A vertical integration strategy can expand the firm's range of activities

CHAPTER 6 Strengthening a Company’s Competitive Position: Strategic Moves, Timing, and Scope of Operations

1

LEARNING OBJECTIVES

THIS CHAPTER WILL HELP YOU UNDERSTAND:

Whether and when to pursue offensive or defensive strategic moves to improve a firm’s market position

When being a first mover or a fast follower or a late mover is most advantageous

The strategic benefits and risks of expanding a firm’s horizontal scope through mergers and acquisitions

The advantages and disadvantages of extending the company’s scope of operations via vertical integration

The conditions that favor outsourcing certain value chain activities to outside parties

When and how strategic alliances can substitute for horizontal mergers and acquisitions or vertical integration and how they can facilitate outsourcing

© McGraw-Hill Education.

MAXIMIZING THE POWER OF A STRATEGY

Offensive and defensive competitive actions

Competitive dynamics and the timing of strategic moves

Scope of operations along the industry’s value chain

Making choices that complement a competitive approach and

maximize the power of strategy

Jump to Appendix 1 long image description

© McGraw-Hill Education.

CONSIDERING STRATEGY-ENHANCING MEASURES

Whether and when to go on the offensive strategically

Whether and when to employ defensive strategies

When to undertake strategic moves—first mover, a fast follower, or a late mover

Whether to merge with or acquire another firm

Whether to integrate backward or forward into more stages of the industry’s activity chain

Which value chain activities, if any, should be outsourced

Whether to enter into strategic alliances or partnership arrangements

© McGraw-Hill Education.

LAUNCHING STRATEGIC OFFENSIVES TO IMPROVE A COMPANY’S MARKET POSITION

Strategic offensive principles

Focusing relentlessly on building competitive advantage and then striving to convert it into sustainable advantage

Applying resources where rivals are least able to defend themselves

Employing the element of surprise as opposed to doing what rivals expect and are prepared for

Displaying a capacity for swift, decisive, and overwhelming actions to overpower rivals

© McGraw-Hill Education.

STRATEGIC MANAGEMENT PRINCIPLE (1 of 8)

Sometimes a company’s best strategic option is to seize the initiative, go on the attack, and launch a strategic offensive to improve its market position.

© McGraw-Hill Education.

CHOOSING THE BASIS FOR COMPETITIVE ATTACK

Avoid directly challenging a targeted competitor where it is strongest.

Use the firm’s strongest strategic assets to attack a competitor’s weaknesses.

The offensive may not yield immediate results if market rivals are strong competitors.

Be prepared for the threatened competitor’s counter-response.

© McGraw-Hill Education.

STRATEGIC MANAGEMENT PRINCIPLE (2 of 8)

The best offensives use a company’s most powerful resources and capabilities to attack rivals in the areas where they are competitively weakest.

© McGraw-Hill Education.

PRINCIPAL OFFENSIVE STRATEGY OPTIONS

Offering an equally good or better product at a lower price

Leapfrogging competitors by being first to market with next-generation products

Pursuing continuous product innovation to draw sales and market share away from less innovative rivals

Pursuing disruptive product innovations to create new markets

Adopting and improving on the good ideas of other companies (rivals or otherwise)

Using hit-and-run or guerrilla marketing tactics to grab market share from complacent or distracted rivals

Launching a preemptive strike to secure an industry’s limited resources or capture a rare opportunity

© McGraw-Hill Education.

CHOOSING WHICH RIVALS TO ATTACK

Market leaders that are in vulnerable competitive positions

Runner-up firms with weaknesses in areas where the challenger is strong

Struggling enterprises on the verge of going under

Small local and regional firms with limited capabilities

Best Targets for Offensive Attacks

Jump to Appendix 2 long image description

© McGraw-Hill Education.

BLUE-OCEAN STRATEGY—A SPECIAL KIND OF OFFENSIVE

The business universe is divided into:

An existing market with boundaries and rules in which rival firms compete for advantage

A “blue ocean” market space, where the industry has not yet taken shape, with no rivals and wide-open long-term growth and profit potential for a firm that can create demand for new types of products

© McGraw-Hill Education.

Core Concept (1 of 8)

A blue-ocean strategy offers growth in revenues and profits by discovering or inventing new industry segments that create altogether new demand.

© McGraw-Hill Education.

Bonobos’s Blue-Ocean Strategy in the U.S. Men’s Fashion Retail Industry

Given the rapidity with which most first-mover advantages based on Internet technologies can be overcome by competitors, what has Bonobos done to retain its competitive advantage?

Is Bonobos’s unique focused-differentiation entry into brick-and-mortar retailing a sufficiently strong strategic move?

What would you predict is the likelihood of long-term success for Bonobos in the retail clothing sector?

© McGraw-Hill Education.

DEFENSIVE STRATEGIES—PROTECTING MARKET POSITION AND COMPETITIVE ADVANTAGE

Purposes of Defensive Strategies

Lower the firm’s risk of being attacked

Weaken the impact of an attack that does occur

Influence challengers to aim their efforts at other rivals

Jump to Appendix 3 long image description

© McGraw-Hill Education.

FORMS OF DEFENSIVE STRATEGIES

Defensive strategies can take either of two forms

Actions to block challengers

Actions to signal the likelihood of strong retaliation

© McGraw-Hill Education.

STRATEGIC MANAGEMENT PRINCIPLE (3 of 8)

Good defensive strategies can help protect a competitive advantage but rarely are the basis for creating one.

© McGraw-Hill Education.

STRATEGIC MANAGEMENT PRINCIPLE (4 of 8)

There are many ways to throw obstacles in the path of would-be challengers.

© McGraw-Hill Education.

BLOCKING THE AVENUES OPEN TO CHALLENGERS

Introduce new features and models to broaden product lines to close off gaps and vacant niches.

Maintain economy-pricing to thwart lower price attacks.

Discourage buyers from trying competitors’ brands.

Make early announcements about new products or price changes to induce buyers to postpone switching.

Offer support and special inducements to current customers to reduce the attractiveness of switching.

Challenge quality and safety of competitor’s products.

Grant discounts or better terms to intermediaries who handle the firm’s product line exclusively.

© McGraw-Hill Education.

SIGNALING CHALLENGERS THAT RETALIATION IS LIKELY

Signaling is an effective defensive strategy when the firm follows through by:

Publicly announcing its commitment to maintaining the firm’s present market share

Publicly committing to a policy of matching competitors’ terms or prices

Maintaining a war chest of cash and marketable securities

Making a strong counter-response to the moves of weaker rivals to enhance its tough defender image

© McGraw-Hill Education.

STRATEGIC MANAGEMENT PRINCIPLE (5 of 8)

To be an effective defensive strategy, signaling needs to be accompanied by a credible commitment to follow through.

© McGraw-Hill Education.

Core Concept (2 of 8)

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.

© McGraw-Hill Education.

TIMING A FIRM’S OFFENSIVE AND DEFENSIVE STRATEGIC MOVES

Timing’s importance:

Knowing when to make a strategic move is as crucial as knowing what move to make.

Moving first is no guarantee of success or competitive advantage.

The risks of moving first to stake out a monopoly position versus being a fast follower or even a late mover must be carefully weighed.

© McGraw-Hill Education.

CONDITIONS THAT LEAD TO FIRST-MOVER ADVANTAGES

When pioneering helps build a firm’s reputation and creates strong brand loyalty

When a first mover’s customers will thereafter face significant switching costs

When property rights protections thwart rapid imitation of the initial move

When an early lead enables movement down the learning curve ahead of rivals

When a first mover can set the technical standard for the industry

© McGraw-Hill Education.

Uber’s First-Mover Advantage in Mobile Ride-Hailing Services

Which first-mover advantages contributed to Uber’s domination of the on-demand transportation markets in its chosen cities?

What first-mover advantages will Uber not have in entering overseas markets?

How could Uber extend its success into smaller and less urban markets as user growth in the larger urban markets peaks?

© McGraw-Hill Education.

THE POTENTIAL FOR LATE-MOVER ADVANTAGES OR FIRST-MOVER DISADVANTAGES

When pioneering is more costly than imitating and offers negligible experience or learning-curve benefits

When the products of an innovator are somewhat primitive and do not live up to buyer expectations

When rapid market evolution allows fast followers to leapfrog a first mover’s products with more attractive next-version products

When market uncertainties make it difficult to ascertain what will eventually succeed

When customer loyalty is low and first mover’s skills, know-how, and actions are easily copied or surpassed

© McGraw-Hill Education.

TO BE A FIRST MOVER OR NOT

Does market takeoff depend on complementary products or services that currently are not available?

Is new infrastructure required before buyer demand can surge?

Will buyers need to learn new skills or adopt new behaviors?

Will buyers encounter high switching costs in moving to the newly introduced product or service?

Are there influential competitors in a position to delay or derail the efforts of a first mover?

© McGraw-Hill Education.

STRENGTHENING A FIRM’S MARKET POSITION VIA ITS SCOPE OF OPERATIONS

Range of its activities performed internally

Breadth of its product and service offerings

Extent of its geographic market presence and its mix of businesses

Size of its competitive footprint on its market or industry

Defining the Scope of the Firm’s Operations

Jump to Appendix 4 long image description

© McGraw-Hill Education.

Core Concept (3 of 8)

The scope of the firm refers to the range of activities that the firm performs internally, the breadth of its product and service offerings, the extent of its geographic market presence, and its mix of businesses.

Scope issues are at the very heart of corporate-level strategy.

© McGraw-Hill Education.

Core Concepts (4 of 8)

Horizontal scope is the range of product and service segments that a firm serves within its focal market.

Vertical scope is the extent to which a firm’s internal activities encompass one, some, many, or all of the activities that make up an industry’s entire value chain system, ranging from raw-material production to final sales and service activities.

© McGraw-Hill Education.

HORIZONTAL MERGER AND ACQUISITION STRATEGIES

Merger:

Is the combining of two or more firms into a single corporate entity that often takes on a new name

Acquisition:

Is a combination in which one firm, the "acquirer," purchases and absorbs the operations of another firm, the "acquired"

© McGraw-Hill Education.

STRATEGIC OJECTIVES FOR HORIZONTAL MERGERS AND ACQUISITIONS

Creating a more cost-efficient operation out of the combined companies

Expanding the firm’s geographic coverage

Extending the firm’s business into new product categories

Gaining quick access to new technologies or other resources and capabilities

Leading the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunities

© McGraw-Hill Education.

BENEFITS OF INCREASING HORIZONTAL SCOPE

Increasing a firm’s horizontal scope strengthens its business and increases its profitability by:

Improving the efficiency of its operations

Heightening its product differentiation

Reducing market rivalry

Increasing the firm’s bargaining power over suppliers and buyers

Enhancing its flexibility and dynamic capabilities

© McGraw-Hill Education.

Bristol-Myers Squibb’s “String-of-Pearls” Horizontal Acquisition Strategy

Which strategic outcomes did Bristol-Myers Squibb pursue through its “string-of-pearls” acquisition strategy?

Why did Bristol-Myers Squibb choose to pursue an acquisition strategy that was different from its industry competitors?

How did increasing the horizontal scope of Bristol-Myers Squibb through acquisitions strengthen its competitive position and profitability?

© McGraw-Hill Education.

WHY MERGERS AND ACQUISITIONS SOMETIMES FAIL TO PRODUCE ANTICIPATED RESULTS

Strategic issues

Cost savings may prove smaller than expected.

Gains in competitive capabilities take longer to realize or never materialize at all.

Organizational issues

Cultures, operating systems and management styles fail to mesh due to resistance to change from organization members.

Key employees at the acquired firm are lost.

Managers overseeing integration make mistakes in melding the acquired firm into their own.

© McGraw-Hill Education.

Core Concept (5 of 8)

A vertically integrated firm is one that performs value chain activities along more than one stage of an industry’s value chain system.

© McGraw-Hill Education.

VERTICAL INTEGRATION STRATEGIES

Vertically integrated firm

One that participates in multiple segments or stages of an industry’s overall value chain

Vertical integration strategy

Can expand the firm’s range of activities backward into its sources of supply or forward toward end users of its products

© McGraw-Hill Education.

TYPES OF VERTICAL INTEGRATION STRATEGIES

Full integration

A firm participates in all stages of the vertical activity chain.

Partial integration

A firm builds positions only in selected stages of the vertical chain.

Tapered integration

A firm uses a mix of in-house and outsourced activity in any stage of the vertical chain.

© McGraw-Hill Education.

THE ADVANTAGES OF A VERTICAL INTEGRATION STRATEGY

Benefits of a Vertical Integration Strategy

Add materially to a firm’s technological capabilities

Strengthen the firm’s competitive position

Boost the firm’s profitability

Jump to Appendix 5 long image description

© McGraw-Hill Education.

Core Concepts (6 of 8)

Backward integration involves entry into activities previously performed by suppliers or other enterprises positioned along earlier stages of the industry value chain system.

Forward integration involves entry into value chain system activities closer to the end user.

© McGraw-Hill Education.

INTEGRATING BACKWARD TO ACHIEVE GREATER COMPETITIVENESS

Integrating backwards by:

Achieving same scale economies as outside suppliers: low-cost based competitive advantage

Matching or beating suppliers’ production efficiency with no drop-off in quality: differentiation-based competitive advantage

Reasons for integrating backwards

Reduction of supplier power

Reduction in costs of major inputs

Assurance of the supply and flow of critical inputs

Protection of proprietary know-how