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

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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

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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

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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

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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

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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.

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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.

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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.

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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

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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

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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

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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.

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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?

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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

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FORMS OF DEFENSIVE STRATEGIES

Defensive strategies can take either of two forms

Actions to block challengers

Actions to signal the likelihood of strong retaliation

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STRATEGIC MANAGEMENT PRINCIPLE (3 of 8)

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

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STRATEGIC MANAGEMENT PRINCIPLE (4 of 8)

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

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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.

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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

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STRATEGIC MANAGEMENT PRINCIPLE (5 of 8)

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

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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.

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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.

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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

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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?

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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

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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?

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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

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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.

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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.

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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"

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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

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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

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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?

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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.

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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.

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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

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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.

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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

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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.

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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

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INTEGRATING FORWARD TO ENHANCE COMPETITIVENESS

Reasons for integrating forward

To lower overall costs by increasing channel activity efficiencies relative to competitors

To increase bargaining power through control of channel activities

To gain better access to end users

To strengthen and reinforce brand awareness

To increase product differentiation

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DISADVANTAGES OF A VERTICAL INTEGRATION STRATEGY

Increased business risk due to large capital investment

Slow acceptance of technological advances or more efficient production methods

Less flexibility in accommodating shifting buyer preferences that require non-internally produced parts

Internal production levels may not reach volumes that create economies of scale

Efficient production of internally-produced components and parts hampered by capacity matching problems

New or different resources and capabilities requirements

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WEIGHING THE PROS AND CONS OF VERTICAL INTEGRATION

Will vertical integration enhance the performance of strategy-critical activities ways that lower cost, build expertise, protect proprietary know-how, or increase differentiation?

What impact will vertical integration have on investment costs, flexibility, and response times?

What administrative costs are incurred by coordinating operations across more vertical chain activities?

How difficult will it be for the firm to acquire the set of skills and capabilities needed to operate in another stage of the vertical chain?

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Kaiser Permanente’s Vertical Integration Strategy

What are the most important strategic benefits that Kaiser Permanente derives from its vertical integration strategy?

Over the long term, how could the vertical scope of Kaiser Permanente’s operations threaten its competitive position and profitability?

Why is a vertical integration strategy more appropriate in some industries than in others?

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Core Concept (7 of 8)

Outsourcing involves contracting out certain value chain activities that are normally performed in-house to outside vendors.

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OUTSOURCING STRATEGIES: NARROWING THE SCOPE OF OPERATIONS

Outsource an activity if it:

Can be performed better or more cheaply by outside specialists

Is not crucial to achieving sustainable competitive advantage

Improves organizational flexibility and speeds time to market

Reduces risk exposure due to new technology or buyer preferences

Allows the firm to concentrate on its core business, leverage key resources, and do even better what it already does best

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THE BIG RISKS OF OUTSOURCING VALUE CHAIN ACTIVITIES

Hollowing out resources and capabilities that the firm needs to be a master of its own destiny

Loss of direct control when monitoring, controlling, and coordinating activities of outside parties by means of contracts and arm’s-length transactions

Lack of incentives for outside parties to make investments specific to the needs of the outsourcing firm’s value chain

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STRATEGIC MANAGEMENT PRINCIPLE (6 of 8)

A company must guard against outsourcing activities that hollow out the resources and capabilities that it needs to be a master of its own destiny.

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Core Concepts (8 of 8)

A strategic alliance is a formal agreement between two or more separate companies in which they agree to work cooperatively toward some common objective.

A joint venture is a partnership involving the establishment of an independent corporate entity that the partners own and control jointly, sharing in its revenues and expenses.

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FACTORS THAT MAKE AN ALLIANCE “STRATEGIC”

A strategic alliance:

Facilitates achievement of an important business objective

Helps build, sustain, or enhance a core competence or competitive advantage

Helps remedy an important resource deficiency or competitive weakness

Helps defend against a competitive threat, or mitigates a significant risk to a company’s business

Increases the bargaining power over suppliers or buyers.

Helps open up important new market opportunities

Speeds development of new technologies or product innovations

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BENEFITS OF STRATEGIC ALLIANCES AND PARTNERSHIPS

Minimize the problems associated with vertical integration, outsourcing, and mergers and acquisitions

Are useful in extending the scope of operations via international expansion and diversification strategies

Reduce the need to be independent and self-sufficient when strengthening the firm’s competitive position

Offer greater flexibility should a firm’s resource requirements or goals change over time

Are useful when industries are experiencing high-velocity technological advances simultaneously

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STRATEGIC MANAGEMENT PRINCIPLE (7 of 8)

Companies that have formed a host of alliances need to manage their alliances like a portfolio.

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WHY AND HOW STRATEGIC ALLIANCES ARE ADVANTAGEOUS

Strategic Alliances:

Expedite development of promising new technologies or products

Help overcome deficits in technical and manufacturing expertise

Bring together the personnel and expertise needed to create new skill sets and capabilities

Improve supply chain efficiency

Help partners allocate venture risk sharing

Allow firms to gain economies of scale

Provide new market access for partners

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CAPTURING THE BENEFITS OF STRATEGIC ALLIANCES

Picking a good partner

Being sensitive to cultural differences

Recognizing that the alliance must benefit both sides

Adjusting the agreement over time to fit new circumstances

Structuring the decision-making process for swift actions

Ensuring both parties keep their commitments

Strategic Alliance Factors

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STRATEGIC MANAGEMENT PRINCIPLE (8 of 8)

The best alliances are highly selective, focusing on particular value chain activities and on obtaining a specific competitive benefit.

Alliances enable a firm to learn and to build on its strengths.

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REASONS FOR ENTERING INTO STRATEGIC ALLIANCES

When seeking global market leadership

Enter into critical country markets quickly.

Gain inside knowledge about unfamiliar markets and cultures through alliances with local partners.

Provide access to valuable skills and competencies concentrated in particular geographic locations.

When staking out a strong industry position

Establish a stronger beachhead in target industry.

Master new technologies and build expertise and competencies.

Open up broader opportunities in the target industry.

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PRINCIPLE ADVANTAGES OF STRATEGIC ALLIANCES

They lower investment costs and risks for each partner by facilitating resource pooling and risk sharing.

They are more flexible organizational forms and allow for a more adaptive response to changing conditions.

They are more rapidly deployed—a critical factor when speed is of the essence.

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STRATEGIC ALLIANCES VERSUS OUTSOURCING

Key advantages of strategic alliances

The increased ability to exercise control over the partners’ activities.

A greater commitment and willingness of the partners to make relationship-specific investments as opposed to arm’s-length outsourcing transactions.

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ACHIEVING LONG-LASTING STRATEGIC ALLIANCE RELATIONSHIPS

Collaborating with partners that do not compete directly

Establishing a permanent trusting relationship

Continuing to collaborate is in the parties’ mutual interest

Factors Influencing the Longevity of Alliances

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THE DRAWBACKS OF STRATEGIC ALLIANCES AND PARTNERSHIPS

Culture clash and integration problems due to different management styles and business practices

Anticipated gains not materializing due to an overly optimistic view of the potential for synergies or the unforeseen poor fit of partners’ resources and capabilities

Risk of becoming dependent on partner firms for essential expertise and capabilities

Protection of proprietary technologies, knowledge bases, or trade secrets from partners who are rivals

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HOW TO MAKE STRATEGIC ALLIANCES WORK

Create a system for managing the alliance.

Build trusting relationships with partners.

Set up safeguards to protect from the threat of opportunism by partners.

Make commitments to partners and see that partners do the same.

Make learning a routine part of the management process.

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Appendix 1 Maximizing the Power of a Strategy

Making choices that complement a competitive approach and maximize the power of strategy includes:

Offensive and defensive competitive actions

Competitive dynamics and the timing of strategic moves

Scope of operations along the industry's value chain

Return to slide

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Appendix 2 Choosing Which Rivals to Attack

The best targets for offensive attacks are: 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, and small local and regional firms with limited capabilities.

Return to slide

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Appendix 3 Defensive Strategies—Protecting Market Position and Competitive Advantage

The three 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

Return to slide

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Appendix 4 Strengthening a Firm’s Market Position Via Its Scope of Operations

The scope of a firm's operations is defined as: the range of its activities performed internally; the breadth of its product and service offerings; the extent of its geographic market presence and its mix of business; and the size of its competitive footprint on its market or industry.

Return to slide

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Appendix 5 The Advantages of a Vertical Integration Strategy

Three benefits of a vertical integration strategy

Add materially to a firm's technological capabilities

Strengthen the firm's competitive positon

Boost the firm's profitability

Return to slide

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Appendix 6 Capturing the Benefits of Strategic Alliances

The strategic alliance factors are:

Being sensitive to culture differences

Recognizing that the alliance must benefit both sides

Adjusting the agreement over time to fit new circumstances

Structuring the decisions-making process for swift actions

Ensuring both parties keep their commitments

Picking a good partner

Return to slide

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Appendix 7 Achieving Long-Lasting Strategic Alliance Relationships

Three factors that influence the longevity of alliances

Collaborating with partners that do not compete directly

Establishing a permanent trusting relationship

Continuing to collaborate is in the parties' mutual interest

Return to slide

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