Supplementing the Chosen Competitive Strategy

Supplementing the Chosen Competitive Strategy

Strategic Alliances Joint Ventures Vertical Integration Outsourcing Mergers & Acquisitions

Cooperative Strategies• Strategic Alliance – formal

agreement between two or more companies in which there is a strategically relevant collaboration.

• Joint Venture – when two or more firms contribute resources to the creation of a third organization in an effort to pursue some mutually beneficial activity.

Advantages of Alliances/JVs

• Gain access to new global markets• Gain knowledge about unfamiliar

markets or cultures• Gain access or master new

technologies• Gain access to complementary

resources

Keys to Alliance/JV Success

• Picking the right partner• Sensitivity to cultural differences• Must be win-win• Managing the learning process • Maintaining flexibility

Who Makes a Geo?Geo Storm was actually manufactured

by Isuzu. The Storm is the Isuzu Impulse.

Geo Prizm = Toyota Corolla Geo Tracker = Suzuki Sidekick Geo Metro = Suzuki Esteem or Swift

w/hatchbackNo Geo cars were actually made by

General Motors. They were all imported from foreign manufacturers.

Vertical IntegrationOperating in more than one stage of the industry value

chain• partial/taper or full integration• forward or backwardBenefits

can not be held hostage – reduces buyer/supplier power

greater control over operations access to new business/technologies reduce procurement and sales efforts

Risks increased overhead, capital and administrative costs loss of flexibility different competencies may be required unbalanced capacities and increased risk

Vertical Integration• Will add value when:

• Enhance critical activities that lower costs or increase differentiation

• Benefits exceed the costs and enhances competitive capabilities

Outsourcing• Farming out specific activities to

others, allowing the firm to focus on more critical activities and core competencies

Outsourcing Works When:

• Others can do it better and cheaper• Not a core competency• Reduces the companies’ risk to

technology changes• Improves the company’s innovation• Streamlines operations

Mergers and Acquisitions

Reasons of Acquisitions

Cost Efficiencies

Geographic Expansion

Product/Market Extensions

Increased Speed

Lower Risk

Mergers and AcquisitionsProblems with Acquisitions

Integration of two firms

Overpayment/Debt

Overestimation of Synergy

Overdiversification

Managerial energy absorption

Become too large

Substitute for innovation

Mergers and AcquisitionsResults

Poor Performance

Who Wins?

Acquired FirmShareholders

Monday October 27th WSJ Bank of American – Boston Fleet

Financial BoA down $8.29, or 10%, BFF rose 23%

Anthem – WellPoint Health Networks Anthem down 8.2%, WellPoint up 8.8%

United Health – MidAtlantic Med Services UH down 4.9%, MAMS up 9.7%

Failures of Acquisitions30 - 40% average acquisition

premiumAcquiring firm’s value drops 4% in

the 3 months following acquisitions

30 - 50% of acquisitions are later divested

Acquirers underperform S&P by 14%, peers by 4%

3 month performance before and after 30% substantial losses, 20% some

losses, 33% marginal returns, 17% substantial returns

Why, then, do executives acquire?

Often, for personal reasonsFirm size and executive compensation

are relatedWhen do executives loss their jobs?

1) Acquired - larger firms harder to acquire

2) Performing poorly - employment risk is reduced as returns are less volatile

Competitive DynamicsCompetitive action within an

industry Strategic and tactical action does

not occur within a vacuumWhat industries have high

competitive dynamics?What sort of actions/tactics are

taken?

Drivers of Competitive Dynamics

numerous/equally balanced competitors slow growth high fixed/storage costs lack of differentiation/switching costs high exit barriers Etc…

Rivalry CompetitiveDynamics

Competition in the Pharmaceutical Industry

• Reps quadrupled to 120K last 10-15 years• 12B on sales force, 2.76B on ads• Managed care bet – Pfizer from 14th to 1st

• 529 visits yearly, average length – 2.5 min• 8% remember

• Glaxo can reach 80% of the Drs in a week• “Is this necessary. No, but if my

competitors do it and I can’t, then I’m at a disadvantage. This has been an arms race in the worst possible manner.”

Types of Competitive Responses

• First Movers - initial competitive action• advantages and disadvantages

• Fast Followers or Capable Competitors- respond quickly to first movers

• Late Entrants - day late and a dollar short