SUPPLEMENTING THE CHOSEN COMPETITIVE STRATEGY— OTHER IMPORTANT STRATEGY CHOICES McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

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.

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.

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.

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.

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 rivals Has no choice but to try to whittle away at a strong rival’s competitive advantage Can reap the benefits a competitive edge offers—a leading market share, excellent profit margins, and rapid growth The best offensives use a firm’s resource strengths to attack its rivals’ weaknesses.

Choosing the Basis for Competitive Attack Principal Offensive Strategy Options Adopt and improve on good ideas of other firms Attack profitable market segments of key rivals Capture unoccupied or less contested markets Attack the competitive weaknesses of rivals Offer an equal or better product at a lower price Pursue continuous product innovation Leapfrog competitors to be the first to market Use hit-and-run or guerrilla marketing tactics Launch a preemptive strike on a market opportunity

Principal Offensive Strategy Options Attacking the competitive weaknesses of rivals Offering an equally good or better product at a lower price Pursuing continuous product innovation Leapfrogging competitors by being the first to market with next generation technology or products Adopting and improving on the good ideas of other companies (rivals or otherwise) Deliberately attacking those market segments where a key rival makes big profits Maneuvering around competitors to capture unoccupied or less contested market territory

Principal Offensive Strategy Options (cont’d) Using hit-and-run or guerrilla warfare tactics to grab sales and market share from complacent or distracted rivals Launching a preemptive strike to capture a rare opportunity or secure an industry’s limited resources Secure the best distributors in a particular geographic region or country Secure the most favorable retail locations Tie up the most reliable, high-quality suppliers via exclusive partnerships, long-term contracts, or even acquisition

Choosing Which Rivals to Attack Small local and regional firms with limited capabilities Market leaders that are vulnerable Struggling enterprises that are on the verge of going under Runner-up firms with weaknesses in areas where the challenger is strong Best Targets for Offensive Attacks

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.

Blue ocean strategies offer growth in revenues and profits by discovering or inventing new industry segments that create altogether new demand.

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.

Blocking the Avenues Open to Challengers Maintain economy-priced models Announce new products or price changes Grant volume discounts or better financing terms Defending a Competitive Position Introduce new features Add new models Broaden product line to fill vacant niches

Blocking the Avenues Open to Challengers Introduce new features Add new models Broaden product line to fill vacant niches Maintain economy-priced models Make early announcements about upcoming new products or planned price changes Grant volume discounts or better financing terms to dealers and distributors to discourage them from experimenting with other suppliers

Signaling Challengers that Retaliation Is Likely Making a strong counterresponse to weak competitor moves to enhance the firm’s image as a tough defender Publicly announcing management’s strong commitment to maintain the firm’s present market share Maintaining a war chest of cash and marketable securities Publicly committing the firm to a policy of matching competitors’ terms or prices Dissuading or diverting competitors

Signaling Challengers that Retaliation Is Likely Publicly announce management’s strong commitment to maintain the firm’s 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

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 buyers Early commitments (technology, market channels) produce an absolute cost advantage over rivals First-time customers remain strongly loyal in making repeat purchases Moving first constitutes a preemptive strike, making imitation extra hard or unlikely

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.

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 imitation Innovators’ products are primitive, and do not live up to buyer expectations Potential buyers are skeptical about the benefits of new technology/product of a first mover Rapid changes in technology or buyer needs allow followers to leapfrog pioneers

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?

Concepts and Connections 6. 1 Amazon Concepts and Connections 6.1 Amazon.Com’s First-Mover Advantage in Online Retailing

Vertical Integration: Operating Across More Industry Value Chain Segments Involves extending a firm’s competitive and operating scope within the same industry Backward into sources of supply Forward toward end users of final product Can aim at either full or partial integration

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

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.

The Advantages of a Vertical Integration Strategy The two best reasons for vertically integrating into more value chain segments: Strengthen the firm’s competitive position Boost profitability

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 suppliers Match or beat suppliers’ production efficiency with no drop in quality

When Backward Vertical Integration Becomes a Consideration When powerful suppliers are inclined to raise prices at every opportunity When suppliers have large profit margins When the requisite technological skills are easily mastered or acquired When the item being supplied is a major cost component Backward Vertical Integration Situations

When Backward Vertical Integration Becomes a Consideration Potential situations that create opportunities for cost reduction through backward vertical integration: When suppliers have large profit margins Where the item being supplied is a major cost component Where the requisite technological skills are easily mastered or acquired When powerful suppliers are inclined to raise prices at every opportunity

Integrating Forward to Enhance Competitiveness Gain better access to end users Improve market visibility Include the purchasing experience as a differentiating feature

Forward Vertical Integration and Internet Retailing Direct selling and Internet retailing have appeal when there is no potential to: Lower distribution costs Gain a cost advantage over rivals Produce higher margins Allow for lower prices charged to end users Competing directly against distribution allies can create channel conflict and signal a weak commitment to dealers.

Disadvantages of a Vertical Integration Strategy Increases a firm’s capital investments in its industry Increases a firm’s business risk if industry growth and profits sour Can slow the adoption of technical advances for vertically integrated firms using older technologies and facilities Results 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 units May require development of radically different skills and business capabilities

Concepts and Connections 6 Concepts and Connections 6.2 American Apparel’s Vertical Integration Strategy American 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, www.americanapparel.net, accessed June 16, 2010; American Apparel investor presentation, June 2009, http://files.shareholder.com/downloads/APP/ 938846703x0x300331/3dd0b7ca-e458-45b8-8516-e25ca 272016d/NYC%20JUNE%202009.pdf; YouTube, “American Apparel—Dov Charney Interview,” CBS News, http://youtube.com/watch?v 5 hYqR8UIl8A4; and Christopher Palmeri, “Living on the Edge at American Apparel,” BusinessWeek, June 27, 2005.

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.

Outsourcing involves contracting out certain value chain activities to outside specialists and strategic allies.

Outsourcing Strategies: Narrowing the Scope of Operations (cont’d) The Big Risk of Outsourcing: Farming out the wrong types of activities Hollowing out strategically important capabilities ultimately damages a firm’s competitiveness and long- term success in the marketplace

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 collaboration A joint contribution of resources An assumption of a shared risk An agreement to shared control A recognition of mutual dependence Is attractive in that it allows firms to bundle resources and competencies that are more valuable in a joint effort than when kept separate.

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.

Reasons for Firms to Enter into Strategic Alliances Improve supply chain efficiency Gain economies of scale in production and/or marketing Acquire or improve market access via joint marketing agreements Reasons for Alliances Expedite development of new technologies or products Overcome technical or manufacturing expertise deficits Bring together personnel to create new skill sets and capabilities

Reasons for Firms to Enter into Strategic Alliances To expedite development of new technologies or products To overcome deficits in technical or manufacturing expertise To bring together personnel of each partner to create new skill sets and capabilities To improve supply chain efficiency To gain economies of scale in production and/or marketing To acquire or improve market access through joint marketing agreements

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.

Failed Strategic Alliances and Cooperative Partnerships Common causes for the failure of 60–70% of alliances each year: Diverging objectives and priorities An inability to work well together Changing conditions that make the purpose of the alliance obsolete The emergence of more attractive technological paths Marketplace rivalry between one or more allies

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.

Merger and Acquisition Strategies An attractive strategic option for achieving operating economies, strengthening competencies, and opening avenues to new market opportunities: Merger The combining of two or more firms into a single entity, with the newly created firm often taking on a new name Acquisition The combination in which one firm, the acquirer, purchases and absorbs the operations of another, the acquired firm

Typical Objectives of Mergers and Acquisitions To create a more cost-efficient operation out of the combined firms To expand a firm’s geographic coverage To extend the firm’s business into new product categories To gain quick access to new technologies or other resources and competitive capabilities To lead the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunities

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.