Achieve the same scale economies as outside suppliersMatch or beat suppliers’ production efficiency with no drop in quality
28 When Backward Vertical Integration Becomes a Consideration When powerful suppliers are inclined to raise prices at every opportunityWhen suppliers have large profit marginsWhen the requisite technological skills are easily mastered or acquiredWhen the item being supplied is a major cost componentBackward Vertical Integration Situations
29 When Backward Vertical Integration Becomes a Consideration Potential situations that create opportunities for cost reduction through backward vertical integration:When suppliers have large profit marginsWhere the item being supplied is a major cost componentWhere the requisite technological skills are easily mastered or acquiredWhen powerful suppliers are inclined to raise prices at every opportunity
30 Integrating Forward to Enhance Competitiveness Gain better access to end usersImprove market visibilityInclude the purchasing experience as a differentiating feature
31 Forward Vertical Integration and Internet Retailing Direct selling and Internet retailing have appeal when there is no potential to:Lower distribution costsGain a cost advantage over rivalsProduce higher marginsAllow for lower prices charged to end usersCompeting directly against distribution allies can create channel conflict and signal a weak commitment to dealers.
32 Disadvantages of a Vertical Integration Strategy Increases a firm’s capital investments in its industryIncreases a firm’s business risk if industry growth and profits sourCan slow the adoption of technical advances for vertically integrated firms using older technologies and facilitiesResults in less flexibility to accommodate changing buyer preferences when a new product design requires parts a firm doesn’t make in-house.Creates capacity-matching problems among integrated in-house component manufacturing unitsMay require development of radically different skills and business capabilities
33 Concepts and Connections 6 Concepts and Connections 6.2 American Apparel’s Vertical Integration StrategyAmerican Apparel—known for its hip line of basic garments and its provocative advertisements—is no stranger to the concept of “doing it all.” The Los Angeles-based casual wear company has made both forward and backward vertical integration a central part of its strategy, making it a rarity in the fashion industry. Not only does it do all its own fabric cutting and sewing, but it also owns several knitting and dyeing facilities in Southern California, as well as a distribution warehouse, a wholesale operation, and more than 270 retail stores in 20 countries. American Apparel even does its own clothing design, marketing, and advertising, often using its employees as photographers and clothing models.Founder and CEO Dov Charney claims the company’s vertical integration strategy lets American Apparel respond more quickly to rapid market changes, allowing the company to bring an item from design to its stores worldwide in the span of a week. End-to-end coordination also improves inventory control, helping prevent common problems in the fashion business such as stock-outs and steep markdowns. The company capitalizes on its California-based vertically integrated operations by using taglines such as “Sweatshop Free. Made in the USA” to bolster its “authentic” image.However, this strategy is not without risks and costs. In an industry where 97 percent of goods are imported, American Apparel pays its workers wages and benefits above the relatively high mandated American minimum. Furthermore, operating in so many key vertical chain activities makes it impossible to be expert in all of them, and creates optimal scale and capacity mismatches—problems with which the firm has partly dealt by tapering its backward integration into knitting and dyeing. Lastly, while the company can respond quickly to new fashion trends, its vertical integration strategy may make it more difficult for the company to scale back in an economic downturn or respond to radical change in the industry environment. Ultimately, only time will tell whether American Apparel will dilute or capitalize on its vertical integration strategy in its pursuit of profitable growth.Developed with John R. Moran.Sources: American Apparel website,accessed June 16, 2010; American Apparel investor presentation, June 2009,x0x300331/3dd0b7ca-e458-45b e25ca272016d/NYC%20JUNE% pdf; YouTube, “American Apparel—Dov Charney Interview,” CBS News,5 hYqR8UIl8A4; and Christopher Palmeri, “Living on the Edge at American Apparel,” BusinessWeek, June 27, 2005.
34 Outsourcing Strategies: Narrowing the Scope of Operations Outsourcing an activity is a consideration when:It can be performed better or more cheaply by outside specialists.It is not crucial to achieve a sustainable competitive advantage and will not hollow out capabilities, core competencies, or technical know-how of a firm.It improves organizational flexibility and speeds time to market.It reduces a firm’s risk exposure to changing technology and/or buyer preferences.It allows a firm to concentrate on its core business, leverage its key resources and core competencies, and do even better what it already does best.
35 Outsourcing involves contracting out certain value chain activities to outside specialists and strategic allies.
36 Outsourcing Strategies: Narrowing the Scope of Operations (cont’d) The Big Risk of Outsourcing:Farming out the wrong types of activitiesHollowing out strategically important capabilities ultimately damages a firm’s competitiveness and long- term success in the marketplace
37 Strategic Alliances and Partnerships Is a formal collaborative agreement in which two or more firms join forces to achieve mutually beneficial strategic outcomes:A strategically relevant collaborationA joint contribution of resourcesAn assumption of a shared riskAn agreement to shared controlA recognition of mutual dependenceIs attractive in that it allows firms to bundle resources and competencies that are more valuable in a joint effort than when kept separate.
38 A strategic alliance is a formal agreement between two or more companies to work cooperatively toward some common objective.A joint venture is a type of strategic alliance that involves the establishment of an independent corporate entity that is jointly owned and controlled by the two partners.
39 Reasons for Firms to Enter into Strategic Alliances Improve supply chain efficiencyGain economies of scale in production and/or marketingAcquire or improve market access via joint marketing agreementsReasons for AlliancesExpedite development of new technologies or productsOvercome technical or manufacturing expertise deficitsBring together personnel to create new skill sets and capabilities
40 Reasons for Firms to Enter into Strategic Alliances To expedite development of new technologies or productsTo overcome deficits in technical or manufacturing expertiseTo bring together personnel of each partner to create new skill sets and capabilitiesTo improve supply chain efficiencyTo gain economies of scale in production and/or marketingTo acquire or improve market access through joint marketing agreements
41 Reasons for Firms to Continue in Strategic Alliances Alliances are likely to be long-lasting when:They involve collaboration with suppliers or distribution allies.Both parties conclude that continued collaboration is in their mutual interest, perhaps because new opportunities for learning are emerging.Experience indicates that:Alliances stand a reasonable chance of helping a firm reduce its competitive disadvantage but very rarely have alliances proved a strategic option for gaining a durable competitive edge over rivals.
42 Failed Strategic Alliances and Cooperative Partnerships Common causes for the failure of 60–70% of alliances each year:Diverging objectives and prioritiesAn inability to work well togetherChanging conditions that make the purpose of the alliance obsoleteThe emergence of more attractive technological pathsMarketplace rivalry between one or more allies
43 The Strategic Dangers of Relying on Alliances for Essential Resources and Capabilities The Achilles’ heel of alliances and cooperative partnerships is becoming dependent on other companies for essential expertise and capabilities.Ultimately, a firm must develop its own resources and capabilities to protect its competitiveness and capabilities to build and maintain its competitive advantage.
44 Merger and Acquisition Strategies An attractive strategic option for achieving operating economies, strengthening competencies, and opening avenues to new market opportunities:MergerThe combining of two or more firms into a single entity, with the newly created firm often taking on a new nameAcquisitionThe combination in which one firm, the acquirer, purchases and absorbs the operations of another, the acquired firm
45 Typical Objectives of Mergers and Acquisitions To create a more cost-efficient operation out of the combined firmsTo expand a firm’s geographic coverageTo extend the firm’s business into new product categoriesTo gain quick access to new technologies or other resources and competitive capabilitiesTo lead the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunities
46 Why Mergers and Acquisitions Sometimes Fail to Produce Anticipated Results Cost savings are smaller than expected.Gains in competitive capabilities take much longer to realize or may never materialize.Efforts to mesh the corporate cultures can stall because of resistance from organization members.Managers and employees at the acquired company may continue to do things as they were done prior to the acquisition.Key employees of the acquired firm may leave.