Chapter 06 Test Bank Key
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, and (4) displaying a capacity for swift and decisive actions to overwhelm rivals.
Strategic offensives should, as a general rule, be grounded in a company’s strategic assets and employ a company’s strengths to attack rivals in the competitive areas where they are weakest.
The principal offensive strategy options include the following: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; 6.Using hit-and-run or guerrilla warfare tactics to grab market share from complacent or distracted rivals; and 7. Launching a preemptive strike to secure an industry’s limited resources or capture a rare opportunity.
The principal offensive strategy options include the following: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; 6.Using hit-and-run or guerrilla warfare tactics to grab market share from complacent or distracted rivals; and 7. Launching a preemptive strike to secure an industry’s limited resources or capture a rare opportunity.
How long it takes for an offensive to yield good results varies with the competitive circumstances. It can be short if buyers respond immediately (as can occur with a dramatic cost-based price cut, an imaginative ad campaign, or a disruptive innovation).
Runner-up firms are an especially attractive target when a challenger’s resources and capabilities are well suited to exploiting their weaknesses.
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. In this type of situation, it makes sense to attack the rival in the market segments where it makes the most profits, since this will threaten its survival the most.
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.
A terrific example of such blue-ocean market space is the online auction industry that eBay created and now dominates. Other companies that have created blue-ocean market spaces include NetJets in fractional jet ownership, Drybar in hair blowouts, Tune Hotels in limited service “backpacker” hotels, and Cirque du Soleil in live entertainment.
In a competitive market, 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. While defensive strategies usually don’t enhance a firm’s competitive advantage, they can definitely help fortify the firm’s competitive position, protect its most valuable resources and capabilities from imitation, and defend whatever competitive advantage it might have.
The most frequently employed approach to defending a company’s present position involves actions that restrict a challenger’s options for initiating a competitive attack. There are any number of obstacles that can be put in the path of would-be challengers. A defender can introduce new features, add new models, or broaden its product line to close off gaps and vacant niches to opportunity-seeking challengers. It can thwart rivals’ efforts to attack with a lower price by maintaining its own lineup of economy-priced options. It 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. It can induce potential buyers to reconsider switching. It can challenge the quality or safety of rivals’ products. Finally, 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.
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. Either goal can be achieved by letting challengers know the battle will cost more than it is worth.
Signals to would-be challengers can be given by: publicly announcing management’s commitment to maintaining the firm’s present market share; publicly committing the company to a policy of matching competitors’ terms or prices; maintaining a war chest of cash and marketable securities; making an occasional strong counter response to the moves of weak competitors to enhance the firm’s image as a tough defender.
There are five conditions in which first-mover advantages are most likely to arise: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 the first mover to move down the learning curve ahead of rivals; and 5. When a first mover can set the technical standard for the industry.
There are five such conditions in which first-mover advantages are most likely to arise: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 the first mover to move down the learning curve ahead of rivals; and 5. When a first mover can set the technical standard for the industry.
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 next-version products; When market uncertainties make it difficult to ascertain what will eventually succeed, allowing late movers to wait until these needs are clarified, and: When customer loyalty to the pioneer is low and a first mover’s skills, know-how, and actions are easily copied or even surpassed.
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.
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?; 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? 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—the race is likely going to be closer to a 10-year marathon than a 2-year sprint.
The lesson here is that 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.
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?; 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?
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.
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.
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.
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.
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.
Merger and acquisition strategies typically set sights on achieving any of five objectives: Creating a more cost-efficient operation out of the combined companies; Expanding a company’s geographic coverage; Extending the company’s business into new product categories; Gaining quick access to new technologies or other resources and capabilities; and, Leading the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunities.
Despite many successes, mergers and acquisitions do not always produce the hoped for outcomes. Cost savings may prove smaller than expected. Gains in competitive capabilities may take substantially longer to realize or, worse, may never materialize at all. Efforts to mesh the corporate cultures can stall due to formidable resistance from organization members. 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. Differences in management styles and operating procedures can prove hard to resolve. In addition, 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 strategy can expand the firm’s 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.
Under the right conditions, a vertical integration strategy can add materially to a company’s technological capabilities, strengthen the firm’s competitive position, and boost its profitability. But it is important to keep in mind that vertical integration has no real payoff strategy-wise or profit-wise unless the extra investment can be justified by compensating improvements in company costs, differentiation, or competitive strength.
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. Oil companies, for instance, supply their refineries with oil from their own wells as well as with oil that they purchase from other producers—they engage in tapered backward integration.
A vertical integration strategy can expand the firm’s range of activities backward into sources of supply and/or forward toward end users.
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.
For 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.
When there are few suppliers and when the item being supplied is a major component, vertical integration can lower costs by limiting supplier power. Vertical integration can also lower costs by facilitating the coordination of production flows and avoiding bottleneck problems. Furthermore, 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.
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. On occasion, integrating into more stages along the industry value chain system can add to a company’s differentiation capabilities by allowing it to strengthen its core competencies, better master key skills or strategy-critical technologies, or add features that deliver greater customer value.
Like backward integration, forward integration can lower costs by increasing efficiency and bargaining power. In addition, it can allow manufacturers to gain better access to end users, improve market visibility, and include the end user’s purchasing experience as a differentiating feature.
Vertical integration has some substantial drawbacks beyond the potential for channel conflict. The most serious drawbacks to vertical integration include the following concerns: slow to embrace technological advances; less flexibility in accommodating shifting buyer preferences; may not enable a company to realize economies of scale; capacity-matching problems; and, calls for developing new types of resources and capabilities.
Bypassing regular wholesale and retail channels in favor of direct sales and Internet retailing can have appeal if it reinforces the brand and enhances consumer satisfaction or if it lowers distribution costs, produces a relative cost advantage over certain rivals, and results in lower selling prices to end users.
The tip of the scales depends on (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, (2) what impact vertical integration will have on investment costs, flexibility, and response times, (3) what administrative costs will be incurred by coordinating operations across more vertical chain activities, and (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.
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: an activity can be performed better or more cheaply by outside specialists; the activity is not crucial to the firm’s ability to achieve sustainable competitive advantage; the outsourcing improves organizational flexibility and speeds time to market; it reduces the company’s risk exposure to changing technology and buyer preferences; and, it allows a company to concentrate on its core business, leverage its key resources, and do even better what it already does best.
The biggest danger of outsourcing is that a company will farm out the wrong types of activities and thereby hollow out its own capabilities.
A strategic alliance is a formal agreement between two or more separate companies in which they agree to work cooperatively toward some common objective.
An alliance becomes “strategic,” as opposed to just a convenient business arrangement, when it serves any of the following purposes: 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); It helps build, strengthen, or sustain a core competence or competitive advantage; It helps remedy an important resource deficiency or competitive weakness; It helps defend against a competitive threat, or mitigates a significant risk to a company’s business; It increases bargaining power over suppliers or buyers; It helps open up important new market opportunities; and, It speeds the development of new technologies and/or product innovations.
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.
Companies are employing strategic alliances and partnerships to extend their scope of operations via international expansion. It lowers investment costs and risks in comparison to going it alone. Strategic cooperation is a much-favored approach in industries where new technological developments are occurring at a furious pace along many different paths and where advances in one technology spill over to affect others (often blurring industry boundaries).
An alliance becomes “strategic,” as opposed to just a convenient business arrangement, when it serves any of the following purposes: 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); it helps build, strengthen, or sustain a core competence or competitive advantage; it helps remedy an important resource deficiency or competitive weakness; it helps defend against a competitive threat, or mitigates a significant risk to a company’s business; it increases bargaining power over suppliers or buyers; it helps open up important new market opportunities; and, it speeds the development of new technologies and/or product innovations.
The best alliances are highly selective, focusing on particular value chain activities and on obtaining a specific competitive benefit. They enable a firm to build on its strengths and to learn.
Strategic partnerships or cooperative arrangements: facilitate 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); help build, strengthen, or sustain a core competence or competitive advantage; help remedy an important resource deficiency or competitive weakness; help defend against a competitive threat, or mitigate a significant risk to a company’s business; increase bargaining power over suppliers or buyers; help open up important new market opportunities; and, speed the development of new technologies and/or product innovations.
Whenever industries are experiencing high-velocity technological advances in many areas simultaneously, firms find it virtually essential to have cooperative relationships with other enterprises to stay on the leading edge of technology, even in their own area of specialization. In industries like these, alliances are all about fast cycles of learning, gaining quick access to the latest round of technological know-how, and developing dynamic capabilities. In bringing together firms with different skills and knowledge bases, alliances open up learning opportunities that help partner firms better leverage their own resources and capabilities.
The merits of strategic alliances and collaborative partnerships are: 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; managing the learning process and then adjusting the alliance agreement over time to fit new circumstances.
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. Moreover, there are additional pitfalls to collaborative arrangements. The greatest danger is that a partner will gain access to a company’s proprietary knowledge base, technologies, or trade secrets, enabling the partner to match the company’s core strengths and costing the company its hard-won competitive advantage.
Unless there is respect among all the parties for cultural differences, including those stemming from different local cultures and local business practices, productive working relationships are unlikely to emerge.
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 principal advantages of strategic alliances over vertical integration or horizontal mergers and acquisitions are threefold: 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; and they are more rapidly deployed.
Companies that have greater success in managing their strategic alliances and partnerships often credit the following factors: they create a system for managing their alliance; they build relationships with their partners and establish trust; they protect themselves from the threat of opportunism by setting up safeguards; they make commitments to their partners and see that their partners do the same; they make learning a routine part of the management process.
Alliance management is an organizational capability, much like any other. It develops over time, out of effort, experience, and learning. For this reason, it is wise to begin slowly, with simple alliances designed to meet limited, short-term objectives.
Strategic assets are a company’s 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. Ignoring the need to tie a strategic offensive to a company’s competitive strengths and what it does best is like going to war with a popgun—the prospects for success are dim. For instance, it is foolish for a company with relatively high costs to employ a price-cutting offensive. Likewise, it is ill advised to pursue a product innovation offensive without having proven expertise in R&D and new product development.
Cost-based strategies involve lowering prices to gain market share. Lower prices can produce market share gains if competitors don’t respond with price cuts of their own and if the challenger convinces buyers that its product is just as good or better. Price-cutting offensives should be initiated only by companies that have first achieved a cost advantage. 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. A “blue ocean” is a market space 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. A terrific example of such blue-ocean market space is the online auction industry that eBay created and now dominates.
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. This strategy views the business universe as consisting of two distinct types of market space. 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. 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. A terrific example of such blue-ocean market space is the online auction industry that eBay created and now dominates.
Two “best targets” for offensive attacks by companies are:· Runner-up firms with weaknesses in areas where the challenger is strong. These 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. In this type of situation, it makes sense to attack the rival in the market segments where it makes the most profits, since this will threaten its survival the most.
When to make a strategic move is often as crucial as what move to make. Timing is especially important when first-mover advantages or disadvantage sexist. Under certain conditions, being first to initiate a strategic move can have a high payoff in the form of a competitive advantage that later movers can’t dislodge. If the market responds well to its initial move, the pioneer will benefit from a monopoly position (by virtue of being first to market) that enables it to recover its investment costs and make an attractive profit. If the firm’s pioneering move gives it a competitive advantage that can be sustained even after other firms enter the market space, its first-mover advantage will be greater still.
Mergers and acquisitions are much-used strategic options to strengthen a company’s market position. 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. Horizontal mergers and acquisitions can strengthen a firm’s competitiveness in five ways: (1) by improving the efficiency of its operations, (2) by heightening its product differentiation, (3) by reducing market rivalry, (4) by increasing the company’s bargaining power over suppliers and buyers, and (5) by enhancing its flexibility and dynamic capabilities.
The general strategic objectives of merger and acquisition strategies are:· Creating a more cost-efficient operation out of the combined companies.· Expanding a company’s geographic coverage.· Extending the company’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.
It is harder than one might think to generate cost savings or improve profitability by integrating backward into activities such as the manufacture of parts and components(which could otherwise be purchased from suppliers with specialized expertise in making the parts and components). For 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. Neither outcome is easily achieved. To begin with, a company’s in-house requirements are often too small to reach the optimum size for low-cost operation. Furthermore, matching the production efficiency of suppliers is fraught with problems when suppliers have considerable production experience, when the technology they employ has elements that are hard to master, and/or when substantial R&D expertise is required to develop next-version components or keep pace with advancing technology in components production.
Forward integration can lower costs by increasing efficiency and bargaining power. In addition, it can allow manufacturers to gain better access to end users, improve market visibility, and include the end user’s purchasing experience as a differentiating feature. Some producers have opted to integrate forward by selling directly to customers at the company’s website. Bypassing regular wholesale and retail channels in favor of direct sales and Internet retailing can have appeal if it reinforces the brand and enhances consumer satisfaction or if it lowers distribution costs, produces a relative cost advantage over certain rivals, and results in lower selling prices to end users.
The most serious drawbacks to vertical integration include the following concerns:• Vertical integration raises a firm’s capital investment in the industry, thereby increasing business risk.• Vertically integrated companies are often slow to embrace technological advances or more efficient production methods when they are saddled with older technology or facilities.• Vertical integration can result in less flexibility in accommodating shifting buyer preferences.• Vertical integration may not enable a company to realize economies of scale if its production levels are below the minimum efficient scale.• Vertical integration poses all kinds of capacity-matching problems.• Integration forward or backward often calls for developing new types of resources and capabilities.
Outsourcing strategies narrow the scope of a business’s operations, in terms of what activities are performed internally. A company can improve its cost position and competitiveness by performing a broader range of industry value chain activities in-house rather than having such activities performed by outside suppliers. When there are few suppliers and when the item being supplied is a major component, vertical integration can lower costs by limiting supplier power. Vertical integration can also lower costs by facilitating the coordination of production flows and avoiding bottleneck problems. Furthermore, 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 know how is beneficial even if such activities could otherwise be performed by outsiders.Outsourcing certain value chain activities makes strategic sense whenever:• An activity can be performed better or more cheaply by outside specialists.• The activity is not crucial to the firm’s ability to achieve sustainable competitive advantage.• The outsourcing improves organizational flexibility and speeds time to market.• It reduces the company’s risk exposure to changing technology and buyer preferences.• It allows a company to concentrate on its core business, leverage its key resources, and do even better what it already does best.
Strategic alliances suffer from some drawbacks. 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. Moreover, there are additional pitfalls to collaborative arrangements. The greatest danger is that a partner will gain access to a company’s proprietary knowledge base, technologies, or trade secrets, enabling the partner to match the company’s core strengths and costing the company its hard-won competitive advantage.
The principal advantages of strategic alliances over vertical integration or horizontal mergers and acquisitions are threefold:1. They lower investment costs and risks for each partner by facilitating resource pooling and risk sharing. This can be particularly important when investment needs and uncertainty are high, such as when a dominant technology standard has not yet emerged.2. They are more flexible organizational forms and allow for a more adaptive response to changing conditions. Flexibility is essential when environmental conditions or technologies are changing rapidly. Moreover, strategic alliances under such circumstances may enable the development of each partner’s dynamic capabilities.3. They are more rapidly deployed—a critical factor when speed is of the essence. Speed is of the essence when there is a winner-take-all type of competitive situation, such as the race for a dominant technological design or a race down a steep experience curve, where there is a large first-mover advantage.
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. Increasingly, companies are also employing strategic alliances and partnerships to extend their scope of operations via international expansion and diversification strategies. Strategic alliances help lower a company’s investment costs and risks in comparison to going it alone. It allows two companies to achieve jointly the global scale required for cost competitiveness.
Strategic cooperation is a much-favored approach in industries where new technological developments are occurring at a furious pace along many different paths and where advances in one technology spill over to affect others (often blurring industry boundaries). Whenever industries are experiencing high-velocity technological advances in many areas simultaneously, firms find it virtually essential to have cooperative relationships with other enterprises to stay on the leading edge of technology, even in their own area of specialization. In industries like these, alliances are all about fast cycles of learning, gaining quick access to the latest round of technological know-how, and developing dynamic capabilities. In bringing together firms with different skills and knowledge bases, alliances open up learning opportunities that help partner firms better leverage their own resources and capabilities.
Three factors that can aid companies in forming a successful strategic alliance are:1. Recognizing that the alliance must benefit both sides. Information must be shared as well as gained, and the relationship must remain forthright and trustful. If either partner plays games with information or tries to take advantage of the other, the resulting friction can quickly erode the value of further collaboration. Open, trustworthy behavior on both sides is essential for fruitful collaboration.2. Ensuring that both parties live up to their commitments. Both parties have to deliver on their commitments for the alliance to produce the intended benefits. The division of work has to be perceived as fairly apportioned, and the caliber of the benefits received on both sides has to be perceived as adequate.3. Structuring the decision-making process so that actions can be taken swiftly when needed. In many instances, the fast pace of technological and competitive changes dictates an equally fast decision-making process. If the parties get bogged down in discussions or in gaining internal approval from higher-ups, the alliance can turn into an anchor of delay and inaction.
The most serious drawbacks to vertical integration include the following concerns:• Vertical integration raises a firm’s capital investment in the industry, thereby increasing business risk.• Vertically integrated companies are often slow to embrace technological advances or more efficient production methods when they are saddled with older technology or facilities. A company that obtains parts and components from outside suppliers can always shop the market for the newest, best, and cheapest parts, whereas a vertically integrated firm with older plants and technology may choose to continue making suboptimal parts rather than face the high costs of premature abandonment.• Vertical integration can result in less flexibility in accommodating shifting buyer preferences. It is one thing to design out a component made by a supplier and another to design out a component being made in-house (which can mean laying off employees and writing off the associated investment in equipment and facilities). Integrating forward or backward locks a firm into relying on its own in-house activities and sources of supply.• Vertical integration may not enable a company to realize economies of scale if its production levels are below the minimum efficient scale. Small companies in particular are likely to suffer a cost disadvantage by producing in-house.
Typically, strategic alliances involve shared financial responsibility, joint contribution of resources and capabilities, shared risk, shared control, and mutual dependence.Advantages of a strategic alliance are:1. 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).2. It helps build, strengthen, or sustain a core competence or competitive advantage.3. It helps remedy an important resource deficiency or competitive weakness.4. It helps defend against a competitive threat, or mitigates a significant risk to a company’s business.5. It increases bargaining power over suppliers or buyers.6. It helps open up important new market opportunities.7. It speeds the development of new technologies and/or product innovations.
There are circumstances when other organizational mechanisms are preferable to alliances and partnering. Mergers and acquisitions are especially suited for situations in which strategic alliances or partnerships do not go far enough in providing a company with access to needed resources and capabilities. Ownership ties are more permanent than partnership ties, allowing the operations of the merger or acquisition participants to be tightly integrated and creating more in-house control and autonomy. Other organizational mechanisms are also preferable to alliances when there is limited property rights protection for valuable know-how and when companies fear being taken advantage of by opportunistic partners.
The merits of strategic alliances and collaborative partnerships are: 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; managing the learning process and then adjusting the alliance agreement over time to fit new circumstances.Strategic cooperation is a much-favored approach in industries where new technological developments are occurring at a furious pace along many different paths and where advances in one technology spill over to affect others (often blurring industry boundaries). Whenever industries are experiencing high-velocity technological advances in many areas simultaneously, firms find it virtually essential to have cooperative relationships with other enterprises to stay on the leading edge of technology, even in their own area of specialization. In industries like these, alliances are all about fast cycles of learning, gaining quick access to the latest round of technological know-how, and developing dynamic capabilities. In bringing together firms with different skills and knowledge bases, alliances open up learning opportunities that help partner firms better leverage their own resources and capabilities.
In order to capture the benefits of engaging in strategic alliances a company must:1. Pick a good partner. A good partner must bring complementary strengths to the relationship. To the extent that alliance members have non-overlapping strengths, there is greater potential for synergy and less potential for coordination problems and conflict. In addition, a good partner needs to share the company’s vision about the overall purpose of the alliance and to have specific goals that either match or complement those of the company. Strong partnerships also depend on good chemistry among key personnel and compatible views about how the alliance should be structured and managed.2. Be sensitive to cultural differences. Cultural differences among companies can make it difficult for their personnel to work together effectively. Cultural differences can be problematic among companies from the same country, but when the partners have different national origins, the problems are often magnified. Unless there is respect among all the parties for cultural differences, including those stemming from different local cultures and local business practices, productive working relationships are unlikely to emerge.3. Recognize that the alliance must benefit both sides. Information must be shared as well as gained, and the relationship must remain forthright and trustful. If either partner plays games with information or tries to take advantage of the other, the resulting friction can quickly erode the value of further collaboration. Open, trustworthy behavior on both sides is essential for fruitful collaboration.
Chapter 06 Test Bank Summary
Chapter 07 Test Bank
Student: ___________________________________________________________________________
Chapter 07 Test Bank Key
The world economy is globalizing at an accelerating pace as ambitious, growth-minded companies race to build stronger competitive positions in the markets of more and more countries, as countries previously closed to foreign companies open up their markets, and as information technology shrinks the importance of geographic distance.
A company may opt to expand outside its domestic market for any of five major reasons:(i) To gain access to new customers; (ii) To achieve lower costs through economies of scale, experience, and increased purchasing power; (iii) To gain access to low-cost inputs of production; (iv) To further exploit its core competencies; (v) To gain access to resources and capabilities located in foreign markets. Cross-border strategic alliances create value through resource sharing and risk spreading.
A company may opt to expand outside its domestic market for any of five major reasons: (i) To gain access to new customers; (ii) To achieve lower costs through economies of scale, experience, and increased purchasing power; (iii) To gain access to low-cost inputs of production; (iv) To further exploit its core competencies; (v) To gain access to resources and capabilities located in foreign markets. Companies in industries based on natural resources (e.g., oil and gas, minerals, rubber, and lumber) often find it necessary to operate in the international arena since raw-material supplies are located in different parts of the world and can be accessed more cost-effectively at the source.
Many companies are driven to sell in more than one country because domestic sales volume alone is not large enough to capture fully economies of scale in product development, manufacturing, or marketing. Similarly, firms expand internationally to increase the rate at which they accumulate experience and move down the learning curve. International expansion can also lower a company’s input costs through greater pooled purchasing power. Companies often expand internationally to extend the life cycle of their products. An increasingly important motive for entering foreign markets is to acquire resources and capabilities that may be unavailable in a company’s home market.
Cross-border strategic alliances create value through resource sharing and risk spreading. A company may opt to expand outside its domestic markets to gain access to new customers; to achieve lower costs through economies of scale, experience, and increased purchasing power; and to further exploit its core competencies. Companies also choose to establish operations in other countries to utilize local distribution networks, gain local managerial or marketing expertise, or acquire technical knowledge.
Crafting a strategy to compete in one or more countries of the world is inherently more complex for five reasons. First, different countries have different home-country advantages in different industries. Second, there are location-based advantages to conducting particular value chain activities in different parts of the world. Third, different political and economic conditions make the general business climate more favorable in some countries than in others. Fourth, companies face risk due to adverse shifts in currency exchange rates when operating in foreign markets. And fifth, differences in buyer tastes and preferences present a challenge for companies concerning customizing versus standardizing their products and services.
Differences in buyer tastes and preferences present a challenge for companies concerning customizing versus standardizing their products and services. Greater standardization of a global company’s product offering can lead to scale economies and learning-curve effects, thus contributing to the achievement of a low-cost advantage. Differing population sizes, income levels, and other demographic factors give rise to considerable differences in market size and growth rates from country to country. Sometimes, product designs suitable in one country are inappropriate in another because of differing local standards. When companies produce and market their products and services in many different countries, they are subject to the impacts of sometimes favorable and sometimes unfavorable changes in currency exchange rates.
The diamond framework can be used to reveal the answers to several questions that are important for competing on an international basis. First, it can help predict where foreign entrants into an industry are most likely to come from. Second, it can reveal the countries in which foreign rivals are likely to be weakest. And third, because it focuses on the attributes of a country’s business environment that allow firms to flourish, it reveals something about the advantages of conducting particular business activities in that country. Thus the diamond framework is an aid to deciding where to locate different value chain activities most beneficially.
Differences in buyer tastes and preferences present a challenge for companies competing in one or more countries of the world concerning customizing versus standardizing their products and services.
The four major factors in the diamond framework are: (i) demand conditions, (ii) factor conditions, (iii) related and supporting industries (i.e. industries within the same value chain system); and (iv) firm strategy, structure and rivalry (indicating country environments fostering development of different styles of management, organization and strategy).The demand conditions in an industry’s home market include the relative size of the market, its growth potential, and the nature of domestic buyers’ needs and wants. Industry sectors that are larger and more important in their home market tend to attract more resources and grow faster than others.
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