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Chapter 6 Strengthening a Company’s Competitive Position

Identify how and when to deploy offensive or defensive strategic moves. 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.

Launching Strategic Offensives to Improve a Company’s Market Position Strategic offensives are called for when a company spots opportunities to gain profitable market share at its rival’s competitive advantage. The best offensives tend to incorporate several principles: 1. Focusing relentlessly on building competitive advantage and then striving to convert it into a sustainable advantage 2. Applying resources where rivals are least able to defend themselves 3. Employing the element of surprise as opposed to doing what rivals expect and are prepared for 4. 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 company’s strongest competitive assets—its most valuable resources and capabilities such as a betterknown brand name, a more efficient production or distribution system, greater technological capability, or 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. The best offensives use a company’s most powerful resources and capabilities to attack rivals in the areas where they are weakest.

The best offensives use a company’s most powerful resources and capabilities to attack rivals in the areas where they are competitively weakest.

The principal offensive strategy options include the following: 1. Offering an equally good or better product at a lower price. Price-cutting offensives should be initiated only be companies that have first achieved a cost advantage. 2. Leapfrogging competitors by being first to market with next-generation products. In technology-based industries, the opportune time to overtake an entrenched competitor is when there is a shift to the next generation of the technology. 3. Pursuing continuous product innovation to draw sales and market share away from less innovative rivals. Ongoing introductions of new and improved products can put rivals under tremendous competitive pressure, especially when rivals’ new product development capabilities are weak. 4. Pursuing disruptive product innovations to create new markets. While this strategy can be riskier and more costly than a strategy of continuous innovation, it can be a game changer if successful. 5. Adopting and improving on the good ideas of other companies (rivals or otherwise). Offensiveminded companies are often quick to adopt any good idea (not nailed down by a patent or other legal protection) and build on it to create competitive advantage for themselves. 6. Using hit-and-run or guerrilla warfare tactics to grab market share from complacent or distracted rivals. Guerrilla offensives are particularly well suited to small challengers that have neither the resources nor the market visibility to mount a full-fledged attack on industry leaders.

Chapter 6 Strengthening a Company’s Competitive Position 7. Launching a preemptive strike to secure an industry’s limited resources or capture a rare opportunity. What makes a move preemptive is its one-of-a-kind nature—whoever strikes first stands to acquire competitive assets that rivals can’t readily match.  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 Offensive-minded firms need to analyze which of their rivals to challenge as well as how to mount the challenge. The following are the best targets for offensive attacks:  Market leaders that are vulnerable. Signs of leader vulnerability include unhappy buyers, an inferior product line, aging technology or outdated plants and equipment, a preoccupation with diversification into other industries, and financial problems.  Runner-up firms with weaknesses in areas where the challenger is strong. Runner-up firms are an especially attractive target when a challenger’s resources and capabilities are well suited to exploiting their weaknesses  Struggling enterprises that are on the verge of going under. Challenging a hard-pressed rival in ways that further sap its financial strength and competitive position can weaken its resolve and hasten its exit from the market  Small local and regional firms with limited capabilities. Because small firms typically have limited expertise and resources, a challenger with broader and/or deeper capabilities is well positioned to raid their biggest and best customers—particularly those that are growing rapidly, have increasingly sophisticated requirements, and may already be thinking about switching to a supplier with a more full-service capability

Blue-Ocean Strategy—a Special Kind of Offensive

A blue-ocean strategy offers growth in revenues and profits by discovering or inventing new industry segments that create altogether new demand.

A blue-ocean strategy seeks to gain a dramatic competitive advantage by abandoning efforts to beat out competitors in existing markets and, instead, inventing a new market segment that allows a company to create and capture altogether new demand. This strategy views the business universe as consisting of two distinct types of market space. Once is where industry boundaries are well defined, the competitive rules of the game are understood, and companies try to outperform rivals by capturing a bigger share of existing demand. In such markets, intense competition constrains a company’s prospects for rapid growth and superior profitability since rivals move quickly to either imitate or counter the successes of competitors. The second type of market space is a “blue ocean,” where the industry does not really exist yet, is untainted by competition, and offers wide-open opportunity for profitable and rapid growth if a company can create new demand with a new type of product offering. Blue-ocean strategies provide a company with a great opportunity in the short run. But they don’t guarantee a company’s long-term success, which depends more on whether a company can protect the market position it opened up and sustain its early advantage.

Chapter 6 Strengthening a Company’s Competitive Position

Defensive Strategies—Protecting Market Position and Competitive Advantage All firms are subject to offensive challenges from rivals. The purposes of defensive strategies are to lower the risk of being attacked, weaken the impact of any attack that occurs, and induce challengers to aim their efforts at other rivals. 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

Good defensive strategies can help protect a competitive advantage but rarely are the basis for creating one.

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The most frequently employed approach to defending a company’s present position involves actins that restrict a challenger’s options for initiating a competitive attack. There are any number of obstacles that can be put in the path of would-be challengers. A defender can introduce new feathers, add new models, or broaden its product line to close off gaps and vacant niches to opportunity-seeking challengers. A defender can grant volume discounts or better financing terms to dealers and distributors to discourage them from experimenting with other suppliers, or it can convince them to handle its product line exclusively and force competitors to use other distribution outlets.

Signaling Challengers that Retaliation is Likely

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. Signals to would-be challengers can be given by: To be an effective Publicly announcing management’s commitment to maintaining the firm’s present market share defensive strategy signaling Publicly committing the company to a policy of matching competitors’ terms or prices needs to be accompanied Maintaining a war chest of cash and marketable securities Making an occasional strong counter-response to the moves of weak competitors enhancecommitment by a to credible the firm’s image as a tough defender

to follow through.

Timing a Company’s Strategic Moves Timing is especially important when first-mover advantages and disadvantages exist. Because the Because of first-mover timing of a 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 advantages and move.

disadvantages, competitiv advantage can spring from The Potential for First-Mover Advantages Market pioneers and other types of first movers typically bear greater risks and greater development when a move is made as costs than firms that move later. If the firm’s pioneering move gives it a competitive advantage that well as from what move is can be sustained even after other firms enter the market space, its first-mover advantage will be greater still. The extent of this type of advantage, however, will depend on whether and howmade fast follower firms can piggyback on the pioneer’s success and either imitate or improve on its move. There are six such conditions in which first-mover advantages are most likely to arise:

Chapter 6 Strengthening a Company’s Competitive Position 1. When pioneering helps build a firm’s reputation and creates strong brand loyalty. Customer loyalty to an early mover’s brand can create a tie that binds, limiting the success of later entrants’ attempts to poach from the early mover’s customer base and steal market share. 2. When a first mover’s customers will thereafter face significant switching costs. Switching costs can protect first movers when consumers make large investments in learning how to use a specific company’s product or in purchasing complementary products that are also brandspecific. Switching costs can also arise from loyalty programs or longterm contracts that give customers incentives to remain with an initial Identify when being a provider. first mover, a fast 3. When property rights protections thwart rapid imitation of the initial follower, or a late move. In certain types of industries, property rights protections in the form of patents, copyrights, and trademarks prevent the ready mover is most imitation of an early mover’s initial moves. advantageous. 4. When an early lead enables the first mover to reap scale economies or move down the learning curve ahead of rivals. If significant scale-based advantages are available to an early mover, later entrants (with a smaller market share) will face relatively higher productions costs. This disadvantage will make it even harder for later entrants to gain share and overcome the first mover scale advantage. When there is a steep learning curve and when learning can be kept proprietary, a first mover can benefit from volume-based cost advantages that grow ever larger as its experience accumulates and its scale of operations increases. 5. When a first mover can set the technical standard for the industry. In many technology-based industries, the market will converge around a single technical standard. By establishing the industry standard, a first mover can gain a powerful advantage that, like experience-based advantages, builds over time. 6. When strong network effects compel increasingly more consumers to choose the first mover’s product or service. Network effects are at work whenever consumers benefit form having other consumers use the same product or service that they use—a benefit that increase with the number of consumers using the product. Network effects can also occur with respect to suppliers.

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

Chapter 6 Strengthening a Company’s Competitive Position 

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

To Be a First Mover or Not In weighing the pros and cons of being a first mover versus a fast follower versus a late mover, it matters whether the race to market leadership in a particular industry is a 10-year marathon or a 2-year sprint. There is a market penetration curve for every emerging opportunity. Typically, the curve has an inflection point at which all the pieces of the business model fall into place, buyer demand explodes, and the market takes off. The inflection point can come early on a fast-rising curve (like the use of e-mail and watching movies streamed over the internet) or farther up on a slow-rising curve (as with batterypowered motor vehicles, solar and wind power, and textbook rental for college students). Any company that seeks competitive advantage by being a first mover thus needs to ask some hard questions:  Does market takeoff depend on the development of complementary products or services that currently are not available?  Is new infrastructure required before buyer demand can surge?  Will buyers need to learn new skills or adopt new behaviors? Horizontal scope is  Will buyers encounter high switching costs in moving to the newly introduced product or service? the range of product  Are there influential competitors in a position to delay or derail and service the efforts of a first mover? When the answers to any of these questions are yes, then a company must be careful not to pour too many resources into getting ahead of the market opportunity. On the other hand, if the market is a winner-take-all type of market, where powerful first-mover advantages insulate early entrants from competition and prevent later movers from making any headway, then it may be best to move quickly despite the risks.

Strengthening a Company’s Market Position via its Scope of Operations Apart from considerations of competitive moves and their timing, there is another set of managerial decision that can affect the strength of a company’s market position. These decisions concern the scope of a company’s operations—the breadth of its activities and the extent of its market reach. Decisions regarding the scope of the firm focus on which activities a firm will perform internally and which it will not. Scope issues are at the very heart of corporate-level strategy. Several dimensions of firm scope have relevance for business-level strategy in terms of their capacity to strengthen a company’s position in a given market. These include the firm’s horizontal scope, which is the range of product and service segments that the firm serves within its product or service market. Mergers and acquisitions involving other

segments that a firm serves within its focal market Vertical scope is the extent to which a firm’s internal activities encompass the range of activities that make up an industry’s entire value chain system, from raw-material production to final sales and service activities

Chapter 6 Strengthening a Company’s Competitive Position market participants provide a means for a company to expand its horizontal scope. Expanding the firm’s vertical scope by means of vertical integration can also affect the success of its market strategy. Vertical scope is the extent to which the firm engages in the various activities that make up the industry’s entire value chain system, from initial activities such as raw-material production all the way to retailing and after-sale service activities. Outsourcing decisions concern another dimension of scope since they involve narrowing the firm’s boundaries with respect to its participation in value chain activities. Because strategic alliances and partnerships provide an alternative to vertical integration and acquisition strategies and are sometimes used to facilitate outsourcing, we conclude this chapter with a discussion of the benefits and challenges associated with cooperative arrangements of this nature.

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

Horizontal Merger and Acquisition Strategies 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. 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: 1. Creating a more cost-efficient operation out of the combined companies. When a company acquires another company in the same industry, there’s usually enough overlap in operations that less efficient plant can be closed or distribution and sales activities partly combined and downsized. The combined companies may also be able to reduce supply chain coasts because of greater bargaining power over common suppliers and closer collaboration with supply chain partners. 2. Expanding a company’s geographic coverage. One of the best and quickest ways to expand a company’s geographic coverage is to acquire rivals with operations in the desired locations. Since a company’s size increases with its geographic scope, another benefit is increased bargaining power with the company’s suppliers or buyers. Greater geographic coverage can also contribute to product differentiation by enhancing a company’s name recognition and brand awareness. 3. Extending the company’s business into new product categories. Many times, a company has gaps in its product line that need to be filled in order to offer customers a more effective product bundle or the benefits of one-stop shopping. 4. Gaining quick access to new technologies or other resources and capabilities. Making acquisitions to bolster a company’s technological know-how or to expand its skills and capabilities allows a company to bypass a time-consuming and expensive internal effort to build desirable new resources and capabilities. 5. Leading the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunities. In fast-cycle industries or industries whose boundaries are changing, companies can use acquisition strategies to hedge their bets about the direction ...