Chapter 6: Supplementing the Chosen Competitive Strategy: Other Important Business Strategy Choices

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-tocompany dealings but fall short of merger or full joint venture partnership.
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Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University

McGraw-Hill/Irwin Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Learning Objectives

1. Gain an understanding of how strategic alliances and
collaborative partnerships can bolster a companys competitive capabilities and resource strengths.

Characteristics of a Strategic Alliance

Strategic alliance A formal agreement between

2. Become aware of the strategic benefits of mergers and

acquisitions.

3. Understand when a company should consider using a

vertical integration strategy to extend its operations to more stages of the overall industry value chain.

4. Understand the conditions that favor farming out certain

value chain activities to vendors and strategic allies.

5. Recognize how and why different types of market

situations shape business strategy choices.

6. Understand when being a first-mover or a fast-follower or

a late-mover can lead to competitive advantage.
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two or more separate companies where there is Strategically relevant collaboration of some sort Joint contribution of resources Shared risk Shared control Mutual dependence Alliances often involve Joint marketing Joint sales or distribution Joint production Design collaboration Joint research Projects to jointly develop new technologies or
products
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Chapter Roadmap
Strategic Alliances and Partnerships Merger and Acquisition Strategies Vertical Integration Strategies: Operating

What Factors Make an Alliance Strategic?

It is critical to a companys achievement of

an important objective
It helps build, sustain, or enhance a core

Across More Stages of the Industry Value Chain Outsourcing Strategies: Narrowing the Boundaries of the Business Business Strategy Choices for Specific Market Situations Timing Strategic Moves To be an Early Mover of a Late
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competence or competitive advantage

It helps block a competitive threat It helps open up important

market opportunities
It mitigates a significant risk

to a companys business
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Why Are Strategic Alliances Formed?

To collaborate on technology development

Capturing the Benefits of Strategic Alliances

Benefits from forming partnerships are a

or new product development

To fill gaps in technical or manufacturing

function of
Picking a good partner Being sensitive to cultural differences Recognizing an alliance
must benefit both parties

expertise
To create new skill sets and capabilities To improve supply chain efficiency To gain economies of scale in

Ensuring both parties live

up to their commitments

Structuring the decision-making process

so actions can be taken swiftly when needed

production and/or marketing

To acquire or improve market

Managing the learning process and then

adjusting the alliance agreement over time to fit new circumstances
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access via joint marketing agreements

Alliances Can Enhance a Firms Competitiveness

Alliances and partnerships can help companies

Why Alliances Fail

Ability of an alliance to endure depends on

cope with two demanding competitive challenges

Racing against rivals to build a
market presence in many different national markets

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

Racing against rivals 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
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Diverging objectives and priorities of partners Inability of partners to work well together Changing conditions rendering purpose of alliance obsolete Emergence of more attractive technological paths Marketplace rivalry between one or more allies
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Potential Benefits of Alliances to Achieve Global and Industry Leadership

Get into critical country markets quickly to

Merger and Acquisition Strategies

Merger Combination and pooling of equals,

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 beachhead to participate in target

industry
Master new technologies and build new expertise

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 strategy
Much-used strategic option Especially suited for situations where alliances do not provide a firm with needed capabilities or costreducing opportunities Ownership allows for tightly integrated operations, creating more control and autonomy than alliances
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faster than would be possible internally

Open up expanded opportunities in target industry

by combining firms capabilities with resources of partners

Objectives of Mergers and Acquisitions

To create a more cost-efficient operation To expand a firms geographic coverage To extend a firms business into new

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

product categories or international markets

To gain quick access to new technologies

or competitive capabilities
To invent a new industry and lead

Can produce a differentiation-based competitive

the convergence of industries whose boundaries are blurred by changing technologies and new market opportunities
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advantage when it results in a better quality part

Reduces risk of depending on suppliers of

crucial raw materials / parts / components

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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

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

Tough problems of integration Greater-than-anticipated difficulties in

may sell directly to end users

To bypass regular distribution channels in favor

Achieving expected cost-savings Sharing of expertise Achieving enhanced competitive capabilities

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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
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Vertical Integration Strategies

Extend a firms competitive scope within

Strategic Disadvantages of Vertical Integration

Boosts resource requirements Locks firm deeper into same industry Results in fixed sources of supply and

same industry
Backward into sources of supply Forward toward end-users of final product Can aim at either full or partial integration

Activities, Costs, & Margins of Suppliers

Internally Performed Activities, Costs, & Margins

Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners

Buyer/User Value Chains

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
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Outsourcing Strategies
Concept
Outsourcing involves having outsiders perform certain value chain activities rather than performing them internally
Internally Performed Activities Contract Manufacturers Vendors with specialized expertise
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Matching Strategy to a Companys Situation

Nature of industry and competitive conditions

Most important drivers shaping a firms strategic options fall into two categories

Distributors or Retailers

Firms internal resource strengths and weaknesses

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When Does Outsourcing an Activity Make Strategic Sense?

Activity can be performed better or more cheaply by

Matching a Companys Strategy to Different Market Conditions

Fragmented Markets Freshly Emerging Markets Rapidly Growing Markets Mature, SlowGrowth Markets
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outside specialists
Activity is not crucial to achieve a sustainable

competitive advantage
Risk exposure to changing technology and/or

changing buyer preferences is reduced

It improves firms ability to innovate Operations are streamlined to Improve flexibility Cut time to get new products into the market It increases firms ability to assemble diverse kinds

Turbulent Markets

of expertise speedily and efficiently

Firm can concentrate on core value chain activities

that best suit its resource strengths

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Stagnant or Declining Markets

The Big Risk of Outsourcing

Farming out too many or the wrong

Features of an Emerging Industry

New and unproven market Proprietary technology Lack of consensus regarding which of

activities, thus
Hollowing out capabilities Losing touch with activities and expertise that determine overall long-term success

several competing technologies will win out

Low entry barriers Experience curve effects may permit

cost reductions as volume builds

Buyers are first-time users and marketing involves

inducing initial purchase and overcoming customer concerns First-generation products are expected to be rapidly improved so buyers delay purchase until technology matures Possible difficulties in securing raw materials Firms struggle to fund R&D, operations and build resource capabilities for rapid growth
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Strategy Options for Competing in Emerging Industries

Win early race for industry leadership by employing

Strategy Options for Competing in Rapidly Growing Markets

Drive down costs per unit to enable price

a bold, creative strategy

Push hard to perfect technology,

reductions that attract droves of new customers

Pursue rapid product innovation to
Set a companys product offering apart from rivals Incorporate attributes to appeal to growing numbers of customers

improve product quality, and develop attractive performance features Consider merging with or acquiring another firm to Gain added expertise Pool resource strengths When technological uncertainty clears and a dominant technology emerges, try to capture any first-mover advantages by moving quickly Form strategic alliances with Companies having related technological expertise or Key suppliers
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Gain access to additional distribution

channels and sales outlets

Expand a companys geographic coverage Expand product line to add models/styles to

appeal to a wider range of buyers

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Strategy Options for Competing in Emerging Industries (continued)

Pursue new customers and user

Industry Maturity: The Standout Features

Slowing demand breeds stiffer competition More sophisticated buyers demand bargains Greater emphasis on cost and service Topping out problem in adding

applications
Enter new geographical areas Make it easy and cheap for

first-time buyers to try product

Focus advertising emphasis on Increasing frequency of use Creating brand loyalty Use price cuts to attract price-sensitive

production capacity
Product innovation and new

end uses harder to come by

International competition increases Industry profitability falls Mergers and acquisitions reduce

buyers
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number of rivals
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What Is the Key to Success for Competing in Rapidly Growing Markets? A company needs a strategy predicated on growing faster than the market average so it
Can boost its market share and Improve its competitive standing vis--

Strategy Options for Competing in a Mature Industry

Prune marginal products and models Emphasize innovation in the value chain Strong focus on cost reduction Increase sales to present customers Purchase rivals at bargain prices Expand internationally Build new, more flexible

vis rivals

competitive capabilities
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Strategic Pitfalls in a Maturing Industry

Employing a ho-hum strategy with no distinctive

End-Game Strategies for Declining Industries

An end-game strategy can take either of

features thus leaving firm stuck in the middle

Being slow to mount a defense against stiffening

two paths
Slow-exit strategy involving

competitive pressures
Concentrating on short-term profits rather than

strengthening long-term competitiveness

Being slow to respond to price-cutting Having too much excess capacity Overspending on marketing efforts Failing to aggressively Invest in product / process innovations Pursue cost reductions
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Gradual phasing down of operations Getting the most cash flow from the business

Fast-exit strategy involving

Disengaging from an industry during early stages of decline Quick recovery of as much of a companys investment as possible
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Stagnant or Declining Industries: The Standout Features

Demand grows more slowly than economy

Features of Turbulent Markets

Rapid-fire technological change Short product life-cycles Entry of important new rivals Frequent launches of

as a whole (or even declines)

Advancing technology gives rise to better-

performing substitute products or lower costs

Customer group shrinks Changing lifestyles and buyer tastes Rising costs of complementary products Competitive battle ensues among industry

new competitive moves

Rapidly evolving

customer expectations
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members for the available business

Strategy Options for Competing in a Stagnant or Declining Industry

Pursue focus strategy aimed at

Strategy Options for Competing in High-Velocity Markets

Invest aggressively in R&D Keep products/services fresh and

fastest growing market segments Stress differentiation based on quality improvement or product innovation Work diligently to drive costs down
Cut marginal activities from value chain Use outsourcing Redesign internal processes
to exploit e-commerce Consolidate under-utilized production facilities Add more distribution channels Close low-volume, high-cost distribution outlets Prune marginal products
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exciting
Develop quick response capabilities Shift resources Adapt competencies Create new competitive capabilities Speed new products to market Use strategic partnerships to develop

specialized expertise and capabilities

Initiate fresh actions every few months
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Keys to Success in Competing in High Velocity Markets

Cutting-edge expertise Speed in responding to new developments Collaboration with others Agility Innovativeness Opportunism Resource flexibility First-to-market capabilities
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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 firms 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
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Competitive Features of a Fragmented Industry

Absence of market leaders with large market shares or

What Is a Blue Ocean Strategy?

Seeks to gain a dramatic, durable

widespread buyer recognition

Product/service is delivered to neighborhood

locations to be convenient to local residents Buyer demand is so diverse that many firms are required to satisfy buyer needs Low entry barriers
Absence of scale economies Market for industrys product/service may be globalizing,

competitive advantage by
Abandoning efforts to beat out
competitors in existing markets and

Inventing a new industry or distinctive

market segment to render existing competitors largely irrelevant and

thus putting many companies across the world in same market arena
Exploding technologies force firms to specialize just to

keep up in their area of expertise

Industry is young and crowded with aspiring contenders,

Allowing a company to create and

capture altogether new demand
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with no firm having yet developed recognition to command a large market share

Competing in a Fragmented Industry: The Strategy Options

Construct and operate formula facilities Become a low-cost operator Specialize by product type Specialize by customer type Focus on limited geographic area
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What Is Different About a Blue Ocean?

Typical Market Space
Industry boundaries are

Blue Ocean Market Space

Industry does not exist yet Industry is untainted

defined and accepted

Competitive rules are well

by competition
Industry offers wide-open

understood by all rivals

Companies try to

outperform rivals by capturing a bigger share of existing demand

opportunities if a firm has a product and strategy allowing it to

Create new demand and Avoid fighting over existing
demand
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First-Mover Disadvantages
Moving early can be a disadvantage (or

fail to produce an advantage) when

When costs of pioneering are more than being
an imitative follower and only negligible learning/experience curve benefits accrue to the leader

Innovators products are primitive, not living up

to buyer expectations

Demand side of the market is skeptical about

the benefits of new technology/product of a firstmover

Rapid technological change allows followers to

leapfrog pioneers
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To Be a First-Mover or Not?
Key issue Is the race to market leadership in

an industry a marathon or a sprint?

Seeking a competitive advantage by being a

first-mover 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? Will buyers encounter high switching costs? Are there influential competitors in a position to delay or derail the efforts of a first-mover?
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