Chapter 6 Strengthening a Company's Competitive Position PDF

CHAPTER 6 STRENGTHENING A COMPANY’S COMPETITIVE POSITION: STRATEGIC MOVES, TIMING, AND SCOPE OF OPERATIONS (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This docum...

CHAPTER 6 STRENGTHENING A COMPANY’S COMPETITIVE POSITION: STRATEGIC MOVES, TIMING, AND SCOPE OF OPERATIONS (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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 outsourcing 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–2 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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 the operations along competitive timing of strategic the industry’s actions moves value chain (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–3 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–4 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–5 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. STRATEGIC MANAGEMENT PRINCIPLE ♦ 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–6 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–7 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. STRATEGIC MANAGEMENT PRINCIPLE ♦ The best offensives use a company’s most powerful resources and capabilities to attack rivals in the areas where they are weakest. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–8 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. PRINCIPAL OFFENSIVE STRATEGY OPTIONS 1. Offer an equally good or better product at a lower price. 2. Leapfrog competitors by being first to market with next-generation products. 3. Pursue continuous product innovation to draw sales and market share away from less innovative rivals. 4. Pursue disruptive product innovations to create new markets. 5. Adopt and improve on the good ideas of other companies (rivals or otherwise). 6. Use hit-and-run or guerrilla marketing tactics to grab market share from complacent or distracted rivals. 7. Launch a preemptive strike to secure an industry’s limited resources or capture a rare opportunity (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–9 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. CHOOSING WHICH RIVALS TO ATTACK Best Targets for Offensive Attacks Market leaders Runner-up firms Struggling Small local that are in with weaknesses enterprises on and regional vulnerable in areas where the verge of firms with limited competitive the challenger going under capabilities positions is strong (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–10 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–11 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.  ILLUSTRATION Gilt Groupe’s Blue-Ocean Strategy CAPSULE 6.1 in the U.S. Flash Sale Industry ♦ Given the rapidity with which most first-mover advantages based on Internet technologies can be overcome, what would have led Gilt Groupe to expect to build a sustainable competitive advantage based on its initial business model? ♦ Is Gilt Groupe a “one-trick pony” business that the ephemeral nature of a first-mover advantage strategy tends to favor? ♦ How critical is timing to first-mover advantage? (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 6–12 CORE CONCEPT ♦ A blue-ocean strategy offers growth in revenues and profits by discovering or inventing new industry segments that create altogether new demand. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–13 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. STRATEGIC MANAGEMENT PRINCIPLE ♦ Good defensive strategies can help protect a competitive advantage but rarely are the basis for creating one. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–14 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. DEFENSIVE STRATEGIES—PROTECTING MARKET POSITION AND COMPETITIVE ADVANTAGE Purposes of Defensive Strategies Influence Lower the firm’s Weaken the impact challengers to risk of being of an attack aim their efforts attacked that does occur at other rivals (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–15 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. STRATEGIC MANAGEMENT PRINCIPLE ♦ There are many ways to throw obstacles in the path of would-be challengers. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–16 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. BLOCKING THE AVENUES OPEN TO CHALLENGERS ◆ Adopt alternative technologies as a hedge against rivals attacking with a new or better technology. ◆ Introduce new features and models to broaden product lines to close 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. ◆ Challenge quality and safety of competitor’s products. ◆ Grant discounts or better terms to intermediaries who handle the firm’s product line exclusively. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–17 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–18 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. STRATEGIC MANAGEMENT PRINCIPLE ♦ To be an effective defensive strategy, signaling needs to be accompanied by a credible commitment to follow through. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–19 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–20 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. TIMING A FIRM’S OFFENSIVE AND DEFENSIVE 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 must be carefully weighed. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–21 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. CONDITIONS THAT LEAD TO FIRST-MOVER ADVANTAGES 1. When pioneering helps build a firm’s reputation and creates strong brand loyalty. 2. When a first mover’s customers will thereafter face significant switching costs. 3. When property rights protections thwart rapid imitation of the initial move. 4. When an early lead enables movement down the learning curve ahead of rivals. 5. When a first mover can set the technical standard for the industry. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–22 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.  ILLUSTRATION Amazon.com’s First-Mover CAPSULE 6.2 Advantage in Online Retailing ♦ Which first-mover advantages did Jeff Bezos have in starting Amazon.com? ♦ What first-mover disadvantages did Bezos have to watch for after starting Amazon.com? ♦ Why was the learning curve so steep for Amazon.com? ♦ When do you predict that Amazon will become profitable? (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 6–23 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 the products of an innovator 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 first mover’s skills, know-how, and actions are easily copied or surpassed (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–24 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. TO BE A FIRST MOVER OR NOT ◆ Does market takeoff depend on 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? (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–25 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. STRENGTHENING A FIRM’S MARKET POSITION VIA ITS SCOPE OF OPERATIONS Defining the Scope of the Firm’s Operations Extent of its Size of its Range of its geographic Breadth of its competitive activities market product and footprint on performed presence and service offerings its market internally its mix of or industry businesses (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–26 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–27 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. CORE CONCEPTS ♦ Horizontal scope is the range of product and service segments that a firm serves within its focal market. ♦ Vertical scope is the extent to which a firm’s internal activities encompass one, some, many, or all of the activities that make up an industry’s entire value chain system, ranging from raw-material production to final sales and service activities. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–28 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–29 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. STRATEGIC OJECTIVES FOR HORIZONTAL MERGERS AND ACQUISITIONS 1. Creating a more cost-efficient operation out of the combined companies. 2. Expanding the firm’s geographic coverage. 3. Extending the firm’s business into new product categories. 4. Gaining quick access to new technologies or other resources and capabilities. 5. Leading the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunities. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–30 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. BENEFITS OF INCREASING HORIZONTAL SCOPE ◆ Increasing a firm’s horizontal scope strengthens its business and increases its profitability by: Improving the efficiency of its operations Heightening its product differentiation Reducing market rivalry Increasing the firm’s bargaining power over suppliers and buyers Enhancing its flexibility and dynamic capabilities (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–31 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.  ILLUSTRATION Bristol-Myers Squibb’s “String-of-Pearls” CAPSULE 6.3 Horizontal Acquisition Strategy ♦ Which strategic outcomes did Bristol-Myers Squibb pursue through its “string-of-pearls” acquisition strategy? ♦ Why did Bristol-Myers Squibb choose to pursue a acquisition strategy that was different from its industry competitors? ♦ How did increasing the horizontal scope of Bristol-Myers Squibb through acquisitions strengthen its competitive position and profitability? (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 6–32 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. Loss of key employees at the acquired firm. Managers overseeing integration make mistakes in melding the acquired firm into their own. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–33 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–34 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. VERTICAL INTEGRATION STRATEGIES ◆ Vertically Integrated Firm Is 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 and/or forward toward end users of its products. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–35 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. TYPES OF VERTICAL INTEGRATION STRATEGIES Vertical Integration Choices Full Partial Tapered Integration Integration Integration (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–36 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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 Involves a mix of in-house and outsourced activity in any stage of the vertical chain. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–37 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. THE ADVANTAGES OF A VERTICAL INTEGRATION STRATEGY Benefits of a Vertical Integration Strategy Add materially Strengthen Boost to a firm’s the firm’s the firm’s technological competitive profitability capabilities position (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–38 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. CORE CONCEPTS ♦ 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 (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–39 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. INTEGRATING BACKWARD TO ACHIEVE GREATER COMPETITIVENESS ◆ Integrating Backwards 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 (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–40 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–41 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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 be 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–42 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. WEIGHING THE PROS AND CONS OF VERTICAL INTEGRATION ◆ Can vertical integration enhance the performance of strategy-critical activities in ways that lower cost, build expertise, protect proprietary know-how, or increase differentiation? ◆ What is the impact of vertical integration on investment costs, flexibility and response times? ◆ What administrative costs are incurred by coordinating operations across more vertical chain activities? ◆ How difficult it will be for the firm to acquire the set of skills and capabilities needed to operate in another stage of the vertical chain? (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–43 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.  ILLUSTRATION Kaiser Permanente’s Vertical CAPSULE 6.4 Integration Strategy ♦ What are the most important strategic benefits that Kaiser Permanente derives from its vertical Integration strategy? ♦ Over the long term, how could the vertical scope of Kaiser Permanente’s operations threaten its competitive position and profitability? ♦ Why is a vertical integration strategy more appropriate in some industries and not in others? (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 6–44 CORE CONCEPT ♦ Outsourcing involves contracting out certain value chain activities that are normally performed in-house to outside vendors. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–45 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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 and/or buyer preferences. Allows the firm to concentrate on its core business, leverage key resources, and do even better what it already does best. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–46 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. THE BIG RISKS 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–47 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. STRATEGIC MANAGEMENT PRINCIPLE ♦ 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–48 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. CORE CONCEPTS ♦ 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 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–49 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. FACTORS THAT MAKE AN ALLIANCE “STRATEGIC” An strategic alliance: 1. Facilitates achievement of an important business objective. 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 open up important new market opportunities. 7. Speeds the development of new technologies and/or product innovations. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–50 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–51 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. STRATEGIC MANAGEMENT PRINCIPLE ♦ Companies that have formed a host of alliances need to manage their alliances like a portfolio. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–52 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–53 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. CAPTURING THE BENEFITS OF STRATEGIC ALLIANCES Being sensitive to cultural differences Recognizing that Picking a good the alliance must partner benefit both sides Strategic Alliance Factors Ensuring both Adjusting the parties keep their agreement over commitments time to fit new Structuring the circumstances decision-making process for swift actions (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–54 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. STRATEGIC MANAGEMENT PRINCIPLE ♦ The best alliances are highly selective, focusing on particular value chain activities and on obtaining a specific competitive benefit. ♦ Alliances enable a firm to build on its strengths and to learn. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–55 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. REASONS FOR ENTERING INTO STRATEGIC ALLIANCES ◆ When seeking global market leadership: Enter into critical country markets quickly. Gain inside knowledge about unfamiliar markets and cultures through alliances with local partners. Provide access to valuable skills and competencies concentrated in particular geographic locations. ◆ When staking out a strong industry position: Establish a stronger beachhead in target industry. Master new technologies and build expertise and competencies. Open up broader opportunities in the target industry. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–56 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. PRINCIPLE ADVANTAGES OF STRATEGIC ALLIANCES 1. They lower investment costs and risks for each partner by facilitating resource pooling and risk sharing. 2. They are more flexible organizational forms and allow for a more adaptive response to changing conditions. 3. They are more rapidly deployed—a critical factor when speed is of the essence. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–57 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. STRATEGIC ALLIANCES VERSUS OUTSOURCING ◆ Key Advantages of Strategic Alliances: The increased ability to exercise control over the partners’ activities. A greater commitment and willingness of the partners to make relationship-specific investments as opposed to arm’s-length outsourcing transactions. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–58 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. ACHIEVING LONG-LASTING STRATEGIC ALLIANCE RELATIONSHIPS Factors Influencing the Longevity of Alliances Collaborating Establishing Continuing to with partners that a permanent collaborate is do not compete trusting in the parties’ directly relationship mutual interest (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–59 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. THE DRAWBACKS OF STRATEGIC ALLIANCES AND PARTNERSHIPS ◆ Culture clash and integration problems due to different management styles and business practices. ◆ Anticipated gains do not materialize 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–60 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 6–61 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.