CHAPTER6StrengtheningaCompanysCompetitivePosition.docx
CHAPTER 6 Strengthening a Company’s Competitive Position Strategic Moves, Timing, and Scope of Operations © Fanatic Studio/Getty Images Learning Objectives THIS CHAPTER WILL HELP YOU UNDERSTAND: LO 1 Whether and when to pursue offensive or defensive strategic moves to improve a company’s market position. LO 2 When being a first mover or a fast follower or a late mover is most advantageous. LO 3 The strategic benefits and risks of expanding a company’s horizontal scope through mergers and acquisitions. LO 4 The advantages and disadvantages of extending the company’s scope of operations via vertical integration. LO 5 The conditions that favor farming out certain value chain activities to outside parties. LO 6 When and how strategic alliances can substitute for horizontal mergers and acquisitions or vertical integration and how they can facilitate outsourcing. page 149 Whenever you look at any potential merger or acquisition, you look at the potential to create value for your shareholders. Dilip Shanghvi—Founder and managing director of Sun Pharmaceuticals In the virtual economy, collaboration is a new competitive imperative. Michael Dell—Founder and CEO of Dell Inc. Alliances and partnerships produce stability when they reflect realities and interests. Stephen Kinzer—Author, journalist, and academic Once a company has settled on which of the five generic competitive strategies to employ, attention turns to what other strategic actions it can take to complement its competitive approach and maximize the power of its overall strategy. The first set of decisions concerns whether to undertake offensive or defensive competitive moves, and the timing of such moves. The second set concerns the breadth of a company’s activities (or its scope of operations along an industry’s entire value chain). All in all, the following measures to strengthen a company’s competitive position must be considered: Whether to go on the offensive and initiate aggressive strategic moves to improve the company’s market position. Whether to employ defensive strategies to protect the company’s market position. When to undertake strategic moves—whether advantage or disadvantage lies in being a first mover, a fast follower, or a late mover. Whether to bolster the company’s market position by merging with or acquiring another company in the same industry. Whether to integrate backward or forward into more stages of the industry value chain system. Which value chain activities, if any, should be outsourced. Whether to enter into strategic alliances or partnership arrangements with other enterprises. This chapter presents the pros and cons of each of these strategy-enhancing measures. LAUNCHING STRATEGIC OFFENSIVES TO IMPROVE A COMPANY’S MARKET POSITION LO 1 Whether and when to pursue offensive or defensive strategic moves to improve a company’s market position. No matter which of the five generic competitive strategies a firm employs, there are times when a company should go on the offensive to improve its market position and performance. Strategic offensives are called for when a company spots opportunities to gain profitable market share at its rivals’ expense or when a company has no choice page 150but to try to whittle away at a strong rival’s competitive advantage. Companies like AutoNation, Amazon, Apple, and Google play hardball, aggressively pursuing competitive advantage and trying to reap the benefits a competitive edge offers—a leading market share, excellent profit margins, and rapid growth.1 The best offensives tend to incorporate several principles: (1) focusing relentlessly on building competitive advantage and then striving to convert it into a sustainable advantage, (2) applying resources where rivals are least able to defend themselves, (3) employing the element of surprise as opposed to doing what rivals expect and are prepared for, and (4) displaying a capacity for swift and decisive actions to overwhelm rivals.2 Sometimes a company’s best strategic option is to seize the initiative, go on the attack, and launch a strategic offensive to improve its market position. Choosing the Basis for Competitive Attack As a rule, challenging rivals on competitive grounds where they are strong is an uphill struggle.3 Offensive initiatives that exploit competitor weaknesses stand a better chance of succeeding than do those that challenge competitor strengths, especially if the weaknesses represent important vulnerabilities and weak rivals can be caught by surprise with no ready defense. The best offensives use a company’s most powerful resources and capabilities to attack rivals in the areas where they are competitively weakest. Strategic offensives should exploit the power of a company’s strongest competitive assets—its most valuable resources and capabilities such as a better-known brand name, a more efficient production or distribution system, greater technological capability, or a superior reputation for quality. But a consideration of the company’s strengths should not be made without also considering the rival’s strengths and weaknesses. A strategic offensive should be based on those areas of strength where the company has its greatest competitive advantage over the targeted rivals. If a company has especially good customer service capabilities, it can make special sales pitches to the customers of those rivals that provide subpar customer service. Likewise, it may be beneficial to pay special attention to buyer segments that a rival is neglecting or is weakly equipped to serve. The best offensives use a company’s most powerful resources and capabilities to attack rivals in the areas where they are weakest. Ignoring the need to tie a strategic offensive to a company’s competitive strengths and what it does best is like going to war with a popgun—the prospects for success are dim. For instance, it is foolish for a company with relatively high costs to employ a price-cutting offensive. Likewise, it is ill-advised to pursue a product innovation offensive without having proven expertise in R&D and new product development. The principal offensive strategy options include the following: Offering an equally good or better product at a lower price. Lower prices can produce market share gains if competitors don’t respond with price cuts of their own and if the challenger convinces buyers that its product is just as good or better. However, such a strategy increases total profits only if the gains in additional unit sales are enough to offset the impact of thinner margins per unit sold. Price-cutting offensives should be initiated only by companies that have first achieved a cost advantage.4 British airline EasyJet used this strategy successfully against rivals such as British Air, Alitalia, and Air France by first cutting costs to the bone and then targeting leisure passengers who care more about low price than in-flight amenities and service.5 Leapfrogging competitors by being first to market with next-generation products. In technology-based industries, the opportune time to overtake an entrenched competitor is when there is a shift to the next generation of the technology. Microsoft page 151got its next-generation Xbox 360 to market a full 12 months ahead of Sony’s PlayStation 3 and Nintendo’s Wii, helping it build a sizable market share on the basis of cutting-edge innovation in the video game industry. Sony was careful to avoid a repeat, releasing its PlayStation 4 in November 2013 just as Microsoft released its Xbox One. With better graphical performance than Xbox One, along with some other advantages, the PS4 was able to boost Sony back into the lead position. Pursuing continuous product innovation to draw sales and market share away from less innovative rivals. Ongoing introductions of new and improved products can put rivals under tremendous competitive pressure, especially when rivals’ new product development capabilities are weak. But such offensives can be sustained only if a company can keep its pipeline full with new product offerings that spark buyer enthusiasm. Pursuing disruptive product innovations to create new markets. While this strategy can be riskier and more costly than a strategy of continuous innovation, it can be a game changer if successful. Disruptive innovation involves perfecting a new product with a few trial users and then quickly rolling it out to the whole market in an attempt to get many buyers to embrace an altogether new and better value proposition quickly. Examples include online universities, Bumble (dating site), Venmo (digital wallet), Apple Music, CampusBookRentals, and Amazon’s Kindle. Adopting and improving on the good ideas of other companies (rivals or otherwise). The idea of warehouse-type home improvement centers did not originate with Home Depot cofounders Arthur Blank and Bernie Marcus; they got the “big-box” concept from their former employer, Handy Dan Home Improvement. But they were quick to improve on Handy Dan’s business model and take Home Depot to the next plateau in terms of product-line breadth and customer service. Offensive-minded companies are often quick to adopt any good idea (not nailed down by a patent or other legal protection) and build on it to create competitive advantage for themselves. Using hit-and-run or guerrilla warfare tactics to grab market share from complacent or distracted rivals. Options for “guerrilla offensives” include occasionally lowballing on price (to win a big order or steal a key account from a rival), surprising rivals with sporadic but intense bursts of promotional activity (offering a discounted trial offer to draw customers away from rival brands), or undertaking special campaigns to attract the customers of rivals plagued with a strike or problems in meeting buyer demand.6 Guerrilla offensives are particularly well suited to small challengers that have neither the resources nor the market visibility to mount a full-fledged attack on industry leaders. Launching a preemptive strike to secure an industry’s limited resources or capture a rare opportunity.7 What makes a move preemptive is its one-of-a-kind nature—whoever strikes first stands to acquire competitive assets that rivals can’t readily match. Examples of preemptive moves include (1) securing the best distributors in a particular geographic region or country; (2) obtaining the most favorable site at a new interchange or intersection, in a new shopping mall, and so on; (3) tying up the most reliable, high-quality suppliers via exclusive partnerships, long-term contracts, or acquisition; and (4) moving swiftly to acquire the assets of distressed rivals at bargain prices. To be successful, a preemptive move doesn’t have to totally block rivals from following; it merely needs to give a firm a prime position that is not easily circumvented. page 152 How long it takes for an offensive to yield good results varies with the competitive circumstances.8 It can be short if buyers respond immediately (as can occur with a dramatic cost-based price cut, an imaginative ad campaign, or a disruptive innovation). Securing a competitive edge can take much longer if winning consumer acceptance of the company’s product will take some time or if the firm may need several years to debug a new technology or put a new production capacity in place. But how long it takes for an offensive move to improve a company’s market standing—and whether the move will prove successful—depends in part on whether market rivals recognize the threat and begin a counterresponse. Whether rivals will respond depends on whether they are capable of making an effective response and if they believe that a counterattack is worth the expense and the distraction.9 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:10 Market leaders that are vulnerable. Offensive attacks make good sense when a company that leads in terms of market share is not a true leader in terms of serving the market well. Signs of leader vulnerability include unhappy buyers, an inferior product line, aging technology or outdated plants and equipment, a preoccupation with diversification into other industries, and financial problems. Caution is well advised in challenging strong market leaders—there’s a significant risk of squandering valuable resources in a futile effort or precipitating a fierce and profitless industrywide battle for market share. Runner-up firms with weaknesses in areas where the challenger is strong. Runner-up firms are an especially attractive target when a challenger’s resources and capabilities are well suited to exploiting their weaknesses. Struggling enterprises that are on the verge of going under. Challenging a hard-pressed rival in ways that further sap its financial strength and competitive position can weaken its resolve and hasten its exit from the market. In this type of situation, it makes sense to attack the rival in the market segments where it makes the most profits, since this will threaten its survival the most. Small local and regional firms with limited capabilities. Because small firms typically have limited expertise and resources, a challenger with broader and/or deeper capabilities is well positioned to raid their biggest and best customers—particularly those that are growing rapidly, have increasingly sophisticated requirements, and may already be thinking about switching to a supplier with a more full-service capability. CORE CONCEPT A blue-ocean strategy offers growth in revenues and profits by discovering or inventing new industry segments that create altogether new demand. Blue-Ocean Strategy—a Special Kind of Offensive A blue-ocean strategy seeks to gain a dramatic and durable competitive advantage by abandoning efforts to beat out competitors in existing markets and, instead, inventing a new market segment that renders existing competitors irrelevant and allows a company to create and capture altogether new demand.11 This strategy views the business universe as consisting of two distinct types of market space. One is where industry boundaries are well defined, the competitive rules of the game are understood, and companies try to outperform rivals by capturing a bigger share of existing demand. In such markets, intense competition constrains a company’s page 153prospects for rapid growth and superior profitability since rivals move quickly to either imitate or counter the successes of competitors. The second type of market space is a “blue ocean,” where the industry does not really exist yet, is untainted by competition, and offers wide-open opportunity for profitable and rapid growth if a company can create new demand with a new type of product offering. A terrific example of such blue-ocean market space is the online auction industry that eBay created and now dominates. Other companies that have created blue-ocean market spaces include NetJets in fractional jet ownership, Drybar in hair blowouts, Tune Hotels in limited service “backpacker” hotels, and Cirque du Soleil in live entertainment. Cirque du Soleil “reinvented the circus” by pulling in a whole new group of customers—adults and corporate clients—who not only were noncustomers of traditional circuses (like Ringling Brothers) but also were willing to pay several times more than the price of a conventional circus ticket to have a “sophisticated entertainment experience” featuring stunning visuals and star-quality acrobatic acts. Zipcar Inc. has been using a blue-ocean strategy to compete against entrenched rivals in the rental-car industry. It rents cars by the hour or day (rather than by the week) to members who pay a yearly fee for access to cars parked in designated spaces located conveniently throughout large cities. By allowing drivers under 25 years of age to rent cars and by targeting city dwellers who need to supplement their use of public transportation with short-term car rentals, Zipcar entered uncharted waters in the rental-car industry, growing rapidly in the process. Illustration Capsule 6.1 provides another example of a company that has thrived by seeking uncharted blue waters. Blue-ocean strategies provide a company with a great opportunity in the short run. But they don’t guarantee a company’s long-term success, which depends more on whether a company can protect the market position it opened up and sustain its early advantage. Gilt Groupe serves as an example of a company that opened up new competitive space in online luxury retailing only to see its blue-ocean waters ultimately turn red. Its competitive success early on prompted an influx of fast followers into the luxury flash-sale industry, including HauteLook, RueLaLa, Lot18, and MyHabit.com. The new rivals not only competed for online customers, who could switch costlessly from site to site (since memberships were free), but also competed for unsold designer inventory. In recent years, Gilt Groupe has been forced to downsize and still has yet to go public, contrary to early expectations. DEFENSIVE STRATEGIES—PROTECTING MARKET POSITION AND COMPETITIVE ADVANTAGE In a competitive market, all firms are subject to offensive challenges from rivals. The purposes of defensive strategies are to lower the risk of being attacked, weaken the impact of any attack that occurs, and induce challengers to aim their efforts at other rivals. While defensive strategies usually don’t enhance a firm’s competitive advantage, they can definitely help fortify the firm’s competitive position, protect its most valuable resources and capabilities from imitation, and defend whatever competitive advantage it might have. Defensive strategies can take either of two forms: actions to block challengers or actions to signal the likelihood of strong retaliation. It was not too long ago that young, athletic men struggled to find clothing that adequately fit their athletic frames. It was this issue that led two male Stanford MBA students, in 2007, to create Bonobos, a men’s clothing brand that initially focused on selling well-fitting men’s pants via the Internet. At the time, this concept occupied relatively blue waters as most other clothing brands and retailers in reasonable price ranges had largely focused on innovating in women’s clothing, as opposed to men’s. In the years since, Bonobos has expanded its product portfolio to include a full line of men’s clothing, while growing its revenue from $4 million in 2009 to over $100 million in 2016. This success has not gone unnoticed by both established players as well as other entrepreneurs. Numerous startups have jumped on the custom men’s clothing bandwagon ranging from the low-cost Combatant Gentlemen, to the many bespoke suit tailors that exist in major cities around the United States. In addition, more mainstream clothing retailers have also identified this new type of male customer, with the CEO of Men’s Wearhouse, Doug Ewert, stating that he views custom clothing as a “big growth opportunity.” That company recently acquired Joseph Abboud to focus more on millennial customers, and plans to begin offering more types of customized clothing in the future. © Patti McConville/Alamy Stock Photo In response, Bonobos has focused on a new area of development to move to bluer waters in the brick-and-mortar space. The company’s innovation is the Guideshop—a store where you can’t actually buy anything to take home. Instead, the Guideshop allows men to have a personalized shopping experience, where they can try on clothing in any size or color, and then have it delivered the next day to their home or office. This model was based on the insight that most men want an efficient shopping experience, with someone to help them identify the right product and proper fit, so that they could order with ease in the future. As Bonobos CEO Andy Dunn stated more simply, the idea was to provide a different experience from existing retail, which had become “a job about keeping clothes folded [rather] than delivering service.” Since opening its first Guideshop in 2011, the company has now expanded to 20 Guideshops nationwide and plans to continue this growth moving forward. This strategy has been fueling the company’s success, but how long Bonobos has before retail clothing copycats turn these blue waters red remains to be seen. Note: Developed with Jacob M. Crandall. Sources: Richard Feloni, “After 8 Years and $128 Million Raised, the Clock Is Ticking for Men’s Retailer Bonobos,” BusinessInsider.com, October 6, 2015; Vikram Alexei Kansara, “Andy Dunn of Bonobos on Building the Armani of the E-commerce Era,” Businessoffashion.com, July 19, 2013; Hadley Malcolm, “Men’s Wearhouse Wants to Suit Up Millennials,” USA Today, June 8, 2015. page 154 Good defensive strategies can help protect a competitive advantage but rarely are the basis for creating one. Blocking the Avenues Open to Challengers The most frequently employed approach to defending a company’s present position involves actions that restrict a challenger’s options for initiating a competitive attack. There are any number of obstacles that can be put in the path of would-be challengers. A defender can introduce new features, add new models, or broaden its product line to close off gaps and vacant niches to opportunity-seeking challengers. It can thwart rivals’ efforts to attack with a lower price by maintaining its own lineup of economy-priced options. It can discourage buyers from trying competitors’ brands by lengthening warranties, making early announcements about impending new products or price changes, offering free training and support services, or providing coupons and sample giveaways to buyers most prone to experiment. It can induce potential buyers to page 155reconsider switching. It can challenge the quality or safety of rivals’ products. Finally, a defender can grant volume discounts or better financing terms to dealers and distributors to discourage them from experimenting with other suppliers, or it can convince them to handle its product line exclusively and force competitors to use other distribution outlets. Signaling Challengers That Retaliation Is Likely There are many ways to throw obstacles in the path of would-be challengers. The goal of signaling challengers that strong retaliation is likely in the event of an attack is either to dissuade challengers from attacking at all or to divert them to less threatening options. Either goal can be achieved by letting challengers know the battle will cost more than it is worth. Signals to would-be challengers can be given by: Publicly announcing management’s commitment to maintaining the firm’s present market share. Publicly committing the company to a policy of matching competitors’ terms or prices. Maintaining a war chest of cash and marketable securities. Making an occasional strong counterresponse to the moves of weak competitors to enhance the firm’s image as a tough defender. To be an effective defensive strategy, however, signaling needs to be accompanied by a credible commitment to follow through. TIMING A COMPANY’S STRATEGIC MOVES 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. When to make a strategic move is often as crucial as what move to make. Timing is especially important when first-mover advantages and disadvantages exist. Under certain conditions, being first to initiate a strategic move can have a high payoff in the form of a competitive advantage that later movers can’t dislodge. Moving first is no guarantee of success, however, since first movers also face some significant disadvantages. Indeed, there are circumstances in which it is more advantageous to be a fast follower or even a late mover. Because the timing of strategic moves can be consequential, it is important for company strategists to be aware of the nature of first-mover advantages and disadvantages and the conditions favoring each type of move.12 The Potential for First-Mover Advantages LO 2 When being a first mover or a fast follower or a late mover is most advantageous. Market pioneers and other types of first movers typically bear greater risks and greater development costs than firms that move later. If the market responds well to its initial move, the pioneer will benefit from a monopoly position (by virtue of being first to market) that enables it to recover its investment costs and make an attractive profit. If the firm’s pioneering move gives it a competitive advantage that can be sustained even after other firms enter the market space, its first-mover advantage will be greater still. The extent of this type of advantage, however, will depend on whether and how fast follower firms can piggyback on the pioneer’s success and either imitate or improve on its move. There are five such conditions in which first-mover advantages are most likely to arise: When pioneering helps build a firm’s reputation and creates strong brand loyalty. Customer loyalty to an early mover’s brand can create a tie that binds, limiting the page 156success of later entrants’ attempts to poach from the early mover’s customer base and steal market share. When a first mover’s customers will thereafter face significant switching costs. Switching costs can protect first movers when consumers make large investments in learning how to use a specific company’s product or in purchasing complementary products that are also brand-specific. Switching costs can also arise from loyalty programs or long-term contracts that give customers incentives to remain with an initial provider. When property rights protections thwart rapid imitation of the initial move. In certain types of industries, property rights protections in the form of patents, copyrights, and trademarks prevent the ready imitation of an early mover’s initial moves. First-mover advantages in pharmaceuticals, for example, are heavily dependent on patent protections, and patent races in this industry are common. In other industries, however, patents provide limited protection and can frequently be circumvented. Property rights protections also vary among nations, since they are dependent on a country’s legal institutions and enforcement mechanisms. When an early lead enables the first mover to move down the learning curve ahead of rivals. When there is a steep learning curve and when learning can be kept proprietary, a first mover can benefit from volume-based cost advantages that grow ever larger as its experience accumulates and its scale of operations increases. This type of first-mover advantage is self-reinforcing and, as such, can preserve a first mover’s competitive advantage over long periods of time. Honda’s advantage in small multiuse motorcycles has been attributed to such an effect. When a first mover can set the technical standard for the industry. In many technology-based industries, the market will converge around a single technical standard. By establishing the industry standard, a first mover can gain a powerful advantage that, like experience-based advantages, builds over time. The lure of such an advantage, however, can result in standard wars among early movers, as each strives to set the industry standard. The key to winning such wars is to enter early on the basis of strong fast-cycle product development capabilities, gain the support of key customers and suppliers, employ penetration pricing, and make allies of the producers of complementary products. Illustration Capsule 6.2 describes how Uber achieved a first-mover advantage in ride-hailing services. The Potential for Late-Mover Advantages or First-Mover Disadvantages In some instances there are advantages to being an adept follower rather than a first mover. Late-mover advantages (or first-mover disadvantages) arise in four instances: When the costs of pioneering are high relative to the benefits accrued and imitative followers can achieve similar benefits with far lower costs. This is often the case when second movers can learn from a pioneer’s experience and avoid making the same costly mistakes as the pioneer. When an innovator’s products are somewhat primitive and do not live up to buyer expectations, thus allowing a follower with better-performing products to win disenchanted buyers away from the leader. page 157When rapid market evolution (due to fast-paced changes in either technology or buyer needs) gives second movers the opening to leapfrog a first mover’s products with more attractive next-version products. When market uncertainties make it difficult to ascertain what will eventually succeed, allowing late movers to wait until these needs are clarified. When customer loyalty to the pioneer is low and a first mover’s skills, know-how, and actions are easily copied or even surpassed In February 2008, Travis Kalanick and Garrett Camp stood on a Paris street struggling to hail a cab when an idea hit them: get a ride by using an app on your smartphone. The result of this brainstorm was the ride-sharing company Uber. The company’s mobile app pairs individuals looking for a car with the nearest available driver. Within minutes of summoning a car with Uber, a rider can be on her way. The Uber app takes care of everything: giving the driver directions, charging the ride to the customer’s credit card, and tipping the driver. There is no need to carry cash or scan streets for an open cab. Uber has been extremely successful with customers looking for an on-demand cab and individuals looking to make money driving. After its founding in March 2009, Uber became one of the fastest-growing companies in history, faster than Facebook or Twitter, and dominated the on-demand transportation market, leaving competitors like Lyft, Taxify, and Sidecar in the dust. Uber’s rapid rise had much to do with the advantages of being the first mover in the on-demand transportation market. Upon introducing its car service to new cities, Uber aggressively established itself, offering monetary bonuses for drivers who signed up and providing free first rides to encourage new customers to download the Uber app. When competitors entered a city after Uber, they found that the market was largely saturated; many potential customers and drivers were already using Uber. Once the app was downloaded, Uber customers had little reason to try a new ride-sharing service. With more drivers working for them, Uber could provide customers with shorter wait times, on average. Similarly, with more customers using Uber’s app, drivers had little incentive to work a competitor since Uber could provide steadier work. © Mark Ralston/AFP/Getty Images In 2015, Uber served over 300 cities worldwide, dwarfing Lyft’s availability in just 65 cities. The company expanded its product offering, with low-cost UberX and UberPool, to capture new customer segments before competitors could; both times, Lyft launched similar services later but had already missed out on most of the market. With rapid growth and a large customer base, Uber earned a $50 billion valuation and expected revenue of $2 billion in 2015. However, future success depends on whether Uber continues to stay a step ahead of its competition. In China, where Uber lacks the recognition and reputational advantage that it has in the United States, a similar service called Didi Kuaidi has been beating Uber at its own game, by being the first to enter many Chinese cities. Note: Developed with Arthur J. Santry. Sources: D. MacMillan and T. Demos, “Uber Valued at More Than $50 Billion,” Wall Street Journal Online, July 15, 2015, www.wsj.com; Edmund Ingham, “Start-ups Take Note,” Forbes, December 5, 2014, www.forbes.com; Heather Kelly, “Lyft Battles Uber for Drivers with New Perks,” CNN, October 8, 2015, www.cnn.com; “Uber: Driving Hard,” The Economist, June 13, 2015, www.economist.com; company website (accessed November 30, 2015). page 158 To Be a First Mover or Not In weighing the pros and cons of being a first mover versus a fast follower versus a late mover, it matters whether the race to market leadership in a particular industry is a 10-year marathon or a 2-year sprint. In marathons, a slow mover is not unduly penalized—first-mover advantages can be fleeting, and there’s ample time for fast followers and sometimes even late movers to catch up.13 Thus the speed at which the pioneering innovation is likely to catch on matters considerably as companies struggle with whether to pursue an emerging market opportunity aggressively (as a first mover) or cautiously (as a late mover). For instance, it took 5.5 years for worldwide mobile phone use to grow from 10 million to 100 million, and it took 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 opportunity. 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 inflection point can come early on a fast-rising curve (like the use of e-mail and watching movies streamed over the Internet) or farther up on a slow-rising curve (as with battery-powered motor vehicles, solar and wind power, and digital textbooks for college students). Any company that seeks competitive advantage by being a first mover thus needs to ask some hard questions: Does market takeoff depend on the development of complementary products or services that currently are not available? Is new infrastructure required before buyer demand can surge? Will buyers need to learn new skills or adopt new behaviors? Will buyers encounter high switching costs in moving to the newly introduced product or service? Are there 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 many resources into getting ahead of the market opportunity—the race is likely going to be closer to a 10-year marathon than a 2-year sprint.14 On the other hand, if the market is a winner-take-all type of market, where powerful first-mover advantages insulate early entrants from competition and prevent later movers from making any headway, then it may be best to move quickly despite the risks. STRENGTHENING A COMPANY’S MARKET POSITION VIA ITS SCOPE OF OPERATIONS Apart from considerations of competitive moves and their timing, there is another set of managerial decisions that can affect the strength of a company’s market position. These decisions concern the scope of a company’s operations—the breadth of its activities and the extent of its market reach. Decisions regarding the scope of the firm focus on which activities a firm will perform internally and which it will not. CORE CONCEPT The scope of the firm refers to the range of activities that the firm performs internally, the breadth of its product and service offerings, the extent of its geographic market presence, and its mix of businesses. Consider, for example, Ralph Lauren Corporation. In contrast to Rare Essentials, a boutique clothing store that sells apparel at a single retail store, Ralph Lauren designs, markets, and distributes fashionable apparel and other merchandise to approximately page 15913,000 major department stores and specialty retailers throughout the world. In addition, it operates over 400 Ralph Lauren retail stores, more than 250 factory stores, and 10 e-commerce sites. Scope decisions also concern which segments of the market to serve—decisions that can include geographic market segments as well as product and service segments. Almost 40 percent of Ralph Lauren’s sales are made outside the United States, and its product line includes apparel, fragrances, home furnishings, eyewear, watches and jewelry, and handbags and other leather goods. The company has also expanded its brand lineup through the acquisitions of Chaps menswear and casual retailer Club Monaco. Decisions such as these, in essence, determine where the boundaries of a firm lie and the degree to which the operations within those boundaries cohere. They also have much to do with the direction and extent of a business’s growth. In this chapter, we introduce the topic of company scope and discuss different types of scope decisions in relation to a company’s business-level strategy. In the next two chapters, we develop two additional dimensions of a firm’s scope. Chapter 7 focuses on international expansion—a matter of extending the company’s geographic scope into foreign markets. Chapter 8 takes up the topic of corporate strategy, which concerns diversifying into a mix of different businesses. Scope issues are at the very heart of corporate-level strategy. 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 firm’s internal activities encompass the range of activities that make up an industry’s entire value chain system, from raw-material production to final sales and service activities. Several dimensions of firm scope have relevance for business-level strategy in terms of their capacity to strengthen a company’s position in a given market. These include the firm’s horizontal scope, which is the range of product and service segments that the firm serves within its product or service market. Mergers and acquisitions involving other market participants provide a means for a company to expand its horizontal scope. Expanding the firm’s vertical scope by means of vertical integration can also affect the success of its market strategy. Vertical scope is the extent to which the firm engages in the various activities that make up the industry’s entire value chain system, from initial activities such as raw-material production all the way to retailing and after-sale service activities. Outsourcing decisions concern another dimension of scope since they involve narrowing the firm’s boundaries with respect to its participation in value chain activities. We discuss the pros and cons of each of these options in the sections that follow. Because strategic alliances and partnerships provide an alternative to vertical integration and acquisition strategies and are sometimes used to facilitate outsourcing, we conclude this chapter with a discussion of the benefits and challenges associated with cooperative arrangements of this nature. HORIZONTAL MERGER AND ACQUISITION STRATEGIES LO 3 The strategic benefits and risks of expanding a company’s horizontal scope through mergers and acquisitions. Mergers and acquisitions are much-used strategic options to strengthen a company’s market position. A merger is the combining of two or more companies into a single corporate entity, with the newly created company often taking on a new name. An acquisition is a combination in which one company, the acquirer, purchases and absorbs the operations of another, the acquired. 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 and page 160competitive capabilities of the newly created enterprise end up much the same whether the combination is the result of an acquisition or a merger. Horizontal mergers and acquisitions, which involve combining the operations of firms within the same product or service market, provide an effective means for firms to rapidly increase the scale and horizontal scope of their core business. For example, the merger of AMR Corporation (parent of American Airlines) with US Airways has increased the airlines’ scale of operations and extended their reach geographically to create the world’s largest airline. Merger and acquisition strategies typically set sights on achieving any of five objectives:15 Creating a more cost-efficient operation out of the combined companies. When a company acquires another company in the same industry, there’s usually enough overlap in operations that less efficient plants can be closed or distribution and sales activities partly combined and downsized. Likewise, it is usually feasible to squeeze out cost savings in administrative activities, again by combining and downsizing such administrative activities as finance and accounting, information technology, human resources, and so on. The combined companies may also be able to reduce supply chain costs because of greater bargaining power over common suppliers and closer collaboration with supply chain partners. By helping consolidate the industry and remove excess capacity, such combinations can also reduce industry rivalry and improve industry profitability. Expanding a company’s geographic coverage. One of the best and quickest ways to expand a company’s geographic coverage is to acquire rivals with operations in the desired locations. Since a company’s size increases with its geographic scope, another benefit is increased bargaining power with the company’s suppliers or buyers. Greater geographic coverage can also contribute to product differentiation by enhancing a company’s name recognition and brand awareness. Banks like JPMorgan Chase, Wells Fargo, and Bank of America have used acquisition strategies to establish a market presence and gain name recognition in an ever-growing number of states and localities. Food products companies like Nestlé, Kraft, Unilever, and Procter & Gamble have made acquisitions an integral part of their strategies to expand internationally. Extending the company’s business into new product categories. Many times a company has gaps in its product line that need to be filled in order to offer customers a more effective product bundle or the benefits of one-stop shopping. For example, customers might prefer to acquire a suite of software applications from a single vendor that can offer more integrated solutions to the company’s problems. Acquisition can be a quicker and more potent way to broaden a company’s product line than going through the exercise of introducing a company’s own new product to fill the gap. Coca-Cola has increased the effectiveness of the product bundle it provides to retailers by acquiring beverage makers Minute Maid, Odwalla, Hi-C, and Glacéau Vitaminwater. Gaining quick access to new technologies or other resources and capabilities. Making acquisitions to bolster a company’s technological know-how or to expand its skills and capabilities allows a company to bypass a time-consuming and expensive internal effort to build desirable new resources and capabilities. From 2000 through December 2015, Cisco Systems purchased 128 companies to give it page 161more technological reach and product breadth, thereby enhancing its standing as the world’s largest provider of hardware, software, and services for creating and operating Internet networks. Leading the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunities. In fast-cycle industries or industries whose boundaries are changing, companies can use acquisition strategies to hedge their bets about the direction that an industry will take, to increase their capacity to meet changing demands, and to respond flexibly to changing buyer needs and technological demands. News Corporation has prepared for the convergence of media services with the purchase of satellite TV companies to complement its media holdings in TV broadcasting (the Fox network and TV stations in various countries), cable TV (Fox News, Fox Sports, and FX), filmed entertainment (Twentieth Century Fox and Fox studios), newspapers, magazines, and book publishing. Horizontal mergers and acquisitions can strengthen a firm’s competitiveness in five ways: (1) by improving the efficiency of its operations, (2) by heightening its product differentiation, (3) by reducing market rivalry, (4) by increasing the company’s bargaining power over suppliers and buyers, and (5) by enhancing its flexibility and dynamic capabilities. Illustration Capsule 6.3 describes how Bristol-Myers Squibb developed its “string-of-pearls” horizontal acquisition strategy to fill in its pharmaceutical product development gaps. Why Mergers and Acquisitions Sometimes Fail to Produce Anticipated Results Despite many successes, mergers and acquisitions do not always produce the hoped-for outcomes.16 Cost savings may prove smaller than expected. Gains in competitive capabilities may take substantially longer to realize or, worse, may never materialize at all. Efforts to mesh the corporate cultures can stall due to formidable resistance from organization members. Key employees at the acquired company can quickly become disenchanted and leave; the morale of company personnel who remain can drop to disturbingly low levels because they disagree with newly instituted changes. Differences in management styles and operating procedures can prove hard to resolve. In addition, the managers appointed to oversee the integration of a newly acquired company can make mistakes in deciding which activities to leave alone and which activities to meld into their own operations and systems. A number of mergers and acquisitions have been notably unsuccessful. Google’s $12.5 billion acquisition of struggling smartphone manufacturer Motorola Mobility in 2012 turned out to be minimally beneficial in helping to “supercharge Google’s Android ecosystem” (Google’s stated reason for making the acquisition). When Google’s attempts to rejuvenate Motorola’s smartphone business by spending over $1.3 billion on new product R&D and revamping Motorola’s product line resulted in disappointing sales and huge operating losses, Google sold Motorola Mobility to China-based PC maker Lenovo for $2.9 billion in 2014 (however, Google retained ownership of Motorola’s extensive patent portfolio). The jury is still out on whether Lenovo’s acquisition of Motorola will prove to be a moneymaker. Back in 2007, the pharmaceutical company Bristol-Myers Squibb had a problem: Its top-selling drugs, Plavix and Abilify, would go off patent by 2012 and its drug pipeline was nearly empty. Together these drugs (the first for heart attacks, the second for depression) accounted for nearly half of the company’s sales. Not surprisingly, the company’s stock price had stagnated and was underperforming that of its peers. Developing new drugs is difficult: New drugs must be identified, tested in increasingly sophisticated trials, and approved by the Food and Drug Administration. On average, this process takes 13 years and costs $2 billion. The success rate is low: Only one drug in eight manages to pass through clinical testing. In 2007, Bristol-Myers Squibb had only six new drugs at the clinical testing stage. At the time, many drug companies were diversifying into new markets like over-the-counter drugs to better manage drug development risk. Bristol-Myers Squibb’s management pursued a different strategy: product diversification through horizontal acquisitions. Bristol-Myers Squibb targeted small companies in new treatment areas, with the objective of reducing new product development risk by betting on pre-identified drugs. The small companies it targeted, with one or two drugs in development, needed cash; Bristol-Myers Squibb needed new drugs. The firm’s management called this its “string-of-pearls” strategy. To implement its approach and obtain the cash it needed, Bristol-Myers Squibb sold its stake in Mead Johnson, a nutritional supplement manufacturer. Then it went on a shopping spree. Starting in 2007, the company spent over $8 billion on 18 transactions, including 12 horizontal acquisitions. In the process, the company acquired many promising new drug candidates for common diseases such as cancer, cardiovascular disease, rheumatoid arthritis, and hepatitis C. © John Greim/LightRocket via Getty Images By early 2012, the company’s string-of-pearls acquisitions were estimated to have added over $4 billion of new revenue to the company’s coffers. Despite management changes over the subsequent year leading to the loss of two of the visionaries of the string-of-pearls concept, the new R&D chief remained committed to continuing the strategy. Analysts reported that Bristol-Myers Squibb had one of the best pipelines among drug makers. Investors agreed: The company’s stock price has climbed consistently since 2007, outperforming its competitors and experiencing annual growth of over 20 percent. Note: Developed with Dennis L. Huggins. Sources: D. Armstrong and M. Tirrell, “Bristol’s Buy of Inhibitex for Hepatitis Drug Won’t Be Last,” Bloomberg Businessweek, January 2012, www.bloomberg.com (accessed January 30, 2012); S. M. Paul et al., “How to Improve R&D Productivity: The Pharmaceutical Industry’s Grand Challenge,” Nature Reviews, March 2010, pp. 203–214; Bristol-Myers Squibb 2007 and 2011 annual reports; D. Armstrong, “Bristol-Myers New R&D Chief Plans to Keep Focus on Cancer,” Bloomberg Online, April 8, 2013. page 162 VERTICAL INTEGRATION STRATEGIES LO 4 The advantages and disadvantages of extending the company’s scope of operations via vertical integration. Expanding the firm’s vertical scope by means of a vertical integration strategy provides another possible way to strengthen the company’s position in its core market. A vertically integrated firm is one that participates in multiple stages of an industry’s value chain system. Thus, if a manufacturer invests in facilities to produce component page 163parts that it had formerly purchased from suppliers, or if it opens its own chain of retail stores to bypass its former distributors, it is engaging in vertical integration. A good example of a vertically integrated firm is Maple Leaf Foods, a major Canadian producer of fresh and processed meats whose best-selling brands include Maple Leaf and Schneiders. Maple Leaf Foods participates in hog and poultry production, with company-owned hog and poultry farms; it has its own meat-processing and rendering facilities; it packages its products and distributes them from company-owned distribution centers; and it conducts marketing, sales, and customer service activities for its wholesale and retail buyers but does not otherwise participate in the final stage of the meat-processing vertical chain—the retailing stage. CORE CONCEPT A vertically integrated firm is one that performs value chain activities along more than one stage of an industry’s value chain system. A vertical integration strategy can expand the firm’s range of activities backward into sources of supply and/or forward toward end users. When Tiffany & Co., a manufacturer and retailer of fine jewelry, began sourcing, cutting, and polishing its own diamonds, it integrated backward along the diamond supply chain. Mining giant De Beers Group and Canadian miner Aber Diamond integrated forward when they entered the diamond retailing business. A firm can pursue vertical integration by starting its own operations in other stages of the vertical activity chain or by acquiring a company already performing the activities it wants to bring in-house. Vertical integration strategies can aim at full integration (participating in all stages of the vertical chain) or partial integration (building positions in selected stages of the vertical chain). Firms can also engage in tapered integration strategies, which involve a mix of in-house and outsourced activity in any given stage of the vertical chain. Oil companies, for instance, supply their refineries with oil from their own wells as well as with oil that they purchase from other producers—they engage in tapered backward integration. Coach, Inc., the maker of Coach handbags and accessories, engages in tapered forward integration since it operates full-price and factory outlet stores but also sells its products through third-party department store outlets. The Advantages of a Vertical Integration Strategy Under the right conditions, a vertical integration strategy can add materially to a company’s technological capabilities, strengthen the firm’s competitive position, and boost its profitability.17 But it is important to keep in mind that vertical integration has no real payoff strategy-wise or profit-wise unless the extra investment can be justified by compensating improvements in company costs, differentiation, or competitive strength. CORE CONCEPT Backward integration involves entry into activities previously performed by suppliers or other enterprises positioned along earlier stages of the industry value chain system; forward integration involves entry into value chain system activities closer to the end user. Integrating Backward to Achieve Greater Competitiveness It is harder than one might think to generate cost savings or improve profitability by integrating backward into activities such as the manufacture of parts and components (which could otherwise be purchased from suppliers with specialized expertise in making the parts and components). For backward integration to be a cost-saving and profitable strategy, a company must be able to (1) achieve the same scale economies as outside suppliers and (2) match or beat suppliers’ production efficiency with no drop-off in quality. Neither outcome is easily achieved. To 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 units to achieve scale economies and a company’s in-house requirements are just 250,000 units, then it falls far short of being able to match the costs page 164of outside suppliers (which may readily find buyers for 1 million or more units). Furthermore, matching the production efficiency of suppliers is fraught with problems when suppliers have considerable production experience, when the technology they employ has elements that are hard to master, and/or when substantial R&D expertise is required to develop next-version components or keep pace with advancing technology in components production. That said, occasions still arise when a company can improve its cost position and competitiveness by performing a broader range of industry value chain activities internally rather than having such activities performed by outside suppliers. When there are few suppliers and when the item being supplied is a major component, vertical integration can lower costs by limiting supplier power. Vertical integration can also lower costs by facilitating the coordination of production flows and avoiding bottlenecks and delays that disrupt production schedules. Furthermore, when a company has proprietary know-how that it wants to keep from rivals, then in-house performance of value-adding activities related to this know-how is beneficial even if such activities could otherwise be performed by outsiders. Apple decided to integrate backward into producing its own chips for iPhones, chiefly because chips are a major cost component, suppliers have bargaining power, and in-house production would help coordinate design tasks and protect Apple’s proprietary iPhone technology. International Paper Company backward integrates into pulp mills that it sets up near its paper mills and reaps the benefits of coordinated production flows, energy savings, and transportation economies. It does this, in part, because outside suppliers are generally unwilling to make a site-specific investment for a buyer. Backward vertical integration can produce a differentiation-based competitive advantage when performing activities internally contributes to a better-quality product or service offering, improves the caliber of customer service, or in other ways enhances the performance of the final product. On occasion, integrating into more stages along the industry value chain system can add to a company’s differentiation capabilities by allowing it to strengthen its core competencies, better master key skills or strategy-critical technologies, or add features that deliver greater customer value. Spanish clothing maker Inditex has backward integrated into fabric making, as well as garment design and manufacture, for its successful Zara brand. By tightly controlling the process and postponing dyeing until later stages, Zara can respond quickly to changes in fashion trends and supply its customers with the hottest items. News Corp backward integrated into film studios (Twentieth Century Fox) and TV program production to ensure access to high-quality content for its TV stations (and to limit supplier power). Integrating Forward to Enhance Competitiveness Like backward integration, forward integration can lower costs by increasing efficiency and bargaining power. In addition, it can allow manufacturers to gain better access to end users, improve market visibility, and enhance brand name awareness. For example, Harley’s company-owned retail stores are essentially little museums, filled with iconography, that provide an environment conducive to selling not only motorcycles and gear but also memorabilia, clothing, and other items featuring the brand. Insurance companies and brokerages like Allstate and Edward Jones have the ability to make consumers’ interactions with local agents and office personnel a differentiating feature by focusing on building relationships. In many industries, independent sales agents, wholesalers, and retailers handle competing brands of the same product and have no allegiance to any one company’s page 165brand—they tend to push whatever offers the biggest profits. To avoid dependence on distributors and dealers with divided loyalties, Goodyear has integrated forward into company-owned and franchised retail tire stores. Consumer-goods companies like Coach, Under Armour, Pepperidge Farm, Bath & Body Works, Nike, Tommy Hilfiger, and Ann Taylor have integrated forward into retailing and operate their own branded stores in factory outlet malls, enabling them to move overstocked items, slow-selling items, and seconds. Some producers have opted to integrate forward by selling directly to customers at the company’s website. Bypassing regular wholesale and retail channels in favor of direct sales and Internet retailing can have appeal if it reinforces the brand and enhances consumer satisfaction or if it lowers distribution costs, produces a relative cost advantage over certain rivals, and results in lower selling prices to end users. In addition, sellers are compelled to include the Internet as a retail channel 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 retailers is competing directly against its distribution allies. Such actions constitute channel conflict and create a tricky route to negotiate. A company that is actively trying to expand online sales to consumers is signaling a weak strategic commitment to its dealers and a willingness to cannibalize dealers’ sales and growth 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 industries where the strong support and goodwill of dealer networks is essential, companies may conclude that it is important to avoid channel conflict and that their websites should be designed to partner with dealers rather than compete against them. The Disadvantages of a Vertical Integration Strategy Vertical integration has some substantial drawbacks beyond the potential for channel conflict.18 The most serious drawbacks to vertical integration include the following concerns: Vertical integration raises a firm’s capital investment in the industry, thereby increasing business risk (what if industry growth and profitability unexpectedly go sour?). Vertically integrated companies are often slow to adopt technological advances or more efficient production methods when they are saddled with older technology or facilities. A company that obtains parts and components from outside suppliers can always shop the market for the newest, best, and cheapest parts, whereas a vertically integrated firm with older plants and technology may choose to continue making suboptimal parts rather than face the high costs of writing off undepreciated assets. Vertical integration can result in less flexibility in accommodating shifting buyer preferences. It is one thing to eliminate use of a component made by a supplier and another to stop using a component being made in-house (which can mean laying off employees and writing off the associated investment in equipment and facilities). Integrating forward or backward locks a firm into relying on its own in-house activities and sources of supply. Most of the world’s automakers, page 166despite their manufacturing expertise, have concluded that purchasing a majority of their parts and components from best-in-class suppliers results in greater design flexibility, higher quality, and lower costs than producing parts or components in-house. Vertical integration may not enable a company to realize economies of scale if its production levels are below the minimum efficient scale. Small companies in particular are likely to suffer a cost disadvantage by producing 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. Building the capacity to produce just the right number of axles, radiators, engines, and transmissions in-house—and doing so at the lowest unit costs for each—poses significant challenges and operating complications. Integration forward or backward typically calls for developing new types of resources and capabilities. Parts and components manufacturing, assembly operations, wholesale distribution and retailing, and direct sales via the Internet represent different kinds of businesses, operating in different types of industries, with different key success factors. Many manufacturers learn the hard way that company-owned wholesale and retail networks require skills that they lack, fit poorly with what they do best, and detract from their overall profit performance. Similarly, a company that tries to produce many components in-house is likely to find itself very hard-pressed to keep up with technological advances and cutting-edge production practices for each component used in making its product. In today’s world of close working relationships with suppliers and efficient supply chain management systems, relatively few companies can make a strong economic case for integrating backward into the business of suppliers. The best materials and components suppliers stay abreast of advancing technology and best practices and are adept in making good quality items, delivering them on time, and keeping their costs and prices as low as possible. Weighing the Pros and Cons of Vertical Integration All in all, therefore, a strategy of vertical integration can have both strengths and weaknesses. The tip of the scales depends on (1) whether vertical integration can enhance the performance of strategy-critical activities in ways that lower cost, build expertise, protect proprietary know-how, or increase differentiation; (2) what impact vertical integration will have on investment costs, flexibility, and response times; (3) what administrative costs will be incurred by coordinating operations across more vertical chain activities; and (4) how difficult it will be for the company to acquire the set of skills and capabilities needed to operate in another stage of the vertical chain. Vertical integration strategies have merit according to which capabilities and value-adding activities truly need to be performed in-house and which can be performed better or cheaper by outsiders. Absent solid benefits, integrating forward or backward is not likely to be an attractive strategy option. Kaiser Permanente, the largest managed care organization in the United States, has made vertical integration a central part of its strategy, as described in Illustration Capsule 6.4. Kaiser Permanente’s unique business model features a vertical integration strategy that enables it to deliver higher-quality care to patients at a lower cost. Kaiser Permanente is the largest vertically integrated health care delivery system in the United States, with $56.4 billion in revenues and $3.1 billion in net income in 2014. It functions as a health insurance company with over 10 million members and a provider of health care services with 28 hospitals, 619 medical offices, and nearly 18,000 physicians. As a result of its vertical integration, Kaiser Permanente is better able to efficiently match demand for services by health plan members to capacity of its delivery infrastructure, including physicians and hospitals. Moreover, its prepaid financial model helps incentivize the appropriate delivery of health care services. Unlike Kaiser Permanente, the majority of physicians and hospitals in the United States provide care on a fee-for-service revenue model or per-procedure basis. Consequently, most physicians and hospitals earn higher revenues by providing more services, which limits investments in preventive care. In contrast, Kaiser Permanente providers are incentivized to focus on health promotion, disease prevention, and chronic disease management. Kaiser Permanente pays primary care physicians more than local averages to attract top talent, and surgeons are salaried rather than paid by procedure to encourage the optimal level of care. Physicians from multiple specialties work collaboratively to coordinate care and treat the overall health of patients rather than individual health issues. © Bryan Chan/Los Angeles Times via Getty One result of this strategy is enhanced efficiency, enabling Kaiser Permanente to provide health insurance that is, on average, 10 percent cheaper than that of its competitors. Further, the care provided is of higher quality based on national standards of care. For the seventh year in a row, Kaiser Permanente health plans received the highest overall quality-of-care rating of any health plan in California, which accounts for almost 8 million of its 10 million members. Kaiser Permanente is also consistently praised for member satisfaction. Four of Kaiser’s health plan regions, accounting for 90 percent of its membership, were ranked highest in member satisfaction by J.D. Power and Associates. The success of Kaiser Permanente’s vertical integration strategy is the primary reason why many health care organizations are seeking to replicate its model as they transition from a fee-for-service revenue model to an accountable care model. Note: Developed with Christopher C. Sukenik. Sources: “Kaiser Foundation Hospitals and Health Plan Report Fiscal Year 2013 and Fourth Quarter Financial Results,” PR Newswire, February 14, 2014, www.prnewswire.com; Kaiser Permanente website and 2012 annual report; J. O’Donnell, “Kaiser Permanente CEO on Saving Lives, Money,” USA Today, October 23, 2012. page 167 OUTSOURCING STRATEGIES: NARROWING THE SCOPE OF OPERATIONS LO 5 The conditions that favor farming out certain value chain activities to outside parties. In contrast to vertical integration strategies, outsourcing strategies narrow the scope of a business’s operations, in terms of what activities are performed internally. Outsourcing involves contracting out certain value chain activities that are normally performed in-house to outside vendors.19 Many PC makers, for example, have shifted from assembling units in-house to outsourcing the entire assembly process to manufacturing specialists, which can operate more efficiently due to their greater scale, experience, and bargaining power over components makers. Nearly all name-brand page 168apparel firms have in-house capability to design, market, and distribute their products but they outsource all fabric manufacture and garment-making activities. Starbucks finds purchasing coffee beans from independent growers far more advantageous than having its own coffee-growing operation, with locations scattered across most of the world’s coffee-growing regions. CORE CONCEPT Outsourcing involves contracting out certain value chain activities that are normally performed in-house to outside vendors. Outsourcing certain value chain activities makes strategic sense whenever: An activity can be performed better or more cheaply by outside specialists. A company should generally not perform any value chain activity internally that can be performed more efficiently or effectively by outsiders—the chief exception occurs when a particular activity is strategically crucial and internal control over that activity is deemed essential. Dolce & Gabbana, for example, outsources the manufacture of its brand of sunglasses to Luxottica—a company considered to be the world’s best sunglass manufacturing company, known for its Oakley, Oliver Peoples, and Ray-Ban brands. The activity is not crucial to the firm’s ability to achieve sustainable competitive advantage. Outsourcing of support activities such as maintenance services, data processing, data storage, fringe-benefit management, and website operations has become commonplace. Colgate-Palmolive, for instance, has reduced its information technology operational costs by more than 10 percent annually through an outsourcing agreement with IBM. The outsourcing improves organizational flexibility and speeds time to market. Outsourcing gives a company the flexibility to switch suppliers in the event that its present supplier falls behind competing suppliers. Moreover, seeking out new suppliers with the needed capabilities already in place is frequently quicker, easier, less risky, and cheaper than hurriedly retooling internal operations to replace obsolete capabilities or trying to install and master new technologies. It reduces the company’s risk exposure to changing technology and buyer preferences. When a company outsources certain parts, components, and services, its suppliers must bear the burden of incorporating state-of-the-art technologies and/or undertaking redesigns and upgrades to accommodate a company’s plans to introduce next-generation products. If what a supplier provides falls out of favor with buyers, or is rendered unnecessary by technological change, it is the supplier’s business that suffers rather than the company’s. It allows a company to concentrate on its core business, leverage its key resources, and do even better what it already does best. A company is better able to enhance its own capabilities when it concentrates its full resources and energies on performing only those activities. United Colors of Benetton and Sisley, for example, outsource the production of handbags and other leather goods while devoting their energies to the clothing lines for which they are known. Apple outsources production of its iPod, iPhone, and iPad models to Chinese contract manufacturer Foxconn and concentrates in-house on design, marketing, and innovation. Hewlett-Packard and IBM have sold some of their manufacturing plants to outsiders and contracted to repurchase the output instead from the new owners. The Risk of Outsourcing Value Chain Activities A company must guard against outsourcing activities that hollow out the resources and capabilities that it needs to be a master of its own destiny. The biggest danger of outsourcing is that a company will farm out the wrong types of activities and thereby hollow out its own capabilities.20 For example, in recent years companies eager to reduce operating costs have opted to outsource such strategically page 169important activities as product development, engineering design, and sophisticated manufacturing tasks—the very capabilities that underpin a company’s ability to lead sustained product innovation. While these companies have apparently been able to lower their operating costs by outsourcing these functions to outsiders, their ability to lead the development of innovative new products is weakened because so many of the cutting-edge ideas and technologies for next-generation products come from outsiders. 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 arm’s-length transactions alone. Unanticipated problems may arise that cause delays or cost overruns and become hard to resolve amicably. Moreover, contract-based outsourcing can be problematic because outside parties lack incentives to make investments specific to the needs of the outsourcing company’s internal value chain. Companies like Cisco Systems are alert to these dangers. Cisco 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 improvements and safeguarding its innovations from imitation. Further, Cisco has developed online systems to monitor the factory operations of contract manufacturers around the clock so that it knows immediately when problems arise and can decide whether to get involved. STRATEGIC ALLIANCES AND PARTNERSHIPS LO 6 When and how strategic alliances can substitute for horizontal mergers and acquisitions or vertical integration and how they can facilitate outsourcing. 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. Companies frequently engage in cooperative strategies as an alternative to vertical integration or horizontal mergers and acquisitions. Increasingly, companies are also employing strategic alliances and partnerships to extend their scope of operations via international expansion and diversification strategies, as we describe in Chapters 7 and 8. Strategic alliances and cooperative arrangements are now a common means of narrowing a company’s scope of operations as well, serving as a useful way to manage outsourcing (in lieu of traditional, purely price-oriented contracts). For example, oil and gas companies engage in considerable vertical integration— but Shell Oil Company and Pemex (Mexico’s state-owned petroleum company) have found that joint ownership of their Deer Park Refinery in Texas lowers their investment costs and risks in comparison to going it alone. The colossal failure of the Daimler–Chrysler merger formed an expensive lesson for Daimler AG about what can go wrong with horizontal mergers and acquisitions; its 2010 strategic alliance with Renault–Nissan is allowing the two companies to achieve jointly the global scale required for cost-competitiveness in cars and trucks while avoiding the type of problems that so plagued DaimlerChrysler. Ford Motor Company joined Daimler AG and Renault–Nissan more recently in an effort to develop affordable, mass-market hydrogen fuel cell vehicles by 2017. Many companies employ strategic alliances to manage the problems that might otherwise occur with outsourcing—Cisco’s system of alliances guards against loss of control, protects its proprietary manufacturing expertise, and enables the company to monitor closely the assembly operations of its partners while devoting its energy to page 170designing new generations of the switches, routers, and other Internet-related equipment for which it is known. 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. A strategic alliance is a formal agreement between two or more separate companies in which they agree to work collaboratively toward some strategically relevant objective. Typically, they involve shared financial responsibility, joint contribution of resources and capabilities, shared risk, shared control, and mutual dependence. They may be characterized by cooperative marketing, sales, or distribution; joint production; design collaboration; or projects to jointly develop new technologies or products. They can vary in terms of their duration and the extent of the collaboration; some are intended as long-term arrangements, involving an extensive set of cooperative activities, while others are designed to accomplish more limited, short-term objectives. Collaborative arrangements may entail a contractual agreement, but they commonly stop short of formal ownership ties between the partners (although sometimes an alliance member will secure minority ownership of another member). CORE CONCEPT A joint venture is a partnership involving the establishment of an independent corporate entity that the partners own and control jointly, sharing in its revenues and expenses. A special type of strategic alliance involving ownership ties is the joint venture. A joint venture entails forming a new corporate entity that is jointly owned by two or more companies that agree to share in the revenues, expenses, and control of the newly formed entity. Since joint ventures involve setting up a mutually owned business, they tend to be more durable but also riskier than other arrangements. In other types of strategic alliances, the collaboration between the partners involves a much less rigid structure in which the partners retain their independence from one another. If a strategic alliance is not working out, a partner can choose to simply walk away or reduce its commitment to collaborating at any time. An alliance becomes “strategic,” as opposed to just a convenient business arrangement, when it serves any of the following purposes:21 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). It helps build, strengthen, or sustain a core competence or competitive advantage. It helps remedy an important resource deficiency or competitive weakness. It helps defend against a competitive threat, or mitigates a significant risk to a company’s business. It increases bargaining power over suppliers or buyers. It helps open up important new market opportunities. It speeds the development of new technologies and/or product innovations. Strategic cooperation is a much-favored approach in industries where new technological developments are occurring at a furious pace along many different paths and where advances in one technology spill over to affect others (often blurring industry boundaries). Whenever industries are experiencing high-velocity technological advances in many areas simultaneously, firms find it virtually essential to have cooperative relationships with other enterprises to stay on the leading edge of technology, even in their own area of specialization. In industries like these, alliances are all about fast cycles of learning, gaining quick access to the latest round of technological know-how, and developing dynamic capabilities. In bringing together firms with different skills and knowledge bases, alliances open up learning opportunities that help partner firms better leverage their own resources and capabilities.22 page 171 It took a $3.2 billion joint venture involving the likes of Sprint-Nextel, Clearwire, Intel, Time Warner Cable, Google, Comcast, and Bright House Networks to roll out next-generation 4G wireless services based on Sprint’s and Clearwire’s WiMax mobile networks. WiMax was an advanced Wi-Fi technology that allowed people to browse the Internet at speeds as great as 10 times faster than other cellular Wi-Fi technologies. The venture was a necessity for Sprint-Nextel and Clearwire since they lacked the financial resources to handle the rollout on their own. The appeal of the partnership for Time Warner, Comcast, and Bright House was the ability to bundle the sale of wireless services to their cable customers, while Intel had the chip sets for WiMax and hoped that WiMax would become the dominant wireless Internet format. Google’s interest in the alliance was its desire to strengthen its lead in desktop searches on wireless devices. Companies that have formed a host of alliances need to manage their alliances like a portfolio. iHeartMedia (formerly Clear Channel Communications) entered into a series of early partnerships to provide a multiplatform launchpad for artists like Taylor Swift, Phoenix, and Sara Bareilles. More recently, they formed a partnership with Microsoft involving Windows 10. iHeartMedia benefits because people who buy Windows 10 automatically have access to its content, and Microsoft benefits because there are iHeartMedia features that are exclusive to Windows 10, thus potentially drawing in customers. The best alliances are highly selective, focusing on particular value chain activities and on obtaining a specific competitive benefit. They enable a firm to build on its strengths and to learn. Because of the varied benefits of strategic alliances, many large corporations have become involved in 30 to 50 alliances, and a number have formed hundreds of alliances. Genentech, 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 various diseases and ailments. Companies that have formed a host of alliances need to manage their alliances like a portfolio—terminating those that no longer serve a useful purpose or that have produced meager results, forming promising new alliances, and restructuring existing alliances to correct performance problems and/or redirect the collaborative effort. Capturing the Benefits of Strategic Alliances The extent to which companies benefit from entering into alliances and partnerships seems to be a function of six factors:23 Picking a good partner. A good partner must bring complementary strengths to the relationship. To the extent that alliance members have nonoverlapping strengths, there is greater potential for synergy and less potential for coordination problems and conflict. In addition, a good partner needs to share the company’s vision about the overall purpose of the alliance and to have specific goals that either match or complement those of the company. Strong partnerships also depend on good chemistry among key personnel and compatible views about how the alliance should be structured and managed. Being sensitive to cultural differences. Cultural differences among companies can make it difficult for their personnel to work together effectively. Cultural differences can be problematic among companies from the same country, but when the partners have different national origins, the problems are often magnified. Unless there is respect among all the parties for cultural differences, including those stemming from different local cultures and local business practices, productive working relationships are unlikely to emerge. Recognizing that the alliance must benefit both sides. Information must be shared as well as gained, and the relationship must remain forthright and trustful. If either page 172partner plays games with information or tries to take advantage of the other, the resulting friction can quickly erode the value of further collaboration. Open, trustworthy behavior on both sides is essential for fruitful collaboration. Ensuring that both parties live up to their commitments. Both parties have to deliver on their commitments for the alliance to produce the intended benefits. The division of work has to be perceived as fairly apportioned, and the caliber of the benefits received on both sides has to be perceived as adequate. Structuring the decision-making process so that actions can be taken swiftly when needed. In many instances, the fast pace of technological and competitive changes dictates an equally fast decision-making process. If the parties get bogged down in discussions or in gaining internal approval from higher-ups, the alliance can turn into an anchor of delay and inaction. Managing the learning process and then adjusting the alliance agreement over time to fit new circumstances. One of the keys to long-lasting success is adapting the nature and structure of the alliance to be responsive to shifting market conditions, emerging technologies, and changing customer requirements. Wise allies are quick to recognize the merit of an evolving collaborative arrangement, where adjustments are made to accommodate changing conditions and to overcome whatever problems arise in establishing an effective working relationship. Most alliances that aim at sharing technology or providing market access turn out to be temporary, lasting only a few years. This is not necessarily an indicator of failure, however. Strategic alliances can be terminated after a few years simply because they have fulfilled their purpose; indeed, many alliances are intended to be of limited duration, set up to accomplish specific short-term objectives. Longer-lasting collaborative arrangements, however, may provide even greater strategic benefits. Alliances are more likely to be long-lasting when (1) they involve collaboration with partners that do not compete directly, such as suppliers or distribution allies; (2) a trusting relationship has been established; and (3) both parties conclude that continued collaboration is in their mutual interest, perhaps because new opportunities for learning are emerging. The Drawbacks of Strategic Alliances and Partnerships While strategic alliances provide a way of obtaining the benefits of vertical integration, mergers and acquisitions, and outsourcing, they also suffer from some of the same drawbacks. 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. When outsourcing is conducted via alliances, there is no less risk of becoming dependent on other companies for essential expertise and capabilities—indeed, this may be the Achilles’ heel of such alliances. Moreover, there are additional pitfalls to collaborative arrangements. The greatest danger is that a partner will gain access to a company’s proprietary knowledge base, technologies, or trade secrets, enabling the partner to match the company’s core strengths and costing the company its hard-won competitive advantage. This risk is greatest when the alliance is among industry rivals or when the alliance is for the purpose of collaborative R&D, since this type of partnership requires an extensive exchange of closely held information. The question for managers is when to engage in a strategic alliance and when to choose an alternative means of meeting their objectives. The answer to this question page 173depends on the relative advantages of each method and the circumstances under which each type of organizational arrangement is favored. The principal advantages of strategic alliances over vertical integration or horizontal mergers and acquisitions are threefold: They lower investment costs and risks for each partner by facilitating resource pooling and risk sharing. This can be particularly important when investment needs and uncertainty are high, such as when a dominant technology standard has not yet emerged. They are more flexible organizational forms and allow for a more adaptive response to changing conditions. Flexibility is essential when environmental conditions or technologies are changing rapidly. Moreover, strategic alliances under such circumstances may enable the development of each partner’s dynamic capabilities. They are more rapidly deployed—a critical factor when speed is of the essence. Speed is of the essence when there is a winner-take-all type of competitive situation, such as the race for a dominant technological design or a race down a steep experience curve, where there is a large first-mover advantage. The key advantages of using strategic alliances rather than arm’s-length transactions to manage outsourcing are (1) the increased ability to exercise control over the partners’ activities and (2) a greater willingness for the partners to make relationship-specific investments. Arm’s-length transactions discourage such investments since they imply less commitment and do not build trust. On the other hand, there are circumstances when other organizational mechanisms are preferable to alliances and partnering. Mergers and acquisitions are especially suited for situations in which strategic alliances or partnerships do not go far enough in providing a company with access to needed resources and capabilities. Ownership ties are more permanent than partnership ties, allowing the operations of the merger or acquisition participants to be tightly integrated and creating more in-house control and autonomy. Other organizational mechanisms are also preferable to alliances when there is limited property rights protection for valuable know-how and when companies fear being taken advantage of by opportunistic partners. While it is important for managers to understand when strategic alliances and partnerships are most likely (and least likely) to prove useful, it is also important to know how to manage them. How to Make Strategic Alliances Work A surprisingly large number of alliances never live up to expectations. Even though the number of strategic alliances increases by about 25 percent annually, about 60 to 70 percent of alliances continue to fail each year.24 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. A successful alliance requires real in-the-trenches collaboration, not merely an arm’s-length exchange of ideas. Unless partners place a high value on the contribution each brings to the alliance and the cooperative arrangement results in valuable win–win outcomes, it is doomed to fail. While the track record for strategic alliances is poor on average, many companies have learned how to manage strategic alliances successfully and routinely defy this average. Samsung Group, which includes Samsung Electronics, successfully manages an page 174ecosystem of over 1,300 partnerships that enable productive activities from global procurement to local marketing to collaborative R&D. Companies that have greater success in managing their strategic alliances and partnerships often credit the following factors: They create a system for managing their alliances. Companies need to manage their alliances in a systematic fashion, just as they manage other functions. This means setting up a process for managing the different aspects of alliance management from partner selection to alliance termination procedures. To ensure that the system is followed on a routine basis by all company managers, many companies create a set of explicit procedures, process templates, manuals, or the like. They build relationships with their partners and establish trust. Establishing strong interpersonal relationships is a critical factor in making strategic alliances work since such relationships facilitate opening up channels of communication, coordinating activity, aligning interests, and building trust. They protect themselves from the threat of opportunism by setting up safeguards. There are a number of means for preventing a company from being taken advantage of by an untrustworthy partner or unwittingly losing control over key assets. Contractual safeguards, including noncompete clauses, can provide other forms of protection. They make commitments to their partners and see that their partners do the same. When partners make credible commitments to a joint enterprise, they have stronger incentives for making it work and are less likely to “free-ride” on the efforts of other partners. Because of this, equity-based alliances tend to be more successful than nonequity alliances.25 They make learning a routine part of the management process. There are always opportunities for learning from a partner, but organizational learning does not take place automatically. Whatever learning occurs cannot add to a company’s knowledge base unless the learning is incorporated systematically into the company’s routines and practices. Finally, managers should realize that alliance management is an organizational capability, much like any other. It develops over time, out of effort, experience, and learning. For this reason, it is wise to begin slowly, with simple alliances designed to meet limited, short-term objectives. Short-term partnerships that are successful often become the basis for much more extensive collaborative arrangements. Even when strategic alliances are set up with the hope that they will become long-term engagements, they have a better chance of succeeding if they are phased in so that the partners can learn how they can work together most fruitfully. KEY POINTS Once a company has settled on which of the five generic competitive strategies to employ, attention turns to how strategic choices regarding (1) competitive actions, (2) timing of those actions, and (3) scope of operations can complement its competitive approach and maximize the power of its overall strategy. Strategic offensives should, as a general rule, be grounded in a company’s strategic assets and employ a company’s strengths to attack rivals in the competitive areas where they are weakest. page 175Companies have a number of offensive strategy options for improving their market positions: using a cost-based advantage to attack competitors on the basis of price or value, leapfrogging competitors with next-generation technologies, pursuing continuous product innovation, adopting and improving the best ideas of others, using hit-and-run tactics to steal sales away from unsuspecting rivals, and launching preemptive strikes. A blue-ocean type of offensive strategy seeks to gain a dramatic new competitive advantage by 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. The purposes of defensive strategies are to lower the risk of being attacked, weaken the impact of any attack that occurs, and influence challengers to aim their efforts at other rivals. Defensive strategies to protect a company’s position usually take one of two forms: (1) actions to block challengers or (2) actions to signal the likelihood of strong retaliation. The timing of strategic moves also has relevance in the quest for competitive advantage. Company managers are obligated to carefully consider the advantages or disadvantages that attach to being a first mover versus a fast follower versus a late mover. Decisions concerning the scope of a company’s operations—which activities a firm will perform internally and which it will not—can also affect the strength of a company’s market position. The scope of the firm refers to the range of its activities, the breadth of its product and service offerings, the extent of its geographic market presence, and its mix of businesses. Companies can expand their scope horizontally (more broadly within their focal market) or vertically (up or down the industry value chain system that starts with raw-material production and ends with sales and service to the end consumer). Horizontal mergers and acquisitions (combinations of market rivals) provide a means for a company to expand its horizontal scope. Vertical integration expands a firm’s vertical scope. Horizontal mergers and acquisitions typically have any of five objectives: lowering costs, expanding geographic coverage, adding product categories, gaining new technologies or other resources and capabilities, and preparing for the convergence of industries. They can strengthen a firm’s competitiveness in five ways: (1) by improving the efficiency of its operations, (2) by heightening its product differentiation, (3) by reducing market rivalry, (4) by increasing the company’s bargaining power over suppliers and buyers, and (5) by enhancing its flexibility and dynamic capabilities. Vertical integration, forward or backward, makes most strategic sense if it strengthens a company’s position via either cost reduction or creation of a differentiation-based advantage. Otherwise, the drawbacks of vertical integration (increased investment, greater business risk, increased vulnerability to technological changes, less flexibility in making product changes, and the potential for channel conflict) are likely to outweigh any advantages. Outsourcing involves contracting out pieces of the value chain formerly performed in-house to outside vendors, thereby narrowing the scope of the firm. Outsourcing can enhance 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 competitive advantage; (3) the page 176outsourcing improves organizational flexibility, speeds decision making, and cuts cycle time; (4) it reduces the company’s risk exposure; and (5) it permits a company to concentrate on its core business and focus on what it does best. 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. They serve as an alternative to vertical integration and mergers and acquisitions, and as a supplement to outsourcing, allowing more control relative to outsourcing via arm’s-length transactions. Companies that manage their alliances well generally (1) create a system for managing their alliances, (2) build relationships with their partners and establish trust, (3) protect themselves from the threat of opportunism by setting up safeguards, (4) make commitments to their partners and see that their partners do the same, and (5) make learning a routine part of the management process. ILLUSTRATION CAPSULE 6.1 Bonobos’s Blue-Ocean Strategy in the U.S. Men’s Fashion Retail Industry ILLUSTRATION CAPSULE 6.2 Uber’s First-Mover Advantage in Mobile Ride-Hailing Services ILLUSTRATION CAPSULE 6.3 Bristol-Myers Squibb’s “String-of-Pearls” Horizontal Acquisition Strategy ILLUSTRATION CAPSULE 6.4 Kaiser Permanente’s Vertical Integration Strategy ASSURANCE OF LEARNING EXERCISES Live Nation operates music venues, provides management services to music artists, and promotes more than 22,000 live music events annually. The company merged with Ticketmaster and acquired concert and festival promoters in the United States, Australia, and Great Britain. How has the company used horizontal mergers and acquisitions to strengthen its competitive position? Are these moves primarily offensive or defensive? Has either Live Nation or Ticketmaster achieved any type of advantage based on the timing of its strategic moves? LO 1, LO 2, LO 3 Kaiser Permanente, a standout among managed health care systems, has become a model of how to deliver good health care cost-effectively. Illustration Capsule 6.4 describes how Kaiser Permanente has made vertical integration a central part of its strategy. What value chain segments has Kaiser Permanente chosen to enter and perform internally? How has vertical integration aided the organization in building competitive advantage? Has vertical integration strengthened its market position? Explain why or why not. LO 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? LO 5 Perform a thought experiment whereby two popular specialty food stores, Trader Joe’s and Whole Foods, join forces in a strategic alliance in the near future. Conduct some research on the market niches that these food stores operate in to determine whether there might be an opportunity for some kind of fruitful partnership. Explain the nature of the proposed partnership, along with its potential advantages and disadvantages and what hurdles the two companies might need to overcome in order to benefit from the strategic alliance. LO 6 page 177 EXERCISE FOR SIMULATION PARTICIPANTS Has your company relied more on offensive or defensive strategies to achieve your rank in the industry? What options for being a first mover does your company have? Do any of these first-mover options hold competitive advantage potential? LO 1, LO 2 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? LO 3 Is your company vertically integrated? Explain. LO 4 Is your company able to engage in outsourcing? If so, what do you see as the pros and cons of outsourcing? Are strategic alliances involved? Explain. LO 5, LO 6 ENDNOTES 1 George Stalk, Jr., and Rob Lachenauer, “Hardball: Five Killer Strategies for Trouncing the Competition,” Harvard Business Review 82, no. 4 (April 2004); Richard D’Aveni, “The Empire Strikes Back: Counterrevolutionary Strategies for Industry Leaders,” Harvard Business Review 80, no. 11 (November 2002); David J. Bryce and Jeffrey H. Dyer, “Strategies to Crack Well-Guarded Markets,” Harvard Business Review 85, no. 5 (May 2007). 2 George Stalk, “Playing Hardball: Why Strategy Still Matters,” Ivey Business Journal 69, no.2 (November–December 2004), pp. 1–2; W. J. Ferrier, K. G. Smith, and C. M. Grimm, “The Role of Competitive Action in Market Share Erosion and Industry Dethronement: A Study of Industry Leaders and Challengers,” Academy of Management Journal 42, no. 4 (August 1999), pp. 372–388. 3 David B. Yoffie and Mary Kwak, “Mastering Balance: How to Meet and Beat a Stronger Opponent,” California Management Review 44, no. 2 (Winter 2002), pp. 8–24. 4 Ian C. MacMillan, Alexander B. van Putten, and Rita Gunther McGrath, “Global Gamesmanship,” Harvard Business Review 81, no. 5 (May 2003); Ashkay R. Rao, Mark E. Bergen, and Scott Davis, “How to Fight a Price War,” Harvard Business Review 78, no. 2 (March–April 2000). 5 D. B. Yoffie and M. A. Cusumano, “Judo Strategy–the Competitive Dynamics of Internet Time,” Harvard Business Review 77, no. 1 (January–February 1999), pp. 70–81. 6 Ming-Jer Chen and Donald C. Hambrick, “Speed, Stealth, and Selective Attack: How Small Firms Differ from Large Firms in Competitive Behavior,” Academy of Management Journal 38, no. 2 (April 1995), pp. 453–482; William E. Rothschild, “Surprise and the Competitive Advantage,” Journal of Business Strategy 4, no. 3 (Winter 1984), pp. 10–18. 7 Ian MacMillan, “Preemptive Strategies,” Journal of Business Strategy 14, no. 2 (Fall 1983), pp. 16–26. 8 Ian C. MacMillan, “How Long Can You Sustain a Competitive Advantage?” in Liam Fahey (ed.), The Strategic Planning Management Reader (Englewood Cliffs, NJ: Prentice Hall, 1989), pp. 23–24. 9 Kevin P. Coyne and John Horn, “Predicting Your Competitor’s Reactions,” Harvard Business Review 87, no. 4 (April 2009), pp. 90–97. 10 Philip Kotler, Marketing Management, 5th ed. (Englewood Cliffs, NJ: Prentice Hall, 1984). 11 W. Chan Kim and Renée Mauborgne, “Blue Ocean Strategy,” Harvard Business Review 82, no. 10 (October 2004), pp. 76–84. 12 Jeffrey G. Covin, Dennis P. Slevin, and Michael B. Heeley, “Pioneers and Followers: Competitive Tactics, Environment, and Growth,” Journal of Business Venturing 15, no. 2 (March 1999), pp. 175–210; Christopher A. Bartlett and Sumantra Ghoshal, “Going Global: Lessons from Late-Movers,” Harvard Business Review 78, no. 2 (March-April 2000), pp. 132–145. 13 Costas Markides and Paul A. Geroski, “Racing to Be 2nd: Conquering the Industries of the Future,” Business Strategy Review 15, no. 4 (Winter 2004), pp. 25–31. 14 Fernando Suarez and Gianvito Lanzolla, “The Half-Truth of First-Mover Advantage,” Harvard Business Review 83, no. 4 (April 2005), pp. 121–127. 15 Joseph L. Bower, “Not All M&As Are Alike–and That Matters,” Harvard Business Review 79, no. 3 (March 2001); O. Chatain and P. Zemsky, “The Horizontal Scope of the Firm: Organizational Tradeoffs vs. Buyer-Supplier Relationships,” Management Science 53, no.4 (April 2007), pp. 550–565. 16 Jeffrey H. Dyer, Prashant Kale, and Harbir Singh, “When to Ally and When to Acquire,” Harvard Business Review 82, no. 4 (July–August 2004), pp. 109–110. 17 John Stuckey and David White, “When and When Not to Vertically Integrate,” Sloan Management Review (Spring 1993), pp. 71–83. 18 Thomas Osegowitsch and Anoop Madhok, “Vertical Integration Is Dead, or Is It?” Business Horizons 46, no. 2 (March–April 2003), pp. 25–35. 19 Ronan McIvor, “What Is the Right Outsourcing Strategy for Your Process?” European Management Journal 26, no. 1 (February 2008), pp. 24–34. 20 Gary P. Pisano and Willy C. Shih, “Restoring American Competitiveness,” Harvard Business Review 87, no. 7-8 (July–August 2009), pp. 114–125; Jérôme Barthélemy, “The Seven Deadly Sins of Outsourcing,” Academy of Management Executive 17, no. 2 (May 2003), pp. 87–100. 21 Jason Wakeam, “The Five Factors of a Strategic Alliance,” Ivey Business Journal 68, no. 3 (May–June 2003), pp. 1–4. 22 A. Inkpen, “Learning, Knowledge Acquisition, and Strategic Alliances,” European Management Journal 16, no. 2 (April 1998), pp. 223–229. 23 Advertising Age, May 24, 2010, p. 14. 24 Patricia Anslinger and Justin Jenk, “Creating Successful Alliances,” Journal of Business Strategy 25, no. 2 (2004), pp. 18–23; Rosabeth Moss Kanter, “Collaborative Advantage: The Art of the Alliance,” Harvard Business Review 72, no. 4 (July–August 1994), pp. 96-108; Gary Hamel, Yves L. Doz, and C. K. Prahalad, “Collaborate with Your Competitors–and Win,” Harvard Business Review 67, no. 1 (January–February 1989), pp. 133–139. 25 Y. G. Pan and D. K. Tse, “The Hierarchical Model of Market Entry Modes,” Journal of International Business Studies 31, no. 4 (2000), pp. 535–554.
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