STRATEGIC MANAGEMENT

MODULE 5

Generic Competitive Strategies

Generic Competitive Strategies Low cost, Differentiation, Best cost , Focused Strategies - Focused Low cost, Focused Differentiation. Strategic alliances, Collaborative partnerships , Mergers and acquisition, Joint Ventures Strategies Outsourcing Strategies International Business level strategies.

Competitive strategy is about being different. It means deliberately choosing to perform activities differently or to perform different activities than rivals to deliver a unique mix of value. Michael E. Porter

Chapter Roadmap
Five Competitive Strategies Low-Cost Provider Strategies Differentiation Strategies

Best-Cost Provider Strategies

Focused (or Market Niche) Strategies

The Contrasting Features of the Five Generic Competitive Strategies: A Summary

Strategy and Competitive Advantage

Competitive advantage exists when a firms strategy gives it an edge in
Attracting customers and Defending against competitive forces Key to Gaining a Competitive Advantage

Convince customers firms product / service offers superior value

A good product at a low price A superior product worth paying more for A best-value product

What Is Competitive Strategy?

Deals exclusively with a companys business plans to compete successfully
Specific efforts to please customers Offensive and defensive moves to counter maneuvers of rivals Responses to prevailing market conditions Initiatives to strengthen its market position

Narrower in scope than business strategy

Fig. 5.1: The Five Generic Competitive Strategies

Low-Cost Provider Strategies

Keys to Success
Make achievement of meaningful lower costs than rivals the theme of firms strategy Include features and services in product offering that buyers consider essential Find approaches to achieve a cost advantage in ways difficult for rivals to copy or match

Low-cost leadership means low overall costs, not just low manufacturing or production costs!

Options: Achieving a Low-Cost Advantage

Option 1: Use lower-cost edge to
Underprice competitors and attract price-sensitive buyers in enough numbers to increase total profits

Option 2: Maintain present price, be content with present market share, and use lower-cost edge to
Earn a higher profit margin on each unit sold, thereby increasing total profits

Nucor Corporations Low-Cost Provider Strategy

Eliminate some production processes from value chain used by traditional integrated steel mills; cut investment in facilities and equipment Strive hard for continuous improvement in the efficiency of its plants and frequently invest in state-of-the art equipment to reduce unit costs Carefully select plan sites to minimize inbound and outbound shipping costs and to take advantage of low rates for electricity Hire a nonunion workforce that uses team-based incentive compensation systems Heavily emphasize consistent product quality and maintain rigorous quality systems Minimize general and administrative expenses by maintaining a lean staff at corporate headquarters and allowing only 4 levels of management

Approaches to Securing a Cost Advantage

Approach 1 Do a better job than rivals of performing value chain activities efficiently and cost effectively Approach 2 Revamp value chain to bypass costproducing activities that add little value from the buyers perspective
Control costs! By-pass costs!

Approach 1: Controlling the Cost Drivers

Capture scale economies; avoid scale diseconomies Capture learning and experience curve effects Manage costs of key resource inputs Consider linkages with other activities in value chain Find sharing opportunities with other business units Compare vertical integration vs. outsourcing Assess first-mover advantages vs. disadvantages Control percentage of capacity utilization Make prudent strategic choices related to operations

Approach 2: Revamping the Value Chain

Make greater use of Internet technology applications Use direct-to-end-user sales/marketing methods Simplify product design Offer basic, no-frills product/service Shift to a simpler, less capital-intensive, or more flexible technological process Find ways to bypass use of high-cost raw materials Relocate facilities closer to suppliers or customers Drop something for everyone approach and focus on a limited product/service

Keys to Success in Achieving Low-Cost Leadership

Scrutinize each cost-creating activity, identifying cost drivers

Use knowledge about cost drivers to manage costs of each activity down year after year
Find ways to restructure value chain to eliminate nonessential work steps and low-value activities Work diligently to create cost-conscious corporate cultures
Feature broad employee participation in continuous costimprovement efforts and limited perks for executives Strive to operate with exceptionally small corporate staffs

Aggressively pursue investments in resources and capabilities that promise to drive costs out of the business

Characteristics of a Low-Cost Provider

Cost conscious corporate culture Employee participation in cost-control efforts Ongoing efforts to benchmark costs Intensive scrutiny of budget requests Programs promoting continuous cost Successful improvementlow-cost producers champion frugality but wisely and aggressively invest in cost-saving improvements !

When Does a Low-Cost Strategy Work Best?

Price competition is vigorous Product is standardized or readily available from many suppliers There are few ways to achieve differentiation that have value to buyers Most buyers use product in same ways Buyers incur low switching costs Buyers are large and have significant bargaining power Industry newcomers use introductory low prices to attract buyers and build customer base

Pitfalls of Low-Cost Strategies

Being overly aggressive in cutting price

Low cost methods are easily imitated by rivals Becoming too fixated on reducing costs and ignoring
Buyer interest in additional features Declining buyer sensitivity to price Changes in how the product is used

Technological breakthroughs open up cost reductions for rivals

Differentiation Strategies
Objective
Incorporate differentiating features that cause buyers to prefer firms product or service over brands of rivals

Keys to Success
Find ways to differentiate that create value for buyers and are not easily matched or cheaply copied by rivals Not spending more to achieve differentiation than the price premium that can be charged

Benefits of Successful Differentiation

A product / service with unique, appealing attributes allows a firm to
Command a premium price and/or Increase unit sales and/or Build brand loyalty
Which hat is unique?

= Competitive Advantage

Types of Differentiation Themes

Unique taste -- Dr. Pepper Multiple features -- Microsoft Windows and Office Wide selection and one-stop shopping -- Home Depot and Amazon.com Superior service -- FedEx, Ritz-Carlton Spare parts availability -- Caterpillar More for your money -- McDonalds, Wal-Mart Prestige -- Rolex Quality manufacture -- Honda, Toyota Technological leadership -- 3M Corporation Top-of-line image -- Ralph Lauren, Chanel, Cross

Sustaining Differentiation: Keys to Competitive Advantage

Most appealing approaches to differentiation
Those hardest for rivals to match or imitate Those buyers will find most appealing

Best choices to gain a longer-lasting, more profitable competitive edge

New product innovation Technical superiority Product quality and reliability Comprehensive customer service Unique competitive capabilities

Where to Find Differentiation Opportunities in the Value Chain

Purchasing and procurement activities Product R&D and product design activities Production process / technology-related activities Manufacturing / production activities Distribution-related activities Internally Marketing, sales, and customer service Activities, Costs, Activities, Performed Buyer/User & Margins of Costs, & Activities, Value activities Forward Channel Margins of Costs, & Chains
Suppliers Margins Allies & Strategic Partners

How to Achieve a Differentiation-Based Advantage

Approach 1 Incorporate product features/attributes that lower buyers overall costs of using product Approach 2 Incorporate features/attributes that raise the performance a buyer gets out of the product
Approach 3 Incorporate features/attributes that enhance buyer satisfaction in non-economic or intangible ways Approach 4 Compete on the basis of superior capabilities

Importance of Perceived Value

Buyers seldom pay for value that is not perceived
Price premium of a differentiation strategy reflects
Value actually delivered to the buyer and Value perceived by the buyer

Actual and perceived value can differ when buyers are unable to assess their experience with a product

Signaling Value as Well as Delivering Value

Incomplete knowledge of buyers causes them to judge value based on such signals as Price Attractive packaging Extensive ad campaigns Ad content and image Characteristics of seller
Facilities Customers Professionalism and personality of employees

Signals of value may be as important as actual value when Nature of differentiation is hard to quantify Buyers are making first-time purchases Repurchase is infrequent Buyers are unsophisticated

When Does a Differentiation Strategy Work Best?

There are many ways to differentiate a product that have value and please customers Buyer needs and uses are diverse Few rivals are following a similar differentiation approach

Technological change and product innovation are fast-paced

When Does a Differentiation Strategy Work Best?

There are many ways to differentiate a product that have value and please customers Buyer needs and uses are diverse

Few rivals are following a similar differentiation approach

Technological change and product innovation are fast-paced

Pitfalls of Differentiation Strategies

Buyers see little value in unique attributes of product Appealing product features are easily copied by rivals Differentiating on a feature buyers do not perceive as lowering their cost or enhancing their well-being Over-differentiating such that product features exceed buyers needs Charging a price premium buyers perceive is too high Not striving to open up meaningful gaps in quality, service, or performance features vis--vis rivals products

Best-Cost Provider Strategies

Combine a strategic emphasis on low-cost with a strategic emphasis on differentiation
Make an upscale product at a lower cost Give customers more value for the money

Objectives Deliver superior value by meeting or exceeding buyer expectations on product attributes and beating their price expectations Be the low-cost provider of a product with goodto-excellent product attributes, then use cost advantage to underprice comparable brands

Competitive Strength of a Best-Cost Provider Strategy

A best-cost providers competitive advantage comes from matching close rivals on key product attributes and beating them on price Success depends on having the skills and capabilities to provide attractive performance and features at a lower cost than rivals A best-cost producer can often out-compete both a low-cost provider and a differentiator when
Standardized features/attributes wont meet diverse needs of buyers Many buyers are price and value sensitive

Risk of a Best-Cost Provider Strategy

A best-cost provider may get squeezed between strategies of firms using low-cost and differentiation strategies
Low-cost leaders may be able to siphon customers away with a lower price High-end differentiators may be able to steal customers away with better product attributes

Focus / Niche Strategies

Involve concentrated attention on a narrow piece of the total market

Objective
Serve niche buyers better than rivals Choose a market niche where buyers have distinctive preferences, special requirements, or unique needs

Keys to Success

Develop unique capabilities to serve needs of target buyer segment

Approaches to Defining a Market Niche

Geographic uniqueness Specialized requirements in using product/service Special product attributes appealing only to niche buyers

Examples of Focus Strategies

eBay
Online auctions

Porsche
Sports cars

Jiffy Lube International

Maintenance for motor vehicles

Pottery Barn Kids

Childrens furniture and accessories

Bandag
Specialist in truck tire recapping

Focus / Niche Strategies and Competitive Advantage

Approach 1

Achieve lower costs than rivals in serving the segment -A focused low-cost strategy
Approach 2

Offer niche buyers something different from rivals --

Which hat is unique ?

A focused differentiation strategy

What Makes a Niche Attractive for Focusing?

Big enough to be profitable and offers good growth potential Not crucial to success of industry leaders Costly or difficult for multi-segment competitors to meet specialized needs of niche members Focuser has resources and capabilities to effectively serve an attractive niche Few other rivals are specializing in same niche Focuser can defend against challengers via superior ability to serve niche members

Risks of a Focus Strategy

Competitors find effective ways to match a focusers capabilities in serving niche

Niche buyers preferences shift towards product attributes desired by majority of buyers niche becomes part of overall market
Segment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered

Deciding Which Generic Competitive Strategy to Use

Each positions a company differently in its market and competitive environment Each establishes a central theme for how a company will endeavor to outcompete rivals Each creates some boundaries for maneuvering as market circumstances unfold Each points to different ways of experimenting with the basics of the strategy Each entails differences in product line, production emphasis, marketing emphasis, and means to sustainthe strategy

Deciding Which Generic Competitive Strategy to Use

Each positions a company differently in its market Each establishes a central theme for how a company will endeavor to outcompete rivals Each creates some boundaries for maneuvering as market circumstances unfold Each points to different ways of experimenting with the basics of the strategy Each entails differences in product line, production emphasis, marketing emphasis, and means to sustain the strategy risk Selecting a stuck in the middle strategy! The big This rarely produces a sustainable competitive advantage or a distinctive competitive position.

Fig. 6.1: A Companys Menu of Strategy Options

Strategic Alliances and Collaborative Partnerships

Companies sometimes use strategic alliances or collaborative partnerships to complement their own strategic initiatives and strengthen their competitiveness. Such cooperative strategies go beyond normal company-to-company dealings but fall short of merger or full joint venture partnership.

A Strategic Alliance
A Strategic Alliance is a relationship between two or more parties to pursue a set of agreed upon goals or to meet a critical business need while remaining independent organizations A partnership is an arrangement where parties agree to cooperate to advance their mutual interests

Alliances Can Enhance a Firms Competitiveness

Alliances and partnerships can help companies cope with two demanding competitive challenges
Racing against rivals to build a market presence in many different national markets Racing against rivals to seize opportunities on the frontiers of advancing technology

Collaborative arrangements can help a company lower its costs and/or gain access to needed expertise and capabilities

Capturing the Full Potential of a Strategic Alliance

Capacity of partners to defuse organizational frictions Ability to collaborate effectively over time and work through challenges Technological and competitive surprises New market developments Changes in their own priorities and competitive circumstances Collaborative partnerships nearly always entail an evolving relationship whose competitive value depends on Mutual learning Cooperation Adaptation to changing industry conditions Competitive advantage emerges when a company acquires valuable capabilities via alliances it could not obtain on its own

Why Are Strategic Alliances Formed?

To collaborate on technology development or new product development To fill gaps in technical or manufacturing expertise To acquire new competencies To improve supply chain efficiency To gain economies of scale in production and/or marketing To acquire or improve market access via joint marketing agreements

Potential Benefits of Alliances to Achieve Global and Industry Leadership

Get into critical country markets quickly to accelerate process of building a global presence Gain inside knowledge about unfamiliar markets and cultures Access valuable skills and competencies concentrated in particular geographic locations Establish a beachhead to participate in target industry Master new technologies and build new expertise faster than would be possible internally Open up expanded opportunities in target industry by combining firms capabilities with resources of partners

Why Alliances Fail

Ability of an alliance to endure depends on
How well partners work together Success of partners in responding and adapting to changing conditions Willingness of partners to renegotiate the bargain

Reasons for alliance failure

Diverging objectives and priorities of partners Inability of partners to work well together Changing conditions rendering purpose of alliance obsolete Emergence of more attractive technological paths Marketplace rivalry between one or more allies

Merger and Acquisition Strategies

Merger Combination and pooling of equals, with newly created firm often taking on a new name Acquisition One firm, the acquirer, purchases and absorbs operations of another, the acquired Merger-acquisition
Much-used strategic option Especially suited for situations where alliances do not provide a firm with needed capabilities or cost-reducing opportunities Ownership allows for tightly integrated operations, creating more control and autonomy than alliances

Objectives of Mergers and Acquisitions

To pave way for acquiring firm to gain more market share and create a more efficient operation To expand a firms geographic coverage To extend a firms business into new product categories or international markets To gain quick access to new technologies To invent a new industry and lead the convergence of industries whose boundaries are blurred by changing technologies and new market opportunities

Joint Ventures

Background
Joint venture is a separate business entity
Participants continue as separate firms May be organized as partnership, corporation, or any other form of business Formal long-term contract of 8 to 12 years duration

 Characteristics of Joint Ventures

Limited scope and duration Generally involve only two firms Involve only small fraction of participants' total activities Each participant offers something of value Joint production of single products No sharing of assets/information beyond venture

Need not affect competitive relationships

 Joint property interest in subject matter of venture

Right of mutual control or management of

enterprise

Right to share in cash flows of the enterprise

Limited risk

Joint Ventures in Business Strategy

Goals/objectives of joint ventures
Risk sharing
Each participant diversifies risk
Reduces investment cost of entering risky new area Realizes benefits of economies of scale, critical mass, learning curve effects sooner

 Knowledge acquisition learning experience for both partners

Shared technology
Shared managerial skills in organization, planning, and control Successive integration joint venturing as a way to learn about

prospective merger partners

Entry into new, expanded, foreign markets

Augments financial or technical capabilities Reduces risk Foreign country may require joint venture with local partner

 Financing to raise capital

Share investment expense

Small company has product idea but no cash

Joint venture with large company that has cash to develop product

Distribution/marketing
To obtain distribution channels To obtain raw materials supply

 More favorable tax/political treatment

Foreign ventures Antitrust issues joint ventures increase rather than reduce number of firms

Long-run strategic planning spider's web strategy

Provide countervailing power among rivals

Small firms in a concentrated industry do multiple joint ventures with

dominant firms to form self-protective networks

Tax aspects of joint ventures

Contribution of a patent or licensable technology to a

joint venture may have better tax consequences than a

licensing arrangement with royalties Examples:
One partner contributes technology
Other partner contributes depreciable assets Depreciation offsets revenues

Joint venture ends up with lower tax rate than any of its partners
Partners pay deferred capital gains if/when venture is terminated

 Joint ventures and restructuring

Joint ventures can be used as transitional mechanism

in a broad restructuring process

Buyer can use joint venture experience to better determine value of seller's brands, distribution systems, and personnel Risk of making mistakes is reduced through direct

involvement with business

 Advantages
Customers are moved to buyer over a period of time in

which both seller and buyer continue to be involved

Buyer builds experience with new line of business Buyer receives managerial and technical advice and assistance from seller during transition period Experience and knowledge developed during life of joint venture enable buyer to obtain better understanding of the value of acquisition

 International joint ventures

Widely used

Reduce risks of expanding into foreign environments

May be legal requirement of local joint venturer in some foreign countries Local partner's contribution likely to be in the form of specialized knowledge about local conditions

Subject to clashes of different cultures

Rationale for Joint Ventures

Transaction cost theory of the firm why
joint ventures over other contractual

arrangements
Transaction costs
Involved in all exchanges and organizing activities
Affect allocation of resources

 Complementary production Joint use of assets or inputs to produce outputs which

cannot be attributed to any single input

Synergy output is more than sum of inputs

 Specialization Asset's productivity increases with its specialization to

other inputs used in production

Specialization increases risk of loss to owner of complementary asset if other inputs are withdrawn

Nonrecoverable portion of investment cost of

complementary asset lost if other inputs withdrawn

 Leads to pre-investment arrangements to promote confidence in

joint use of assets Choose transaction-cost-minimizing form of pre-investment

arrangements
The greater the transaction costs relative to output value, the more critical the search for economizing organizational form

Contractual arrangements
Costly to write and enforce Repetitive transactions would require repetitive contracting

 Joint ownership More likely with greater frequency of exchange of inputs Frequency of transaction improves prospects of recovering investment cost of specialized asset Joint ventures more appropriate than merger where: Complementary production involves only small subset of each participant's assets Complementary assets have limited service life Complementary production has limited life

 Reasons for failure Inflexibility problems similar to other long-term contracts

Implementation requires substantial commitments of

managerial resources Joint ventures do not last as long as planned

About 70% are disbanded before scheduled maturity

On average they do not last as long as one-half the term of years stated in agreement

 Reasons for disbanding joint ventures

Inadequate preplanning Technology did not develop as expected Disagreement between parties on approaches to joint venture objectives Refusal to share knowledge with counterparts in venture firms wants to learn as much as possible but not to convey too much

Inability of parent companies to share control or compromise on difficult

issues

Public policy concerns conflict with firms' longterm strategies

Joint Venture
Joint ventures are new enterprises owned by two or more

participants.
They are typically formed for special reasons for a limited duration. This brings the participants into what is essentially a medium to long term contract which is both specific and flexible. Each participant expects to gain from the activity but also must make contribution .

EXAMPLE
GM- Toyota JV, GM hoped to gain new experience in the management techniques of the Japanese in building high quality, low cost compact cars. Toyota was seeking to learn from the management traditions that had made GM the number one auto producer in the world and in addition to learn how to operate an auto company in the environment under the conditions in the US.

Outsourcing Strategies
Concept
Outsourcing involves withdrawing from certain value chain activities and relying on outsiders to supply needed products, support services, or functional activities
Internally Performed Activities

Suppliers

Functional Activities

Support Services

Distributors or Retailers

When Does Outsourcing Make Strategic Sense?

Activity can be performed better or more cheaply by outside specialists Activity is not crucial to achieve a sustainable competitive advantage Risk exposure to changing technology and/or changing buyer preferences is reduced Operations are streamlined to
Cut cycle time Speed decision-making Reduce coordination costs

Firm can concentrate on core value chain activities that best suit its resource strengths

Strategic Advantages of Outsourcing

Improves firms ability to obtain high quality and/or cheaper components or services Improves firms ability to innovate by interacting with best-in-world suppliers Enhances firms flexibility should customer needs and market conditions suddenly shift Increases firms ability to assemble diverse kinds of expertise speedily and efficiently Allows firm to concentrate its resources on performing those activities internally which it can perform better than outsiders

Pitfalls of Outsourcing
Farming out too many or the wrong activities, thus
Hollowing out capabilities

Losing touch with activities and expertise that determine overall long-term success

The Four Big Strategic Issues in Competing Multi-nationally

Whether to customize a companys offerings in each different country market to match preferences of local buyers or offer a mostly standardized product worldwide Whether to employ essentially the same basic competitive strategy in all countries or modify the strategy country by country Where to locate a companys production facilities, distribution centers, and customer service operations to realize the greatest location advantages Whether and how to efficiently transfer a companys resource strengths and capabilities from one country to another to secure competitive advantage

What Is the Motivation for Competing Internationally?

Gain access to new customers Obtain access to valuable natural resources Help achieve lower costs Capitalize on core competencies

Spread business risk across wider market base

Two Primary Patterns of International Competition

Multi-country Competition

Global Competition

Characteristics of Multi-Country Competition

Market contest among rivals in one country not closely connected to market contests in other countries Buyers in different countries are attracted to different product attributes Sellers vary from country to country Industry conditions and competitive forces in Rival firms battle for each national market national championships differ in important winning in one country does not necessarily signal respects
the ability to fare well in other countries!

Characteristics of Global Competition

Competitive conditions across country markets are strongly linked
Many of same rivals compete in many of the same country markets A true international market exists

A firms competitive position in one country is affected by its position in other countries Competitive advantage is based on a firms worldwide operations and overall global standing Rival firms in globally competitive industries
vie for worldwide leadership!

Strategy Options for Competing in Foreign Markets

Exporting Licensing Franchising strategy Multi-country strategy Global strategy Strategic alliances or joint ventures

Export Strategies
Involve using domestic plants as a production base for exporting to foreign markets Excellent initial strategy to pursue international sales Advantages
Conservative way to test international waters Minimizes both risk and capital requirements Minimizes direct investments in foreign countries

An export strategy is vulnerable when

Manufacturing costs in home country are higher than in foreign countries where rivals have plants High shipping costs are involved Adverse fluctuations in currency exchange rates

Licensing Strategies
Licensing makes sense when a firm
Has valuable technical know-how or a patented product but does not have international capabilities to enter foreign markets Desires to avoid risks of committing resources to markets which are
Unfamiliar Politically volatile Economically unstable

Disadvantage

Risk of providing valuable technical know-how to foreign firms and losing some control over its use

Franchising Strategies
Often is better suited to global expansion efforts of service and retailing enterprises Advantages
Franchisee bears most of costs and risks of establishing foreign locations Franchisor has to expend only the resources to recruit, train, and support franchisees

Disadvantage
Maintaining cross-country quality control

Multi-Country Strategy
Strategy is matched to local market needs Different country strategies are called for when
Significant country-to-country differences in customers needs exist Buyers in one country want a product different from buyers in another country Host government regulations preclude uniform global approach

Two drawbacks
1. Poses problems of transferring competencies across borders 2. Works against building a unified competitive advantage

Global Strategy
Strategy for competing is similar in all country markets Involves
Coordinating strategic moves globally Selling in many, if not all, nations where a significant market exists

Works best when products and buyer requirements are similar from country to country

Fig. 7.1: How a Multi-country Strategy Differs from a Global Strategy

The Quest for Competitive Advantage in Foreign Markets

Three ways to gain competitive advantage
1. Locating activities among nations in ways that lower costs or achieve greater product differentiation

2. Efficient/effective transfer of competitively valuable competencies and capabilities from company operations in one country to company operations in another country 3. Coordinating dispersed activities in ways a domestic-only competitor cannot

Locating Activities to Build a Global Competitive Advantage

Two issues
Whether to
Concentrate each activity in a few countries or Disperse activities to many different nations

Where to locate activities

Which country is best location for which activity?

Concentrating Activities to Build a Global Competitive Advantage

Activities should be concentrated when
Costs of manufacturing or other value chain activities are meaningfully lower in certain locations than in others There are sizable scale economies in performing the activity There is a steep learning curve associated with performing an activity in a single location Certain locations have
Superior resources Allow better coordination of related activities or Offer other valuable advantages

Dispersing Activities to Build a Global Competitive Advantage

Activities should be dispersed when
They need to be performed close to buyers Transportation costs, scale diseconomies, or trade barriers make centralization expensive Buffers for fluctuating exchange rates, supply interruptions, and adverse politics are needed

Transferring Valuable Competencies to Build a Global Competitive Advantage

Transferring competencies, capabilities, and resource strengths across borders contributes to
Development of broader competencies and capabilities Achievement of dominating depth in some competitively valuable area

Dominating depth in a competitively valuable capability is a strong basis for sustainable competitive advantage over
Other multinational or global competitors and
Small domestic competitors in host countries

Coordinating Cross-Border Activities to Build a Global Competitive Advantage

Aligning activities located in different countries contributes to competitive advantage in several ways
Choose where and how to challenge rivals Shift production from one location to another to take advantage of most favorable cost or trade conditions or exchange rates Use Internet technology to collect ideas for new or improved products and to determine which products should be standardized or customized Enhance brand reputation by incorporating same differentiating attributes in its products in all markets where it competes

What Are Profit Sanctuaries?

Profit sanctuaries are country markets where a firm
Has a strong, protected market position and Derives substantial profits

Generally, a firms most strategically crucial profit sanctuary is its home market Profit sanctuaries are a valuable competitive asset in global industries!

Fig. 5.2: Profit Sanctuary Potential of Various Competitive Approaches

What Is Cross-Market Subsidization?

Involves supporting competitive offensives in one market with resources/profits diverted from operations in other markets Competitive power of cross-market subsidization results from a global firms ability to
Draw upon its resources and profits in other country markets to mount an attack on single-market or one-country rivals and Try to lure away their customers with Lower prices Discount promotions Heavy advertising Other offensive tactics

Global Strategic Offensives

Three Options
1. Direct onslaught Objective Capture a major slice of market share, forcing rival to retreat Involves
Price cutting Heavy expenditures on marketing, advertising, and promotion Efforts to gain upper hand in one or more distribution channels

2. Contest More subtle and focused than an onslaught Focuses on a particular market segment unsuited to defenders capabilities and in which attacker has a new next-generation product 3. Feint Move designed to divert the defenders attention away from attackers main target

Achieving Global Competitiveness via Cooperation

Cooperative agreements / strategic alliances with foreign companies are a means to
Enter a foreign market or Strengthen a firms competitiveness in world markets

Purpose of alliances
Joint research efforts Technology-sharing Joint use of production or distribution facilities Marketing / promoting one anothers products

Benefits of Strategic Alliances

Gain scale economies in production and/or marketing Fill gaps in technical expertise or knowledge of local markets Share distribution facilities and dealer networks Direct combined competitive energies toward defeating mutual rivals Take advantage of partners local market knowledge and working relationships with key government officials in host country Useful way to gain agreement on important technical standards

Pitfalls of Strategic Alliances

Different motives and conflicting objectives Time consuming; slows decision-making Language and cultural barriers

Mistrust when collaborating in competitively sensitive areas

Clash of egos and company cultures Becoming too dependent on another firm for essential expertise over the long-term