Supplementing the Chosen Competitive Strategy McGraw-Hill/IrwinCopyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Supplementing the Chosen Competitive

Strategy

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

“Successful business strategy

is about actively shaping the

game you play, not just

playing the game you find.”

Adam M. Brandenburger and Barry J. Nalebuff

Fig. 6.1: A Company’s Menu of Strategy Options

Companies sometimes use strategic alliances or collaborative

partnerships to complement their own strategic initiatives and

strengthen their competitiveness.

Collaborative Strategies:Alliances and Partnerships

Characteristics of a Strategic Alliance

• Strategic alliance – A formal agreement between two or more separate companies where there is– Strategically relevant collaboration of some sort– Joint contribution of resources– Shared risk– Shared control– Mutual dependence

• Alliances often involve– Joint marketing– Joint sales or distribution– Joint production– Design collaboration– Joint research– Projects to jointly develop new technologies or products

What Factors Make an Alliance Strategic?

• It is critical to a company’s achievement of an important objective

• It helps build, sustain, or enhance a core competence or competitive advantage

• It helps block a competitive threat

• It helps open up importantmarket opportunities

• It mitigates a significant riskto a company’s business

• Merger – Combination and pooling of equals, with newly created firm often taking on a new name

• Acquisition – One firm, the acquirer, purchases and absorbs operations of another, the acquired

• Merger-acquisition strategy– Much-used strategic option– Especially suited for situations where

alliances do not provide a firm with neededcapabilities or cost-reducing opportunities

– Ownership allows for tightly integrated operations, creating more control and autonomy than alliances

Merger and Acquisition Strategies

• To create a more cost-efficient operation• To expand a firm’s geographic coverage• To extend a firm’s business into new

product categories or international markets• To gain quick access to new technologies

or competitive capabilities• To invent a new industry and lead the

convergence of industries whose boundariesare blurred by changing technologies andnew market opportunities

Objectives of Mergers and Acquisitions

Vertical Integration Strategies

• Extend a firm’s competitive scope withinsame industry

– Backward into sources of supply

– Forward toward end-users of final product

• Can aim at either full or partial integration

InternallyPerformedActivities,

Costs, &Margins

Activities, Costs, &

Margins ofSuppliers

Buyer/UserValueChains

Activities, Costs,& Margins of

Forward ChannelAllies &

Strategic Partners

Strategic Disadvantagesof Vertical Integration

• Boosts resource requirements

• Locks firm deeper into same industry

• Results in fixed sources of supply andless flexibility in accommodating buyerdemands for product variety

• Poses all types of capacity-matching problems

• May require radically different skills / capabilities

• Reduces flexibility to make changes in component parts which may lengthen design time and ability to introduce new products

Outsourcing Strategies

Outsourcing involves withdrawing fromcertain value chain activities and relyingon outsiders to supply needed products,support services, or functional activities

Concept

InternallyPerformedActivitiesSuppliers

Support Services

Functional Activities

Distributors or Retailers

• Activity can be performed better ormore cheaply by outside specialists

• Activity is not crucial to achieve asustainable competitive advantage

• Risk exposure to changing technology and/orchanging buyer preferences is reduced

• It improves firm’s ability to innovate• Operations are streamlined to

– Improve flexibility– Cut time to get new products into the market

• It increases firm’s ability to assemble diverse kinds of expertise speedily and efficiently

• Firm can concentrate on “core” value chain activities that best suit its resource strengths

When Does OutsourcingMake Strategic Sense?

• Farming out too many or the wrong activities, thus

– Hollowing out capabilities

– Losing touch with activities and expertise that determine overall long-term success

Risk of an Outsourcing Strategy

Offensive and Defensive Strategies

Used to build newor stronger market position and/or create competitive

advantage

Used to protect competitive advantage (rarely lead to

creating advantage)

Offensive Strategies Defensive Strategies

Types of Offensive Strategy Options1. Offer an equally good or better product at a lower price2. Leapfrog competitors3. Pursue continuous product innovation4. Adopt and improve on the

good ideas of other companies5. Deliberately attack market segments where a key rival

makes big profits6. Attack competitive weaknesses of rivals7. Maneuver around competitors and

concentrate on capturing unoccupiedor less contested market territory

8. Use hit-and-run or guerrilla warfare tactics9. Launch a preemptive strike

What Is a Blue Ocean Strategy?

• Seeks to gain a dramatic, durablecompetitive advantage by

– Abandoning efforts to beat outcompetitors in existing markets and

– Inventing a new industry or distinctivemarket segment to render existingcompetitors largely irrelevant and

– Allowing a company to create andcapture altogether new demand

Blue Ocean Strategy

• Kim & Mauborgne (2005)• Driving forces are increased supply capabilities

and reduced demand distinctions• Reconstructionist view of strategy– Shift emphasis from supply to demand– Systemic strategy of driving up value while

lowering costs

Type of Markets: Blue Ocean Strategy

Red Ocean Market Space

• Industry boundaries are defined and accepted

• Competitive rules are well understood by all rivals

• Companies try to outperform rivals by capturing a bigger share of existing demand

Blue Ocean Market Space

• Industry does not exist yet

• Industry is untainted by competition

• Industry offers wide-open opportunities if a firm has a product and strategy allowing it to

– Create new demand and

– Avoid fighting over existing demand

US Wine Industry

• 20 billion, 3rd largest aggregate consumption• 33rd place in per capita consumption• Intense competition• 8 top producers account for 75% of production;

1,600 account for the remaining 25%• Entry of other regions and countries• California wines account for 2/3rds of sales• Consolidation of retailers

Blue Ocean Tools

• Strategy canvas• Four actions framework

Blue Ocean Strategy: Four Action Framework

1. Eliminate factors that companies in the industry have long competed on.

2. Determine whether products have been over designed.

3. Eliminate customer compromises.4. Discover new sources of value.

Casella Wines

Web Site Strategies

• Strategic Challenge – What use of the Internet should a company make in staking out its position in the marketplace?

• Five Web site approaches– Use to disseminate only product information – Use as minor distribution channel

to sell direct to customers – Use as one of several important distribution

channels to access customers– Use as primary distribution channel to access buyers– Use as exclusive channel to transact sales with customers

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