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CHAPTER 6
STRENGTHENING A COMPANYS
COMPETITIVE POSITION
CHAPTER SUMMARY
Chapter 6 discusses that once a company has settled on which of the five generic strategies to employ, attention
must turn to what other strategic actions can be taken in order to complement the choice of its basic competitive
strategy. The three dimensions discussed include offensive and defensive competitive actions, competitive
dynamics and the timing of strategic moves, and the breadth of a companys activities. These are explored
through seven broad categories: (1) Whether and when to go on the offensive, (2) Whether and when to employ
defensive strategies, (3) When to undertake strategic moves, (4) Whether to merge or acquire another firm,
(5) Whether to integrate the value chain backward or forward, (6) Whether to outsource certain value chain
activities, and (7) Whether to enter into strategic alliances.
LECTURE OUTLINE
I. Going on the Offensive Strategic Options to Improve a Companys Market Position
1. Regardless of which of the five generic competitive strategies the firm is pursuing, there are times
when the company must go on the offensive. The best offensive moves tend to incorporate several
key principles:
a. Focusing relentlessly on building competitive advantage and then striving to convert it into a
sustainable advantage.
b. Applying resources where rivals are least able to defend themselves.
c. Employing the element of surprise as opposed to doing what rivals expect and are prepared for.
d. Displaying a strong bias for swift, decisive, and overwhelming actions to overpower rivals
2. Choosing the Basis for Competitive Attack
a. Strategic offensives should, as a general rule be based on exploiting a companys strongest
strategic assets.
b. The principal offensive strategy options include the following:
1. Offering an equally good or better product at a lower price.
2. Leapfrogging competitors by being first to market with next-generation products.
3. Pursuing continuous product innovation to draw sales and market share away from less
innovative rivals
4. Adopting and improving on the good ideas of other companies (rivals or otherwise).
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5. Using hit-and-run or guerrilla warfare tactics to grab market share from complacent or
distracted rivals
6. Launching a preemptive strike to secure an advantageous position that rivals are prevented
or discouraged from duplicating.
3. How long it takes for an offensive to yield good results varies with the competitive circumstances
including buyer response to the initiative and whether market rivals recognize the threat and begin
a counter-response.
4. Choosing Which Rivals to Attack - Offensive-minded firms need to analyze which of their rivals
to challenge as well as how to mount the challenge. The following are the best targets for offensive
attacks:
a. Market leaders that are vulnerable.
b. Runner-up firms with weaknesses in areas where the challenger is strong.
c. Struggling enterprises that are on the verge of going under.
d. Small local and regional firms with limited capabilities.
5. Blue Ocean strategies seek to gain a dramatic and durable competitive advantage by abandoning
effort 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.
CORE CONCEPT
A blue-ocean strategy offers growth in revenues and profits by discovering or
inventing new industry segments that create altogether new demand.
a. This strategy views the business universe as consisting of two distinct types of market space:
1) Industry boundaries are defined and accepted, the competitive rules of the game are well
understood by all industry members, and companies try to outperform rivals by capturing
a bigger share of existing demand.
2) Industry does not really exist yet, is untainted by competition, and offers wide open
opportunity for profitable and rapid growth if a company can come up with a product
offering and strategy that allows it to create new demand rather than fight over existing
demand.
b. Blue-ocean strategies provide a company with a great opportunity in the short run. Long term
success depends on whether a company can protect the market position they opened up and
sustain their early advantage.
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CORE CONCEPT
Because of first-mover advantages and disadvantages, competitive advantage can
spring from when a move is made as well as from what move is made.
2. The Potential for first-mover advantages is great however, first-movers typically bear greater risks
and development costs than firms that move later. There are five conditions where first-movers have
an advantage:
a. When pioneering helps build a firms reputation with buyers and creates brand loyalty.
b. When a first movers customers will thereafter face significant switching costs.
c. When property rights protections thwart rapid imitation of the initial move.
d. When an early lead enables the first mover to move down the learning curve ahead of rivals.
e. When a first mover can set the technical standard for the industry.
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This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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CORE CONCEPT
The scope of the firm refers to the range of activities which the firm performs
internally, the breadth of its product and service offerings, the extent of its
geographic market presence, and its mix of businesses.
2. There are several dimensions of firm scope that are relevant to business level strategy. The two
primary dimensions are horizontal and vertical scope.
CORE CONCEPT
Horizontal scope is the range of product and service segments that a firm serves
within its focal market.
CORE CONCEPT
Vertical scope is the extent to which a firms internal activities encompass one, some,
many, or all of the activities that make up an industrys entire value chain system,
ranging from raw-material production to final sales and service activities.
V. Horizontal Merger and Acquisition Strategies
1. Mergers and acquisitions are a much-used strategic plan. They are especially suited for situations
where alliances and partnerships do not go far enough in providing a company with access to the
needed resources and capabilities.
2. Combining the operations of two companies within the same industry, via merger or acquisition,
is an attractive strategic option for achieving operating economies, strengthening the resulting
companys competencies and competitiveness, and opening up avenues of new market opportunity.
3. The difference between a merger and an acquisition relates more to the details of ownership,
management control, and financial arrangements than to strategy and competitive advantage. The
resources, competencies, and competitive capabilities of the newly created enterprise end up much
the same whether the combination is the result of acquisition or merger.
4. Many horizontal mergers and acquisitions are driven by strategies to achieve one of five strategic
objectives:
a. Creating a more cost-efficient operation out of the combined companies.
b. Expanding a companys geographic coverage.
c. Extend a companys business into new product categories.
d. Gaining quick access to new technologies or complementary resources and capabilities.
e. Leading the convergence of industries whose boundaries are being blurred by changing
technologies and new market opportunities.
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CORE CONCEPT
A vertically integrated firm is one that performs value chain activities along more
than one stage of an industrys value chain system.
2. Integrating Backward to Achieve Greater Competitiveness: For backward integration to be a
viable and profitable strategy, a company must be able to:
a. Achieve the same scale economies as outside suppliers.
b. Match or beat suppliers production efficiency with no drop-off in quality.
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This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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CORE CONCEPT
Backward integration involves performing industry value chain activities previously
performed by suppliers or other enterprises engaged in earlier stages of the industry
value chain; forward integration involves performing industry value chain activities
closer to the end user.
1. Backward integration is most likely to reduce costs when:
a. The firm can achieve the same scale economies as outside suppliers.
b. The firm can match or beat suppliers production efficiency with no drop-off in quality.
c. The needed technological skills and product capability are easily mastered or can be gained by
acquiring a supplier with desired expertise
2. Backward vertical integration can produce a differentiation-based competitive advantage when
a company, by performing activities in-house that were previously outsourced, ends up with a
better quality offering, improves the caliber of its customer service, or in other ways enhances the
performance of its final product.
3. Other potential advantages of backward integration include:
a. Decreasing the companys dependence on suppliers of crucial components
b. Lessening the companys vulnerability to powerful suppliers inclined to raise prices at every
opportunity
4. Integrating Forward to Enhance Competitiveness: The strategic impetus for forward integration
is to gain better access to end-users and better market visibility.
a. Forward integration can lower costs by increasing efficiency and bargaining power. In addition,
it can allow manufacturers to gain better access to end users.
b. Forward integration can improve market visibility and include the end users purchasing
experience as a differentiating feature.
C. The Disadvantages of a Vertical Integration Strategy - Vertical integration has some substantial
drawbacks:
1. It raises a firms capital investment in the industry, increasing business risk
2. Vertically integrated companies are often slow to embrace technological advances
3. It can impair a companys operating flexibility
4. It can result in less flexibility in accommodating shifting buyer preferences.
5. It may not be able to achieve economies of scale
6. It poses all kinds of capacity-matching problems
7. It often calls for changes in skills and business capabilities
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CORE CONCEPT
Outsourcing involves farming out certain value chain activities to outside vendors.
1. When Outsourcing Value Chain Activities Makes Sense:
a. An activity can be performed better or more cheaply by outside specialist
b. An activity is not crucial to the firms ability to achieve sustainable competitive advantage and
will not hollow out its core competencies.
c. It improves organizational flexibility and speeds time to market.
d. It reduces the companys risk exposure to changing technology and/or changing buyer
preferences
e. It allows a company to assemble diverse kinds of expertise speedily and efficiently.
f. It allows a company to concentrate on its core business, leverage its key resources, and do even
better what it already does.
2. The Big Risk of Outsourcing Value Chain Activities
a. The biggest danger of outsourcing is that a company will farm out too many or the wrong types
of activities and thereby hollow out its own capabilities.
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b. Another risk of outsourcing comes from the lack of direct control. It may be difficult to
monitor, control, and coordinate the activities of outside parties via contracts and arms-length
transactions alone.
VIII. Strategic Alliances and Partnerships
1. Strategic alliances and cooperative partnerships provide one way to gain some of the benefits offered
by vertical integration, outsourcing, and horizontal mergers and acquisitions while minimizing the
associated problems.
2. Companies in all types of industries have elected to form strategic alliances and partnerships to
complement their own strategic initiatives and strengthen their competitiveness. These are the very
same goals that motivate vertical integration, horizontal mergers and acquisitions, and outsourcing
initiatives.
3. Collaborative arrangements may entail a contractual agreement, but they commonly stop short of
formal ownership ties between the partners.
CORE CONCEPT
A Strategic alliance is a formal agreement between two or more separate companies
in which they agree to work cooperatively toward some common objective.
CORE CONCEPT
A joint venture is a type of strategic alliance in which the partners set up an
independent corporate entity that they own and control jointly, sharing in its
revenues and expenses.
4. An alliance becomes strategic, as opposed to just a convenient business arrangement, when it
serves any of the following purposes:
a. It facilitates achievement of an important business objective (like lowering costs or delivering
more value to customers in the form of better quality, added features, and greater durability).
b. It helps build, sustain, or enhance a core competence or competitive advantage.
c. It helps block a competitive threat.
d. It helps remedy an important resource deficiency or competitive weakness.
e. It increases the bargaining power of alliance members over suppliers or buyers.
f. It helps open up important new market opportunities.
g. It mitigates a significant risk to a companys business.
5. Why and How Strategic Alliances are Advantageous - The most common reasons why companies
enter into strategic alliances are to collaborate on technology or the development of promising new
products, to overcome deficits in their technical and manufacturing expertise, to acquire altogether
new competencies, to improve supply chain efficiency, to gain economies of scale in production
and/or marketing, and to acquire or improve market access through joint marketing agreements.
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6. A company that is racing to stake out a strong position in a technology or industry of the future
needs alliances to:
a. Establish a stronger beachhead for participating in the target technology or industry
b. Master new technologies and build new expertise and competencies faster than would be
possible through internal efforts
c. Open up broader opportunities in the target industry by melding the firms own capabilities
with the expertise and resources of partners
7. Capturing the Benefits of Strategic Alliances - The extent to which companies benefit from entering
into alliances and collaborative partnerships seem to be a function of six factors:
a. Picking a good partner
b. Being sensitive to cultural differences
c. Recognizing that the alliance must benefit both sides
d. Ensuring that both parties live up to their commitments
e. Structuring the decision-making process so that actions can be taken swiftly when needed
f. Managing the learning process and then adjusting the alliance agreement over time to fit new
circumstance
8. Alliances are more likely to be long lasting when:
a. They involve collaboration with partners that do not compete.
b. A trusting relationship has been established.
c. Both parties conclude that continued collaboration is in their mutual interest.
9. The Drawbacks of Strategic Alliances and Partnerships
a. Anticipated gains may fail to materialize due to an overly optimistic view of the synergies or a
poor fit in terms of the combination of resources and capabilities.
b. The greatest danger is that a partner will gain access to a companys proprietary knowledge
base, technologies, or trade secrets, enabling the partner to match the companys core strengths
and costing the company its hard-won competitive advantage.
10. The principle advantages of strategic alliances over vertical integration or horizontal mergers/
acquisitons are threefold:
a. They lower investment costs and risks for each partner.
b. They are more flexible organizational forms and allow for faster market response.
c. They are faster to deploy.
11. They key advantages to using strategic alliances are the increased ability to exercise control over
the partners activities and a greater willingness for the partners to make relationship specific
investments.
12. How to Make Strategic Alliances Work - The success of an alliance depends on how well the partners
work together, their capacity to respond and adapt to changing internal and external conditions, and
their willingness to renegotiate the bargain if circumstances so warrant.
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13. Companies that have greater success in managing their strategic alliances and partnerships often
credit the following factors:
a. They create a system for managing their alliances.
b. They build relationships with their partners and establish trust.
c. They protect themselves from the threat of opportunism by setting up safeguards.
d. They make commitments to their partners and see that their partners do the same.
e. They make learning a routine part of the management process.
14. Managers must realize that alliance management is an organizational capability and develop it over
time to become another source of competitive advantage.
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Answer: The student should find that American Apparel has moved backward into the industry value chain
by doing its own fabric cutting and sewing and also owns its own knitting and dying facilities. It also does
its own clothing design, marketing, and advertising.
This strategy has allowed the company to gain competitive advantage by reducing the time required to
respond to market changes and reduce inventory requirements. From a marketing perspective, the company
has the unique ability to market products that are sweatshop free.
4. Perform an Internet search to identify at least two companies in different industries that have entered into
outsourcing agreements with firms with specialized services. In addition, describe what value chain activities
the companies have chosen to outsource. Do any of these outsourcing agreements seem likely to threaten
any of the companies competitive capabilities?
Answer: There are numerous choices that should allow students to provide extensive, well-developed
answers to this question. Suggested student responses may identify the following examples.
The first example is IBM and Grupo Gigante, one of Mexicos leading business groups. The companies
have extended their business contract for five additional years through a series of outsourcing agreements.
IBM will be responsible for fully managing and monitoring the information technology (IT) infrastructure
under two managed service modes, applications and infrastructure. IBMs outsourcing solution for Grupo
Gigante includes infrastructure services components for equipment and server hosting, help desk activation,
distributed computing services, on-site support services, data center security and disaster recovery planning.
Grupo Gigante will strategically retain a team of experts to manage the main IT applications that support
the business which will enable the company to keep in-house the value of the key human capital it has
developed over time. This provides the company with opportunities to test new solutions that facilitate
strategic business decision-making and will bring more efficiency to day-to-day operations. The value chain
activity involved is a support activity, i.e. information technology.
A second example involves a three-year ATM-outsourcing agreement between NCR Corporation and Co-op
Financial Services that enables Co-ops credit-union members to lease instead of buy new ATMs to reduce
participating credit unions capital expenses. According to Bill Allen, NCRs marketing director, Leasing
ATMs is a lot more attractive for some financial institutions because leasing agreements are not carried
on the books as a capital expense. Co-op ATM Managed Services, a unit of Co-op Financial Services,
will manage credit-union members leased ATMs. NCR will provide first- and second-line maintenance on
all of the leased machines so if the ATM breaks down, NCR fixes it. It does not appear these outsourcing
agreements are likely to threaten the competitive capabilities of these companies.
5. Using your university librarys subscription to Lexis-Nexis, EBSCO, or a similar database, find two examples
of how companies have relied on strategic alliances or joint ventures to substitute for horizontal or vertical
integration.
Answer: Students will be able to find a wealth of companies engaged in successful alliances and joint
ventures. LG Electronics is one example of a company that has use alliances to broaden their base (horizontal)
and add to their value chain (vertical). The company has been able to gain significant market share in recent
years. The company attributes part of their success to their use of Strategic
Alliances to gain advantage in business and technology fields. Alliance partners include:
2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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