Chapter 6 Supplementing the ... Choices

7/23/2019 Chapter 6 Supplementing the ... Choices

1/20

Supptementing

the Chosen

Co

m

petitive

Strategy

-

Oth

e

r

lmportant

Business

Strategy

Choices

Chapter Learning

Obiectives

LOl.

Gain

an understanding

of how strategic

atliances

and

cotlaborative

partnerships can bolster a

company's

competitive capabilities

and

resource

strengths.

LO2.

Become

aware

of

the strategic benefits

of

mergers

and

acquisitions.

LO3.

Understand

when a

company

should consider

using

a vertical

integra-

tion strategy

to

extend

its

operations

to more stages of

the

overall

industry

value chain.

LO4.

Understand

the condtions

that

favor

farming

out

certain value

chain

activities

to

outside vendors and strategic

alties.

LOs.

Learn whether

and when

to

pursue

offensive strategic

moves to

improve

a company's market

position.

LO6,

Learn whether

and when

to emptoy

defensive

strategies

to

protect

the

companyb

market

position.

LO7.

Recognize when

being

a

first-mover

or a

fast-follower

or

a

[ate-mover

can

lead

to competitive

advantage.


2/20

117

hapter 6

Supplementing

the

Chosen

Competitive Strategy-other

lmportant

Business

Strategy

Choices

Oncc

a

company

has

settled

on which of

the

five

basic

competitive

strategies

to emplov attention

turns to what

other strategic actions

t

can

take to comple-

ment

its

competitive

approach

and round out

its

business

strategy.

As dis-

cussed

in

earlier

chapters, a companv's overall

business strategy

includes

not

only

the

details of

its

competitive strategy

to

deliver

value

to customers

in a

unique

way,

but

also any

other

strategic

initiatives

that can

promote

comPeti-

tive

advantage.

Several

measures

to enhance

a

comPany's stratcgy have to

be

considered:

.

Whether

to enter

into

strategic

alliances or

partncrship

arrangements

with

other enterprises.

.

Whether to bolster

the

company's

market position via

merger

or

acquisitions.

.

Whether

to

intcgrate

backward or forward into more stages of

the

indus-

try

value chain.

.

Which value chain

activities,

if

any,

should

be

outsourced.

.

Whether

and

when

to go

on the offensive and

initiate

aggressive strategic

moves to

improve

the

company's

market

Position.

.

Whether

and

when

to

employ

defensive strategies

to

protect the

compa-

ny's market position.

.

When to undertake stratcgic

moves-whether

it is advanta;eous to be

a

first-mover or

a fast follower

or

a late-mover.

This chaptcr

presents

the

pros

and cons of each of these

business strategy

choices.

Strategic

Altiances

and

Collaborative

Partnershps

Companics

in

all

types

of

industries have

elected

to

form strategic alliances

and partnerships

io add to their accumulation of

resources and competitive

capabilities

and

strengthen

their

competitiveness

in

domestic

and

interna-

tional markets. Strategic

alliances

allow

companies

to

correct particular

resource gaps

or

deficiencies

by

part-

$rategc alliances are collaborative

arrange-

nering

with

other

enterprises

having

the

missing

ments where

two or

more companies

oin

forces

know-how

and capabilities.

Thus,

a

strategic

alliance

to achieve mutually beneficial

strategic

out-

is a

formnl

ngreement bettueen

tloo or

ffiore separnte

compa-

comes.

The

competitive

attracton

of

allances

is

nies

in

zuhich

there

is strategically

releannt

collaboration

of

in

allowing companies

to

bundle resources

and

some sort,

joint

contribution

of resources,

shnred risk, slured

competences

that

are more

valuable in a

ioint

control,

and mutunl

dependnce, Collaborative

relation-

effort an

when

kept

separate.

ships

between parbners

may

entail

a contractual

agree-

ment

but

they commonlv

stop short of

formal ownership ties

between

the

partners

(although

thcrc

are

a feu'strategic

alliances where

one or

more allies

havc

minority

ownership

in

certain

of

the

othe

alllance

members).

The most

common

reasons

why

companies enter

into

strategic

alliances are

to

expedite ihe development

of promising

new

technologies

or products,

to

overcome

deficits

in their

own

technical

and

manufacturing

expertise,

to bring


3/20

Part

One: Section

C: Crafting

a

Strategy

together the personnel

and expertise needed

to

create desirable

new

skill sets

and

capabilities, to

improve

supply chairr efficiency, to gain economies

of

scale

in

production

and/

or

marketing,

and to

acquire

or improve market access

through

joint

marketing

agreements.l

In many

instances, the resources,

capa-

bilities, skills, and knowledge

bases

of

parbner firms

are more

valuable when

bundled in

a

joint

effort

than

when kept

separate.

Companies

in

many different

industries

all

across

the

world

have

made

strategic alliances a core

part

of their

overall

strategy;

U.S. cornpanies alone

arrnounced nearly

68,000 alliances frcrn 7996 through

2003.':

Cenentech, a

leader in

biotechnology

and

human

genetics, has

formed R&D

alliances with

over 30

companies

to boost its

prospects

for

developing new

cures

for vari-

ous diseases and ailments.

United Airlines, American

Airlines,

Continental,

Delta,

and

Northwest

created an

alliance

to form

Orbitz,

an

Internet

travel

site

that

enabled

them

to compete head-to-head

against Expedia

and Travelocity

and,

further,

to

give

them more

economical

access

to travelers

and vacationers

shopping online for

airfares,

rental

cars,

lodging,

cruises,

and

vacation

pack-

ages.

johnson

&

|ohnson

and

Merck

entered

into

an

alliance to

market

Pepcid

AC;

Merck

developed the

stomach distress

remedy and

Johnson

&

Johnson

functioned

as

marketer-the

alliance made Pepcid the best-selling

heartburn

and

acid

indigestion

remedy

sold

in

the United States.

Failed

Strategic Alliances

and

Cooperative

Partnershps

Most

alliances u-ith

an objective of technology sharing

or providing

market

access turn

out to be temporary,

fulfilling

their purpose after

a few years

because

the

benefts

of mutual learning

have

occurred.

Although

long-term

alliances

sometimes prove mutually

beneficial, most

partners

don't hesitate

to terminate the

alliance

and

go

it

alone

r+'hen

the

payoffs

run

out.

Alliances

are more likely to be krng-lasting when

(1)

they involve

collaboration

with

suppliers

or

distribution

allies,

or

(2)

both

pafties

conclude that

continued

col-

Iaboration

is

in

their mutual interest,

perhaps because

new

opportunities

for

Ieaming

are emerging.

A

surprising number

of

alliances never

live

up to expectations. In 2007,

a Hnroard

Busness

Rzrlezu

article reported

that

even

though

the

number

of

strategic

alliances incrcases

by about

25

percent annually,

about 60 percent

to 70 percent of alliances

continue to fail

each year.3

The

hgh

"divorce

rate"

among

strategic allies has several

causes,

thc

most

common of

which

are:a

'

Michael

E. Porter,

fhe

Compettve

Advdntoge

of

Notions

(New

York:

Free

Press,

r99o),

p. 66.

For

a dscussion

of

how

to realize

the advantages

of

strategic

partnerships,

see

Nancy

J.

Kaplan

and

lonathan

Hurd, "ReaLizing

the

Promise

of

Partnerships,"

Journ0l

of

?usness Strotegy 23, no.

3

[May-]une

zooz),

pp. j8-42;

Salvatore Parise

and Lisa Sasson,

"Leveraging

Knowtedge Manage-

ment

across Strategic Alliances,"

lvey

9usness

Journol

66,

no.

4

(March-April

zooz),

pp.

4rq7;

and Davd Ernst and

James

Bamford,

"Your Alliances Are Too

Stable," Horvard Business Revew

8?,

no.

6

(fune

zoo5)

pp.

r33-t4r.

'Jeffrey

H. Dyer,

Prashant Kale,

and Harbir

Singh,

"When

to

ALly

and When

to

Acquire,"

Horvard

Business Revew

82,

no.

t/8

(July-August

zoo4),

p.

ro9.

,

Jonathan

Hughes

and

Jeff

Weiss,

"Smple

Rules for

Making Alliances Work,"

Horvotd

Busness

Review

85, no.

rr

(November

zooT),

pp.

tzz t3t.

a

Yves L.

Doz and

Gary

Hamel, Allance

Advontoge;

The Aft

of

Creotng Volue

thrcugh

Porfnering

(Boston:

Harvard Business School Press,

1998),

pp.

16-18.


4/20

Chaptcr 6

Supplementng

the

Chosen

Competitive Strategy-Other

lmportant

Business

Strategy

Choces

.

Divergin8 objectives

and

priorities.

.

An

inability to

work

rt'ell

together.

.

Changin8 conditions

that

make

the

purpose

of the alliance

obsolete.

.

The

emergence

of

more attractive technological

paths.

.

Marketplace rivalry

betr.t'een one

or more allies.

Experience

indicates

thal

allinnces stand n

reasonnble chnnce

of

helping

a

company

reduce

cotnpetitiae disndtsantage

but

oerr

rnrely

haae

they

protted a

strntegic ottion

for

gnining

n

Juruble comteliliae

edge ouer

rianls.

The Strategic Dangers

of

Relying

on Alliances

for

Essential Resources

and

Capabitities

The

Achilles'

heel of allianccs and

cooperative

strategies is

becoming dependent

on

other

companies

for

ssarf

ial expertise

and capabilities.

To

be

a

market leader

(and

pcrhaps even

a

serious

market

contender),

a company

must ultimately

develop

its

own

resources and capabilities

in

areas

where

internal

strategic

con-

trol

is

pivotal

to

protecting

its

competitiveness

and

buildrng competitive

advan-

tage. Moreover, some

alliances

hold

only

limited

potential because

the

Partncr

guards its most

valuable

skills

and expertise;

in

such

instances, acquiring or

merging

lvith a

company

possessing the dcsired

know-how and

resources is a

better solution.

Merger

and

Acquisition Strategies

Mergers and acquisitions

are

especially

suited for situations in which strategic

alliances or

partnerships

do

not

go

far enough

in

pro'r'iding

a

company

with

access

to

needed

resources

and

capabilities.5

Olr,'nership

ties

are

more

Pe

ma-

nent

than

partnership ties, allowing

the

operations

of

the merger/acquisition

participants

to

be tightly

integratecl and creating

more

in-hottse control and autonomy

A nterger

is

thc

com-

combining

the operations

of

two companies,

via

bining of t14'o or

more

companies

into

a

single

:ntity,

merger

oiacquisition,

is

an

attracttve

strategrc

with

the

newly

created

company often

taking

on a

new

option

for

achieving

operating

economies,

name. An

ncquisition

is

a

combination

in which

one

strengthening

the

resulting company's

compe-

company, the

acquirer,

purchases

and

absorbs the

tencies

and

competitiveness,

and opening

up

operations of

another,

the

acquired. The di

:rer-rce

avenues

of

new

market

opportunrty.

between

a merger and an acquisition

relates

more to

the

details

of ownership,

management control,

and financial arrange

rents

than

to

strategy and competitive advantagc. The

resources

and compe

itive

capabilities of the

newly

creatcd enterprise

end up much the same w ther

the combination

is

the result of acquisition or

merger.

Merger and acquisition strategies

typically set sights on

achieving any of

five

obiectives:

'

For

an excellent discussion of

the

Dros

and cons

of

alliances

versus

acquisitions,

see

jeffrey

H.

Dyer, Preshant

Kale,

and

Harbir Singh,

"When

to

Ally

and

When to Acquire," Horvard Busne

s

Revew

82,

no.

4

0uly-August,

zoo4),

pp.

ro9-5.

For

an excetlent review of the strategic objectves

of

various

types

of

mergers and acquisitions

and

the

managerial chaLlenges that dfferent knds of mergers and acquisition

present,

see

loseph

L. Bower,

"Not

All M&As

Are

Al

ke-and

That Matters,"

HaNa

d Business Review

79,

no.

3

(vlarch

zoor),

pp.

93-ror.


5/20

"1.

To

crente

a more

cost-efficient operation out of the combined companies-Whcn

a

company acquires another

company in

the

same

industry,

therc's usually

enough

overlap

in

operations that certain inefficient plants can be closed

or

distribution

and

sales

activities

can be partly

combined and dorvn-

sized.

The

combined companies may

also

be able

to reduce

supply chain

costs bccause of buying in

greater

voiume

from

common

suppliers.

Like-

r.r.ise,

it

is

usually

feasible

to

squcezc

out

cost

savings

in

adminisirative

activities, again by

combining

and

downsizing such activities

as

finance

and accounting,

information

technology, human

resources,

and

so on.

2.

To

expand a company's geographic

coaerage-4ne

of

the best

and quickest

ways

to expand

a company's

geographic

coverage s

to

acquire rivals

w.ith

operations

in

thc desired locations. Food

products

companies

like

Nestl, Kraft, Unilever, and Procter

& Gamble have made acquisitions

an

integrai

part of their strategies to expand internationally.

3.

To

extend the

company's business

into

nezu

prodttct

categories-Many times

a

company

has

gaps

in its

product

linc

that need

to be filled. Acquisition

can be

a

quicker

and more

potent

\4'ay

to broaden

a

company's product

Iine than going

through the

exercise

of introducing a

company's own

new

product

to fill the gap. PepsiCo's

Frito-Lay division acquired Flat Earth,

a

maker

of fruit and

vegetable

crisps,

to

broaden its lineup of

snacks

that

appeal

to

heath-conscious

consumers. Coca-Cola added

to

its lineup

of

healthy

bcvcrages n'ith the

$4.1

billion acquisition

of Glacau

ir2007.

Glacau

VitaminWatcr

was the leading

enhanced water brand in the

United States.

4.

To gain

quick

access

to neru

technologies or other resoLtrces

nnd competitiue

capabilities-Making

acquisitions

to

bolster

a

company's technological

know-how or to expand its

skills

and

capabilitics allows

a

company to

bypass

a time-consuming

and perhaps expensive internal effort to

t:uild

desirable new

resource

strengths. Fom

2000

through April 2009, Cisco

Systems

purchased

85

companies to

give it

more technological

reach

and

product

breadth, thereby

enhancing its

standing as the world's

biggest

providcr of hardware,

software, and

services

for

building and operating

Internet networks.

5.

To

lead the conaergence

of industries uose

bowtdaries are

beinp

blurred ba

changing teclutologies

and

neu mrket

opportunif

ies-Such acqurisitions are

the result

of a company's

management

betting that two

or

lnore distilrct

industries

are

converging

into

one and deciding

to

establish a strong posi-

tion

in

the

consolidating

markets

by

bringing

together the

resources

and

products

of

several

different companies. Microsoft

has

made

a

scrics

of

acquisitions that have

enabled

it to

launch

Microsoft TV Internet

Protocol

Television

(IPTD.

Microsoft TV

allows

broadband

users to use their

home

compuiers or

Xbox

360 game

consoles to watch live programming, video

on demand, view pictures,

and

listen

to music.

Conccpts &

Connections

6.1.

describes how

Clear Channel Communications

has used

acquisitions

to build a

leading global

postion in outdoor advertising

and radio

broadcasting.


6/20

lementing the Chosen

Competitive

Strategy-Other lmportant

Buslness

Strategy

Choices

t9r

CLEAR

CHANNEL

COMMUNICATIONS_USING

MERGERS

AND

ACQUISITIONS

TO

BECOME

A

GLOBAL MARKET

LEADER

In zoo9,

Clear Channel

Communicatons

was

among the

worldwide

leaders

in

radio broadcasting

and

outdoor

advertising.

Ctear Channel

owned and

operated

more

than

1,ooo

radio stations in

the

United

States

and about

goo,ooo

outdoor

advertsing

displays

across the world.

The

company,

which

was

founded

in

r97z

by

Lowry

Mays

and Billy

Joe

McCornbs,

got

its start

by

acquiring

an

unprofltabLe

country,music

radio

station in

San

Antonio,

Texas.

Over the next 10

years,

Mays

learned

the radio

business

and slowly

bought

other

rado

stations n a

variety

of

states.

When

the

FederaI

Communications Commission

loos-

ened the rules regarding

the abitity of

one company to

own both

radio

and

TV

statons in

the late

198os,

Clear

Channel

broadened

its

strategy

and

began acquiring

smatl,

struggling

TV

stations.

By 1998,

Clear

Channel

had

used

acquisitions

to

build

a leadng

position

in radio

and

television

stations.

Domestlcally,

it

owned,

programmed,

or sold

airtime for

69

Al\4

radio stations,

135 FM

stations,

nd

rB TV

>tlio^s in

8 locdl

rarkets

n

24

staTes.

ln

ry97,

Clear

Channel

used

acquistions

to establsh

a major

position

n

outdoor

advertising. lts first

acqusi-

tion

was Phoenix-based

Eller Media Company,

an

outdoor

advertising

company with

over

roo,ooo billboard

facings,

This

was

quickly

followed

by additional

acquisitions

of

outdoor

advertising companies,

the

most important

of

which

were ABC

0utdoor in

Milwaukee.

Wisconsin;

Paxton

Communcations

(with

operations n Tampa

and

Orlando,

Florida);

Universal Outdoor;

and the More

Group, with

outdoor

operations and

9o,ooo

dsplays

in z4

countries.

Then

in

October

999,

Clear

Channel made

a

major

move

by

acquring AM-FM, Inc.,

and changed

its

name

to Clear

Channel

Communications;

the AM-FM

acouisiton

gave

Ctear Channel

operations in

32

countries, includ-

ing 83o

radio

stations, 19 TV

stations,

and more

than

425,ooo

outdoor disptays. In

2ooo

Clear Channel

broad-

ened ts media

strategy

by acquiring

SFX Entertanment,

one

of the world's

Largest

promoters,

producers,

and

pre-

senters

of live entertainment

events.

ln zoo6,

Clear

Channel management

recognized

that

the company's

outdoor

advertising and radio

businesses

were

by far

the company's most

profitable

businesses

and began a

search for

buyers of its lesser

performing

busnesses.

The

company spun

off of

its

live

entertain.

ment

busness

in

zoo6

and divested its

56

television

stations

ln

zoo8.

1n

zoo9,

Clear Channel

operated

1,166

radio

stations

and

owned and

operated more

than

z3o,ooo

billboards in

the

United States and 670,000 out-

door displays

in 36

other

countries.

Sources: www.clearchannel.com,

accessed May

2oo8;

and

BusinessWeek,October

19,

1999,

p,

56.

Why

Mergers

and Acquisitions

Sometmes

Fail

to Produce

Anticipated

Results

AII too frequc.ntlri rrrergers

arrcl acquisitions

clo

not produce

the hoped for

outcomes.; Cost savings

may prove smaller

than

expectecl.

Gains

in

competi-

tive

capabilities mav

takc.

suhstantially longer

to realize,

or

worse, mcry

never

malerialrze

.tt.tll.

Efforis

to mesh

thc

corpt>rate

crrltur.es can

sLrll olrt clue

to

fclrmrdable

resistrncc.

frorn

organizatirr mc.mbcrs.

Nlanagels

aud

er-nplovees

at the acrluirerl

cornpany

rnry

rglle forcefully for

corrtintring

to

.lt

certalr-r

thir-rgs

tlre

n'av

they n,ere

done

prior

to

the

acrr-risition.

And

kcy

c.rnployees at

the

actlttirccl

colxPaltv

can rlurckly Lrecome

c1rscuch.rnted

and leave.

,

For

a more

expansive cliscussion,

see Dyer, Kale,

and Singh,

"Whcn

to Ally and

Whe

r

to

Acqu

re,"

pp.

1o9

11o.


7/20

Part

One: Section

C: Crafting

a

Strategy

Anumber of

previously

applauded

mcrgers

/

acquisitions

have yet to

live up

to expecta

tions-prominent

examples

include the merger of

Sprint

and

Nextel

and FedEx's

acquisition

of

Kinkos.

The

merger

of

Daimler

Benz

(Mercedes)

and Chrysler

was a

failure, as was Ford's

$2.5

billion

acquisition

of

Jaguar

and

its

$2.5

billion

acquisition of

Land

Rover

(both

were sold

to India's

Tata

Motors in

2008

for

$2.3

billion).

eBay's 52.6

billion

acquisition

of Skype

(an

Internet

phone service

companv) in

2005

proved

to

be

a

failure

as

well-eBay

wrote off $900

million

of

its

Skvpe

investmcnt

in 2007

and announced

it u'ould

sell Skvpe

iu

2010.

Vertical

lntegration

:

Operating

across

More Industry

Value Chain

Segments

Vertical integration

extends

a

firm's competitivc

and operating

scope

n-ithin

the same

irdustry. It

involves

expanding

the

firm's range of value chain

activi-

ties

backward

into

sources of

supply

and/or

forward toward

end

users.

Thus,

if

a

manufacturer invests

in

facilities to

produce

cer-

A

vertical ntegration

strategy

has appeal

oniy

tain component

Palts

that

it formerly

purchased

from

if

it

signifrcantly

strengthens

a

frrm's

competitiv

outside

suppliers

or

if it opens

its own

chain of

retail

position

andlor boosts

ts

profitability.

stores to

market

its products

to

consumers,

it

remains

ur esserrhally

the

same

industry

as before.

The only

change

is

that it

has

operations

in two

stages

of

the industry

value

charn.

For

example,

pair-rt

manufacturer

Shcrwin-Williams

remains

in the

paint

business

even

though

it

has

integratcd

forward into retailing

by operating

more

than

3,300

retail

stores

that

market

its

paint products

directly

to

consumers.

Vertical

intcgration

strategies can aim

atfull

itrtegratiorl

(participating

in all

stagcs

of

the

industry

value chain)

ot

partial inLegration

(building

positions

in

selecied

stages

of

the

industry's

total value

chain). A

firm

can

Pursue

vertical

irtegration by

starting

its

own

operations

in

other

sta;es in the

industrv's

activity

chain or

by acquiring

a

company

alreadv

performing

the

activties.

The Advantages

of

a

Vertical

Integration

Strategy

The

tzuo

best

reasons

for

in'oesting

comPnny

resoLffces

in'oertical

integration

are

to

strengtlrcn the

firm's

competitirte

position and/or

to boost

its profitability.E

Vertical

integration has no real

payoff nnless

it produces sufficient

cost

savings to

justlfy

the extra

im.estment, adds

materially

to a comPany's

technological

and com-

petitive

strengths,

and/or

helps

diffcrentiate

the comPany's

product offering.

INTECRATING BACKI AI(D

'I

O

ACHIEVE

CREATI-I{

CON4PET-

ITIVENESS

It

is

harder than one

might

think to

generate cost

savings

or boost profitability

by integrating

backward

into activities such

as parts

and components manufacture.

For backward

integration

to be a viable

and

E

See

Kathryn

R. Harrlgan,

"Matching Vertical

Integration

Strategies

to Competitive

Conditions,"

Strotegc

Management

Journol

7,

no.

6

(Novem

ber-December

1986),

pp.

ss-s16;

for

a

more

extensive

discussion

of

the

advantages

and disadvantages of

vertcal

integration, see

John

Stuckev

and David

White,

"When

and

When

Not

to

VerticalLy Integrate," Sloan

Monogement

Revlew

(Spring

ry9t,

pp.

7r-83.


8/20

Chapter e Supplementing the

Chosen

Competitve

Strategy-0ther

lmportant

Eusiness Strategy Choices

profitabie strategy, a company must be able to

(1)

achieve the

same

scalc

economies

as outside suppliers and

(2)

match or

beat

suppliers' production

efficiency with no drop-off in quality. Neither outcome is easily achieved.

Tcr

begin

with,

a

company's

in-house requirements

are often too small to reach the

optimum

size

for

low-cost

operation-for

instance,

if it takes

a

minimum

pro-

duction

volume

of

1

million

r.rnits

to

achieve

scale

economies and

a

company's

in-house requirements

are

just

250,000

units,

then

it

falls

r+.ay

short of being

able

to

match

the

costs

of outside suppliers

(who

may readily

find

buyers

for

1 million

or more units).

But that

said,

there

are

still occasions

when

a

company

can improve

its

cost

position and

competitiveness

by performing a broader range

of value

chain

activities

in-house rather

than

having

these activities performed

by

outside

suppliers. The best potential for being able to reduce costs via a backward

integration strategy

exists

in

situations

where suppliers have very large

profit

margins, where

the

item being supplied

is

a major

cost

component, and where

the

requisite

technological skills are easily mastered

or

acquired. Backward

vertical integration

can

produce a differentiation-based

competitive advanta;e

when performing activities

intemally

contributes

to

a

better-quality

product/

service

offering,

improves

the caliber of customer

service,

or in other

ways

enhances

the performance

of

a

final

product.

Other

potential

advantages

of

backward integration include

sparing

a

company

the uncertainty

of being

dependent

on

suppliers

for

crucial components or support

services

and

lessen-

ing a company's vulnerability to

powerful

suppliers

inclined to

raise

prices at

every opporturiity. Panera Bread

has

been quite successful with a backward

vertical integration strategy that involves

intemally

producing fresh dough

that

company-owned

and franchised bakery-cafs use in makirg

baguettes,

pashies,

bagels

and

other

types

of

breacl-the company

earns

substantial prof-

its from producing both

these

items internally rather

than

having

these

sup-

plied by outsiders.

Furthermorc,

Panera Bread's vertical integration sategy

made good competitive sense because it not

only

has helped lower

store

oper-

ating

costs,

but

also has

ensured

consistent

product quality irr the company's

1,185 Iocations in

the

United States.

IN

I

ECITAI'INC

FOI(WAITD TO

ENHANCE

CON,II'ETITIVENESS

Vertical

integration into forward

stages of

the rndustry value

chain

allows

manufacturers to gain

better access to end

users,

improve market visibility,

and include

the end user's purchasing cxpcrience

as a

differentiating feature.

ln many industries, independent sales agents, whtrlesalers, and retailers han-

dle competing brands

of the

same

product

and have

no

allegiance to any one

company's

brand-they

tend

to

push

whatever

offers

the

biggest

profits. An

independent insurance

agency,

for

example,

represents

a

number

of different

insurance

companies

and tries to

find

the best match between a

customer's

insurance requirements

and.

the

policies

of

alternative insurance

companies.

Under this affangement,

it

is possible an agent

will

develop

a

preference for

one company's policies

or underwriting

practices

and neglect

other

repre-

sented insurance

companies.

An insurance

company

may

conclude,

therefore,

that it is better off integrating forward and setting up its own local sales offices.

The insurance

company also has the ability to

make

consumers'

interactions


9/20

C: Crafting

a

Strategy

with

local agents and office personnel a differentiating

feature. Likewise,

apparel

manufacturers as varied as Ralph Lauren and Nike have

integrated

forn'ard into retailing by operating full-price stores,

factory

outlet stores,

and

Tntemet

retailing

Web

sites.

FORWARD

VERTICAL

INTEGRATION AND INTEI{NET

I{ETAILINC

Bypassing

regular

wholesale/retail

chamels

in favor

of

direct

sales

and

Inter-

net retailing

can

have appeal

if

it lowers distribution

costs,

produces

a

relative

cost

advantage over certain

rivals,

offers

higher margins,

or

results in lower

selling

prices

to end

users. In addition, sellers are compelled to

include

the

Internet

as

a retail chael when a sufficiently

large

number

of

buyers in an

industry prefer to make purchases online.

However, a

company

that is vig-

orously pursuing online

sales to

consumers

at

the same

time that it is also

heavily promoting

sales to

consumers through its

network

of

wholesalers

and

retailes

is

competing

directly against its distribution

allies. Suc}.

actions consti-

tute

channel

conflict and

create

a tricky

route

to

negotiate. A

company

that is

actively

trying

to grow

online

sales

to

consumers

is

signaling

a weak strategic

commitment

to

its dealers

and

a

willingness

to cannibalize dealers'

sales

and

grozuth

potential.

The

likely result

is

angry

dealers

and loss of

dealer

goodwill.

Quite

possibly,

a

company

may

stand

to lose

more

sales

by offending its

dealers

than

it

gains from its own online

sales

effort. Consequently, in industies where the

strong support and

goodwill

of

dealer

networks is

essential, companies

may

conclude

that it is important to avoid chanrel conflict and that

their

Web site

should

be

designed to

partner

with dealers rather

than

compete with

them.

The Disadvantages of a

Vertical Integration

Strategy

Vertical integration has

some substantial

drawbacks beyond the

potential

for

channel

conflict.e The

most serious drawbacks to

vertical integration include:

.

Vertical integration boosts a

frm's

capital inaestmenf

in the industry

.

Integrating into

more

industry

value chain segments

increases

business

risk

industry growth

and

profitability

sour.

.

Vertically integrated

companies

are

often

slow to embrace technological

aduances

or more efficient production methods when they

are

saddled

with

older technology or facilities.

.

Integrating

backward

potentially

results in less flexibility in accommo-

dating shifting buyer

preferences

when a new product design doesn't

include

parts and components that the

company

makes

in-house.

.

Vertical integration

poses

all kinds

of

capacity matching problems.

In motor

vehicle

manufacturing, for example,

the

most efficient

scale of

operation

for making

axles

is different from

the

most

economic

volume for radiators,

and different yet again for both

engines

and transmissions. Consequently,

integrating

across several

production

stages

in

ways

that

achieve

the

Iowest

feasible

costs can be a

monumental

challenge.

e

The reslience of vertical integration strategies despite the disadvantages s discussed

n

Thomas

Osegowitsch

and

Anoop Madhok,

"Vertical

Integration ls Dead,

or

ls lt?" Eusiness Horizons

46,

no.

z

(March-April

zoo3),

pp.

z5-35.


10/20

Chapter 6

Supplementng

the

Chosen

Competitive Strategy-Other lmportant

Business

Strategy Choices

.

Integration

forward

or

backward

often

requires

the

dauelopment

of

neu

skills and business cnpabilities.

Parts

and

componcnts manufacturing, assembly

operations,

wholesale

distribution

and

retailing,

and direct

sales

via

the

Internet

are

diffcrcnt

busi-

nesses with

different kev

success

factors.

In

today's

world

of close

relationshrps

wth

suppliers and efcent supply chain manage-

ment,

very few

businesses can make

a case

for

ntegrating

backward

into

the

business

of

suppliers.

Outsourcing

Strategies:

Narrowing

the

Boundaries

of the Business

Absent the

ability to

strengthen the

firm's

competitive

position or boost

its

profitability, integrating forward or backward into additional industry value

chain

stages

is not

likelv

to be an attractive strategy option.

Outsourcing

for-

goes

attempts to perform

certain

value

chain activities

internallv

and instead

farms them

out to outside specialists and

strategic

allies-

Outsourcing

makes

strategic sense

whenever:

.

An

nctiaity

cnn

be

performed better

or

more

chenply

by

otttside specialists.

Nikon-by

outsourcing the distribution

of

digital

cameras to UPS-

gained the capability to deliver its

cameras

to rctailcrs in

the

United

States, Latin America, and

the

Caribbean in as little as two days after

an

order

u'as placed

even

though

its

manufacturing

facilities were located in

Japan,

Korea,

and

Indonesia.

.

The

actaity

is not crucial to the

t'irnt's

ability

to achieae

sustainable conryetitiae

adaantage and won't hollozu out its capnbilities,

core

competencies,

or technical

knou-how.

Outsourcing of support activities such as maintenance

sen'ices,

data processrng

and

data storage,

fringe benefit management, and

Web site

operations

has become

commonplace. Colgate-Palmolive, for irstance,

has

been able to reduce

its

information

technology operational

costs

by

more

than 10

percent per

year

through

an

outsourcing agreement with IBM.

.

lt itnprooes

n

coffipany's

ability to

inno'oate.

Coliaborative partnerships with

worldclass

sr.rppliers

who have

cutting-edge

intellectual

capital and are

early

adopters

of

the

latest technology give

a

companv

access

to

eve

bet-

ter parts and

components.

.

It allotus a compnny to

concentrte on

its

core business, lez,erage its

ker

resources

and core competencies, and do

ezten better

zuhat it

already

does best. A

com-

pany is

better able to build and

develop

its

own competitively valuable

competcncies and capabilities

',vhen

it

concen-

A

company should

generally

not

perform

any

value chan actvity

internally

that can be

ource

ffliJffl,ff:ffift1'.:'JiliJ;i:'f]'

handbag

production to 40 contract manufacturers

particular

activity

s

strategically

crucal.

in 15

countries.

1'lll

lilC I{lSK

OF

AN

OUTSOL,RCINC STRAT[GY

Thcbiggcstdan-

ger of outsourcing is that

a

company

will farm

out

the wrong

types

of activitics


11/20

t9e

Part One: Section

C:

Crafting

a

Strategy

and thereby

hollow

out

its

own

capabilities.lO

In

such cases,

a

company

loses

touch with the

very activities

and expertise

that over

the long run dctcrmine

its

success.

But most

companies

are

alert

to this danger and take actions

tcr

protect

against being

held

hostage

by outside supplicts.

Cisco Systems

guards

against

loss

of control

and protects

its manufacturing expertise by designing

the production

methods that its contract manufacturers

must

use. Cisco

keeps

the

source code

for

its

designs

proprietary, thereby

controlling

the

initiation

of all improvernents and safeguarding

its

innovations from

imitation.

Further,

Cisco

uses

the Internet to

monitor

the

factory operations of contract

rnanufac-

turers around the clock,

and

can

therefore

know

immediately when

problems

arise

and decide

'n'hether

to

get

involved.

Strategic Options to

lmprove a Companfs

Market Position-The

Use

of Strategic

Offensives

Beyond stratcgic options

for

expanding

a company's business scope, enhanc-

ing

its

collection of

resources

and capabilities,

improving

efficiency,

gaining

economies

of

scale, and

accessing

new markets,

matlagers must consider

strategic options

for improving a company's

market

prosition.

There are

times when

a

company

should be

aggressiae and

go

ort

the

offensiae.

Strategic

offensives

are

called

for when

a

company

spots opportunities

to

gain profit-

able

market

share

at the expensc of

rivals

or

when a company has no

choice

but to try to

whittle away at a

strong

rival's competitive

advantage.

Compa-

nies like Walmart, Toyota, Microsoft, and Google

play hardball, aggressively

pursuing cornpetitive advanta;e and trying

to

reap the benefits a competi-

tive

edge offes-a

leading

market

share,

excellent

profit

margins,

and

rapid

growth.lr

Choosing

the Basis

for

Competitive

Attack

As

a

general rule,

strategic

offensivcs should be grounded

in

a

company's com-

petitive assets and strong points

and

exploit competitor

weaknesses.r2

Ignoring

the

need to tie

a

strategic

offensive

to

a

company's com-

The

best

offensives use a company's

resource

petitive

strengths and

what it does best

is

like going to

strengs to

attack

rivals in

those

competitive

war n'ith a popgun-the

prosPects

for

success

are

areas where

ihey

are

weak.

dim. For

instance, it

is

foolish for

a

company

with rela-

tively high

costs to employ

a price-cutting offensive.

''

For

a

good

discussion

of

the problems that

can arise

from outsourcng,

see Jrome Barthlemy,

"The

Seven

Deadly

Sins of

Outsourcing," Acodemy of

Manogement Executive

r7,

no.

z

(May

zoo3),

pp.

87-roo.

"

For

an excellent discussion

of

aggressive offensive strateges,

see George Statk,

Jr.,

and

Rob

Lachenauer,

"Hardball:

Five Killer Strategies for Trouncng

the

Competton," Horvard

Busness

Revew

82,

no.

4

(April

zoo4),

pp.

6z-7r. A

discussion

of

offensive strateges

particularly

suitable

for industry

leaders is

presented

in

Richard D'Aven,

"The

Empire Strkes

Back: Counterrevolu-

tionary Strategies

for

Industry Leaders," Harvard Busness Revlew

80,

no,

rr

(November

zooz),

pp.

66

74.

"

For

an

excellent discussion

of

how

to

wage offensives against strong rivals, see

David

B.

Yoffle

and

Mary Kwak,

"Mastering

Balance: How

to

Meet

and

Beat

a Stronger

Opponent," Calforno

Monogement

Revew

44,

no.

2

(Winter

2oo2),

pp.

8-24.


12/20

Chapter 6 Supplementing

the

Chosen

Competitive


Business Strategy Choices

Likewise,

it is ill-advised

to

pursue

a

product innovation

offensive

without

having proven

expertise in R&D.

new

product

development,

and

speeding

new

or

improved

products

to

market.

The

principal

offensive

strategy options include the following:

l. Attacking the

competitiue tueaknesses

of

riaals.

For example,

a company

with

especially good

customer

service capabilities

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.

2, Offering

an

equally

good

or better product

at a lorner price. Lower

prices

can

pro-

duce

market

share

gains

if

competitors offering similarly performing

prod-

ucts don't

respond

with price

cuts of

their own. Price-cutting

offensives are

best initiated

by companies

that

havefrsf

achieaed

a

cost adpantage.l3

3.

Pursuing continuous product

innooation to drato sales and market

share away

from

less innouatiae

ritsals.

Ongoing introductions of new/improved

prod-

ucts can

put rivals under

tremendous

competitive

pressure,

especially

when

rivals' new product

development

capabilities are weak.

4.

Leapfrogging

competitors

by being the

first

to market with next

generation

tech-

nology or producls.

Microsoft got

its next-generation Xbox

360

to

market

a

full

12

months ahead

of Sony's PlayStation

3

and

Nintendo's Wii, helping

it

convince video

gamers

to

buy

an

Xbox

360 rather than

wait

for

the new

PlayStation

3 and

Wii

to

hit

the market.

5.

Adopting and

improuing

on

the

good

ideas of other companies

(ruals

or other-

wise).1A

The idea

of warehouse-type home

improvement centers did not

originate with

Home Depot

co-founders

Arthur

Blank

and Bernie Marcus;

they

got the

"big box"

concept

from

their former employer Handy

Dan

Home lmprovement. But

they were quick

to

improve

on

Handy Dan's

business

model and strategy and

take Home Depot to

a

higher

plateau in

terms

of

product

line breadth and customer

service.

6.

Deliberately

attacking

those

mnrket

segments

where a key riaal makes

big

profits.ls

Toyota has

launched

a

hardball

attack

on General

Motors,

Ford, and

Chrys-

ler

irr the

U.S.

market

for light

trucks and

SUVs, the

very market

arena

where

the Dehoit automakers typically

eam their big profits

(roughly

$10,000

to

$15,000

per

vehicle).

Toyota's

pick-up trucks and

SUVs

have

weakened

the Big

3

U.S.

automakers by taking away

sales

and market

share

that

they desperately

need.

7

.

Maneuaering

around competitors

to capture unoccupied or less contested market

territory.

Examples include

launching initiatives

to build

strong

positions

in

geographic

areas

or product

categories

where

close

rivals have little

or

no market

presence.

'r

lan

C. MacMillan,

Alexander

B.

van Putten,

and

Rta

Gunther

McGrath,

"Global Gamesmanship,"

Harvard

Busness

Review

8r,

no.

5

(May

zoo3),

pp.

66-67i

also,

see

Askay R. Rao, Mark E. Ber

gen,

and Scott Davis,

"How

to

Fght

a Price War," Horyard

Busness

Revew

78,

no. z

(March-April,

zooo),

pp.

ro7-t6.

'4

StaLk

and

Lachenauer,

"Hardball: Five Killer

Strateges for Trouncing the Competiton,"

p.

64.

"

lbid.,

p.

67.


13/20

Part One:

Section C:

Craftng

a

Strategy

Using

hit-and-run or

guerrilla

warfare

tactics to

grnb

sales and market share

from

complacent

or distracted

rit'als.

Options for

"guerrilia

offensives"

include

occasional

low-balling

on

price

(to

wrn a big order

or

steal

a key account

from a rival) or surprising

key

rivals with

sporadic

but

intense

bursts of

promotional

activity

(offering

a

20

Percent

discount

for

one

wcek

to draw

customers away

from

rival

brands).16

Guerrilla

offensives

are

particularly

well

suited

to

small challengers

who

have neither the

resources

nor

the

maket

visibility

to mount

a full-fledged

attack on

industry

leaders.

Lawrching

a

preemptire strike

to capture

n rare

opportunity

or secure nn

ittdustry's

limited

resources.rT

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)

moving

to

obtain

the

most favorable

site

at a

new

interchange

or

intersection, in a

new

shopping

mall, and

so

on; and

(3)

tying up the

most reliable,

high-quality suppliers

via exclusive partnerships,

long-

term contracts,

or even

acquisition.

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

ihat is not

easily

circumvented.

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:18

.

Market leaders

that nre znnerable--0flensive

attacks

make good

sense

u'hen

a

company

that

leads

in

terms

of size and

market

share

is not a true

leader

in terms of sen'in8 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,

a

PreoccuPatii>n

with

diversification

into other

industries, and

mediocre or declining

Profitability.

.

Runner-up

firms

utith

arcaknesses

in areas where

the challenger is strong-

Runner-up

firms are an

especially

attractive

target when

a

challenger's

resource strengths

and compctitive capabilities

ae

weil-suited to

exploit-

ing their weaknesses.

.

Struggling

enterprises

that are on the uerge

of

going

u nder-Challenging

a

hard-pressed rival in ways that further sap

its financial strength

and com-

petitive position can

hasten

its exit

from

the

market.

'6

For

an interesting study

of how small

firms

can successfutly

employ

guerrilla-style

tactics,

see Ming-

Jer

Chen

and Donatd

C.

Hambrick,

"Speed,

Stealth, and

SeLective

Attack:

How Small

Firms

Dffer from

Large Firms

n

Competitve

Behavior," Acodemy

of

Monogement

Joum1l38,

no.

z

(April

r995),

pp.

45)-482.

Other

discussions of

guerrilla

offensives

can be

found n lan MacMiltan,

"How

Business

Strategists

Can Use Guerritla

Warfare Tactics,"

/ournol

of

Business Strotegy

\

no. z

(Fatl

1980),

pp.

6j-65;

Wllam E.

Rothschitd,

"Surprse

and the Competitive

Advantage,"

lournol

of

Busness

Strotegy

4,

no.

3

(Wnter

1984),

pp.

10 18; Kathryn

R.

Harrigan,

Strategic

Flexiblity

(Lexington,

MA:

Lexngton

Books, r985),

pp.

30

45;

and Liam

Fahey,

"Guerrilla

Strategy:

The

Hit-and-Run

Attack,"

in The

Strutegic

Monogement Planning

Reader,

ed.

Liam

Fahey

(Englwood

Clffs, NJ: Prentce

Halt,

1989),

pp.

194-797.

'/

The

use

of

preemptve

strike offensves

s

treated

comprehensvely

in lan

I\4acMllan,

"Preemp'

tive

Strategies,"

/ournol

of

Business Strategy

4,

no.

z

(Fall

t983),

pp.

16-26.

'3Phlip

Kotler, Marketing

Management,5th

ed.

(Englewood

Ctiffs,

NJ:

Prentice Hall, 1984),

p.4oo.

8.

9.


14/20

Chapter

6 Supplementing the

Chosen

Competitive

Strategy-other

lmportant

Business

Strategy

Choices

.

Small

local and regionnl

firms

zuith limited

capabilitie

s-Because

smaLl

firms

typically have limited expertise and

resources, a

challenger

with broader

capabilities is well positioned to

raid their biggest and

best

customers.

Blue

Ocean

Strategy-A Specia[

Kind

of

Offensive

A

blue

ocean strategy

seeks

to gain a dramatic

and

durable competitive

advantage

br1

nbandoning

elforts

to

bent

out

competitors

in

existing

markets and,

instead,

inoenting

n

nezu

industry

or distinctize mnrket

seg

ment

that renders

existittg

competitors

largely irreleaant

Blue ocean strategies

offer

growth

in

and nlloztts n coIPnnu

to create and capture

altogether

new

revenues and

profrts

by

discovering or

rnventing

demand.1e

This

strategy

views the business universe

as

new industry segments that create altogether

consisting

of

two distinct types

of

market

space.

One

is

new

demand.

wherc industrv boundaries

are

defined and accepted,

the competitive

rules

of

the

game

are

well understood by all

industry mem-

bcrs,

and

companies

try to outperform rivals bv capturing

a

bigger share of

existing

demand;

in

such

markets, Iively 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.

Thc sccond type of

market space

is a

"blue

ocean"

where the industry

does

not really

exist yet,

is

untainted bv competition,

and offcrs

wide

open

opportunity for profitable

and rapid growth

if

a company

can come up with a product offering and strat-

egy

that

allows it

to create new,

demand

ather

than

fight

over

existing demand.

A terrific

example

of such

wide

open

or blue

ocean

market space is the online

auction

industry that

eBay created

and now dominates.

Other

examples of companies

that

have achieved compctitive

advantages

by

creating blue ocean

market spaces

include

Starbucks

in

the coffee

shop

industry,

Dollar

General

in extreme

discount rctailing,

FedEx

in

overnight

package

delivery,

and

Cirque du

Soleil

in

live entertainment. Cirque du

Soleil

"reinvented

thc circus" by creating

a distinctively diffeent market space

for

its pcrformances

(Las

Vegas night clubs and theater-type settings)

and pull-

ing in a whole new

group

of customers-adults ancl corporate

clients-who

were

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.

Companies

that

create blue ocean

market

spaces

can

usually sustain

their initially won com-

petitive

advantage without encountering major competitive

challenge

for 10

to 15 years because of high barriers to

imitation

and the strong

brand

name

awareness that a blue ocean strategy can

produce.

Strategic

Options to

Protect

a

Compant's

Market Position and

Competitive

Advantage-The

Use

of

Defensive

Strategies

In a

competitive

market,

all

firms

are subject to

offensive

challenges

from

rrvals.

The purposes

of

defensive strategies are

to

lou'er the risk of

being

attacked,

weaken

the

irnpact

of

any attack that occurs,

and

influence

challengers

to aim

.e

W.

Chan

Kim

and

Rene Mauborgne,

"Blue

Ocean Strategy," HoNard

Business Review

82,

no.

rc

(October

zoo4),

pp.

76-84.


15/20

Part One: Section C: Crafting a Strategy

their

cfforts at othcr rivals. While defensive

strategies

Good defensive stratesies...l: .g:1.:1

il#'::j'ffil:ilT"lj1ff,;il,r::]il:i,i,l:";1ff1

competitive

advantage but rarely are

the

basis

,,_ I ;-.,

ion. Delensir

e strategies can take either of tw o iorms:

r0r

creaung't

octions

to block

challengers and actions

signaling the

likelil-rood

of strong

retaliation.

Blocking

the

Avenues

Open to Challengers

The

most frequentlv empkryed approach to defending a

company's prcsent

positron involves actions

to

restrict

tr

competitive attack by

a

challenger.

There

are

any

number

of

obstacles

that

can be

pr-rt in

the path of n'ould-be challeng-

ers.rr'A defender can intoduce nerv features,

add

nelv

models,

or

broaden

its product line to

close

off vacant nicl-res to

opportunity-seeking challengers.

It

can thn'art the efforts of rrvals to attack n,ith a lower

price by maintain-

ing

cconomy-priced

options

oi

its

ou'n.

lt

can

try

to discourage

buyers

from

trving compctitors' brands by making

early announcenents about upcoming

new products or planncd price

changes.

Finalll',

a

defender

can

grant volume

discounts or

better

financing terms to dcalcrs

and distributors to discourage

them from

experimenting

with

other suppliers.

Signating

Challengers

That

Retaliation ls Likety

The

goal of signaling challcngers that

strong

retaliation is

likelv in

the

event

of an attack

is

either to dissuadc

challcngers from attacking at all

ol

to divert

them to

less

threatening options. Either

goal can bc

achieved

by letting

chal-

lengers know

the battle rvill

cost

more than

it is r,vorth.

Would-bc

challcngcrs

can

be

sigr-ralecl bv:rr

.

Publicly

amrouncing management's

commitment

to

maintain

the

firm's

present market

share.

.

Publicly

committing

the company

to

a policy of matching competitors'

telms

or

p-rrices.

o

Maintaining

a war chest

of

cash

and

markctablc

sccuritics.

.

Making

an

occasional strong

counter-resFronse to the

moves

of weak

com-

petitors

to

cnhance the

firm's

image as a tough defender,

Timing

a

Company's

Strategic

Moves

INlten

to

makc

a

strategic move

is

often

as

crucial

as ulrnl

move

to

make.

Tim-

ing

is

especiallv important

w'hcn

first-ntortt:r

ntlunntnges

or

disntlz,nntngs

exist.r:

Being first to initiatc

a

stratcgic

movc

can

havc

a

high

Because

of

frsfmover

advantages

and

payoff rvhen

(l)

pioneering

hclps

build

a

firm's imagc

disadvantages,

competitive advantage

can

ncl repr.rtation

with

burers;

(1)

early

commitments

spring

from

when

a

move is

made

as

well

s

to

rle*

technologies,

new-style

componenrs,

nelv

or

from what move is

made

emerging clistributiorr

charrnels,

anrl

so on. e alr pro'lure

"M

chael

E.

Potter, Compettve

Advontaqe

(New

York:

Free

Press, 1985),

pp.

489

494.

"

lb d.,

pp.

495 497.

The

list

here is selective; Pofter

offers a

greater

number

of options.

"

Potle\

Competitve Advontage,

pp.

2

)2-2))


16/20

Chapter

6

Supptementing

the

Chosen

Competitive


Business Strategy Choices

an

absolute cost advantage over

rivals;

(3)

first-time

customcrs

remain

strongly

loyal b pioneering firms

in

making

rePeat

Purchases;

and

(4)

moving first

constitutes

a preemptive strike,

making

imitation extra

hard ot unlikely.

The

bigger

the

first-mover

advantages,

the

more attractive

making

the

first move

becomes.23

Sometimes,

though,

markets

are

slow

to acccpt

the innovative product offer-

ing of

a

first-mover,

in which

case

a fast

follower

n'ith

substantial

resources

and marketing

mLlscle can

overtake

a first-mover

(as

Fox

News

has

done

in

competing

against

CNN

to

become

the

leading cable news network). Some-

times

furious

technological

change

or

product

innovation

makes a

first-mover

'r'ulnerable

to quickly

appearing next-generation

technology or

products

Motorola, oncc

a

market leader

in mobile

phones,

has

been

victimized by

the

far more innovative phones

offered by

Apple

(iPhone)

and Research

in

Motion

(Blackberry).

Hence,

there

are

no guarantees

that

a

first-mover will

rvin sustainable

competitive

advantage.2a

Tb sustain any advantage

that

may initially accrue

to a pioneer,

a first-mover

needs

to

be

a fast learner

and continue

to

move

aggressively

to capitalize on

any

initial

pioneering

advantage. If

a

first-mover's

skills, know-how,

and

actions

are easily

copied

or

even surpassed,

then

followers

and even late-movers can

catch

or

overtake

the first-mover

in a relatively short

period. What

makes

being

a first-mover

strategically

important

is not being the

first

comPany

to

do something

but

rather being the

first competitor

to

Put

together

the

pre-

cise

combination of

features,

customer

value, and sound

revenuc

/cost/profit

economics

that

gives

it

an edge

over

dvals in

the battle

for

market

leadership.25

If

the marketplace

quickly takes to

a

first-mover's

innovative product

offer-

ing,

a

first-mover

must

have

large-scale

production,

marketing, and distribu-

tion capabilities

if it is to

stave

off

fast-followers

who

possess

similar resources

capabilities.

If

technology

is

advancing

at

torrid

Pace,

a first-mover

cannot

hope to sustain

its lead without

having

strong

capabilities

in

R&D,

design,

and new

product

development,

along with the financial strength

to

fund these

activities.

Concepts & Conrections

6.2 describes

how

Amazon.com

achieved

a

first-mover

advantage

in online

retailing.

The

Potential

for Late-Mover

Advantages

or Frst-Mover

Dsadvantages

There are instances

when there are actually

adanntages

to

being an adept

follower

rather than a first-mover.

Late-mover

advantages

(or

first-moz:er

disndztnntnges)

arise

in four

instances:

.

When

pioneering

leadership

is

more

costly

than

imitating

followership

and

only

negligible

experience

or

learning-curve

benefits accrue to the

'r

For reserch evidence on the effects of

pioneering

versus foltowing,

see

Jeffrey

G.

Covin,

Dennis

P.

Slevin, and

Michael B. Heeley,

"Poneers

and

Followers: Competitive

Tactics,

Envronment, and

Growth,"

lournol

of Business

Venturing

r5,

no. z

(March

199q,

pp.

t75-2rc;

and

Chrstopher

A.

Bartlett and

Sumantra Ghoshal,

"Going

Global:

Lessons from Late'Movers,"

Horvard Business

Review

78,

no.z

(March-April

zooo),

pp.

t3:-r45.

'4

For

a more extensive

dscussion of this

point,

see Fernando

Suarez and Gianvito

Lanzolla,

"The

Half-Truth of

First-Mover

Adv

anlage," Harvard Busness

Review 83

no.

4

(April

zoo5),

pp.

tzr-t27.

'5

Gary

Hamet,

"Smart Mover, Dumb Mover,"

Fortlne,

September

3,

20o1,

p.

195.


17/20

t3a

Part

One: Sertior

C: Crafting

a

Slraregy

AMAZON.COM'S

FIRST.MOVER

ADVANTAGE

IN

Amazon.com's

path

to

world's

[argest

online

retailer

began

in

1994

when

Jeff

Bezos,

a

lvlanhattan

hedge

fund

analyst at the time, noticed

that the number

of lnternet

users was increasing

by z,3oo

percent

annually.

Bezos

saw the tremendous

growth

as

an

opportunity

to

sell

products

online that would

be

demanded

by

a

large num-

ber

of

Internet

users

and could be

easity

shipped.

Bezos

Launched

the

ontine

bookselLer, Amazon.com, in 1995. The

start-up's

revenues

soared

to

$r48

million in r997,

$6ro

million in 1998,

and

$r.6

bittion in

1999. Bezo's

business

plan

hatched

white on a

cross-country

trip

r,vith

his

wfe

in 1994 made

him

Time's Person

of

the

Year n

1999.

Amazon.com's

early entry nto online

retaiLing

had

delivered

a

first

mover advantage,

but between zooo

and

2oo9,

Bezos

undertook a

series

of additional

strategic

inrtiatives to solidify

the

company's

number-one

ranking

n the industry Bezos

undertook a

massive

buiLding

pro-

gram

in

the late r99os that

added

five

new

warehouses

and fulfiLtment centers

totaling

$3oo

mitlion. The

addi-

tional warehouse space ws

added

years

before it

was

needed, but Bezos wanted

to nsure

that, as demand

continued

to

grow,

the

company could

continue

to offer

ts customers the

best selection, the

lowest

prices.

and

ONLINE RETAILING

the

cheapest

and most convenient

deLivery.

The company

aLso

expanded its product

Iine

to

nclude

sporting

goods,

tools, toys,

grocery

items, electronics,

and digitaI music

downloads. Amazon.com's 2oo8 revenues

of

$r9.2

bit-

Lon made

it

the world's largest Internet

retailer

and

letf

Bezos'shares

in Amazon.com

made

him

the 11oth wealth-

iest

person

in

the wortd with

an estimated net worth

of

$8.2

billion.

Not

atL

of Bezos'

efforts

to maintain

a

first-mover

advantage in

online

retailing

were

a success. Bezos

corn-

mented

in a

2oo9 Fortune

article

profiling

the

company,

"We

were nvestors

in every

bankrupt,

19g9-vintage

e-commerce

start-up.

Pets.com,

Living.com, kozmo.com.

We

nvested in

a

lot of

high-profile

Flameouts." He

went

on

to

specifu

that

although the

ventures were a

"waste

of

money,"

they

"didn't

take

us

off our own misson." Bezos

also suggested

that

ganing

advantage as

a

first

mover

is'taking

a million

tiny steps-and Learning

quickly

from

your

m issteps.

"

Sources:

N,lark

Brohan,

"The

Top

5oo

Guide,"

/I]cl/1ef

Re

taler,

lue

zoo9,

(accessed

dt

wwr,.internetretaiLer

cor

on

lune

12,

zoog);

losh

Qu

ttner,

"How

leff

Eczos R,rles

the

Retail

Space," Forlune,

May

5,

2oo8,

pp.

126 rl4-

lcadcr

a condition

that

allon's

a follou,er

to cnd

up

n ith lor,vcr

costs

than

ther

first-mover.

lVhen

the

procllrcts

of

an

inltrrator

are sclmcr,vh.rt

primitive arrd

do

not

live

up to

btrver

expect.rtions,

thus allorving a

clc.\,cr

follor,r'er

tct rvln r.lis-

cnchanted brryers

arvay

frorn

the letder

wiih

be tter-perform in

g products.

lVl-ren

the

clemancl side of thc markc.tplace

is

skeptical

about

thc benefits

of a neu,,

technologv

or

procl r.Lct

beirrg pioncr..rt.,l

hy

a first-rnover.

lVtren

rapid market evolution

(drrc

to

fast-paced changes

in either technol-

ogy or

LrLrVer

neecls

ancl

expectatiotrs)

givcs

iast-followers

and mavbc

cr,'en

canfious late-movers

the

opening

kr

lcapfrog

a

first

mover's

p1'oducts

u,ith

rolc

attractive

nex[ \.ersion prodLlcts.

Deciding

Whether

to

Be

an

Early-Mover

or Late-Mover

Tn rvc.ighing

the

pros.rtcl

cons

of being

a

first-movcr \/crsus

a fast-follon'er

\ersus a

slo\\-mo\er,

lt matters lvhether

the

race

to

market

lcadcrs]-rip

in

a

par

ticular inclustry

is

a marathrtrr

or a

sprint. In

rn;rr.tthons,

a skrn,-mrlvcr

is

not


18/20

Chapter

6

Supplementing

the

Chosen

Competitive

Strategy-Other

lmportant

Business

Strategy

Choices

unduly

penalized-first-mover

advantages

can be

fleeting,

and

there's

ample

time

for

fast-followers

and sometimes

even late-movers

to

play catch-up''z6

Thus

the speed

at

which

the

pioneering innovation

is

likely to

catch

on

mat-

ters

considerably

as companies

struggle with

whether

to

Pursue

a particular

emerging

market opportunity

aggressively

or

cautiously.

For instance,

it took

18

months

for 10

million users to sign

up for

Hotmail,5.5 years

for

worldwide

mobile

phone

use

to

grow from

1.0

million

to

100

million worldwide,

and

close

to 10 years

for

the

number of

at-home

broadband

subscribers

to

grow to 100

million

worldwide.

The lesson

here is that

there

is a market-penetration curve

for every emerging

opporhurity;

typically,

the curve

has

an

inflection

point

at which all

the

pieces

of

the

business

model

fall into

place,

buyer demand

explodes,

and

the

market

takes

off.

The

irflection

point can come

early on

a

fast-rising curve

(like

use

of e-mail)

or farther on

uP a

slow-rising

curve

(like

use of

broadband).

Any

cornpany that

seeks

competitive

advantage

by being

a

first-mover

thus

needs to ask some

hard

questions:

.

Does market

take-off depend

on

the development

of

complementary

products

or

services

that

currently

are

not

available?

.

Is new

infrastructure

required

before

buyer

demand

can surge?

.

\,

Chapter 6 Supplementing the ... Choices

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