19e Section6 LN Chapter06

Chapter 6 Strengthening a Company’s Competitive PositionCHAPTER 6 STRENGTHENING A COMPANY’S COMPETITIVE POSITION CHAPTER SUMMARY Chapter 6 discusses that once a company has settled on which of the five generic strategies to employ, attention must turn to what other strategic actions can be taken in order to complement the choice of its basic competitive strategy. The three dimensions discussed include offensive and defensive competitive actions, competitive dynamics and the timing of strategic moves, and the breadth of a company’s activities. These are explored through seven broad categories: (1) Whether and when to go on the offensive, (2) Whether and when to employ defensive strategies, (3) When to undertake strategic moves, (4) Whether to merge or acquire another firm, (5) Whether to integrate the value chain backward or forward, (6) Whether to outsource certain value chain activities, and (7) Whether to enter into strategic alliances. LECTURE OUTLINE I. Going on the Offensive – Strategic Options to Improve a Company’s Market Position 1. Regardless of which of the five generic competitive strategies the firm is pursuing, there are times when the company must go on the offensive. The best offensive moves tend to incorporate several key principles: a. Focusing relentlessly on building competitive advantage and then striving to convert it into a sustainable advantage. b. Applying resources where rivals are least able to defend themselves. c. Employing the element of surprise as opposed to doing what rivals expect and are prepared for. d. Displaying a strong bias for swift, decisive, and overwhelming actions to overpower rivals 2. Choosing the Basis for Competitive Attack a. Strategic offensives should, as a general rule be based on exploiting a company’s strongest strategic assets. b. 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. Adopting and improving on the good ideas of other companies (rivals or otherwise). 607 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 607 Chapter 6 Strengthening a Company’s Competitive Position 5. Using hit-and-run or guerrilla warfare tactics to grab market share from complacent or distracted rivals 6. Launching a preemptive strike to secure an advantageous position that rivals are prevented or discouraged from duplicating. 3. How long it takes for an offensive to yield good results varies with the competitive circumstances including buyer response to the initiative and whether market rivals recognize the threat and begin a counter-response. 4. Choosing Which Rivals to Attack - Offensive-minded firms need to analyze which of their rivals to challenge as well as how to mount the challenge. The following are the best targets for offensive attacks: a. Market leaders that are vulnerable. b. Runner-up firms with weaknesses in areas where the challenger is strong. c. Struggling enterprises that are on the verge of going under. d. Small local and regional firms with limited capabilities. 5. Blue Ocean strategies seek to gain a dramatic and durable competitive advantage by abandoning effort to beat out competitors in existing markets and, instead, inventing a new industry or distinctive market segment that renders existing competitors largely irrelevant and allows a company to create and capture altogether new demand. CORE CONCEPT A blue-ocean strategy offers growth in revenues and profits by discovering or inventing new industry segments that create altogether new demand. a. This strategy views the business universe as consisting of two distinct types of market space: 1) Industry boundaries are defined and accepted, the competitive rules of the game are well understood by all industry members, and companies try to outperform rivals by capturing a bigger share of existing demand. 2) Industry does not really exist yet, is untainted by competition, and offers wide open opportunity for profitable and rapid growth if a company can come up with a product offering and strategy that allows it to create new demand rather than fight over existing demand. b. Blue-ocean strategies provide a company with a great opportunity in the short run. Long term success depends on whether a company can protect the market position they opened up and sustain their early advantage. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 608 Chapter 6 Strengthening a Company’s Competitive Position ILLUSTRATION CAPSULE 6.1 Gilt Groupe’s Blue-Ocean Strategy in the U.S. Flash Sale Industry Discussion Question: Did Gilt Groupe’s pursue their Blue Ocean strategy in an industry with welldefined boundaries and competitive rules or did they pioneer a new industry? What was the fundamental nature of their competitive advantage? Answer: The Gilt Groupe was operating in the well-defined fashion clothing industry with firmly established market leaders and segments. By utilizing an innovative sales approach that provided high fashion clothing in limited quantities via the internet the company was able to gain significant market share. The company was able to develop a sustainable and creative product niche where they maintained the cachet of exclusivity while offering deeply discounted merchandise in the fashion industry. II. Defensive Strategies – Protecting Market Position and Competitive Advantage 1. All firms in a competitive market are subject to the offensive challenges created by rival firms. Defensive strategies counter these challenges by (1) lowering the risk of being attacked, (2) weakening the impact of any attach that occurs, and (3) influencing challengers to aim their attacks at other rivals. 2. Blocking the Avenues Open to Challengers – The most frequently employed approach to defending a company’s present position is to block an attack. Methods can include alternative technology, introduction of new features and models, maintaining economy priced options, enhancing support, and volume discounts to dealers. 3. Signaling Challengers That Retaliation is Likely – The goal is to discourage challengers from attacking, or diverting their attack to another rival. Methods can include public announcements of management’s commitment to the market, public policies for matching rivals terms and prices, and periodic strong responses to the moves of weaker competitors. III. Timing a Company’s Offensive and Defensive Strategic Moves 1. When to make a strategic move is often as crucial to success as what strategic move to make. This is especially important when first move advantage or disadvantages exist. CORE CONCEPT Because of first-mover advantages and disadvantages, competitive advantage can spring from when a move is made as well as from what move is made. 2. The Potential for first-mover advantages is great however, first-movers typically bear greater risks and development costs than firms that move later. There are five conditions where first-movers have an advantage: a. When pioneering helps build a firm’s reputation with buyers and creates brand loyalty. b. When a first mover’s customers will thereafter face significant switching costs. c. When property rights protections thwart rapid imitation of the initial move. d. When an early lead enables the first mover to move down the learning curve ahead of rivals. e. When a first mover can set the technical standard for the industry. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 609 Chapter 6 Strengthening a Company’s Competitive Position 3. The Potential for Late-Mover Advantages or First-Mover Disadvantages - Late-mover advantages (or first-mover disadvantages ) arise in four instances: a. When pioneering is more costly than imitative following, and only negligible learning-curve benefits accrue to the leader—a condition that allows a follower to end up with lower costs than the first-mover. b. When the products of an innovator 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. c. 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. d. When market uncertainties make it difficult to ascertain what will eventually succeed. ILLUSTRATION CAPSULE 6.2 Amazon.com’s First-Mover Advantage in Online Retailing Discussion Question: Discuss the basis for Amazon.com’s competitive advantage and how they leveraged first-mover advantages. Answer: In 1994 Jeff Bezos noted the tremendous growth in internet use and saw an opportunity to sell products online that could be easily shipped. Books made up the bulk of the firm’s initial product offering and selling them online allowed the firm to quickly gain market share over traditional booksellers with large retail spaces to support. This large volume and large customer base translated into strong brand recognition and allowed the firm to spread to other product lines and further grow market share. By moving down the learning curve quickly and well ahead of their rivals, Amazon.com was able to develop further competitive advantage and stay ahead of new entrants. 4. To Be a First Mover or Not - In weighing the pros and cons of first-mover versus fast-follower, it matter whether the race to market leadership in a particular industry is a marathon or a sprint. In a marathon a slow-mover is not unduly penalized – first mover advantage can be fleeting. a. The lesson 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. It can come early in a fast-rising curve (like e-mail) or farther up on a slow-rising curve (like use of broadband) b. Any company that seeks competitive advantage by being a first-mover thus needs to ask some hard questions: 1. Does market takeoff depend on the development of complementary products of services that currently are not available? 2. Is new infrastructure required before buyer demand can surge? 3. Will buyers need to learn new skills or adopt new behaviors? Will buyers encounter high switching costs? 4. Are there influential competitors in a position to delay or derail the efforts of a first-mover? c. When the answer to any of these questions is yes, then a company must be careful not to pour too many resources into getting ahead of the market. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 610 Chapter 6 Strengthening a Company’s Competitive Position IV. Strengthening A Company’s Market Position Via Its Scope Of Operations 1. Separate from competitive moves and timing, managers must also carefully consider the scope of a company’s operations. These decisions essentially determine where the boundaries of the firm lie and the degree to which the operations within the boundaries are common. CORE CONCEPT The scope of the firm refers to the range of activities which the firm performs internally, the breadth of its product and service offerings, the extent of its geographic market presence, and its mix of businesses. 2. There are several dimensions of firm scope that are relevant to business level strategy. The two primary dimensions are horizontal and vertical scope. CORE CONCEPT Horizontal scope is the range of product and service segments that a firm serves within its focal market. CORE CONCEPT Vertical scope is the extent to which a firm’s internal activities encompass one, some, many, or all of the activities that make up an industry’s entire value chain system, ranging from raw-material production to final sales and service activities. V. Horizontal Merger and Acquisition Strategies 1. Mergers and acquisitions are a much-used strategic plan. They are especially suited for situations where alliances and partnerships do not go far enough in providing a company with access to the needed resources and capabilities. 2. Combining the operations of two companies within the same industry, via merger or acquisition, is an attractive strategic option for achieving operating economies, strengthening the resulting company’s competencies and competitiveness, and opening up avenues of new market opportunity. 3. 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. The resources, competencies, and competitive capabilities of the newly created enterprise end up much the same whether the combination is the result of acquisition or merger. 4. Many horizontal mergers and acquisitions are driven by strategies to achieve one of five strategic objectives: a. Creating a more cost-efficient operation out of the combined companies. b. Expanding a company’s geographic coverage. c. Extend a company’s business into new product categories. d. Gaining quick access to new technologies or complementary resources and capabilities. e. Leading the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunities. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 611 Chapter 6 Strengthening a Company’s Competitive Position ILLUSTRATION CAPSULE 6.3 Bristol-Myers Squibb’s “String-of-Pearls” Horizontal Acquisition Strategy Discussion Question: How did Bristol-Meyer Squibb use a horizontal acquisition strategy to gain competitive advantage in the pharmaceutical industry? Answer: In examining their competitive position in 2007, the firm realized that several key pharmaceutical patents were about to expire and they did not have new patented drugs in their development pipeline. Realizing the time involved in new product development and approval, the company undertook a strategy of horizontal acquisitions and purchased several small companies that with pre-identified drugs well into the development and approval phase, dramatically shortening the time to market for Bristol-Meyer Squib and preserving their revenue stream. 5. Why Mergers and Acquisitions Sometimes Fail to Produce Anticipated Results – Many mergers and acquisitions do not always produce the hoped for outcomes, reasons include: a. Cost savings may prove smaller than expected. b. Gains in competitive capabilities may take substantially longer to realize or, worse, may never materialize at all. c. Key employees at the acquired company can quickly become disenchanted and leave. d. The morale of company personnel who remain can drop to disturbingly low levels because they disagree with newly instituted changes. VI. Vertical Integration Strategies 1. Vertical integration extends a firm’s competitive and operating scope within the same industry. It involves expanding the firm’s range of activities backward into sources of supply and/or forward toward end users. 2. Vertical integration strategies can aim at full integration or partial integration. A. The Advantages of a Vertical Integration Strategy 1. The two best reasons for investing company resources in vertical integration are to strengthen the firm’s competitive position and/or boost its profitability, CORE CONCEPT A vertically integrated firm is one that performs value chain activities along more than one stage of an industry’s value chain system. 2. Integrating Backward to Achieve Greater Competitiveness: For backward integration to be a viable and profitable strategy, a company must be able to: a. Achieve the same scale economies as outside suppliers. b. Match or beat suppliers production efficiency with no drop-off in quality. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 612 Chapter 6 Strengthening a Company’s Competitive Position CORE CONCEPT Backward integration involves performing industry value chain activities previously performed by suppliers or other enterprises engaged in earlier stages of the industry value chain; forward integration involves performing industry value chain activities closer to the end user. 1. Backward integration is most likely to reduce costs when: a. The firm can achieve the same scale economies as outside suppliers. b. The firm can match or beat suppliers’ production efficiency with no drop-off in quality. c. The needed technological skills and product capability are easily mastered or can be gained by acquiring a supplier with desired expertise 2. Backward vertical integration can produce a differentiation-based competitive advantage when a company, by performing activities in-house that were previously outsourced, ends up with a better quality offering, improves the caliber of its customer service, or in other ways enhances the performance of its final product. 3. Other potential advantages of backward integration include: a. Decreasing the company’s dependence on suppliers of crucial components b. Lessening the company’s vulnerability to powerful suppliers inclined to raise prices at every opportunity 4. Integrating Forward to Enhance Competitiveness: The strategic impetus for forward integration is to gain better access to end-users and better market visibility. a. Forward integration can lower costs by increasing efficiency and bargaining power. In addition, it can allow manufacturers to gain better access to end users. b. Forward integration can improve market visibility and include the end user’s purchasing experience as a differentiating feature. C. The Disadvantages of a Vertical Integration Strategy - Vertical integration has some substantial drawbacks: 1. It raises a firm’s capital investment in the industry, increasing business risk 2. Vertically integrated companies are often slow to embrace technological advances 3. It can impair a company’s operating flexibility 4. It can result in less flexibility in accommodating shifting buyer preferences. 5. It may not be able to achieve economies of scale 6. It poses all kinds of capacity-matching problems 7. It often calls for changes in skills and business capabilities © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 613 Chapter 6 Strengthening a Company’s Competitive Position D. Weighing the Pros and Cons of Vertical Integration 1. A strategy of vertical integration can have both important strengths and weaknesses. The tip of the scales depends on: a. Whether vertical integration can enhance the performance of strategy-critical activities in ways that lower cost, build expertise, or increase differentiation b. The impact of vertical integration on investments costs, flexibility and response time, and administrative costs of coordinating operations across more value chain activities c. The administrative costs of coordinating operations across more vertical chain activities. d. How difficult it will be for the company to acquire the set of skills and capabilities needed ILLUSTRATION CAPSULE 6.4 American Apparel’s Vertical Integration Strategy Discussion Question: In what way has American Apparel used vertical integration to gain competitive advantage in the clothing industry? Answer: American Apparel has moved backward into the industry value chain by doing its own fabric cutting and sewing and also owns its own knitting and dying facilities. It also does its own clothing design, marketing, and advertising. Through this ‘end to end’ approach, the company is better able to respond to changes in the market and reduce inventory problems. It can also leverage its integrated operations by marketing its products as ‘sweatshop free.’ VII. Outsourcing Strategies: Narrowing the Boundaries of the Business CORE CONCEPT Outsourcing involves farming out certain value chain activities to outside vendors. 1. When Outsourcing Value Chain Activities Makes Sense: a. An activity can be performed better or more cheaply by outside specialist b. An activity is not crucial to the firm’s ability to achieve sustainable competitive advantage and will not hollow out its core competencies. c. It improves organizational flexibility and speeds time to market. d. It reduces the company’s risk exposure to changing technology and/or changing buyer preferences e. It allows a company to assemble diverse kinds of expertise speedily and efficiently. f. It allows a company to concentrate on its core business, leverage its key resources, and do even better what it already does. 2. The Big Risk of Outsourcing Value Chain Activities a. The biggest danger of outsourcing is that a company will farm out too many or the wrong types of activities and thereby hollow out its own capabilities. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 614 Chapter 6 Strengthening a Company’s Competitive Position b. Another risk of outsourcing comes from the lack of direct control. It may be difficult to monitor, control, and coordinate the activities of outside parties via contracts and arm’s-length transactions alone. VIII. Strategic Alliances and Partnerships 1. 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. 2. Companies in all types of industries have elected to form strategic alliances and partnerships to complement their own strategic initiatives and strengthen their competitiveness. These are the very same goals that motivate vertical integration, horizontal mergers and acquisitions, and outsourcing initiatives. 3. Collaborative arrangements may entail a contractual agreement, but they commonly stop short of formal ownership ties between the partners. CORE CONCEPT A Strategic alliance is a formal agreement between two or more separate companies in which they agree to work cooperatively toward some common objective. CORE CONCEPT A joint venture is a type of strategic alliance in which the partners set up an independent corporate entity that they own and control jointly, sharing in its revenues and expenses. 4. An alliance becomes “strategic,” as opposed to just a convenient business arrangement, when it serves any of the following purposes: a. 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). b. It helps build, sustain, or enhance a core competence or competitive advantage. c. It helps block a competitive threat. d. It helps remedy an important resource deficiency or competitive weakness. e. It increases the bargaining power of alliance members over suppliers or buyers. f. It helps open up important new market opportunities. g. It mitigates a significant risk to a company’s business. 5. Why and How Strategic Alliances are Advantageous - The most common reasons why companies enter into strategic alliances are to collaborate on technology or the development of promising new products, to overcome deficits in their technical and manufacturing expertise, to acquire altogether new competencies, to improve supply chain efficiency, to gain economies of scale in production and/or marketing, and to acquire or improve market access through joint marketing agreements. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 615 Chapter 6 Strengthening a Company’s Competitive Position 6. A company that is racing to stake out a strong position in a technology or industry of the future needs alliances to: a. Establish a stronger beachhead for participating in the target technology or industry b. Master new technologies and build new expertise and competencies faster than would be possible through internal efforts c. Open up broader opportunities in the target industry by melding the firm’s own capabilities with the expertise and resources of partners 7. Capturing the Benefits of Strategic Alliances - The extent to which companies benefit from entering into alliances and collaborative partnerships seem to be a function of six factors: a. Picking a good partner b. Being sensitive to cultural differences c. Recognizing that the alliance must benefit both sides d. Ensuring that both parties live up to their commitments e. Structuring the decision-making process so that actions can be taken swiftly when needed f. Managing the learning process and then adjusting the alliance agreement over time to fit new circumstance 8. Alliances are more likely to be long lasting when: a. They involve collaboration with partners that do not compete. b. A trusting relationship has been established. c. Both parties conclude that continued collaboration is in their mutual interest. 9. The Drawbacks of Strategic Alliances and Partnerships a. 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. b. 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. 10. The principle advantages of strategic alliances over vertical integration or horizontal mergers/ acquisitons are threefold: a. They lower investment costs and risks for each partner. b. They are more flexible organizational forms and allow for faster market response. c. They are faster to deploy. 11. They key advantages to using strategic alliances are the increased ability to exercise control over the partner’s activities and a greater willingness for the partners to make relationship specific investments. 12. How to Make Strategic Alliances Work - The success of an alliance depends on how well the partners work together, their capacity to respond and adapt to changing internal and external conditions, and their willingness to renegotiate the bargain if circumstances so warrant. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 616 Chapter 6 Strengthening a Company’s Competitive Position 13. Companies that have greater success in managing their strategic alliances and partnerships often credit the following factors: a. They create a system for managing their alliances. b. They build relationships with their partners and establish trust. c. They protect themselves from the threat of opportunism by setting up safeguards. d. They make commitments to their partners and see that their partners do the same. e. They make learning a routine part of the management process. 14. Managers must realize that alliance management is an organizational capability and develop it over time to become another source of competitive advantage. ASSURANCE OF LEARNING EXERCISES 1. Does it appear that Nintendo relies more heavily on offensive or defensive strategies as it competes in the video game industry? Has Nintendo’s timing of strategic moves made it an early mover or a fast follower? Could Nintendo’s introduction of the Wii be characterized as a blue ocean strategy? You may rely on your knowledge of the video game industry and information provided at Nintendo’s investor relations website (www.nintendo.co.jp) to provide justification for your answers to these questions. Answer: The student should find that in a heavily competitive industry, Nintendo was able to make their way back to a leadership position through the use of offensive strategic moves. This resulted in Nintendo working its way into the top ten list of Business Week’s Most Innovative Companies in 2008. Nintendo has taken an early mover position in the industry in the last few years. Key to this change was the Blue Ocean Strategy introduction of the Wii. With this product, Nintendo moved into an entirely new area of game control that did not rely on standard human interfaces. Rather, this new system allowed the user to control the game with body movements. This has put Microsoft in a follower position with their Kinect controller. 2. Using your university library’s subscription to Lexis-Nexis, EBSCO, or a similar database, perform a search on “acquisition strategy.” Identify at least two companies in different industries that are using acquisitions to strengthen their market positions. How have these acquisitions enhanced the acquiring companies’ competitive capabilities? Answer: The vast amount of choices should permit students to offer extensive, well-developed answers to this question. Suggested student responses may identify the following examples: The first example is SCM Microsystems, Inc.’s merger with Hirsch Electronics Corporation. Following the merger, revenue more than doubled, reflecting the success of the Company’s strategy to increase its revenue by expanding its customer base and market reach through acquisitions and market investment. According to Felix Marx, chief executive officer of SCM Microsystems, “The integration of Hirsch and SCM has proceeded rapidly as we have focused on creating synergies within our sales and marketing organizations to accelerate the acquisition of new customers, expand our mutual distribution channels and introduce new products in target markets.” A second example is Nucor Corporation’s acquisition of Harris Steel. This acquisition was based on Nucor’s desire to achieve vertical integration both upstream for lower cost raw materials and downstream for a higher value-added product mix and diversification. 3. American Apparel, known for its hip line of basic garments and its provocative advertisements, is no stranger to the concept of “doing it all.” Concepts & Connections 6.2 describes how American Apparel has made vertical integration a central part of its strategy. What value chain segments has American Apparel chosen to enter and perform internally? How has vertical integration aided the company in building competitive advantage? Has vertical integration strengthened its market position? Explain why or why not. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 617 Chapter 6 Strengthening a Company’s Competitive Position Answer: The student should find that American Apparel has moved backward into the industry value chain by doing its own fabric cutting and sewing and also owns its own knitting and dying facilities. It also does its own clothing design, marketing, and advertising. This strategy has allowed the company to gain competitive advantage by reducing the time required to respond to market changes and reduce inventory requirements. From a marketing perspective, the company has the unique ability to market products that are ‘sweatshop free.’ 4. Perform an Internet search to identify at least two companies in different industries that have entered into outsourcing agreements with firms with specialized services. In addition, describe what value chain activities the companies have chosen to outsource. Do any of these outsourcing agreements seem likely to threaten any of the companies’ competitive capabilities? Answer: There are numerous choices that should allow students to provide extensive, well-developed answers to this question. Suggested student responses may identify the following examples. The first example is IBM and Grupo Gigante, one of Mexico’s leading business groups. The companies have extended their business contract for five additional years through a series of outsourcing agreements. IBM will be responsible for fully managing and monitoring the information technology (IT) infrastructure under two managed service modes, applications and infrastructure. IBM’s outsourcing solution for Grupo Gigante includes infrastructure services components for equipment and server hosting, help desk activation, distributed computing services, on-site support services, data center security and disaster recovery planning. Grupo Gigante will strategically retain a team of experts to manage the main IT applications that support the business which will enable the company to keep in-house the value of the key human capital it has developed over time. This provides the company with opportunities to test new solutions that facilitate strategic business decision-making and will bring more efficiency to day-to-day operations. The value chain activity involved is a support activity, i.e. information technology. A second example involves a three-year ATM-outsourcing agreement between NCR Corporation and Co-op Financial Services that enables Co-op’s credit-union members to lease instead of buy new ATMs to reduce participating credit unions’ capital expenses. According to Bill Allen, NCR’s marketing director, “Leasing ATMs is a lot more attractive for some financial institutions because leasing agreements are not carried on the books as a capital expense.” Co-op ATM Managed Services, a unit of Co-op Financial Services, will manage credit-union members’ leased ATMs. NCR will provide first- and second-line maintenance on all of the leased machines so if the ATM breaks down, NCR fixes it. It does not appear these outsourcing agreements are likely to threaten the competitive capabilities of these companies. 5. Using your university library’s subscription to Lexis-Nexis, EBSCO, or a similar database, find two examples of how companies have relied on strategic alliances or joint ventures to substitute for horizontal or vertical integration. Answer: Students will be able to find a wealth of companies engaged in successful alliances and joint ventures. LG Electronics is one example of a company that has use alliances to broaden their base (horizontal) and add to their value chain (vertical). The company has been able to gain significant market share in recent years. The company attributes part of their success to their use of Strategic Alliances to gain advantage in business and technology fields. Alliance partners include: • • • • • • • • • • • Qualcom – Early 3G/3.5G Market Entry Schneider – Mobile Phone Camera Lenses GE – Cross license and patent sharing Viking – Home appliances Skype – Broadband TV Maxdome – Premium Video on Demand Skylife – 3DTV Technology Hitachi – Optical Storage Microsoft – Windows based Smart Devices Intel – TV/Internet Convergence Market Sun – Java applications for LG Phones © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 618