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chapter 6 Strengthening a Company’s Competitive Position: Strategic Moves, Timing, and Scope of Operations

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Chapter 6 considers the strategic actions a firm 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 expanding or contracting the breadth of a company’s activities (or its scope of operations along an industry’s entire value chain).

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Learning Objectives

After reading this chapter, you should be able to:

Understand whether, how, and when to deploy offensive or defensive strategic moves.

Identify when being a first mover, a fast follower, or a late mover is most advantageous.

Explain the strategic benefits and risks of expanding a company’s horizontal scope through mergers and acquisitions.

Explain the advantages and disadvantages of extending the company’s scope of operations via vertical integration.

Recognize the conditions that favor farming out certain value chain activities to outside parties.

Understand how to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

The chapter presents the pros and cons of taking strategy-enhancing measures to strengthen a company’s competitive position.

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Maximizing the Power of a Strategy

Making choices that complement a competitive approach and maximize the power of strategy.

Offensive and defensive competitive actions.

Competitive dynamics and the timing of strategic moves.

Scope of operations along the industry’s value chain.

Considering Strategy-Enhancing Measures

Whether and when to go on the offensive strategically.

Whether and when to employ defensive strategies.

When to undertake strategic moves—first mover, a fast follower, or a late mover.

Whether to merge with or acquire another firm.

Whether to integrate backward or forward into more stages of the industry’s activity chain.

Which value chain activities, if any, should be outsourced.

Whether to enter into strategic alliances or partnership arrangements.

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 new strategic initiatives—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

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Launching Strategic Offensives to Improve a Company’s Market Position

Strategic offensive principles:

Focusing relentlessly on building competitive advantage and then striving to convert it into sustainable advantage.

Applying resources where rivals are least able to defend themselves.

Employing the element of surprise as opposed to doing what rivals expect and are prepared for.

Displaying a capacity for swift, decisive, and overwhelming actions to overpower rivals.

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. 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.

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Choosing the Basis For Competitive Attack

Avoid directly challenging a targeted competitor where it is strongest.

Use the firm’s strongest strategic assets to attack a competitor’s weaknesses.

The offensive may not yield immediate results if market rivals are strong competitors.

Be prepared for the threatened competitor’s counter-response.

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 are called for when a company spots opportunities to gain profitable market share at its rivals’ expense or when a company has no choice but to try to whittle away at a strong rival’s competitive advantage.

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Principal Offensive Strategy Options

Offering an equally good or better product at a lower price.

Leapfrogging competitors by being first to market with next-generation products.

Pursuing continuous product innovation to draw sales and market share away from less innovative rivals.

Pursuing disruptive product innovations to create new markets.

Adopting and improving on the good ideas of other companies (rivals or otherwise).

Using hit-and-run or guerrilla marketing tactics to grab market share from complacent or distracted rivals.

Launching a preemptive strike to secure an industry’s limited resources or capture a rare opportunity.

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 counter-response. 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.

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Choosing Which Rivals to Attack

Best Targets for Offensive Attacks

Market leaders that are in vulnerable competitive positions.

Struggling enterprises on the verge of going under.

Runner-up firms with weaknesses in areas where the challenger is strong.

Small local and regional firms with limited capabilities.

Blue-Ocean Strategy—A Special Kind of Offensive

The business universe is divided into:

An existing market with boundaries and rules in which rival firms compete for advantage.

A “blue ocean” market space, where the industry has not yet taken shape, with no rivals and wide-open long-term growth and profit potential for a firm that can create demand for new types of products.

A blue-ocean strategy offers growth in revenues and profits by discovering or inventing new industry segments that create altogether new demand. The "blue ocean" represents wide-open opportunity, offering smooth sailing in uncontested waters for the company first to venture out upon it.

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ILLUSTRATION CAPSULE 6.1 Etsy’s Blue Ocean Strategy in Online Retailing of Handmade Crafts

Given the rapidity with which most first-mover advantages based on Internet technologies can be overcome by competitors, what must Etsy do now to retain its current competitive advantage?

Is Etsy’s unique focused-differentiation entry into online artisanal retailing likely to result in long-term sustainable competitive advantage for Etsy? Why or why not?

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 created and sustain its early advantage.

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Defensive Strategies—Protecting Market Position and Competitive Advantage

Purposes of Defensive Strategies:

Lower the firm’s risk of being attacked.

Weaken the impact of an attack that does occur.

Influence challenges to aim their efforts at other rivals.

Forms of Defensive Strategies

Defensive strategies can take either of two forms:

Actions to block challengers.

Actions to signal the likelihood of strong retaliation.

Good defensive strategies can help protect a competitive advantage but rarely are the basis for creating one. Defensive strategies can take either of two forms: actions to block challengers or actions to signal the likelihood of strong retaliation.

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Blocking the Avenues Open to Challengers

Introduce new features and models to broaden product lines to close off gaps and vacant niches.

Maintain economy-pricing to thwart lower price attacks.

Discourage buyers from trying competitors’ brands.

Make early announcements about new products or price changes to induce buyers to postpone switching.

Offer support and special inducements to current customers to reduce the attractiveness of switching.

Challenge quality or safety of rivals’ products.

Grant discounts or better terms to intermediaries who handle the firm’s product line exclusively.

There are many ways to throw obstacles in the path of would-be 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.

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Signaling Challengers That Retaliation Is Likely

Signaling is an effective defensive strategy when the firm follows through by:

Publicly announcing its commitment to maintaining the firm’s present market share.

Publicly committing to a policy of matching competitors’ terms or prices.

Maintaining a war chest of cash and marketable securities.

Making a strong counter-response to the moves of weaker rivals to enhance its tough defender image.

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.

To be an effective defensive strategy, signaling needs to be accompanied by a credible commitment to follow through.

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Timing a Company’s Strategic Moves

Timing’s importance:

Knowing when to make a strategic move is as crucial as knowing what move to make.

Moving first is no guarantee of success or competitive advantage.

The risks of moving first to stake out a monopoly position versus being a fast follower or even a late mover must be carefully weighed.

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.

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Conditions That Lead to First-Mover Advantages

When pioneering helps build a firm’s reputation and creates strong brand loyalty.

When a first mover’s customers will thereafter face significant switching costs.

When property rights protections thwart rapid imitation of the initial move.

When an early lead enables swift movement down the learning curve ahead of rivals.

When a first mover can set the industry’s technical standards.

When strong network effects compel increasingly more consumers to choose the first mover’s product or service.

There are six conditions in which first-mover advantages are likely to arise.

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ILLUSTRATION CAPSULE 6.2 Tinder Swipes Right for First-Mover Success

Which first-mover advantages contributed to Tinder’s gaining over a million monthly active users in less than a year?

How long can Tinder protect its first-mover advantages?

How has Tinder monetized its success while its rivals are having to play catch-up?

Illustration Capsule 6.2 describes how Tinder’s fast start had much to do with its ease of use, no questionnaires and fun game-like addictive aspects. Tinder targeted college campuses using viral marketing techniques to quickly gain acceptance among social circles, where “key influencers” boosted its popularity to a critical mass.

Its sustained success has enabled Tinder to reap a substantial first-mover advantage as the first major entrant into the field of mobile dating.

And while other apps have been trying to play catch-up, Tinder has been introducing new subscription products and other paid features to turn its market share advantage into a profitability advantage.

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The Potential for Late-Mover Advantages or First-Mover Disadvantages

When pioneering is more costly than imitating and offers negligible experience or learning-curve benefits.

When an innovator’s products are somewhat primitive and do not live up to buyer expectations.

When rapid market evolution allows fast followers 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.

When customer loyalty is low and a first mover’s skills, know-how, and actions are easily copied or surpassed.

When the first mover must make a risky investment in complementary assets or infrastructure (and these are available at low cost or risk by followers).

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 the five instances listed on this slide.

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To Be a First Mover or Not

Does market takeoff depend on complementary products or services that are not yet 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?

In weighing the pros and cons of being a first mover, a fast follower, or a late mover, it matters whether the race to market leadership in a particular industry is a marathon or a sprint. First-mover advantages can be fleeting, and there’s ample time for fast followers and sometimes even late movers to catch up.

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Strengthening a Firm’s Market Position via Its Scope of Operations

Defining the Horizontal and Vertical Scope of a Firm’s Operations:

Range of its activities performed internally.

Breadth of its product and service offerings.

Extent of its geographic market presence and its mix of business.

Size of its competitive footprint on its market or industry.

Horizontal Merger and Acquisition Strategies

Merger:

Is the combining of two or more firms into a single corporate entity that often takes on a new name.

Acquisition:

Is a combination in which one firm, the acquirer, purchases and absorbs the operations of another firm, the acquired.

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.

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Strategic Objectives for Horizontal Mergers and Acquisitions

Creating a more cost-efficient operation out of the combined firms.

Expanding the firm’s geographic coverage.

Extending the firm’s business into new product categories.

Gaining quick access to new technologies or other resources and capabilities.

Leading the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunities.

Merger and acquisition strategies typically set the company’s sights on achieving any of five objectives.

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ILLUSTRATION CAPSULE 6.3 Walmart's Expansion into E-commerce via Horizontal Acquisition

Which strategic transformation outcomes did Walmart expect to gain through its acquisition strategy?

Why did Walmart choose to pursue an acquisition strategy that was ahead of its brick and mortar competitors?

How will increasing the horizontal scope of Walmart through acquisitions strengthen its competitive position and profitability?

Illustration Capsule 6.3 describes how Walmart developed its horizontal acquisition strategy to continue its growth as an omni-channel retailer (i.e. bricks and mortar, online, or mobile).

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Why Mergers and Acquisitions Sometimes Fail to Produce Anticipated Results

Strategic issues:

Cost savings may prove smaller than expected.

Gains in competitive capabilities take longer to realize or never materialize at all.

Organizational issues:

Cultures, operating systems and management styles fail to mesh due to resistance to change from organization members.

Key employees at the acquired firm are lost.

Managers overseeing integration make mistakes in melding the acquired firm into their own.

Despite many successes, mergers and acquisitions do not always produce the hoped-for competitive and financial outcomes.

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Vertical Integration Strategies

Vertically integrated firm:

One that participates in multiple segments or stages of an industry’s overall value chain.

Vertical integration strategy:

Can expand the firm’s range of activities backward into its sources of supply or forward toward end users of its products.

A vertically integrated firm is one that performs value chain activities along more than one stage of an industry’s value chain system.

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Types of Vertical Integration Strategies

Full integration:

A firm participates in all stages of the vertical activity chain.

Partial integration:

A firm builds positions only in selected stages of the vertical chain.

Tapered integration:

A firm uses a mix of in-house and outsourced activity in any stage of the vertical chain.

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.

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The Advantages of a Vertical Integration Strategy

Potential Benefits of Vertical Integration:

Add materially to a firm’s technological capabilities.

Strengthen the firm’s competitive position.

Boost the firm’s profitability.

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.

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.

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Integrating Backward to Achieve Greater Competitiveness

Integrating backward by:

Achieving same scale economies as outside suppliers: low-cost based competitive advantage.

Matching or beating suppliers’ production efficiency with no drop-off in quality: differentiation-based competitive advantage.

Reasons for integrating backwards:

Reduction of supplier power.

Reduction in costs of major inputs.

Assurance of the supply and flow of critical inputs.

Protection of proprietary know-how.

Backward integration involves entry into activities previously performed by suppliers or other enterprises positioned along earlier stages of the industry value chain system.

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Integrating Forward to Enhance Competitiveness

Reasons for integrating forward:

To lower overall costs by increasing channel activity efficiencies relative to competitors.

To increase bargaining power through control of channel activities.

To gain better access to end users.

To strengthen and reinforce brand awareness.

To increase product differentiation.

Forward integration involves entry into value chain system activities closer to the end user.

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Disadvantages of a Vertical Integration Strategy

Increased business risk due to large capital investment.

Slow acceptance of technological advances or more efficient production methods.

Less flexibility in accommodating shifting buyer preferences that require non-internally produced parts.

Internal production levels may not reach volumes that create economies of scale.

Efficient production of internally-produced components and parts hampered by capacity matching problems.

New or different resources and capabilities requirements.

Vertical integration has some substantial drawbacks beyond the potential for channel conflict. The most serious drawbacks to vertical integration are listed on this slide.

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Weighing the Pros and Cons of a Vertical Integration

Will vertical integration enhance the performance of strategy-critical activities in ways that lower cost, build expertise, protect proprietary know-how, or increase differentiation?

What impact will vertical integration have on investment costs, flexibility, and response times?

What administrative costs are incurred by coordinating operations across more vertical chain activities?

How difficult will it be for the firm 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.

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ILLUSTRATION CAPSULE 6.4 Tesla’s Vertical Integration Strategy

What are the most important strategic benefits that Tesla derives from its vertical integration strategy?

Over the long term, how could the vertical scope of Tesla’s operations threaten its competitive position and profitability?

Why is a vertical integration strategy more appropriate in some industries than in others?

ILLUSTRATION CAPSULE 6.4 discusses that, unlike many vehicle manufacturers, Tesla embraces vertical integration from component manufacturing all the way through vehicle sales and servicing. Most of the company’s $11.8 billion in 2017 revenue came from electric vehicle sales and leasing, with the remainder coming from servicing those vehicles and selling residential battery packs and solar energy systems.

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Outsourcing Strategies: Narrowing the Scope of Operations

Outsource an activity if it:

Can be performed better or more cheaply by outside specialists.

Is not crucial to achieving sustainable competitive advantage.

Improves organizational flexibility and speeds time to market.

Reduces risk exposure due to new technology or buyer preferences.

Allows concentration on core businesses, leverages key resources, and is more successful outsourced.

Outsourcing involves contracting out certain value chain activities that are normally performed in-house to outside vendors. The conditions that favor farming out certain value chain activities to outside parties are listed on this slide.

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The Risk of Outsourcing Value Chain Activities

Hollowing out resources and capabilities that the firm needs to be a master of its own destiny.

Loss of direct control when monitoring, controlling, and coordinating activities of outside parties by means of contracts and arm’s-length transactions.

Lack of incentives for outside parties to make investments specific to the needs of the outsourcing firm’s value chain.

A company must guard against outsourcing activities that hollow out the resources and capabilities, lead to loss of control of key activities, and discourage investment in the company.

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Strategic Alliances and Partnerships

Strategic Alliance:

A formal agreement between two or more separate companies in which they agree to work cooperatively toward some common objective.

Joint Venture:

A partnership involving the establishment of an independent corporate entity that the partners own and control jointly, sharing in its revenues and expenses.

Strategic alliances and cooperative partnerships provide a way to gain benefits offered by vertical integration, outsourcing, and horizontal mergers and acquisitions, while minimizing the associated problems.

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.

If a strategic alliance is not working out, a partner can choose at any time to simply walk away or reduce its commitment to collaborating.

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Factors that Make an Alliance “Strategic”

A strategic alliance:

Facilitates achievement of important business objectives.

Helps build, sustain, or enhance a core competence or competitive advantage.

Helps remedy an important resource deficiency or competitive weakness.

Helps defend against a competitive threat or mitigates a significant risk to a company’s business.

Increases the bargaining power over suppliers or buyers.

Helps create important new market opportunities.

Speeds development of new technologies or product innovations.

An alliance becomes “strategic,” as opposed to just a convenient business arrangement, when it serves any of the purposes listed in the slide.

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Benefits of Strategic Alliances and Partnerships

Minimize the problems associated with vertical integration, outsourcing, and mergers and acquisitions.

Are useful in extending the scope of operations via international expansion and diversification strategies.

Reduce the need to be independent and self-sufficient when strengthening the firm’s competitive position.

Offer greater flexibility should a firm’s resource requirements or goals change over time.

Are useful when industries are experiencing high-velocity technological advances simultaneously.

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.

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Why and How Strategic Alliances Are Advantageous

Strategic Alliances:

Expedite development of promising new technologies or products.

Help overcome deficits in technical and manufacturing expertise.

Bring together the personnel and expertise needed to create new skill sets and capabilities.

Improve supply chain efficiency.

Help partners allocate venture risk sharing.

Allow firms to gain economies of scale.

Provide new market access for partners.

Companies that have formed a host of alliances need to manage their alliances like a portfolio.

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Capturing the Benefits of Strategic Alliances

Successful Strategic Alliance Factors:

Picking a good partner.

Being sensitive to cultural differences.

Recognizing that the alliance must benefit both sides.

Ensuring that both parties keep their commitments.

Structuring the decision-making process for swift actions.

Adjusting the agreement over time to fit new circumstances.

Achieving Long-Lasting Strategic Alliance Relationships

Factors Influencing the Longevity of Alliances:

Collaborating with partners that do not compete directly.

Establishing a permanent trusting relationship.

Continuing to collaborate is in the parties’ mutual interest.

The Drawbacks of Strategic Alliances and Their Relative Advantages

Culture clash and integration problems due to different management styles and business practices.

Anticipated gains not materializing due to an overly optimistic view of the potential for synergies or the unforeseen poor fit of partners’ resources and capabilities.

Risk of becoming dependent on partner firms for essential expertise and capabilities.

Protection of proprietary technologies, knowledge bases, or trade secrets from partners who are rivals.

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.

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Principal Advantages of Strategic Alliances over Vertical Integration or Horizontal Mergers and Acquisitions

They lower investment costs and risks for each partner by facilitating resource pooling and risk sharing.

They are more flexible organizational forms and allow for a more adaptive response to changing conditions.

They are more rapidly deployed—a critical factor when speed is of the essence.

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.

Companies that have greater success in managing their strategic alliances and partnerships often credit these factors.

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How to Make Strategic Alliances Work

Create a system for managing the alliance.

Build trusting relationships with partners.

Set up safeguards to protect from the threat of opportunism by partners.

Make commitments to partners and see that partners do the same.

Make learning a routine part of the management process.

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.

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