Chapter 6: Strengthening a Companys Competitive

Position
LAUNCHING S TRATEGIC OFFENSIVES TO IMPROVE A
COMPANYS MARKET POSITION
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 rivals competitive advantage.
The best offensives tend to incorporate several principles:
o Focusing relentlessly on building competitive advantage and then
striving to convert it into a sustainable advantage.
o Applying resources where rivals are least able to defend themselves.
o Employing the element of surprise as opposed to doing what rivals
expect and are prepared for.
o Displaying a capacity for swift and decisive actions to overwhelm
rivals.

Choosing the Basis for Competitive Attack

Strategic offensives should exploit the power of a companys 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.
A strategic offensive should be based on those areas of strength where the
company has its greatest competitive advantage over the targeted rivals.
It may be beneficial to pay special attention to buyer segments that a rival is
neglecting or is weakly equipped to serve.
The principal offensive strategy options include the following:
o Offering an equally good or better product at a lower price.
o Leapfrogging competitors by being first to market with next-generation
products.
o Pursuing continuous product innovation to draw sales and market
share away from less innovative rivals.
o Pursuing disruptive product innovations to create new markets.
o Adopting and improving on the good ideas of other companies (rivals
or otherwise).
o Using hit-and-run or guerrilla warfare tactics to grab market share from
complacent or distracted rivals.
o Launching a preemptive strike to secure an industrys limited resources
or capture a rare opportunity.
Securing the best distributors in a particular geographic region
or country.
Obtaining the most favorable site at a new interchange or
intersection, in a new shopping mall, and so on.

Tying up the most reliable, high-quality suppliers via exclusive

partnerships, long-term contracts, or acquisition.
Moving swiftly to acquire the assets of distressed rivals at
bargain prices.

Choosing Which Rivals to Attack

The best targets for offensive attacks:
o Market leaders that are vulnerable.
o Runner-up firms with weaknesses in areas where the challenger is
strong.
o Struggling enterprises that are on the verge of going under.
o Small local and regional firms with limited capabilities.

Blue-Ocean StrategyA 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.
Two distinct types of market space:
o 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. Intense
competition constrains a companys prospects for rapid growth and
superior profitability since rivals move quickly to either imitate or
counter the successes of competitors.
o The second type of market space is a blue ocean, where the industry
does not really exist yet, is untainted by competition, and offers wideopen opportunity for profitable and rapid growth if a company can
create new demand with a new type of product offering.
Blue-ocean strategies provide a company with a great opportunity in the
short run.

DEFENSIVES TRATEGIESPROTECTING MARKET

POSITIONANDCOMPETITIVEAD VANTAGE
Defensive strategies can take either of two forms: actions to block
challengers or actions to signal the likelihood of strong retaliation.

Blocking the Avenues Open to Challengers

The most frequently employed approach to defending a companys present
position involves actions that restrict a challengers options for initiating a
competitive attack.
o A defender can introduce new features, add new models, or broaden
its product line to close off gaps and vacant niches to opportunityseeking challengers.

o
o

o
o

Can thwart rivals efforts to attack with a lower price by maintaining its
own lineup of economy-priced options.
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.
Can induce potential buyers to reconsider switching. It can challenge
the quality or safety of rivals products.
A defender can grant volume discounts or better financing terms to
dealers and distributors to discourage them from experimenting with
other suppliers
Can convince them to handle its product line exclusively and force
competitors to use other distribution outlets.

Signaling Challengers That Retaliation Is Likely

Signals to would-be challengers can be given by:
o Publicly announcing managements commitment to maintaining the
firms present market share.
o Publicly committing the company to a policy of matching competitors
terms or prices.
o Maintaining a war chest of cash and marketable securities.
o Making an occasional strong counter-response to the moves of weak
competitors to enhance the firms 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 COMPANYS OFFENSIVE AND DEFENSIVES

TRATEGIC MOVES
Timing is especially important when first-mover advantages or disadvantages
exist.
o Because of firs-mover advantages and disadvantages, competitive
advantage can spring from when a move is made as well as from what
move is made.
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.

The Potential for First-Mover Advantages

Market pioneers and other types of first movers typically bear greater risks
and greater development costs than firms that move later.
Five such conditions in which first-mover advantages are most likely to arise:
o When pioneering helps build a firms reputation and creates strong
brand loyalty.

o
o
o
o

When a first movers customers will thereafter face significant

switching costs.
When property rights protections thwart rapid imitation of the initial
move.
When an early lead enables the first mover to move down the learning
curve ahead of rivals.
When a first mover can set the technical standard for the industry.

The Potential for Late-Mover Advantages or First-Mover

Disadvantages
Late-mover advantages (or first-mover disadvantages ) arise in four
instances:
o When the costs of pioneering are high relative to the benefits accrued
and imitative followers can achieve similar benefits with far lower
costs.
o When an innovators products are somewhat primitive and do not live
up to buyer expectations, thus allowing a follower with betterperforming products to win disenchanted buyers away from the leader.
o When rapid market evolution (due to fast-paced changes in either
technology or buyer needs) gives second movers the opening to
leapfrog a first movers products with more attractive next-version
products.
o When market uncertainties make it difficult to ascertain what will
eventually succeed, allowing late movers to wait until these needs are
clarified.
o When customer loyalty to the pioneer is low and a first movers skills,
know-how, and actions are easily copied or even surpassed

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 marathon or a sprint.
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).
There is a market penetration curve for every emerging opportunity.
o 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.
Any company that seeks competitive advantage by being a first mover thus
needs to ask some hard questions:
o Does market takeoff depend on the development of complementary
products or services that currently are not available?
o Is new infrastructure required before buyer demand can surge?
o Will buyers need to learn new skills or adopt new behaviors?

o
o

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?

STRENGTHENINGACOMP ANYS MARKET POSITION VIA ITS

SCOPE OF OPERATIONS
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.
Scope issues are at the very heart of corporate-level strategy.
Horizontal scope is the range of product and service segments that a firm
serves within its focal market.
o Mergers and acquisitions involving other market participants provide a
means for a company to expand its horizontal scope.
Vertical scope is the extent to which a firms internal activities encompass the
range of activities that make up an industrys entire value chain system, from
raw material production to final sales and service activities.
Outsourcing decisions concern another dimension of scope since they involve
narrowing the firms boundaries with respect to its participation in value
chain activities.
o Strategic alliances and partnerships provide an alternative to vertical
integration and acquisition strategies and are sometimes used to
facilitate outsourcing

HORIZONTAL MERGER AND ACQUISITION STRATEGIES

Mergers and acquisitions are much-used strategic options to strengthen a
companys market position.
o 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
o An acquisition is a combination in which one company, the acquirer,
purchases and absorbs the operations of another, the acquired.
o 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.
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.
Merger and acquisition strategies typically set sights on achieving any of five
objectives:
o Creating a more cost-efficient operation out of the combined
companies.
o Expanding a companys geographic coverage.
o Extending the companys business into new product categories.

Gaining quick access to new technologies or other resources and

capabilities.
o Leading the convergence of industries whose boundaries are being
blurred by changing technologies and new market opportunities.
Horizontal mergers and acquisitions can strengthen a firms competitiveness
in five ways:
o By improving the efficiency of its operations
o By heightening its product differentiation
o By reducing market rivalry
o By increasing the companys bargaining power over suppliers and
buyers
o By enhancing its flexibility and dynamic capabilities.
o

Why Mergers and Acquisitions Sometimes Fail to Produce

Anticipated Results
Despite many successes, mergers and acquisitions do not always produce the
hoped for outcomes.
o Cost savings may prove smaller than expected
o Gains in competitive capabilities may take substantially longer to
realize or, worse, may never materialize
o Efforts to mesh the corporate cultures can stall due to formidable
resistance from organization members.
o 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.
o Differences in management styles and operating procedures can prove
hard to resolve.
o 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.

VERTICAL INTEGRATION STRATEGIES

A vertically integrated firm is one that participates in multiple stages of an
industrys value chain system.
A vertical integration strategy can expand the firms range of activities
backward into sources of supply and/or forward toward end users.
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.

The Advantages of a Vertical Integration Strategy

Under the right conditions, a vertical integration strategy can add materially
to a companys technological capabilities, strengthen the firms competitive
position, and boost its profitability.
Integrating Backward to Achieve Greater Competitiveness:
o 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.
o When there are few suppliers and when the item being supplied is a
major component, vertical integration can lower costs by limiting
supplier power.
o Vertical integration can also lower costs by facilitating the coordination
of production flows and avoiding bottleneck problems.
o 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 knowhow is beneficial even if such activities could otherwise be
performed by outsiders.
o 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.
Integrating Forward to Enhance Competitiveness:
o Forward integration can lower costs by increasing efficiency and
bargaining power.
o Allow manufacturers to gain better access to end users, improve
market visibility, and include the end users purchasing experience as
a differentiating feature.
o Some producers have opted to integrate forward by selling directly to
customers at the companys website.

The Disadvantages of a Vertical Integration Strategy

Vertical integration include the following concerns:
o Vertical integration raises a firms capital investment in the industry,
thereby increasing business risk.
o Vertically integrated companies are often slow to embrace
technological advances or more efficient production methods when
they are saddled with older technology or facilities.
o Vertical integration can result in less flexibility in accommodating
shifting buyer preferences.
o Vertical integration may not enable a company to realize economies of
scale if its production levels are below the minimum efficient scale.
o Vertical integration poses all kinds of capacity-matching problems.
o Integration forward or backward often calls for developing new types of
resources and capabilities.

Weighing the Pros and Cons of Vertical Integration

The tip of the scales depends on
o (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.
o (2) What impact vertical integration will have on investment costs,
flexibility, and response times.
o (3) What administrative costs will be incurred by coordinating
operations across more vertical chain activities.
o (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.

OUTSOURCINGS TRATEGIES: NARROWING THE SCOPE OF

OPERATIONS
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:
o An activity can be performed better or more cheaply by outside
specialists.
o The activity is not crucial to the firms ability to achieve sustainable
competitive advantage.
o The outsourcing improves organizational flexibility and speeds time to
market.
o It reduces the companys risk exposure to changing technology and
buyer preferences.
o It allows a company to concentrate on its core business, leverage its
key resources, and do even better what it already does best.

The Risk of Outsourcing Value Chain Activities

The biggest danger of outsourcing is that a company will farm out the wrong
types of activities and thereby hollow out its own capabilities.
o 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.
o Difficult to monitor, control, and coordinate the activities of outside
parties via contracts and arms-length transactions alone.
o Unanticipated problems may arise that cause delays or cost overruns
and become hard to resolve amicably.

Contract-based outsourcing can be problematic because outside

parties lack incentives to make investments specific to the needs of
the outsourcing companys internal value chain.

STRATEGIC ALLIANCES AND PARTNERSHIPS

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.
o Companies frequently engage in cooperative strategies as an
alternative to vertical integration or horizontal mergers and
acquisitions.
o Companies are also employing strategic alliances and partnerships to
extend their scope of operations via international expansion and
diversification strategies.
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.
o Involve shared financial responsibility, joint contribution of resources
and capabilities, shared risk, shared control, and mutual dependence.
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.
o The collaboration between the partners involves a much less rigid
structure in which the partners retain their independence from one
another.
An alliance becomes strategic, as opposed to just a convenient business
arrangement, when it serves any of the following purposes:
o 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).
o It helps build, strengthen, or sustain a core competence or competitive
advantage.
o It helps remedy an important resource deficiency or competitive
weakness.
o It helps defend against a competitive threat, or mitigates a significant
risk to a companys business.
o It increases bargaining power over suppliers or buyers.
o It helps open up important new market opportunities.
o It speeds the development of new technologies and/or product
innovations.

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:
o Picking a good partner.

Being sensitive to cultural differences.

Recognizing that the alliance must benefit both sides.
Ensuring that both parties live up to their commitments.
Structuring the decision-making process so that actions can be taken
swiftly when needed.
o Managing the learning process and then adjusting the alliance
agreement over time to fit new circumstances.
Alliances are more likely to be long-lasting when
o (1) They involve collaboration with partners that do not compete
directly, such as suppliers or distribution allies.
o (2) A trusting relationship has been established.
o (3) Both parties conclude that continued collaboration is in their
mutual interest, perhaps because new opportunities for learning are
emerging.
o
o
o
o

The Drawbacks of Strategic Alliances and Partnerships

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.
The greatest danger is that a partner will gain access to a companys
proprietary knowledge base, technologies, or trade secrets, enabling the
partner to match the companys 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 principal advantages of strategic alliances over vertical integration or
horizontal
mergers and acquisitions are threefold:
o They lower investment costs and risks for each partner by facilitating
resource pooling and risk sharing.
o They are more flexible organizational forms and allow for a more
adaptive response to changing conditions.
o They are more rapidly deployeda critical factor when speed is of the
essence.
The key advantages of using strategic alliances rather than arms-length
transactions to manage outsourcing are
o (1) The increased ability to exercise control over the partners activities
o (2) A greater willingness for the partners to make relationship specific
investments.

How to Make Strategic Alliances Work

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 arms-length exchange of ideas.
Companies that have greater success in managing their strategic alliances
and partnerships often credit the following factors:
o They create a system for managing their alliances.
o They build relationships with their partners and establish trust.
o They protect themselves from the threat of opportunism by setting up
safeguards.
o They make commitments to their partners and see that their partners
do the same.
o They make learning a routine part of the management process.
It is wise to begin slowly, with simple alliances designed to meet limited,
short-term objectives.