5

STRATEGIC MANAGEMENT

STRATEGY AND COMPETITIVE ADVANTAGE

The essence of strategy lies in creating tomorrows competitive advantages faster than competitors mimic the ones you possess today.
Gary Hamel and C.K. Prahalad

Strategies for taking the hill wont necessarily hold it.

Amar Bhide

Chapter Outline
Competitive Strategies:
STRATEGY & COMPETITIVE ADVANTAGE

Michael Porters Generic Strategies: Low-Cost Leadership Strategy. Broad Differentiation Strategies. Best-Cost Provider Strategies.

Focused Low-Cost Strategies.

Focused Differentiation Strategies. Vertical Integration Strategies. Merger and Acquisition Strategies. Co-operative Strategies.

Offensive & Defensive Strategies.

First-Mover Advantages & Disadvantages.

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STRATEGIC MANAGEMENT

CO-OPERATIVE STRATEGIES

Cooperative Strategies

STRATEGY & COMPETITIVE ADVANTAGE

Companies sometimes use strategic alliances or collaborative partnerships to complement their own strategic initiatives, and strengthen their competitiveness.

Such cooperative strategies go beyond normal company-to-company dealings

but fall short of merger or formal joint venture.

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CO-OPERATIVE STRATEGIES

STRATEGIC MANAGEMENT

Organizational Combination Acquisitions

High Collaboration

Mergers

Joint Ventures

Strategic Business Partnering

Strategic Alliance

Preferred Supplier Arrangements

Low Collaboration

STRATEGIC MANAGEMENT

STRATEGIC ALLIANCES

Why are Strategic-Alliances Formed?

To collaborate on technology development or new product development.

STRATEGY & COMPETITIVE ADVANTAGE

To fill gaps in technical or manufacturing expertise.

To acquire new competencies.

To improve supply chain efficiency, and fill gaps.

To gain economies-of-scale in production and/or marketing.

To acquire or improve market access via joint marketing agreements.

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Why Cooperative Strategies are Integral to a Firms Competitiveness

Collaborative arrangements can help a company lower its costs or gain access to needed expertise and capabilities.

STRATEGY & COMPETITIVE ADVANTAGE

Firms often lack the resources & competitive skills to be successful in very demanding competitive races:

Allies can be useful in helping a company establish a stronger presence in global

markets and helping it win the race for global market leadership. Allies with competitively useful technological know-how or expertise can greatly

aid a company racing against rivals for leadership in the industries of the future
now being created by todays technological and information age revolution.

Collaborative arrangements with foreign partners can be very helpful in

pursuing opportunities in unfamiliar national markets.
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Competitive-Value of Strategic-Alliances to the Partners

Above Depends on

STRATEGY & COMPETITIVE ADVANTAGE

Capacity of partners to defuse organizational frictions.

Ability to collaborate effectively over time, and work through challenges: Technological and competitive surprises. New market developments.

Changes in their own priorities & competitive circumstances.

Competitive advantage that emerges when a company acquires valuable capabilities via alliances, it could not obtain on its own, providing an edge over rivals.
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Potential Benefits of Alliances to Achieve Global/Industry Leadership

Get into critical country markets quickly to accelerate process of building a global presence. Gain inside knowledge about unfamiliar markets & cultures. Access valuable skills & competencies concentrated in particular geographic locations. Master new technologies and build new expertise faster than would be possible

STRATEGY & COMPETITIVE ADVANTAGE

internally benefit from IPLC.

Open up expanded opportunities in target industry by combining firms capabilities with resources of partners.

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IPLC International Product Life Cycle.

Why Alliances Fail? Ability of an Alliance to Endure Depends on:

How well partners work together. The success of partners, in responding & adapting to the changing conditions. Willingness of partners to renegotiate the bargain - flexibility.

STRATEGY & COMPETITIVE ADVANTAGE

Reasons Why Alliance Fail, include:

Diverging objectives & priorities of the partners.
Inability of the partners to work well together. Emergence of more attractive technological paths / partners. Marketplace rivalry between the allies.
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STRATEGIC MANAGEMENT

MERGERS & ACQUISITIONS

Merger & Acquisition Strategies

Merger - Combination & pooling of equals, with newly created firm often taking
STRATEGY & COMPETITIVE ADVANTAGE

on a new name (but there is no restriction on keeping one of the old names).

Acquisition - One firm (the acquirer), purchases & absorbs the operations of
another firm (the acquired).

Merger & Acquisition are: Much-used strategic option. Especially suited for situations where alliances do not provide a firm with needed capabilities or cost-reducing opportunities. Ownership allows for tightly integrated operations, creating more control & autonomy than is possible in alliances.
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Merger & Acquisition Strategies Benefits

STRATEGY & COMPETITIVE ADVANTAGE

More or better competitive capabilities. More attractive line-up of products / services. Greater ability to launch next-wave products / services. Wider geographic coverage. Greater financial resources to invest in R&D, add capacity, or expand. Cost-saving opportunities EoScale, EoScope. Filling in of the resource or technological / skill gaps.

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Merger & Acquisition Strategies Risks

STRATEGY & COMPETITIVE ADVANTAGE

Resistance from Rank-and-File employees. Tough problems in combining & integrating operations of the once-different companies. Greater-than-anticipated difficulties in.. Achieving expected cost-savings, Sharing of expertise, and Achieving enhanced competitive capabilities. Hard-to-resolve conflicts in management styles & corporate cultures.
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STRATEGIC MANAGEMENT

INTEGRATION

Vertical Integration Strategies

Vertical integration extends a firms competitive scope within the same industry:
STRATEGY & COMPETITIVE ADVANTAGE

Backward into sources of supply. Forward toward end-users of final product.

Vertical Integration Strategies can aim at either full or partial integration.

Activities, Costs, & Margins of Suppliers

Internally Performed Activities, Costs, & Margins

Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners

Buyer/User Value Chains

A vertical integration strategy has appeal only if it significantly strengthens a firms competitive position!

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Strategic Worth of Backward Integration

Generates cost savings only if the volume needed is big enough to capture
STRATEGY & COMPETITIVE ADVANTAGE

efficiencies of suppliers.

Potential to reduce costs exists when: The suppliers have sizable profit margins. The item(s) supplied is/are a major cost component(s). Resource requirements for the integrated function are easily met.

Vertical Integration can produce a differentiation-based competitive advantage when it results in a better quality part.

Reduces risk of depending on suppliers of crucial raw materials / parts / components.

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Strategic Worth of Forward Integration

Advantageous for a firm to establish its own distribution network if:
STRATEGY & COMPETITIVE ADVANTAGE

Undependable distribution channels undermine steady production operations.

Lacking a broad enough product line to justify integrating forward into standalone distributorships or retail outlets, a firm may sell directly to end users.

Direct sales and Online Retailing may:

Lower distribution costs.

Produce a relative cost advantage over rivals. Enable lower selling prices to end users.
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Strategic Disadvantages of Vertical Integration

Boosts resource requirements.
STRATEGY & COMPETITIVE ADVANTAGE

Locks firm deeper into same industry. Results in fixed sources of supply and less flexibility in accommodating buyer demands for product variety. Poses problems of balancing capacity at each stage of value chain. May require radically different skills / capabilities. Reduces manufacturing flexibility, lengthening design time and ability to introduce new products.
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Pros & Cons of Integration & De-Integration

Whether vertical integration is a viable or attractive strategy depends on: How much it can lower cost, build expertise, increase differentiation, or otherwise

STRATEGY & COMPETITIVE ADVANTAGE

enhance performance of strategy-critical activities.

Its impact on investment cost, flexibility, & administrative overhead. The contribution it makes to strengthening a company market position or helping it create competitive advantage.

Many companies are finding that de-integrating, unbundling, and out-sourcing value chain activities are a better strategic option when it comes to lowering cost, improving their competitiveness, or gaining added operating flexibility.
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STRATEGIC MANAGEMENT

OUTSOURCING

Unbundling & Outsourcing Strategies

STRATEGY & COMPETITIVE ADVANTAGE

De-Integration or unbundling involves narrowing the scope of the firms operations, focusing on performing certain core value chain activities and relying on outsiders to perform the remaining value chain activities.

Suppliers

Internally Performed Activities

Functional Activities

Support Services

Distributors or Retailers
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When Does Outsourcing Makes Strategic Sense?

Activity can be performed better or more cheaply by outside specialists.
STRATEGY & COMPETITIVE ADVANTAGE

Activity is not crucial to achieve a sustainable competitive advantage. Risk exposure to changing technology and/or changing buyer preferences is reduced. Operations are streamlined to: Cut cycle time.

Speed decision-making.
Reduce coordination costs. Firm can concentrate on doing those core value chain activities that best suit its resource strengths and capabilities.
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Strategic Advantages of Outsourcing

Improves firms ability to obtain high quality and/or cheaper components or services.

STRATEGY & COMPETITIVE ADVANTAGE

Improves firms ability to innovate by interacting with best-in-world suppliers.

Enhances firms flexibility should customer needs and market conditions suddenly shift.

Increases firms ability to assemble diverse kinds of expertise speedily and efficiently.

Allows firm to concentrate its resources on performing those activities internally

which it can perform better than outsiders.
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Pitfalls of Outsourcing

STRATEGY & COMPETITIVE ADVANTAGE

Outsourcing too many (or the wrong) activities, thus Hollowing out organizations own capabilities. Losing touch with activities & expertise that determine organizations overall long-term success.

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