Supptementing the Chosen

petitive Strategy - Oth e r

lmportant Business Strategy Choices

Co m

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 integration 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.

Chapter

Supplementing the Chosen Competitive Strategy-other lmportant Business Strategy Choices

117

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 complement its competitive approach and round out its business strategy. As discussed 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 comPetitive 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 industry 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 company'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 international markets. Strategic alliances allow companies to
correct particular resource gaps or deficiencies by part- $rategc alliances are collaborative arrangenering 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-

a formnl ngreement bettueen tloo or ffiore separnte compa- comes. The competitive attracton of allances is
in allowing companies to bundle resources and
nies in zuhich there is strategically releannt collaboration
competences
that are more valuable in a ioint
joint
some sort,
contribution of resources, shnred risk,
when
kept separate.
effort
an
control, and mutunl dependnce, Collaborative

is

of
slured
relation-

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

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, capabilities, 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 packages. 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 colIaboration 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 Management 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.

Chaptcr

.
.
.
.
.

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 control is pivotal to protecting its competitiveness and buildrng competitive advantage. 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 manent 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 compecompany, 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:
jeffrey
' For an excellent discussion of the Dros and cons of alliances versus acquisitions, see

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.

"1.

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 dorvnsized. The combined companies may also be able to reduce supply chain
costs bccause of buying in greater voiume from common suppliers. Liker.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.

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

To crente a more cost-efficient operation out of the combined

To extend the company's business

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 position 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.

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 loosened 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 acqusition 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 broadened ts media strategy by acquiring SFX Entertanment,
one of the world's Largest promoters, producers, and presenters 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

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 competitive 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
Acqu re," pp. 1o9

11o.

than

z3o,ooo billboards in the United States and 670,000 outdoor displays in 36 other countries.

r to

Part

One:

Section C: Crafting a Strategy

Anumber of previously applauded mcrgers / acquisitions have yet to live up

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.
to expecta

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 activities backward into sources of supply and/or forward toward end users. Thus,
if a manufacturer invests in facilities to produce certain component Palts that it formerly purchased from
A vertical ntegration strategy has appeal oniy
its own chain of retail
if it signifrcantly strengthens a frrm's competitiv outside suppliers or if it opens
stores to market its products to consumers, it remains
position andlor boosts ts profitability.
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

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 competitive strengths, and/or helps diffcrentiate the comPany's product offering.
The tzuo best reasons

for in'oesting comPnny

resoLffces

INTECRATING BACKI!AI(D 'I O ACHIEVE CREATI-I{ CON4PETITIVENESS 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
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
E

Stuckev and David White, "When and When Not to VerticalLy Integrate," Sloan Monogement
Revlew (Spring ry9t, pp. 7r-83.

Chapter

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 production 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 lessening 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 profits from producing both these items internally rather than having these supplied by outsiders. Furthermorc, Panera Bread's vertical integration sategy
made good competitive sense because it not only has helped lower store operating 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 handle 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 represented 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

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 Internet 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 vigorously 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 constitute 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

or more efficient production methods when they are saddled
with older technology or facilities.
Integrating backward potentially results in less flexibility in accommodating 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.
aduances

.
.

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.

Chapter

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 businesses with different kev success factors.

In

today's world of close relationshrps wth

suppliers and efcent supply chain management, 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 forgoes 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 UPSgained 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 better 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 company is better able to build and develop its own competitively valuable
competcncies and capabilities ',vhen it concenA company should generally not perform any

value chan actvity internally that can be

handbag production to 40 contract

in

15

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

manufacturers

particular activity s strategically crucal.

countries.

1'lll lilC I{lSK OF AN OUTSOL,RCINC STRAT[GY Thcbiggcstdanger of outsourcing is that a company

will farm out

the wrong types of activitics

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 rnanufacturers 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, enhancing 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 profitable 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. Companies like Walmart, Toyota, Microsoft, and Google play hardball, aggressively
pursuing cornpetitive advanta;e and trying to reap the benefits a competitive 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 competitive assets and strong points and exploit competitor weaknesses.r2 Ignoring
the need to tie a strategic offensive to a company's comThe 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
dim. For instance, it is foolish for a company with relaareas where ihey are weak.
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: Counterrevolutionary 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.

''

Chapter

Supplementing the Chosen Competitive Strategy-Other lmportant 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 produce market share gains if competitors offering similarly performing products 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 products 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 technology 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 otherwise).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 Chrysler 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.

"

Part

One:

Section C: Craftng a Strategy

8.

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.
9. 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-ofa-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, longterm 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 strongRunner-up firms are an especially attractive target when a challenger's
resource strengths and compctitive capabilities ae weil-suited to exploiting 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 competitive position can hasten its exit from the market.

'6 For an interesting study of how small firms can successfutly employ guerrilla-style tactics, see Mingand Donatd C. Hambrick, "Speed, Stealth, and SeLective Attack: How Small Firms Dffer from

Jer Chen

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.

Chapter

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

new
demand.1e This strategy views the business universe as
consisting of two distinct types of market space. One is
and nlloztts n coIPnnu to create and capture altogether

Blue ocean strategies offer growth

wherc industrv boundaries are defined and accepted,

the competitive rules of the game are well understood by all industry membcrs, 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 strategy 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 pulling 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 competitive 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.

in

revenues and profrts by discovering or rnventing

new industry segments that create altogether
new demand.

Chan Kim and Rene Mauborgne, "Blue Ocean Strategy," HoNard Business Review 82, no. rc
(October zoo4), pp. 76-84.

Part

One:

Section C: Crafting a Strategy

their cfforts at othcr rivals. While defensive strategies

stratesies...l:!.g:1.:1
basis
r0r creaung't
Good defensive
competitive advantage but rarely are the

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

Iion. Delensir e strategies can take either of tw o iorms:

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 challengers.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 maintaining 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 challengers 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.

.
o
.

Publicly committing the company to a policy of matching competitors'

telms or p-rrices.
Maintaining a war chest of cash and markctablc sccuritics.
Making an occasional strong counter-resFronse to the moves of weak competitors 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. Timing 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
payoff rvhen (l) pioneering hclps build a firm's imagc

and
can
s

disadvantages, competitive advantage

spring from when a move is made as well
from what move is

made

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))

"M
"

"

ncl repr.rtation with burers; (1) early commitments

to rle* technologies, new-style componenrs, nelv or
emerging clistributiorr charrnels, anrl so on. e alr pro'lure

Chapter

Supptementing the Chosen Competitive Strategy-Other lmportant Business Strategy Choices

an absolute cost advantage over rivals; (3) first-time customcrs remain strongly

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

loyal

becomes.23

Sometimes, though, markets are slow to acccpt the innovative product offering 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). Sometimes 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 precise 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 offering, a first-mover must have large-scale production, marketing, and distribution 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
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
P. Slevin,

Review 78, no.z (March-April zooo), pp. t3:-r45.

"The
'4 For a more extensive dscussion of this point, see Fernando Suarez and Gianvito Lanzolla,
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.

t3a

Part

One:

Sertior C: Crafting a Slraregy

AMAZON.COM'S FIRST.MOVER ADVANTAGE IN ONLINE RETAILING

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 number 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 program in the late r99os that added five new warehouses
and fulfiLtment centers totaling $3oo mitlion. The additional 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

lcadcr a condition that allon's a follou,er

than

ther

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 bitLon made it the world's largest Internet retailer and letf
Bezos'shares in Amazon.com made him the 11oth wealthiest 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 cornmented in a 2oo9 Fortune article profiling the company,

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. "
"We were nvestors

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-

to cnd up n ith lor,vcr costs

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.liscnchanted 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 technology 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

Chapter

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 matters 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?
\,Vill buyers need to leam new skills or adopt new behaviors? Will buyers
encounter high switching costs?
Are thee influential competitors in a position to delay or derail the efforts
of a first-mover?

When the answers to any of these questions are yes/ then a company must
be careful not to pour too mariy resources into getting ahead of the market
opportunity-the race is likely going to be more of a 1'0-year marathon than a
two-year sprint.
lbd., p. 192; and costas Markides and Paul A. Geroski, "Racng to be 2nd: Conquering the
lndustries of the Future," Busness Strotegy Revew 15, no. 4 (Winter zoo4), pp. z5-3r.

Key Points
Once a company has selected which of the five basic competitive strategies to employ

in rts quest for competitive advantage, then it must decide whether and how to supplement its choice of

1.

a basic

competitive strategy approach.

Many companies are using strategic alliances and collaborative partnerships

to help them in the race to build a global market presence or be a leader in the
industries of the future. Strategic alliances are an attractive, flexible, and often
cost-effective means by which companies can gain access to missing technology,
expertise, and business capabilities.

2.

Mergers and acquisitions arc another attractive strategic option for strengthening
a firm's competitiveness. When the operations of two companies are combined
via merger or acquisition, the new comPany's competitiveness can be enhanced
in any of several ways-lower costs; stronger technological skills; more or better

compctitive capabilities; a mote attractive lineup of products and services; wider

geographic coverage; and,/or greater financial resources with which to invest in
R&D, add capacity, or expand into new areas.
3

Vertically integrating forward or backward makes strategic sense only if it

strengthens a company's position via either cost reduction or cteation of a differentiation-based advantage. Otherwise, the drawbacks of vertical integration
(increased invcstment, greater business risk, increased vulnerability to technological changcs, and less flexibility in making product changes) ate likely to outweigh
any advantages.

Outsourcing pieces of the value chain formerly performecl in-house can erance
a company's competitiveness whenever (1) an activity can be performed better
or more cheaply by outside specialists; (2) the activity is not crucial to the firm's
ability to achieve sustainable compctitive advantage and won't hollow out its
core competencies, capabilities, or technical know-how; (3) it improves a company's ability to innovate; and,/or (4) it allows a company to concentrate on its core
business and do what it does best.
Companies have a number of offensive stategy options for improving their
market positions and trying to secure a competitive advantage: (1) attacking competitors weaknesses, (2) offering an equal or better product at a lower
price, (3) pursuing sustained product innovation, (4) leapfrogging competitors
by being first to adopt next-generation technologies or the first to introduce
next-generation products, (5) adopting and improving on the good ideas of other
companies, (6) deliberately attacking those market segments where key rivals
make big profits, (7) going aftet less contestcd or unoccupied market territory
(8) using hit-and-run tactics to steal sales away from unsuspecting rivals, and
(9) launching preemptive strikes. A blue ocean offensir.e strategy seeks to gain a
dramatic and durable competitive advantagc by abandoning efforts to beat out
competitors in existing markets and, instead, inventing a new industry or distinctive market segment that renders existing competitors largely irrelevant and
allow.s a company to create and capture altogether new demand.
Defensive strategies to protect a company's position usually take the form of
making moves that put obstacles in the path of would-be challengers and fortify
the company's present position while undertaking actions to dissuade rivals
from cven trying to attack (by signaling that the resulting battle will be more
costly to the challenger than it is worth).
.7

The timing of strategic moves also has reievance in the quest for competitive
advantage. Company managers are obligated to careful1y coruider the advantages or disadvantages that attach to being a first-mover versus a fast-follower

versus a wait-and-see late-mover.

Assurance
of Learning
Exercises

Using your university library's subscripon to Lexis-Nexis, EBSCO, or a similar LOz

database, perform a search on "acquision strategy." Identify at least two companies in different industries that are using acquisitions to stengthen their market positions. How have these acquisitions enhanced the acquiring companies'
resource strengths and competitive capabilities?
Go to wwwbridgstone.co.jplenglish/info and review information about Bridge- LO3
stone Corporation's Tie and Raw Materials operations under the Corporate
Infomation and Data Library links. To what extent is the company vertically

LO4 3.

integrated? What segments of the industry value chain has the company chosen
to pcrform? \{hat are the benefits and liabilities of Bridgestone's vertical integration strategy?
Co to www.google.com and do a search on "outsourcing." Identify at least two
companies in differeni industries that have entered into outsourcing agreements
with firms with specialized services. In addition, describe what value chain activities thc companies have chosen to outsource. Do any of these outsourcing agreements seem likely to threaten any of the companies' competitive capabilities?

LO2
LO3

1.

Does your company have the option to merge with or acquire other comPanies?
If so, which rival companies would you like to acquire or merge with?

LO4
LO7

2.

Is your company vertically integrated? Explain.

3.

Is your company able to engage in outsourcing? If so, what do you see as the
pros and cons of outsourcing?

4.

What options for being a first-mover does your company have? Do any of these
first-mover options hold competitive advantage potential?

Ex
S