1. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 1 000100101001001111010100100010010100100111101010010001001010010011110101 Chapter 4 Crafting a Strategy Screen graphics created by: Jana F. Kuzmicki, PhD Troy State University-Florida and Western Region

2. “The essence of strategy lies in creating tomorrow’s competitive advantages faster than competitors mimic the ones you possess today.” Gary Hamel and C.K. Prahalad “Strategies for taking the hill won’t necessarily hold it.” Amar Bhide McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

3. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 3 Chapter Outline  Five Generic Competitive Strategies  Strategic Alliances and Partnerships  Merger and Acquisition Strategies  Vertical Integration Strategies  Outsourcing Strategies  Offensive and Defensive Strategies  Strategies for Using the Internet  Choosing Appropriate Functional-Area Strategies  Importance of Linking Strategy to Company Values and Ethical Standards  First-Mover Advantages and Disadvantages

4. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 4 Fig. 4.1: Menu of Strategy Options for Winning in the Marketplace

5. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 5 What Is “Competitive Strategy”?  Deals exclusively with a company’s business plans to compete successfully  Specific efforts to please customers  Offensive and defensive moves to counter maneuvers of rivals  Responses to prevailing market conditions  Initiatives to strengthen its market position  Narrower in scope than business strategy

6. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 6 Strategy and Competitive Advantage  Competitive advantage exists when a firm’s strategy gives it an edge in  Attracting customers and  Defending against competitive forces  Convince customers firm’s product / service offers superior value  A good product at a low price  A superior product worth paying more for  A best-value product Key to Gaining a Competitive Advantage

7. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 7 Fig. 4.2: The Five Generic Competitive Strategies

8. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 8

9. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 9 Low-Cost Provider Strategies  Make achievement of meaningful lower costs than rivals the theme of firm’s strategy  Include features and services in product offering that buyers consider essential  Find approaches to achieve a cost advantage in ways difficult for rivals to copy or match Low-cost leadership means low overall costs, not just low manufacturing or production costs! Keys to Success

10. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 10 Options: Achieving a Low-Cost Advantage Option 1: Use lower-cost edge to  Underprice competitors and attract price-sensitive buyers in enough numbers to increase total profits Option 2: Maintain present price, be content with present market share, and use lower-cost edge to  Earn a higher profit margin on each unit sold, thereby increasing total profits

11. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 11 Approaches to Securing a Cost Advantage Do a better job than rivals of performing value chain activities efficiently and cost effectively Approach 1 Revamp value chain to bypass cost- producing activities that add little value from the buyer’s perspective Approach 2 Control costs! By-pass costs!

12. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 12 Approach 1: Controlling the Cost Drivers  Capture scale economies; avoid scale diseconomies  Capture learning and experience curve effects  Manage costs of key resource inputs  Consider linkages with other activities in value chain  Find sharing opportunities with other business units  Compare vertical integration vs. outsourcing  Assess first-mover advantages vs. disadvantages  Control percentage of capacity utilization  Make prudent strategic choices related to operations

13. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 13 Approach 2: Revamping the Value Chain  Make greater use of Internet technology applications  Use direct-to-end-user sales/marketing methods  Simplify product design  Offer basic, no-frills product/service  Shift to a simpler, less capital-intensive, or more flexible technological process  Find ways to bypass use of high-cost raw materials  Relocate facilities closer to suppliers or customers  Drop “something for everyone” approach and focus on a limited product/service

14. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 14 Keys to Success in Achieving Low-Cost Leadership  Scrutinize each cost-creating activity, identifying cost drivers  Use knowledge about cost drivers to manage costs of each activity down year after year  Find ways to restructure value chain to eliminate nonessential work steps and low- value activities  Aggressively pursue investments in resources and capabilities that promise to drive costs out of the business

15. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 15 Characteristics of a Low-Cost Provider  Cost conscious corporate culture  Employee participation in cost-control efforts  Ongoing efforts to benchmark costs  Intensive scrutiny of budget requests  Programs promoting continuous cost improvement Successful low-cost producers champion frugality but wisely and aggressively invest in cost-saving improvements !

16. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 16 When Does a Low-Cost Strategy Work Best?  Price competition is vigorous  Product is standardized or readily available from many suppliers  There are few ways to achieve differentiation that have value to buyers  Most buyers use product in same ways  Buyers incur low switching costs  Buyers are large and have significant bargaining power  Industry newcomers use introductory low prices to attract buyers and build customer base

17. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 17 Pitfalls of Low-Cost Strategies  Being overly aggressive in cutting price  Low cost methods are easily imitated by rivals  Becoming too fixated on reducing costs and ignoring  Buyer interest in additional features  Declining buyer sensitivity to price  Changes in how the product is used  Technological breakthroughs open up cost reductions for rivals

18. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 18 Differentiation Strategies  Incorporate differentiating features that cause buyers to prefer firm’s product or service over brands of rivals  Find ways to differentiate that create value for buyers and are not easily matched or cheaply copied by rivals  Not spending more to achieve differentiation than the price premium that can be charged Keys to Success Objective

19. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 19 Benefits of Successful Differentiation A product / service with unique, appealing attributes allows a firm to ä äCommand a premium price and/or ä äIncrease unit sales and/or ä äBuild brand loyalty = Competitive Advantage Which hat is unique?

20. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 20 Types of Differentiation Themes  Unique taste -- Dr. Pepper  Multiple features -- Microsoft Windows and Office  Wide selection and one-stop shopping -- Home Depot and Amazon.com  Superior service -- FedEx, Ritz-Carlton  Spare parts availability -- Caterpillar  More for your money -- McDonald’s, Wal-Mart  Prestige -- Rolex  Quality manufacture -- Honda, Toyota  Technological leadership -- 3M Corporation  Top-of-line image -- Ralph Lauren, Chanel, Cross

21. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 21 Sustaining Differentiation: Keys to Competitive Advantage  Most appealing approaches to differentiation  Those hardest for rivals to match or imitate  Those buyers will find most appealing  Best choices to gain a longer-lasting, more profitable competitive edge  New product innovation  Technical superiority  Product quality and reliability  Comprehensive customer service  Unique competitive capabilities

22. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 22 Where to Find Differentiation Opportunities in the Value Chain  Purchasing and procurement activities  Product R&D and product design activities  Production process / technology-related activities  Manufacturing / production activities  Distribution-related activities  Marketing, sales, and customer service activities Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Suppliers Buyer/User Value Chains Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners

23. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 23 How to Achieve a Differentiation-Based Advantage Incorporate product features/attributes that lower buyer’s overall costs of using product Approach 1 Incorporate features/attributes that raise the performance a buyer gets out of the product Approach 2 Incorporate features/attributes that enhance buyer satisfaction in non-economic or intangible ways Approach 3 Compete on the basis of superior capabilities Approach 4

24. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 24 When Does a Differentiation Strategy Work Best?  There are many ways to differentiate a product that have value and please customers  Buyer needs and uses are diverse  Few rivals are following a similar differentiation approach  Technological change and product innovation are fast-paced

25. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 25 Pitfalls of Differentiation Strategies  Buyers see little value in unique attributes of product  Appealing product features are easily copied by rivals  Differentiating on a feature buyers do not perceive as lowering their cost or enhancing their well-being  Over-differentiating such that product features exceed buyers’ needs  Charging a price premium buyers perceive is too high

26. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 26 Best-Cost Provider Strategies  Combine a strategic emphasis on low-cost with a strategic emphasis on differentiation  Make an upscale product at a lower cost  Give customers more value for the money  Deliver superior value by meeting or exceeding buyer expectations on product attributes and beating their price expectations  Be the low-cost provider of a product with good- to-excellent product attributes, then use cost advantage to underprice comparable brands Objectives

27. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 27 Competitive Strength of a Best-Cost Provider Strategy  A best-cost provider’s competitive advantage comes from matching close rivals on key product attributes and beating them on price  Success depends on having the skills and capabilities to provide attractive performance and features at a lower cost than rivals  A best-cost producer can often out-compete both a low-cost provider and a differentiator when  Standardized features/attributes won’t meet the diverse needs of buyers  Many buyers are price and value sensitive

28. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 28 Risk of a Best-Cost Provider Strategy  A best-cost provider may get squeezed between strategies of firms using low-cost and differentiation strategies  Low-cost leaders may be able to siphon customers away with a lower price  High-end differentiators may be able to steal customers away with better product attributes

29. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 29 Focus / Niche Strategies  Involve concentrated attention on a narrow piece of the total market  Serve niche buyers better than rivals  Choose a market niche where buyers have distinctive preferences, special requirements, or unique needs  Develop unique capabilities to serve needs of target buyer segment Objective Keys to Success

30. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 30 Approaches to Defining a Market Niche  Geographic uniqueness  Specialized requirements in using product/service  Special product attributes appealing only to niche buyers

31. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 31 Examples of Focus Strategies  eBay  Online auctions  Porsche  Sports cars  Jiffy Lube International  Maintenance for motor vehicles  Pottery Barn Kids  Children’s furniture and accessories  Bandag  Specialist in truck tire recapping

32. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 32 Focus / Niche Strategies and Competitive Advantage Achieve lower costs than rivals in serving the segment -- A low-cost strategy Offer niche buyers something different from rivals -- A differentiation strategy Approach 1 Approach 2 Which hat is unique?

33. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 33 What Makes a Niche Attractive for Focusing?  Big enough to be profitable and offers good growth potential  Not crucial to success of industry leaders  Costly or difficult for multi-segment competitors to meet specialized needs of niche members  Focuser has resources and capabilities to effectively serve an attractive niche  Few other rivals are specializing in same niche  Focuser can defend against challengers via superior ability to serve niche members

34. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 34 Risks of a Focus Strategy  Competitors find effective ways to match a focuser’s capabilities in serving niche  Niche buyers’ preferences shift towards product attributes desired by majority of buyers - niche becomes part of overall market  Segment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered

35. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 35 Strategic Alliances and 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.

36. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 36 Why Cooperative Strategies Are Integral to a Firm’s Competitiveness  Two demanding competitive challenges are faced by many companies  Global race to build a market presence in many different national markets  Race to seize opportunities on the frontiers of advancing technology  Collaborative arrangements can help a company lower its costs and/or gain access to needed expertise and capabilities

37. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 37 Competitive Value of Strategic Alliances to the Partners  Capacity of partners to defuse organizational frictions  Ability to collaborate effectively over time and work through challenges  Technological and competitive surprises  New market developments  Changes in their own priorities and competitive circumstances  Competitive advantage emerges when a company acquires valuable capabilities via alliances it could not obtain on its own

38. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 38 Why Are Strategic Alliances Formed?  To collaborate on technology development or new product development  To fill gaps in technical or manufacturing expertise  To acquire new competencies  To improve supply chain efficiency  To gain economies of scale in production and/or marketing  To acquire or improve market access via joint marketing agreements

39. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 39 Potential Benefits of Alliances to Achieve Global and Industry Leadership  Get into critical country markets quickly to accelerate process of building a global presence  Gain inside knowledge about unfamiliar markets and cultures  Access valuable skills and competencies concentrated in particular geographic locations  Establish a beachead to participate in target industry  Master new technologies and build new expertise faster than would be possible internally  Open up expanded opportunities in target industry by combining firm’s capabilities with resources of partners

40. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 40 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  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

41. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 41 Merger and Acquisition Strategies  Merger - Combination and pooling of equals, with newly created firm often taking on a new name  Acquisition - One firm, the acquirer, purchases and absorbs operations of another, the acquired  Merger-acquisition  Much-used strategic option  Especially suited for situations where alliances do not provide a firm with needed capabilities or cost-reducing opportunities  Ownership allows for tightly integrated operations, creating more control and autonomy than alliances

42. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 42 Objectives of Mergers and Acquisitions  To pave way for acquiring firm to gain more market share and create a more efficient operation  To expand a firm’s geographic coverage  To extend a firm’s business into new product categories or international markets  To gain quick access to new technologies  To invent a new industry and lead the convergence of industries whose boundaries are blurred by changing technologies and new market opportunities

43. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 43 Pitfalls of Mergers and Acquisitions  Combining operations may result in  Resistance from rank-and-file employees  Hard-to-resolve conflicts in management styles and corporate cultures  Tough problems of integration  Greater-than-anticipated difficulties in Achieving expected cost-savings Sharing of expertise Achieving enhanced competitive capabilities

44. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 44 Vertical Integration Strategies  Extend a firm’s competitive scope within same industry  Backward into sources of supply  Forward toward end-users of final product  Can aim at either full or partial integration Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Suppliers Buyer/User Value Chains Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners

45. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 45 Strategic Advantages of Backward Integration  Generates cost savings only if volume needed is big enough to capture efficiencies of suppliers  Potential to reduce costs exists when  Suppliers have sizable profit margins  Item supplied is a major cost component  Resource requirements are easily met  Can produce a differentiation-based competitive advantage when it results in a better quality part  Reduces risk of depending on suppliers of crucial raw materials / parts / components

46. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 46 Strategic Advantages of Forward Integration  To gain better access to end users and better market visibility  To compensate for undependable distribution channels which undermine steady operations  To offset the lack of a broad product line, a firm may sell directly to end users  To bypass regular distribution channels in favor of direct sales and Internet retailing which may  Lower distribution costs  Produce a relative cost advantage over rivals  Enable lower selling prices to end users

47. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 47 Strategic Disadvantages of Vertical Integration  Boosts resource requirements  Locks firm deeper into same industry  Results in fixed sources of supply and less flexibility in accommodating buyer demands for product variety  Poses all types of capacity-matching problems  May require radically different skills / capabilities  Reduces flexibility to make changes in component parts which may lengthen design time and ability to introduce new products

48. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 48 Pros and Cons of Integration vs. De-Integration  Whether vertical integration is a viable strategic option depends on its  Ability to lower cost, build expertise, increase differentiation, or enhance performance of strategy-critical activities  Impact on investment cost, flexibility, and administrative overhead  Contribution to enhancing a firm’s competitiveness Many companies are finding that de-integrating value chain activities is a more flexible, economic strategic option!

49. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 49 Outsourcing Strategies Involve withdrawing from certain value chain activities and relying on outsiders to supply needed products, support services, or functional activities Concept Internally Performed Activities Suppliers Support Services Functional Activities Distributors or Retailers

50. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 50  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 “core” value chain activities that best suit its resource strengths When Does Outsourcing Make Strategic Sense?

51. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 51 Strategic Advantages of Outsourcing  Improves firm’s ability to obtain high quality and/or cheaper components or services  Improves firm’s ability to innovate by interacting with “best-in-world” suppliers  Enhances firm’s flexibility should customer needs and market conditions suddenly shift  Increases firm’s ability to assemble diverse kinds of expertise speedily and efficiently  Allows firm to concentrate its resources on performing those activities internally which it can perform better than outsiders

52. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 52 Pitfalls of Outsourcing  Farming out too many or the wrong activities, thus  Hollowing out capabilities  Losing touch with activities and expertise that determine overall long-term success

53. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 53 Offensive and Defensive Strategies Used to build new or stronger market position and/or create competitive advantage Used to protect competitive advantage (rarely used to create advantage) Offensive StrategiesDefensive Strategies

54. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 54 Types of Offensive Strategies 1. Initiatives to match or exceed competitor strengths 2. Initiatives to capitalize on competitor weaknesses 3. Simultaneous initiatives on many fronts 4. End-run offensives 5. Guerrilla offensives 6. Preemptive strikes

55. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 55 Objectives Attacking Competitor Strengths  Whittle away at a rival’s competitive advantage  Gain market share by out-matching strengths of weaker rivals Challenging strong competitors with a lower price is foolhardy unless the aggressor has a cost advantage or advantage of greater financial strength!

56. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 56 Options for Attacking a Competitor’s Strengths  Offer equally good product at a lower price  Develop low-cost edge, then use it to under- price rivals  Leapfrog into next-generation technologies  Add appealing new features  Run comparison ads  Construct new plant capacity in rival’s market strongholds  Offer a wider product line  Develop better customer service capabilities

57. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 57 Attacking Competitor Weaknesses Concentrate company strengths on exploiting rival’s weaknesses Weaknesses to Attack   Customers rival is least equipped to serve   Rivals providing sub-par customer service   Rivals with weaker marketing skills   Geographic regions where rival is weak   Segments rival is neglecting Objective

58. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 58 Launching Simultaneous Offensives on Many Fronts  Launch several major initiatives to  Throw rivals off-balance  Splinter their attention  Force them to use substantial resources to defend their position A challenger with superior resources can overpower weaker rivals by out-competing them across-the- board long enough to become a market leader! Objective

59. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 59 End-Run Offensives  Maneuver around strong competitors  Capture unoccupied or less contested markets  Change rules of competition in aggressor’s favor Objectives

60. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 60 Approaches for End-Run Offensives  Introduce new products that redefine market and terms of competition  Build presence in geographic areas where rivals have little presence  Create new segments by introducing products with different features to better meet buyer needs  Introduce next-generation technologies to leapfrog rivals

61. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 61 Guerrilla Offenses Use principles of surprise and hit-and-run to attack in locations and at times where conditions are most favorable to initiator Appeal Well-suited to small challengers with limited resources and market visibility Approach

62. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 62 Options for Guerrilla Offenses  Make random, scattered raids on leaders’ customers  Occasional low-balling on price  Intense bursts of promotional activity  Special campaigns to attract buyers from rivals plagued with a strike or delivery problems  Challenge rivals encountering problems with quality or providing adequate technical support  File legal actions charging antitrust violations, patent infringements, or unfair advertising

63. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 63 Preemptive Strikes Involves moving first to secure an advantageous position that rivals are foreclosed or discouraged from duplicating! Approach

64. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 64 Preemptive Strike Options Preemptive Strike Options  Secure exclusive/dominant access to best distributors  Secure best geographic locations  Tie up best or most sources of essential raw materials  Obtain business of prestigious customers  Expand capacity ahead of demand in hopes of discouraging rivals from following suit  Build an image in buyers’ minds that is unique or hard to copy

65. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 65 Choosing Rivals to Attack  Four types of firms can be the target of a fresh offensive  Vulnerable market leaders  Runner-up firms with weaknesses where challenger is strong  Struggling rivals on verge of going under  Small local or regional firms with limited capabilities

66. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 66 Offensive Strategy as a Basis to Achieve Competitive Advantage  Strategic offensives offering strongest basis for competitive advantage usually entail  An important core competence  A unique competitive capability  Much-improved performance features  An innovative new product  Technological superiority  A cost advantage in manufacturing or distribution  Some type of differentiation advantage

67. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 67 Defensive Strategy  Lessen risk of being attacked  Blunt impact of any attack that occurs  Influence challengers to aim attacks at other rivals Objectives Approaches   Block avenues open to challengers   Signal challengers vigorous retaliation is likely

68. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 68 Block Avenues Open to Challengers  Participate in alternative technologies  Introduce new features, add new models, or broaden product line to close gaps rivals may pursue  Maintain economy-priced models  Increase warranty coverage  Offer free training and support services  Reduce delivery times for spare parts  Make early announcements about new products or price changes  Challenge quality or safety of rivals’ products using legal tactics  Sign exclusive agreements with distributors

69. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 69 Signal Challengers Retaliation Is Likely  Publicly announce management’s strong commitment to maintain present market share  Publicly commit firm to policy of matching rivals’ terms or prices  Maintain war chest of cash reserves  Make occasional counterresponse to moves of weaker rivals  Give out advance information about new products, technological breakthroughs, and other moves

70. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 70 Strategies: Using the Internet as a Distribution Channel  Challenge -- How firms should use Internet in staking their position in marketplace  Approaches to using the Internet  Solely as a vehicle to disseminate product information  Minor distribution channel  One of several important distribution channels  Primary distribution channel  Exclusive distribution channel

71. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 71 Using the Internet to Disseminate Product Information  Approach -- Website used to provide product information of manufacturers or wholesalers  Relies on click-throughs to websites of dealers for sales transactions  Informs end-users of location of retail stores  Issues -- Pursuing online sales may  Signal weak strategic commitment to dealers  Signal willingness to cannibalize dealers’ sales  Prompt dealers to aggressively market rivals’ brands  Avoids channel conflict with dealers -- Important where strong support of dealer networks is essential

72. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 72 Using the Internet as a Minor Distribution Channel  Approach -- Use online sales to  Achieve incremental sales  Gain online sales experience  Conduct marketing research Learn more about buyer tastes and preferences Test reactions to new products Create added market buzz about products  Unlikely to provoke much outcry from dealers

73. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 73 Brick-and-Click Strategies: An Appealing Middle Ground Strategy  Approach  Sell directly to consumers and  Use traditional wholesale/retail channels  Reasons to pursue a brick-and-click strategy  Manufacturer’s profit margin from online sales is bigger than that from sales through traditional channels  Encouraging buyers to visit a firm’s website educates them to the ease and convenience of purchasing online  Selling directly to end users allows a manufacturer to make greater use of build-to-order manufacturing and assembly

74. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 74 Strategies for Online Enterprises  Approach -- Use Internet as the exclusive channel of all buyer-seller contact  Success depends on a firm’s ability to incorporate following features  Capability to deliver unique value to buyers  Deliberate efforts to engineer a value chain that enables differentiation, lower costs, or better value for the money  Innovative, fresh, and entertaining website  Clear focus on a limited number of competencies and a relatively specialized number of value chain activities  Innovative marketing techniques  Minimal reliance on ancillary revenues

75. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 75 Choosing Appropriate Functional-Area Strategies  Involves strategic choices about how functional areas are managed to support competitive strategy and additional strategic moves  Functional strategies include  Research and development  Production  Human resources  Sales and marketing  Finance Tailoring functional-area strategies to support key business-level strategies is critical !

76. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 76 Linking Strategy to Company Values and Ethics Standards  Tightly linking a firm’s strategy to high ethical standards begins with  Managers with strong character and  A set of corporate values and ethical standards that genuinely govern a firm’s strategy and business conduct  Responsibility of top management  See that values statements and ethics codes are observed in devising strategies and  Become a way of life for all employees

77. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 77 First-Mover Advantages  When to make a strategic move is often as crucial as what move to make  First-mover advantages arise when  Pioneering helps build firm’s image and reputation  Early commitments to new technologies, new-style components, and distribution channels can produce cost advantage  Loyalty of first time buyers is high  Moving first can be a preemptive strike

78. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 78  Moving early can be a disadvantage (or fail to produce an advantage) when  Costs of pioneering are sizable and loyalty of first time buyers is weak  Innovator’s products are primitive, not living up to buyer expectations  Rapid technological change allows followers to leapfrog pioneers First-Mover Disadvantages

79. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 79 Timing and Competitive Advantage Being a first-mover holds potential for competitive advantage in some cases but not in others Principle 1 Being a fast follower can sometimes yield as good a result as being a first mover Principle 2 Being a late-mover may or may not be fatal -- it varies with the situation Principle 3