chapter 6

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

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 Learning Objectives

After reading this chapter, you should be able to:

1. Understand whether, how, and when to deploy offensive or defensive
strategic moves.
2. Identify when being a first mover, a fast follower, or a late mover is
most advantageous.
3. Explain the strategic benefits and risks of expanding a company’s
horizontal scope through mergers and acquisitions.
4. Explain the advantages and disadvantages of extending the
company’s scope of operations via vertical integration.
5. Recognize the conditions that favor farming out certain value chain
activities to outside parties.
6. Understand how to capture the benefits and minimize the drawbacks
of strategic alliances and partnerships.

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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 Competitive Scope of

defensive dynamics and operations
competitive the timing of along the
actions. strategic industry’s
moves. value chain.

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 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.

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 Launching Strategic Offensives to Improve
a Company’s Market Position

Strategic offensive principles:

1. Focusing relentlessly on building competitive
advantage and then striving to convert it into
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.
4. Displaying a capacity for swift, decisive, and
overwhelming actions to overpower rivals.

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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.

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 Principal Offensive Strategy Options
1. Offering an equally good or better product at a lower price.
2. Leapfrogging competitors by being first to market with next-generation
products.
3. Pursuing continuous product innovation to draw sales and market
share away from less innovative rivals.
4. Pursuing disruptive product innovations to create new markets.
5. Adopting and improving on the good ideas of other companies (rivals
or otherwise).
6. Using hit-and-run or guerrilla marketing tactics to grab market share
from complacent or distracted rivals.
7. Launching a preemptive strike to secure an industry’s limited
resources or capture a rare opportunity.

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 Choosing Which Rivals to Attack

Best Targets for Offensive Attacks

Market leaders that Runner-up firms with

are in vulnerable weaknesses in areas
competitive where the challenger
positions. is strong.

Struggling Small local and

enterprises on the regional firms with
verge of going under. limited capabilities.

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 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.

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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?

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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.

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 Forms of Defensive Strategies

Defensive strategies can take either of two

forms:
• Actions to block challengers.
• 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.

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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.

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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.

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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.

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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?

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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).

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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?

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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.

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 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.

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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.

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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?

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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.

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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.

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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.

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 The Advantages of a Vertical Integration
Strategy

Add materially to a firm’s

Potential technological capabilities.
Benefits of Strengthen the firm’s
Vertical competitive position.
Integration: Boost the firm’s
profitability.

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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.

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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.

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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.

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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?

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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?

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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.

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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.

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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.

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 Factors that Make an Alliance “Strategic”

A strategic alliance:
1. Facilitates achievement of important business objectives.
2. Helps build, sustain, or enhance a core competence or
competitive advantage.
3. Helps remedy an important resource deficiency or
competitive weakness.
4. Helps defend against a competitive threat or mitigates a
significant risk to a company’s business.
5. Increases the bargaining power over suppliers or buyers.
6. Helps create important new market opportunities.
7. Speeds development of new technologies or product
innovations.
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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.

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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.

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 Capturing the Benefits of Strategic Alliances

Picking a good partner.

Being sensitive to cultural
differences.
Successful Recognizing that the alliance
must benefit both sides.
Strategic
Ensuring that both parties keep
Alliance their commitments.
Factors:
Structuring the decision-making
process for swift actions.
Adjusting the agreement over
time to fit new circumstances.

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 Achieving Long-Lasting Strategic Alliance
Relationships

Factors Influencing the Longevity of Alliances:

Collaborating with Establishing a Continuing to

partners that do permanent collaborate is in
not compete trusting the parties’
directly. relationship. mutual interest.

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 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.

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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.

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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.

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