Chapter 6: Strengthening a Company's Competitive Position

Question 1

When are strategic offensives called for?

Answer 1

When a company spots opportunities to gain a profitable market share at its rivals’ expense or when a company has no choice but to try to whittle away at a strong rival’s competitive advantage.

Question 2

What principles (4) do the best offensives tend to incorporate?

Answer 2

1. Focusing relentlessly on building competitive advantage and then converting it to 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

Question 3

Where should a company focus a strategic offensive on?

Answer 3

Where the company has the greatest competitive advantage over rivals.

Question 4

What are 7 principle offensive strategy options?

Answer 4

1. Offering products at a lower price
2. Being first to market with next-gen products
3. Pursuing continuous innovation to draw market share 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 guerilla warfare tactics
7. Launching a preemptive strike to secure limited resources or capture a rare opportunity

Question 5

When should price-cutting offensives be initiated?

Answer 5

When companies have already achieved a cost advantage.

Question 6

What are “guerrilla offensives”?

Answer 6

Occasionally lowballing on price to win a big order or steal a key account, surprising rivals with sporadic but intense bursts of promotional activity, or undertaking special campaigns.

Question 7

Which companies are best suited for guerrilla offensives?

Answer 7

Small challengers that have neither the resources nor the market visibility to mount a full-fledged attack on industry leaders.

Question 8

Who are the best targets for offensive attacks?

Answer 8

• Vulnerable market leaders.
• Runner-up firms with weaknesses in areas where the challenger is strong.
• Struggling enterprises on the verge of going under.
• Small local and regional firms with limited capabilities.

Question 9

What is a blue-ocean strategy?

Answer 9

Seeks to gain a dramatic competitive advantage by abandoning efforts in existing markets and inventing a new market segment that allows a company to create and capture altogether new demand.

Question 10

What does the “blue ocean” represent?

Answer 10

Wide-open opportunity, offering smooth sailing in uncontested waters for the company first to venture out upon it.

Question 11

What is the purpose of defensive strategies?

Answer 11

Lower the risk of being attacked, weaken the impact of any attack that occurs, and induce challengers to aim their efforts at other rivals.

Question 12

What are some defensive strategies?

Answer 12

• Thwart rivals’ efforts to attack with a lower price
• Discourage buyers from trying competitors’ brands
• Encourage customers to reconsider switching
• Discourage buyers from experimenting with other suppliers by granting volume discounts or better financing terms

Question 13

What are some ways to signal to challengers that retaliation is likely?

Answer 13

• Publicly announcing management’s commitment to maintaining market share
• Publicly committing 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

Question 14

What does signaling need to be accompanied by to be an effective defensive strategy?

Answer 14

A credible commitment to follow through

Question 15

What are first-mover advantages and disadvantages?

Answer 15

Being the first to initiate a strategic move can earn a company a competitive advantage, although moving first is no guarantee of success.

Question 16

Under which 6 conditions are first-mover advantages most likely to arise?

Answer 16

1. Pioneering helps build a firm’s reputation and creates strong brand loyalty
2. First-mover’s customers will face significant switching costs afterwards
3. Property rights protections thwart rapid imitation of the initial move
4. An early lead enables the first mover to reap scale economies or move down the learning curve ahead of rivals
5. A first mover can set the technical standard for the industry
6. Strong network effects compel increasingly more consumers to choose the first mover’s product or service

Question 17

When might late-mover advantages or first-mover disadvantages arise? (6 instances)

Answer 17

1. Costs of pioneering are high, imitative followers can achieve similar benefits with far lower costs
2. Innovator’s products don’t live up to expectations, a follower could win buyers away from the leader
3. Rapid market evolution gives second-movers the opening to leapfrog
4. Market uncertainties make it difficult to ascertain what will eventually succeed, allowing late movers to wait until they are clarified
5. When customer loyalty to the pioneer is low and a first mover’s actions are easily copied/surpassed
6. When the first mover must make a risky investment

Question 18

What are the three ways companies can move into new untapped markets?

Answer 18

First mover, fast follower, late mover.

Question 19

What do decisions regarding the scope of the firm focus on?

Answer 19

Focus on which activities a firm will perform internally and which it will not.

Question 20

What is horizontal scope?

Answer 20

The range of product and service segments that the firm serves within its product or service market.

Question 21

Which type of scope is affected by mergers and acquisitions involving other market participants?

Answer 21

Horizontal scope.

Question 22

What is vertical scope?

Answer 22

The extent to which the firm engages in the various activities that make up the industry’s entire value chain system.

Question 23

What provides an alternative to vertical integration and acquisition strategies?

Answer 23

Strategic alliances and partnerships

Question 24

What is a merger and what is an acquisition?

Answer 24

Merger - combining of 1 or more companies into a single entity
Acquisition - one company purchases and absorbs operations of another

Question 25

What are the 5 objectives that merger and acquisition strategies typically try to achieve?

Answer 25

1. Creating a more cost-efficient operation
2. Expanding a company’s geographic coverage
3. Extending the company’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

Question 26

What is a vertically integrated firm?

Answer 26

One that participates in multiple stages of an industry’s value chain system.

Question 27

What are tapered integration strategies?

Answer 27

Vertical integration involving a mix of in-house and outsourced activity in any given stage of the vertical chain.

Question 28

When do vertical integration strategies provide a payoff?

Answer 28

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.

Question 29

What is backward integration?

Answer 29

Entry into activities previously performed by suppliers or other enterprises in earlier stages of the value chain system.

Question 30

What is forward integration?

Answer 30

Entry into activities within the value chain system that were previously performed closer to the end user.

Question 31

What needs to happen for backward integration to be a profitable strategy?

Answer 31

Company must be able to achieve the same scale economies as outside suppliers and match or beat suppliers’ production efficiency with no drop-off in quality.

Question 32

What occurs when a company is vigorously pursuing online sales to consumers while promoting sales to consumers through a network of wholesalers & retailers?

Answer 32

It is competing directly against its distribution allies, actions that constitute channel conflict.

Question 33

What should companies do in industries where the strong support and goodwill of dealer networks is essential?

Answer 33

Avoid channel conflict. Websites should be designed to partner with dealers rather than compete against them.

Question 34

What are (6) concerns (aside from channel conflict) with a vertical integration strategy?

Answer 34

1. Increased business risk by raising a firm’s capital investment in the industry
2. Often slow to adopt technological advances or more efficient production methods due to old plants and technology
3. Can result in less flexibility in accommodating shifting buyer preferences
4. May not enable a company to realize economies of scale
5. Capacity-matching issues
6. Company-owned wholesale/retail networks often don’t have the necessary skills to be efficient and effective

Question 35

What is outsourcing?

Answer 35

Contracting out certain value chain activities that are normally performed in-house to outside vendors.

Question 36

When does outsourcing make sense?

Answer 36

• An activity can be performed better or more cheaply by others
• Activity is not crucial to the firm’s ability to achieve a sustainable competitive advantage
• Outsourcing improves organization flexibility and speeds time to market
• Reduces company’s risk exposure to changing technology and buyer preferences
• Allows a company to concentrate on its core business

Question 37

What is the biggest risk associated with outsourcing?

Answer 37

A company could farm out the wrong types of activities and thereby hollow out its own capabilities.

Question 38

What do companies frequently engage in as an alternative to vertical integration or horizontal mergers/acquisitons?

Answer 38

Cooperative strategies.

Question 39

What is a strategic alliance?

Answer 39

Formal agreement between 2 or more separate companies in which they agree to work cooperatively toward some common objective.

Question 40

What do typical strategic alliances involve?

Answer 40

Shared financial responsibility, joint contribution of resources and capabilities, shared risk, shared control, and mutual dependence.

Question 41

How do strategic alliances vary?

Answer 41

In terms of duration and extent of collaboration. Some are long-term arrangements involving extensive cooperative activities, others are designed to accomplish more limited short-term objectives.

Question 42

What is a joint venture?

Answer 42

A partnership involving the establishment of an independent corporate entity that the partners own and control jointly, sharing in its revenues and expenses.

Question 43

When does an alliance become “strategic” as opposed to just a convenient business arrangement?

Answer 43

When it serves any of the following purposes:

1. Facilitates achievement of an important business objective
2. Helps build, strengthen, or sustain a core competence
3. Helps remedy an important deficiency/weakness
4. Helps defend against a competitive threat or mitigates a significant risk
5. Increases bargaining power
6. Helps open up new market opportunities
7. Speeds development of new technologies/product innovations

Question 44

Which industries find it essential to have cooperative relationships?

Answer 44

Those that experience high-velocity technological advances in many areas simultaneously.

Question 45

What are the 6 factors that determine a successful strategic alliance?

Answer 45

1. Picking a good partner
2. Being sensitive to cultural differences
3. Recognizing the alliance must benefit both sides
4. Ensuring both parties live up to commitments
5. Structuring the decision-making process
6. Managing the learning process

Question 46

When are alliances more likely to be long-lasting?

Answer 46

1. They involve collaboration with partners that do not compete directly
2. A trusting relationship is established
3. Both parties conclude that continued collaboration is in their mutual interest

Question 47

What is the greatest danger associated with strategic allainces?

Answer 47

That a partner could gain access to a company’s proprietary knowledge base, technology, trade secrets, enabling the partner to match their strengths and cost the company its hard-won advantage.

Question 48

In which type of strategic alliance is there the greatest risk for a company to gain access to proprietary knowledge/technologies/trade secrets?

Answer 48

When an alliance is for the purpose of collaborative R&D.

Question 49

What are (3) principal advantages of strategic alliances over vertical integration/horizontal mergers?

Answer 49

1. Lower investment costs + risks for each partner
2. Flexible, allow for adaptive response to changing conditions
3. Rapidly deployed - critical when speed is of the essence

Question 50

What are the (2) advantages of using strategic alliances over arm’s length outsourcing?

Answer 50

1. Increased ability to exercise control

2. Greater willingness for partners to make relationship-specific investments