Relying on outsiders to perform certain value chain activities offers such strategic advantages as:

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Strategy: Core Concepts and Analytical Approaches

An e-book published by McGraw-Hill Education

Arthur A. Thompson, The University of Alabama 6th Edition, 2020-2021

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chapter 6 Supplementing the Chosen Competitive Strategy— Other Important Strategy Choices Winners in business play rough and don’t apologize for it. The nicest part of playing hardball is watching your competitors squirm. —George Stalk, Jr. and Rob Lachenauer

Whenever you look at any potential merger or acquisi tion, you look at the potential to create value for your shareholders. —Dilip Shanghvi, Founder and managing director of Sun Pharmaceuticals

Don’t form an alliance to correct a weakness and don’t ally with a partner that is trying to correct a weakness of its own. The only result from a marriage of weaknesses is the creation of even more weaknesses. —Michel Robert

Think of your priorities not in terms of what activities you do, but when you do them. Timing is everything. —Dan Millman

Once a company has settled on which of the five generic competitive strategies to employ, attention turns to what other strategic actions it can take to complement its competitive approach and maximize the power of its overall strategy. Several decisions must be made: n Whether to go on the offensive and initiate aggressive strategic moves to improve the company’s market

position.

n Whether to employ defensive strategies to protect the company’s market position.

n What role the company’s website should play in its overall strategy to be a successful performer.

n Whether to outsource certain value chain activities or perform them in-house.

n Whether to integrate backward or forward into more stages of the industry value chain.

n Whether to enter into strategic alliances or partnership arrangements with other enterprises.

n Whether to bolster the company’s market position via mergers or acquisitions.

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n When to undertake strategic moves—whether advantage or disadvantage lies in being a first mover, a fast follower, or a late mover.

This chapter presents the pros and cons of each of these strategy-enhancing measures.

Figure 6.1 shows the menu of strategic options a company has in crafting a comprehensive set of strategic actions and the order in which the choices should generally be made. The portion of Figure 6.1 below the five generic competitive strategy options illustrates the structure of this chapter and the topics that will be covered.

Figure 6.1 A Company’s Menu of Strategy Options

First Mover? Fast-Follower? Late-Mover?

Generic Competitive Strategy Options

What type of website strategy to employ?

Whether to outsource selected value chain activities?

Initiate offensive strategic moves?

Employ defensive strategic moves?

Employ backward or forward vertical integration strategies?

Enter into strategic alliances and partnerships?

Use merger and acquisition strategies to strengthen competitiveness?

Low-Cost Provider?

Broad Differentiation?

Focused Low Cost?

Focused Differentiation?

Best-Cost Provider?

(A company’s first strategic choice)

Complementary Strategy Options (A company’s second set of strategic choices)

R&D Engineering Production

Marketing & Sales

Human Resources Finance

Functional Area Strategies to Support the Above Strategic Choices

Timing a Company’s Strategic Moves in the Marketplace

(When to initiate actions to pursue or make adjustments in any of the above strategic choices—timing matters!)

(A company’s third set of strategic choices)

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Going on the Offensive—Strategic Options to Improve a Company’s Market Position

No matter which of the five generic competitive strategies a company employs, there are times when it makes sense for a company to go on the offensive to improve its market position and business performance. Strategic offensives are called for when a company sees opportunities to gain profitable market share at rivals’ expense, when a company should strive to whittle away at a strong rival’s competitive advantage, and when a company opts to pursue newly emerging market opportunities. Companies like Google, Amazon, Apple, and Facebook play hardball, aggressively pursuing competitive advantage and trying to reap the benefits a competitive edge offers—a leading market share, excellent profit margins, rapid growth (as compared to rivals), and the reputational rewards of being known as a company on the move.1 The best offensives tend to incorporate several behaviors and principles: (1) focusing relentlessly on building competitive advantage and then striving to convert competitive advantage into decisive advantage, (2) employing the element of surprise as opposed to doing what rivals expect and are prepared for, (3) applying resources where rivals are least able to defend themselves, and (4) being impatient with the status quo and displaying a strong bias for swift and decisive actions to overwhelm rivals.2

Choosing the Basis for Competitive Attack As a rule, challenging rivals on competitive grounds where they are strong is an uphill struggle.3 Offensive initiatives that exploit competitor weaknesses stand a better chance of succeeding than do those that challenge competitor strengths, especially if the weaknesses represent important vulnerabilities and weak rivals can be caught by surprise with no ready defense.4

A company’s strategic offensives should be powered by competitively powerful resources and capabilities—such as a better-known brand name, lower production and/or distribution costs, better technological capability, or a core or distinctive competence in designing and producing superior performing products. Designing a strategic offensive spearheaded by relatively weak company resources and capabilities is like marching into battle with a popgun—the prospects for success are dim. For instance, it is foolish for a company with relatively high costs to employ a price-cutting offensive. Price-cutting offensives are best left to financially strong companies whose costs are relatively low in comparison to those of the companies being attacked. Likewise, it is ill-advised to pursue a product innovation offensive without proven expertise in R&D, new product development, and speeding new or improved products to market.

The principal offensive strategy options include the following:

n Offering an equally good or better product at a lower price. Lower prices can produce market share gains if competitors don’t respond with price cuts of their own and if the challenger convinces buyers that its product is just as good or better. However, such a strategy increases total profits only if the gains in additional unit sales are enough to offset the impact of thinner margins per unit sold. Price- cutting offensives generally work best when a company first achieves a cost advantage and then hits competitors with a lower price.5

CORE CONCEPT 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. It takes successful offensive strategies to build competitive advantage, widen an existing advantage, or narrow the advantage held by a strong competitor.

CORE CONCEPT The best offensives use a company’s most potent resources and capabilities to attack rivals where they are competitively weakest.

athom

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Sticky Note

Change to read: Utilizing some of the company's competitively potent resources and capabilities to attack rivals where they are least able to defend themselves, and

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n Leapfrogging competitors by being the first adopter of next-generation technologies or being first to market with next-generation products. In technology-based industries, the opportune time to launch an offensive against rivals is by leading the way in introducing a next-generation technology or product. Amazon got its Alexa-enabled Amazon Echo into the smart-home controls market about two years ahead of Google’s Google Home device. But in 2019 both rivals were racing to introduce next-generation versions with wider-ranging features and capabilities. Two other brands, the Sonos One from Sonos, and Anker’s Eufy Genie, were also trying to gain buyer favor. The pace at which next-version products with ever more appealing capabilities and useful functions would be introduced was expected to produce a formidable leapfrogging battle.

n Pursuing continuous product innovation to draw sales and market share away from rivals with comparatively weak product innovation capabilities. Ongoing introductions of new/improved products can put rivals with deficient product innovation capabilities under tremendous competitive pressure. But such offensives can be sustained only if a company can keep its product development pipeline full of new and improved products that spark buyer enthusiasm.6

n Pursuing disruptive product innovation to create new markets. While this strategy can be riskier and more costly than continuous product innovation, “big bang” disruptive product innovation can be a game changer if successful.7 Disruptive innovation involves perfecting a new product with a few trial users, then quickly rolling it out to the whole market in an attempt to get many buyers to embrace an altogether new and better value proposition quickly. Examples include online degree programs, self- driving capabilities for motor vehicles, Apple Music, and Amazon’s Kindle (which undercut the sales of hardcopy fiction and non-fiction books).

n Adopting and improving on the good ideas of other companies (rivals or otherwise).8 The idea of warehouse home improvement centers did not originate with The Home Depot cofounders Arthur Blank and Bernie Marcus. They got the “big box” concept from their former employer Handy Dan Home Improvement. But they were quick to improve on Handy Dan’s business model and strategy and take The Home Depot to the next plateau in terms of product line breadth and customer service. Offense- minded companies are often quick to adopt any good idea (not nailed down by a patent or other legal protection) in an effort to create competitive advantage for themselves.9

n Deliberately attacking those market segments where a key rival makes big profits.10 Long a dominant force in small automobiles, Toyota launched a hardball attack on General Motors, Ford, and Chrysler in the U.S. market for light trucks and SUVs, the very market segments where the Detroit automakers historically earned big profits (roughly $10,000 to $15,000 per vehicle). Toyota now offers equivalent vehicles, earns handsome profits of its own in these two market segments, and has stolen sales and market share from its U.S.-based rivals. Dell opted to introduce its own brand of printers and printing supplies in the 1990s because its principal rival in desktop and laptop computers was Hewlett-Packard, which made its biggest profits in printing and printing supplies; by attacking H-P in the market for printers, Dell sought to force H-P to devote management attention and resources to defending its printing business and distract its attention away from trying to wrest market leadership away from Dell in the PC market.

n Attacking the competitive weaknesses of rivals. Such offensives present many options. One is to go after the customers of those rivals whose products lag on quality, features, or product performance. If a company has especially good customer service capabilities, it can make special sales pitches to the customers of those rivals who provide subpar customer service. Aggressors with a recognized brand name and strong marketing skills can launch efforts to win customers away from rivals with weak brand recognition. There is considerable appeal in emphasizing sales to buyers in geographic regions where several rivals have low market shares or are less well-equipped to serve. If the attacker’s most potent resources and capabilities should prove powerful enough to outcompete the targeted rivals and result in competitive advantage, so much the better.

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n Maneuvering around competitors and concentrating on capturing unoccupied or less contested market territory. Examples include launching initiatives to build strong positions in geographic areas or market segments where close rivals have little or no market presence. Southwest Airlines became a major carrier not by invading the turf where big airlines had their “hubs”—like Chicago O’Hare, Dallas-Fort Worth, Los Angeles, and New York LaGuardia, but by scheduling point-to-point flights to lesser-sized airports (Las Vegas, Baltimore-Washington, Chicago Midway, and Fort Lauderdale) where relatively weak competition enabled it to gain the leading market share in a fairly short time. Going into 2016, Southwest commanded the biggest share of passenger traffic in over 60 of the 84 airports it served in the United States.

n Using hit-and-run or guerrilla warfare tactics to grab sales and market share from complacent or distracted rivals. Options for “guerrilla offensives” include occasional low-balling on price (to win a big order or steal a key account from a rival); surprising key rivals with sporadic but intense bursts of promotional activity (offering a 20 percent discount for one week to draw customers away from rival brands); or undertaking special campaigns to attract buyers away from rivals plagued with a strike or problems in meeting buyer demand.11 Guerrilla offensives are particularly well suited to small challengers who have neither the resources nor the market visibility to mount a full-fledged attack on industry leaders.

n Launching a preemptive strike to secure an advantageous position that rivals are prevented or discouraged from duplicating.12 What makes a move preemptive is its one-of-a-kind nature— whoever strikes first stands to acquire competitive assets that rivals can’t readily match. Examples of preemptive moves include (1) securing the best distributors in a particular geographic region or country; (2) obtaining the most favorable site along a heavily traveled thoroughfare, at a new interchange or intersection, in a new shopping mall, in a natural beauty spot, close to cheap transportation or raw material supplies or market outlets, and so on; (3) tying up the most reliable, high-quality suppliers via exclusive partnerships, long-term contracts, or even acquisition; and (4) moving swiftly to acquire the assets of distressed rivals at bargain prices. To be successful, a preemptive move doesn’t have to totally block rivals from following or copying; it merely needs to give a firm a prime position that is not easily circumvented.

How long it takes for an offensive to yield good results varies with the competitive circumstances.13 It can be short if buyers respond immediately (as can occur with a dramatic price cut, an imaginative ad campaign, or an especially appealing new product). Securing a competitive edge can take much longer if winning consumer acceptance of the company’s product will take some time or if the firm may need several years to debug a new technology or put new production capacity in place. But how long it takes for an offensive move to improve a company’s market standing—and whether the move will prove successful—depends in part on whether and how quickly rivals recognize the threat and begin a counter-response. And any responses on the part of rivals hinge on whether (1) they have effective countermoves in their arsenal of strategic options and (2) they believe that a counterattack is worth the expense and the distraction.14

Blue Ocean Strategy—A Special Kind of Offensive A blue ocean strategy seeks to gain a dramatic and durable competitive advantage by abandoning efforts to beat out competitors in existing markets and, instead, inventing a new industry or distinctive market segment that renders existing competitors largely irrelevant and allows a company to create and capture altogether new demand.14 This strategy views the business universe as consisting of two distinct types of market space. One is where industry boundaries are defined and accepted, the competitive rules of the game are well understood and accepted by all industry members, and companies use their resources and capabilities to compete against rivals and achieve satisfactory or better performance. In such markets, lively competition constrains a company’s prospects for rapid growth and superior profitability since rivals move quickly to either imitate or counter the successes of competitors. The second type of market space is a “blue ocean” where the industry does not really exist yet, is untainted by competition, and offers wide open opportunity for profitable and rapid growth if a

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company can come up with an innovative new product offering and strategy that allow it to create new demand rather than fight over existing demand. Companies that create blue ocean market spaces can often sustain their initially won competitive advantage without encountering a major competitive challenge for 10 to 15 years provided their blue ocean strategy translates into strong brand name awareness and there are other high barriers to imitating its product offering.

A terrific example of blue ocean market creation is the online auction market that eBay created and now dominates. Other examples of companies that have created blue ocean market spaces include NetJets in fractional jet ownership, Drybar in hair blowouts, Uber and Lyft in ride-hailing services, Amazon’s Alexa-based Echo smart- home device, and Cirque du Soleil in live entertainment. Cirque du Soleil “reinvented the circus” by creating a distinctly different market space for its performances (Las Vegas night clubs and theater settings) and pulling in a whole new group of customers—adults and corporate clients—who not only were noncustomers of traditional circuses (like Ringling Brothers, the legendary industry leader), but were also willing to pay several times more than the price of a conventional circus ticket to have an “entertainment experience” featuring sophisticated clowns and star-quality acrobatic acts in a comfortable atmosphere.

Choosing Which Rivals to Attack Offensive-minded firms need to analyze which of their rivals to challenge as well as how to mount that challenge. The following are the best targets for offensive attacks:15

n Market leaders that are vulnerable. Offensive attacks make good sense when a company that leads in size and market share is not a true leader in serving the market well. Signs of leader vulnerability include unhappy buyers, an inferior product line, a weak competitive strategy with regard to low-cost leadership or differentiation, strong emotional commitment to an aging technology the leader has pioneered, outdated plants and equipment, a preoccupation with diversification into other industries, and mediocre or declining profitability. Offensives to erode the positions of market leaders have real promise when the challenger is able to revamp its value chain or innovate to gain a fresh cost-based or differentiation-based competitive advantage.16 To be judged successful, attacks on leaders don’t have to result in making the aggressor the new leader; a challenger may “win” by simply becoming a stronger runner-up. Caution is well advised in challenging strong market leaders—there is a significant risk of squandering valuable resources in a futile effort or precipitating a fierce and profitless industry-wide battle for market share.

n Runner-up firms with weaknesses in areas where the challenger is strong. Runner-up firms are an especially attractive target when a challenger’s resource strengths and competitive capabilities are well suited to exploiting their weaknesses.

n Struggling enterprises on the verge of going under. Challenging a hard-pressed rival in ways that further deplete its financial strength and competitive position can weaken its resolve and hasten its exit from the market. It often makes sense to attack a struggling enterprise in its most profitable market segments, since this will threaten its survival the most.

n Small local and regional firms with limited resources and/or capabilities. Because small firms typically have limited expertise and resources, a challenger with broader and/or deeper capabilities is well positioned to raid their biggest and best customers—particularly those customers that are growing rapidly, have increasingly sophisticated requirements, and may already be thinking about switching to a supplier with more full-service capability.

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Defensive Strategies—Protecting Market Position and Competitive Advantage

In a competitive market, all firms are subject to offensive challenges from rivals. The purposes of defensive strategies are to lower the risk of being attacked, weaken the impact of any attack that occurs, and induce challengers to aim their offensive initiatives at other rivals. While defensive strategies usually don’t enhance a firm’s competitive advantage, they can definitely help fortify its competitive position, protect its most valuable resources and capabilities from imitation, and defend whatever competitive advantage it might have. Defensive strategies can take either of two forms: actions to block challengers and actions to signal the likelihood of strong retaliation.

Blocking the Avenues Open to Challengers The most frequently employed approach to defending a company’s present position involves actions that restrict a challenger’s options for initiating competitive attack. There are any number of obstacles that can be put in the path of would-be challengers.17 A defender can participate in alternative technologies as a hedge against rivals attacking with a new or better technology. A defender can introduce new features, add new models, or broaden its product line to close off gaps and vacant niches to opportunity-seeking challengers. It can thwart rivals’ efforts to attack with a lower price by maintaining a lineup of product selections that includes economy-priced options for price-sensitive buyers. It can try to discourage buyers from trying competitors’ brands by lengthening warranties, offering free training and support services, developing the capability to deliver spare parts to users faster than rivals can, providing coupons and sample giveaways to buyers most prone to experiment, and making early announcements about impending new products or probable price cuts to induce potential buyers to postpone switching. It can challenge the quality or safety of rivals’ products. Finally, a defender can grant volume discounts or better financing terms to dealers and distributors to discourage them from experimenting with other suppliers, or it can convince them to handle its product line exclusively and force competitors to use other distribution outlets.

Signaling Challengers that Retaliation Is Likely The goal of signaling challengers that strong retaliation is likely in the event of an attack is either to dissuade challengers from attacking at all or to divert them to less- threatening options. Either goal can be achieved by letting challengers know the battle will cost more than it is worth. Would-be challengers can be signaled by:18

n Publicly announcing management’s commitment to maintain the firm’s present market share.

n Publicly committing the company to a policy of matching competitors’ prices and terms of sale.

n Maintaining a war chest of cash and marketable securities.

n Making an occasional strong counter-response to the moves of weak competitors to enhance the firm’s image as a tough defender.

For signaling to be effective, however, challengers must believe that the signaler has every intention of pursuing retaliatory actions if attacked.

CORE CONCEPT Good defensive strategies can help protect competitive advantage but rarely are the basis for creating it.

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

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Website Strategies

Every company with a website has to address what role the site should play in the company’s competitive strategy. In particular, to what degree should a company use online sales as a means for selling its products or services direct to users? Should a company use its website only as a means of disseminating information about the company and its products (relying exclusively on its wholesale and retail partners to make all sales to end users)? Or should online sales at the company’s website be (1) a secondary or minor channel for accessing customers, (2) one of several important distribution channels for accessing customers, (3) the primary distribution channel for accessing customers, or (4) the exclusive channel for transacting sales with customers?19 Let’s look at each of these strategic options in turn.

Product Information–Only Strategies—Avoiding Channel Conflict Operating a website that contains extensive product information but relies on click-throughs to the websites of distribution channel partners for sales transactions (or that informs site visitors where nearby retail stores are located) is an attractive option for manufacturers and/or wholesalers that have invested heavily in building and cultivating retail dealer networks to access end users. A company vigorously pursuing online sales to consumers at the same time it is also heavily promoting sales to consumers through its network of wholesalers and retailers is competing directly against its distribution allies. Such actions constitute channel conflict and are a tricky road to negotiate. A company actively trying to grow online sales is signaling a weak strategic commitment to its dealers and a willingness to cannibalize dealers’ sales and growth potential. The likely result is angry dealers and loss of dealer goodwill. Some or many of the company’s dealers may opt to put more effort into marketing the brands of rival manufacturers who don’t sell online or whose online sales effort is passive and nonthreatening. Quite possibly, a company may lose more sales by offending its dealers than it gains from its own online sales effort. Consequently, in industries where the strong support and goodwill of dealer networks is essential, companies may conclude that it is important to avoid channel conflict and their website should be designed to partner with dealers rather than compete with them.

Website Sales as a Minor Distribution Channel A second strategic option is to use online sales as a relatively minor distribution channel for achieving incremental sales, gaining online sales experience, and doing marketing research. If channel conflict poses a big obstacle to online sales, or if only a small fraction of buyers can be attracted to make online purchases, then companies are well advised to pursue online sales with the strategic intent of gaining experience, learning more about buyer tastes and preferences, testing reaction to new products, creating added market buzz about their products, and boosting overall sales volume a few percentage points. Sony and Nike, for example, sell most all of their products at their websites without provoking resistance from their retail dealers—their website prices are the same (sometimes higher) than the prices of their dealers, which gives buyers little incentive to buy online as compared shopping at the stores of local dealers. However, Nike does allow shoppers at its website to order custom-designed shoes, which gives Nike valuable insight into buyer fashion preferences and aids the company’s new product development personnel in deciding what new shoe designs, colors, and accents to introduce.

Companies today must wrestle with whether to use their websites just as a means of disseminating information about the company and its product offerings or whether to operate an e-store that sells direct to online shoppers.

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Sometimes, manufacturers are willing to accept the channel conflict problems that arise from selling online in head-to-head competition with distribution channel allies because they expect that over the long term online sales at their websites will become progressively larger and more profitable. A strategy to gradually grow online sales into an important distribution channel can make sense in three instances:

n When profit margins from online sales are bigger than those earned from selling to wholesale/retail customers.

n When encouraging buyers to visit the company’s website helps educate them about the ease and convenience of purchasing online and, over time, prompts more and more buyers to purchase online (where company profit margins are greater)—which makes incurring channel conflict in the short term and competing against traditional distribution allies potentially worthwhile.

n When selling directly to end users allows a manufacturer to make greater use of build-to-order manufacturing and assembly, which if met with growing buyer approval would increase the rate at which sales migrate from distribution allies to the company’s website; such migration could lead to streamlining the company’s value chain and boosting its profit margins.

Brick-and-Click Strategies Some companies employ brick-and-click strategies, whereby they sell to consumers both at their own websites and at their own company-owned retail stores (or the stores of independent retailers). Brick-and-click strategies have two big appeals: They are an economic means of expanding a company’s geographic reach, and they give both existing and potential customers another choice of how to communicate with the company, shop for product information, make purchases, or resolve customer service problems. Software developers, for example, have come to rely on the Internet as a highly effective distribution channel to complement sales at brick-and-mortar retailers. Allowing end users to make an online purchase and download it immediately has the big advantage of eliminating the costs of producing and packaging CDs and cutting out the costs and margins of software wholesalers and retailers (often 35 to 50 percent of the retail price). Chain retailers like Walmart and Best Buy operate online stores for their products primarily as a convenience to customers who prefer to buy online and have the items shipped or available for pickup at nearby stores.

Many brick-and-mortar retailers can enter online retailing at relatively low cost—all they need is a web store for displaying products, accepting customer orders, and systems for filling and delivering orders. Brick-and-mortar retailers (as well as manufacturers with company-owned retail stores) can use personnel at their distribution centers and/or retail stores to fill and ship the orders of online buyers, and they can allow online buyers to pick up their orders at the nearest local retail store. Walgreens, a leading drugstore chain, lets customers order a prescription online and then pick it up at the drive-through window or inside counter of a local store—allowing customers to order online and then pick up their orders at local stores has become a popular strategy for many retailers because it enables them to better compete with Amazon. In banking, a brick-and-click strategy allows customers to use local branches and ATMs for depositing checks and getting cash while using online systems to pay bills, monitor account balances, and transfer funds. Bed Bath & Beyond uses its web store to display and sell the items stocked in its stores but also to display and sell a wider number of brands, colors, and selections in the same product categories that, for reasons of limited shelf space, are not available in its stores—such a strategy gives customers a much wider selection and boosts its online sales.

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Strategies for Online Enterprises A company that elects to use its website as the exclusive channel for accessing buyers is essentially an online business—all customer-related transactions occur at the company’s website. Thousands of enterprises have chosen this strategic approach, including Netflix, TripAdvisor, Quicken Loans, eBay, and Expedia. For a company to succeed in using online sales as its exclusive distribution channel, its product or service must be one for which buying online holds strong appeal. The strategies adopted by online enterprises must address several issues:

n How it will deliver unique value to buyers. Online businesses must usually attract buyers on the basis of low price, convenience, superior product information, build-to-order options, or attentive online service.