MGT 4337 Business Policy and Decision Making Module 3 .docx

MGT 4337: Business Policy and Decision Making
Module 3 Strategy Exercises Worksheet
Overview: This exercise will tie concepts from the chapter
material to the simulations assigned in this module. Completing
this exercise will prepare you to help you to make decisions
during the simulation rounds and prepare you for completing
this module’s decision log journal entries and artifact analyses.
Specifically, you will apply what you learned in Chapters 5 and
6 to identify your own company’s and your rivals' competitive
and supplemental strategies, as well as outline specific actions
to obtain a sustainable competitive advantage.
Directions: Download and save a copy of this document so you
can edit the worksheet with your responses to the questions
below.
Chapter 5
1. Which of the five basic competitive strategies best
characterize your athletic footwear company’s strategic
approach to competing successfully?
2. Which rival footwear companies appear to be employing a
low-cost provider strategy?

3. Which rival footwear companies appear to be employing a
broad differentiation strategy?
4. Which rival companies appear to be employing some type of
focus strategy?
5. Which rival companies appear to be employing a best-cost
provider strategy?
6. What is your company's plan to achieve a sustainable
competitive advantage over rivals? List at least three
(preferably more than three) specific kinds of decision entries
on specific decision screens that your company has made or
intends to make to win this kind of competitive edge over
rivals.
1.
2.
3.
Chapter 6
1. What offensive strategy options discussed in this chapter
does your athletic footwear company have? Identify at least two
offensive moves that your company should seriously consider in
order to improve the company’s market standing and financial
performance.
1.
2.

2. What defensive strategy moves should your company
consider in the upcoming decision round? Identify at least two
defensive actions your company has taken in the past one or two
decision rounds.
1.
2.
3. Is your company vertically integrated to some extent?
Explain why or why not.
Rubric
Guidelines for Submission: To complete this assignment, submit
a saved copy of this completed worksheet.
Instructor Feedback: This activity uses an integrated rubric in
Blackboard. Students can view instructor feedback in the Grade
Center.
Criteria
Exemplary (100%)
Needs Improvement (75%)
Incomplete (50%)
Not Evident (0%)
Value
Worksheet
Submitted a complete worksheet that demonstrates sincere
effort.
Submitted a mostly complete worksheet that demonstrates

sincere effort.
Submitted an incomplete worksheet.
Did not submit a worksheet.
100
Total
100%
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Unit 4 Assignment
For this assignment, you are going to gather some data and
discuss your results. Interview or survey 10 people and ask each
person the first three terms or words that come to mind when
they think of each of these age groups (so each interviewee will
give you 12 words):
· Children
· Teenagers
· Middle-Aged Adults
· Senior Citizens
After completing your survey, you should then have 30 words
for each age group. (Some will be repeats.) Look at each word
and determine what kind of connotation it has: Is it positive (P),
negative (N), or neutral (O)? Mark each word. Look at the
frequency of the most used terms and also the distribution of P,
N, & O.
Discuss the results of your survey. Include answers to the
following questions:
· Which words were mentioned most frequently for each age
group? Were they mostly P, N, or O?
· Do the words get more negative as you move from children to
senior citizens or more positive? Or is there no change as you
move up each age group?
· Many of these words will be stereotypes to describe each age

group. Where do these stereotypes come from? Cite from your
readings and/or outside sources (include APA-formatted, in-text
citations) to support your statements.
· How do negative stereotypes affect individuals in each stage
of life? Provide an example and cite your source(s) with APA-
formatted, in-text citations.
Your assignment should consist of one page with your survey
results and another 2 pages in which you discuss your results,
for a total of 3 pages, double-spaced. You also need to include
an APA-formatted reference page.
122Chapter 6 Supplementing the Chosen Competitive
Strategy— Other Important Strategy Choices 122
Copyright © 2022 by Arthur A. Thompson. All rights reserved.
Reproduction and distribution of the contents are expressly
prohibited without the author’s written permission.
Strategy: Core Concepts and Analytical Approaches
An e-book marketed by McGraw-Hill Education
Arthur A. Thompson, The University of Alabama 7th
Edition, 2022-2023
122
Chapter 6
Supplementing the Chosen
Competitive Strategy—

Other Important Strategy Choices
Winners in business play rough and don’t apologize for it. The
nicest part of playing hardball is watching your
competitors squirm.
—George Stalk, Jr. and Rob Lachenauer
Whenever you look at any potential merger or acquisi tion, you
look at the potential to create value for your
shareholders.
—Dilip Shanghvi, Founder and managing director of Sun
Pharmaceuticals
Don’t form an alliance to correct a weakness and don’t ally with
a partner that is trying to correct a weakness
of its own. The only result from a marriage of weaknesses is the
creation of even more weaknesses.
—Michel Robert
Think of your priorities not in terms of what activities you do,
but when you do them. Timing is everything.
—Dan Millman
Once a company has settled on which of the five generic
competitive strategies to employ, attention turns
to what other strategic actions it can take to complement its
competitive approach and maximize the
power of its overall strategy. Several decisions must be made:
l Whether to go on the offensive and initiate aggressive
strategic moves to improve the company’s market
position.
l Whether to employ defensive strategies to protect the
company’s market position.
l What role the company’s website should play in its overall

strategy to be a successful performer.
l Whether to outsource certain value chain activities or perform
them in-house.
l Whether to integrate backward or forward into more stages of
the industry value chain.
l Whether to enter into strategic alliances or partnership
arrangements with other enterprises.
l Whether to bolster the company’s market position via mergers
or acquisitions.
Chapter 6 • Supplementing the Chosen Competitive Strategy—
Other Important Strategy Choices 123
l When to undertake strategic moves—whether advantage or
disadvantage lies in being a first mover, a
fast follower, or a late mover.
This chapter presents the pros and cons of each of these
strategy-enhancing measures.
Figure 6.1 shows the menu of strategic options a company has
in crafting a comprehensive set of strategic actions
and the order in which the choices should generally be made.
The portion of Figure 6.1 below the five generic
competitive strategy options illustrates the structure of this
chapter and the topics that will be covered.

FIGURE 6.1 A Company’s Menu of Strategy Options
First Mover? Fast-Follower? Late-Mover?
Generic Competitive Strategy Options
What type of website
strategy to employ?
Whether to outsource selected
value chain activities?
Initiate offensive
strategic moves?
Employ defensive
strategic moves?
Employ backward or forward
vertical integration strategies?
Enter into strategic alliances
and partnerships?
Use merger and acquisition strategies
to strengthen competitiveness?
Low-Cost
Provider?

Broad
Differentiation?
Focused
Low Cost?
Focused
Differentiation?
Best-Cost
Provider?
(A company’s first strategic choice)
Complementary Strategy Options
(A company’s second set of strategic choices)
R&D
Engineering Production Marketing
& Sales
Human
Resources Finance
Functional Area Strategies to Support the Above Strategic
Choices
Timing a Company’s Strategic Moves in the Marketplace
(When to initiate actions to pursue or make adjustments
in any of the above strategic choices—timing matters!)
(A company’s third set of strategic choices)

GOING ON THE OFFENSIVE—STRATEGIC OPTIONS
TO IMPROVE A COMPANY’S MARKET POSITION
No matter which of the five generic competitive strategies a
company employs, there are times when it makes
sense for a company to go on the offensive to improve its
market position and business performance. Strategic
offensives are called for when a company sees opportunities
to gain profitable market share at rivals’ expense, when a
company should strive to whittle away at a strong rival’s
competitive advantage, and when a company opts to
pursue newly emerging market opportunities. Companies
like Google, Amazon, Apple, and Facebook play hardball,
aggressively pursuing competitive advantage and trying
to reap the benefits a competitive edge offers—a leading
market share, excellent profit margins, rapid growth (as
compared to rivals), and the reputational rewards of being
known as a company on the move.1 The best offensives tend
to incorporate several behaviors and principles: (1) focusing
relentlessly on building competitive advantage and
then striving to convert competitive advantage into decisive
advantage, (2) employing the element of surprise
as opposed to doing what rivals expect and are prepared for, (3)
using competitively potent resources to attack
rivals where they are least able to defend themselves, and (4)
being impatient with the status quo and displaying
a strong bias for swift and decisive actions to overwhelm
rivals.2

Choosing the Basis for Competitive Attack
As a rule, challenging rivals on competitive grounds where they
are strong is an uphill struggle.3 Offensive
initiatives that exploit competitor weaknesses stand a better
chance of succeeding than do those that challenge
competitor strengths, especially if the weaknesses represent
important vulnerabilities and weak rivals can be caught by
surprise with no ready defense.4
A company’s strategic offensives should be powered by
competitively powerful resources and capabilities—such
as a better-known brand name, lower production and/or
distribution costs, better technological capability, or a core or
distinctive competence in designing and producing
superior performing products. Designing a strategic offensive
spearheaded by relatively weak company resources
and capabilities is like marching into battle 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. Price-cutting offensives are
best left to financially strong companies whose costs are
relatively low in comparison to those of the companies
being attacked. Likewise, it is ill-advised to pursue a product
innovation offensive without proven expertise in
R&D, new product development, and speeding new or improved
products to market.
The principal offensive strategy options include the following:
l Offering an equally good or better product at a lower
price. 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. However, such a
strategy increases total profits only if the gains
in additional unit sales are enough to offset the impact of

thinner margins per unit sold. Price-cutting
offensives generally work best when a company first achieves a
cost advantage and then hits competitors
with a lower price.5
l Leapfrogging competitors by being the first adopter of
next-generation technologies or being first to
market with next-generation products. In technology-based
industries, the opportune time to launch an
offensive against rivals is by leading the way in introducing a
next-generation technology or product.
CORE CONCEPT
Sometimes a company’s best strategic option
is to seize the initiative, go on the attack, and
launch a strategic offensive to improve its market
position. It takes successful offensive strategies
to build competitive advantage, widen an existing
advantage, or narrow the advantage held by a
strong competitor.
CORE CONCEPT
The best offensives use a company’s most potent
resources and capabilities to attack rivals where
they are competitively weakest.
Amazon got its Alexa-enabled Amazon Echo into the smart-

home controls market about two years ahead
of Google’s Google Home device. But in 2019 both rivals were
racing to introduce next-generation
versions with wider-ranging features and capabilities. Two
other brands, the Sonos One from Sonos, and
Anker’s Eufy Genie, were also trying to gain buyer favor. The
pace at which next-version products with
ever more appealing capabilities and useful functions would be
introduced was expected to produce a
formidable leapfrogging battle.
l Pursuing continuous product innovation to draw sales and
market share away from rivals with compara-
tively weak product innovation capabilities. Ongoing
introductions of new/improved products can put
rivals with deficient product innovation capabilities under
tremendous competitive pressure. But such
offensives can be sustained only if a company can keep its
product development pipeline full of new and
improved products that spark buyer enthusiasm.6
l Pursuing disruptive product innovation to create new
markets. While this strategy can be riskier and
more costly than continuous product innovation, “big bang”
disruptive product innovation can be a
game changer if successful.7 Disruptive innovation involves
perfecting a new product with a few trial
users, then quickly rolling it out to the whole market in an
attempt to get many buyers to embrace an
altogether new and better value proposition quickly. Examples
include online degree programs, self-
driving capabilities for motor vehicles, Apple Music, and
Amazon’s Kindle (which undercuts the sales
of hardcopy fiction and non-fiction books).
l Adopting and improving on the good ideas of other

companies (rivals or otherwise).8 The idea of
warehouse home improvement centers did not originate with
The Home Depot cofounders Arthur Blank
and Bernie Marcus. They got the “big box” concept from their
former employer Handy Dan Home
Improvement. But they were quick to improve on Handy Dan’s
business model and strategy and take
The Home Depot to the next plateau in terms of product line
breadth and customer service. Offense-
minded companies are often quick to adopt any good idea (not
nailed down by a patent or other legal
protection) in an effort to create competitive advantage for
themselves.9
l Deliberately attacking those market segments where a key
rival makes big profits.10 Long a dominant
force in small automobiles, Toyota launched a hardball attack
on General Motors, Ford, and Chrysler
in the U.S. market for light trucks and SUVs, the very market
segments where the Detroit automakers
historically earned big profits (roughly $10,000 to $15,000 per
vehicle). Toyota now offers equivalent
vehicles, earns handsome profits of its own in these two market
segments, and has stolen sales and
market share from its U.S.-based rivals. Dell opted to introduce
its own brand of printers and printing
supplies in the 1990s because its principal rival in desktop and
laptop computers was Hewlett-Packard,
which made its biggest profits in printing and printing supplies;
by attacking H-P in the market for
printers, Dell sought to force H-P to devote management
attention and resources to defending its printing
business and distract its attention away from trying to wrest
market leadership away from Dell in the PC
market.

l Attacking the competitive weaknesses of rivals. Such
offensives present many options. One is to go
after the customers of those rivals whose products lag on
quality, features, or product performance. If
a company has especially good customer service capabilities, it
can make special sales pitches to the
customers of those rivals who provide subpar customer service.
Aggressors with a recognized brand
name and strong marketing skills can launch efforts to win
customers away from rivals with weak brand
recognition. There is considerable appeal in emphasizing sales
to buyers in geographic regions where
several rivals have low market shares or are less well-equipped
to serve. If the attacker’s most potent
resources and capabilities should prove powerful enough to
outcompete the targeted rivals and result in
competitive advantage, so much the better.
l Maneuvering around competitors and concentrating on
capturing unoccupied or less contested market
territory. Examples include launching initiatives to build strong
positions in geographic areas or market
segments where close rivals have little or no market presence.
Southwest Airlines became a major
carrier not by invading the turf where big airlines had their
“hubs”—like Chicago O’Hare, Dallas-Fort

Worth, Los Angeles, and New York LaGuardia, but by
scheduling point-to-point flights to lesser-sized
airports (Las Vegas, Baltimore-Washington, Chicago Midway,
and Fort Lauderdale) where relatively
weak competition enabled it to gain the leading market share in
a fairly short time. Going into 2016,
Southwest commanded the biggest share of passenger traffic in
over 60 of the 84 airports it served in the
United States.
l Using hit-and-run or guerrilla warfare tactics to grab sales
and market share from complacent or
distrac ted rivals. Options for “guerrilla offensives” include
occasional low-balling on price (to win
a big order or steal a key account from a rival); surprising key
rivals with sporadic but intense bursts
of promotional activity (offering a 20 percent discount for one
week to draw customers away from
rival brands); or undertaking special campaigns to attract buyers
away from rivals plagued with a
strike or problems in meeting buyer demand.11 Guerrilla
offensives are particularly well suited to small
challengers who have neither the resources nor the market
visibility to mount a full-fledged attack on
industry leaders.
l Launching a preemptive strike to secure an advantageous
position that rivals are prevented or
discouraged from duplicating.12 What makes a move
preemptive is its one-of-a-kind nature—whoever
strikes first stands to acquire competitive assets that rivals can’t
readily match. Examples of preemptive
moves include (1) securing the best distributors in a particular
geographic region or country; (2) obtaining
the most favorable site along a heavily traveled thoroughfare, at
a new interchange or intersection, in

a new shopping development, in a natural beauty spot, close to
cheap transportation or raw material
supplies or market outlets, and so on; (3) tying up the most
reliable, high-quality suppliers via exclusive
partnerships, long-term contracts, or even acquisition; and (4)
moving swiftly to acquire the assets of
distressed rivals at bargain prices. To be successful, a
preemptive move doesn’t have to totally block
rivals from following or copying; it merely needs to give a firm
a prime position that is not easily
circumvented.
How long it takes for an offensive to yield good results varies
with the competitive circumstances.13 It can be
short if buyers respond immediately (as can occur with a
dramatic price cut, an imaginative ad campaign, or
an especially appealing new product). Securing a competitive
edge can take much longer if winning consumer
acceptance of the company’s product will take some time or if
the firm may need several years to debug a new
technology or put new production capacity in place. But how
long it takes for an offensive move to improve a
company’s market standing—and whether the move will prove
successful—depends in part on whether and how
quickly rivals recognize the threat and begin a counter-
response. And any responses on the part of rivals hinge
on whether (1) they have effective countermoves in their arsenal
of strategic options and (2) they believe that a
counterattack is worth the expense and the distraction.14
Blue Ocean Strategy—A Special Kind of Offensive
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 industry or distinctive market segment
that renders existing competitors largely irrelevant and allows a

company to create and capture altogether new
demand.14 This strategy views the business universe as
consisting of two distinct types of market space. One is
where industry boundaries are defined and accepted, the
competitive rules of the game are well understood and
accepted by all industry members, and companies use their
resources and capabilities to compete against rivals
and achieve satisfactory or better performance. In such markets,
lively 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 come up with an innovative new product offering
and strategy that allows it to create new demand
rather than fight over existing demand. Companies that create
blue ocean market spaces can often sustain their
initially won competitive advantage without encountering a
major competitive challenge for 10 to 15 years
provided their blue ocean strategy translates into strong brand
name awareness and there are other high barriers
to imitating its product offering.
A terrific example of blue ocean market creation is the online

auction market that eBay created and now dominates.
Other examples of companies that have created blue ocean
market spaces include Etsy in online retailing of
handmade crafts, Nano Dimension and Desktop Metal with their
pioneering advances in 3D Printing technology,
Palentir in complex data analysis software, Beyond Meat and
Impossible Foods in plant-based meat substitutes,
Drybar in hair blowouts, Uber and Lyft in ride-hailing services,
and Cirque du Soleil in live entertainment.
Cirque du Soleil “reinvented the circus” by creating a distinctly
different market space for its performances (Las
Vegas night clubs and theater settings) and pulling in a whole
new group of customers—adults and corporate
clients—who not only were noncustomers of traditional circuses
(like Ringling Brothers, the legendary industry
leader), but were also willing to pay several times more than the
price of a conventional circus ticket to have
an “entertainment experience” featuring sophisticated clowns
and star-quality acrobatic acts in a comfortable
atmosphere.
Choosing Which Rivals to Attack
Offensive-minded firms need to analyze which of their rivals to
challenge as well as how to mount that challenge.
The following are the best targets for offensive attacks:15
l Market leaders that are vulnerable. Offensive attacks
make good sense when a market-leading company
has some glaring weaknesses that are preventing it from
delivering good value to its customers. Signs
that one of an industry’s leading companies is competitively
vulnerable include unhappy buyers, a loss
of several major customers, inferior product quality or
performance, a limited product line, declining
success in introducing innovative new products, narrowing
profit margins because of a failure to

overcome rising cost pressures, strong emotional commitment to
an aging technology the leader has
pioneered, failure to modernize plants and equipment, and a
preoccupation with diversification into
other industries. Offensives to attack important competitive
weaknesses of market leaders have real
promise when the challenger is able to revamp its value chain or
innovate to gain a fresh cost-based or
differentiation-based competitive advantage.16 To be judged
successful, attacks on leaders don’t have to
result in making the aggressor the new leader; a challenger may
“win” by simply becoming a stronger
runner-up. Caution is well advised in challenging strong market
leaders—there is a significant risk of
squandering valuable resources in a futile effort or precipitating
a fierce and profitless industrywide
battle for market share.
l Runner-up firms with weaknesses in areas where the
challenger is strong. Runner-up firms are an
especially attractive target when a challenger’s resource
strengths and competitive capabilities are well
suited to exploiting their weaknesses.
l Struggling enterprises on the verge of going under.
Challenging a hard-pressed rival in ways that further
deplete its financial strength and competitive position can
weaken its resolve and hasten its exit from
the market. It often makes sense to attack a struggling
enterprise in its most profitable market segments,
since this will threaten its survival the most.
l Small local and regional firms with limited resources
and/or capabilities. Because small firms typically
have limited expertise and resources, a challenger with broader
and/or deeper resources and valuable

capabilities often has the competitive firepower to successfully
win the business of some of their biggest
customers—particularly those customers that are growing
rapidly, have increasingly sophisticated
requirements, and may already be thinking about switching to a
supplier with more full-service
capability.
DEFENSIVE STRATEGIES—PROTECTING MARKET
POSITION AND COMPETITIVE ADVANTAGE
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 offensive initiatives at other rivals.
While defensive strategies usually don’t enhance a firm’s
competitive advantage, they can definitely help fortify its
competitive position, protect its most valuable resources
and capabilities from imitation, and defend whatever
competitive advantage it might have. Defensive strategies can
take either of two forms: actions to block
challengers and actions to signal the likelihood of strong
retaliation.
Blocking the Avenues Open to Challengers The most frequently
employed approach to defending a
company’s present position involves actions that restrict a

challenger’s options for initiating competitive
attack. There are any number of obstacles that can be put in the
path of would-be challengers.17 A defender can
participate in alternative technologies as a hedge against rivals
attacking with a new or better technology. 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 a lineup
of product selections that includes economy-priced options for
price-sensitive buyers. It can try to discourage
buyers from trying competitors’ brands by lengthening
warranties, offering free training and support services,
developing the capability to deliver spare parts to users faster
than rivals can, providing coupons and sample
giveaways to buyers most prone to experiment, and making
early announcements about impending new products
or probable price cuts to induce potential buyers to postpone
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.
Signaling Challengers that Retaliation Is Likely The goal of
signaling challengers that strong retaliation
is likely in the event of an attack is either to dissuade
challengers from attacking at all or to divert them to less-
threatening options. Either goal can be achieved by letting
challengers know the battle will cost more than it is
worth. Would-be challengers can be signaled by:18
l Publicly announcing management’s commitment to
maintain the firm’s present market share.

l Publicly committing the company to a policy of matching
competitors’ prices and terms of sale.
l Maintaining a war chest of cash and marketable securities
to fund retaliatory countermeasures if
challengers try to steal away some of its customers.
l Making an occasional strong counter-response to the
moves of weak competitors to enhance the firm’s
image as a tough defender.
For signaling to be effective, however, challengers must believe
that the signaler has every intention of pursuing
retaliatory actions if attacked.
CORE CONCEPT
Good defensive strategies can help protect
competitive advantage but rarely are the basis
for creating it.
There are many ways to throw obstacles in the
path of would-be challengers.
WEBSITE STRATEGIES
Every company with a website has to address what role the site
should play in the company’s competitive strategy.

In particular, to what degree should a company use online
sales as a means for selling its products or services direct to
users? Should a company use its website only as a means
of disseminating information about the company and its
products (relying exclusively on its wholesale and retail
partners to make all sales to end users)? Or should online
sales at the company’s website be (1) a secondary or minor
channel for accessing customers, (2) one of several important
distribution channels for accessing customers, (3) the primary
distribution channel for accessing customers, or (4)
the exclusive channel for transacting sales with customers?19
Let’s look at each of these strategic options in turn.
Product Information–Only Strategies—Avoiding Channel
Conflict
Operating a website that contains extensive product information
but relies on click-throughs to the websites of
distribution channel partners for sales transactions (or that
informs site visitors where nearby retail stores are
located) is an attractive option for manufacturers and/or
wholesalers that have invested heavily in building and
cultivating retail dealer networks to access end users. A
company vigorously pursuing online sales to consumers
at the same time it is also heavily promoting sales to consumers
through its network of wholesalers and retailers
is competing directly against its distribution allies. Such actions
constitute channel conflict and are a tricky
road to negotiate. A company actively trying to grow online
sales is signaling a weak strategic commitment
to its dealers and a willingness to cannibalize dealers’ sales and
growth potential. The likely result is angry
dealers and loss of dealer goodwill. Some or many of the
company’s dealers may opt to put more effort into
marketing the brands of rival manufacturers who don’t sell
online or whose online sales effort is passive and
nonthreatening. Quite possibly, a company may lose more sales

by offending its dealers than it gains from its
own online sales effort. Consequently, in industries where the
strong support and goodwill of dealer networks is
essential, companies may conclude it is important to avoid
channel conflict and, consequently, that their website
should be designed to partner with dealers rather than compete
with them.
Website Sales as a Minor Distribution Channel
A second strategic option is to use online sales as a relatively
minor distribution channel for achieving incremental
sales, gaining online sales experience, and doing marketing
research. If channel conflict poses a big obstacle to
online sales, or if only a small fraction of buyers can be
attracted to make online purchases, then companies are
well advised to pursue online sales with the strategic intent of
gaining experience, learning more about buyer
tastes and preferences, testing reaction to new products,
creating added market buzz about their products, and
boosting overall sales volume a few percentage points. Sony and
Nike, for example, sell most all of their products
at their websites without provoking much resistance from their
retail dealers—their website prices are the same
(sometimes higher) than the prices of their dealers, which gives
buyers little incentive to buy online as compared
to shopping at the stores of local dealers. However, Nike does
allow shoppers at its website to order custom-
designed shoes, which gives Nike valuable insight into buyer
fashion preferences and aids the company’s new
product development personnel in deciding what new shoe
designs, colors, and accents to introduce.
Sometimes, manufacturers are willing to accept the channel
conflict problems that arise from selling online in
head-to-head competition with distribution channel allies
because they expect that over the long term online

sales at their websites will become progressively larger and
more profitable. A strategy to gradually grow online
sales into an important distribution channel can make sense in
three instances:
l When profit margins from online sales are bigger than
those earned from selling to wholesale/retail
customers.
Companies today must wrestle with whether
to use their websites just as a means of
disseminating information about the company
and its product offerings or whether to operate an
e-store that sells direct to online shoppers.
l When encouraging buyers to visit the company’s website
helps educate them about the ease and
convenience of purchasing online and, over time, prompts more
and more buyers to purchase online
(where company profit margins are typically greater)—which
can make incurring channel conflict in the
short term and competing against traditional distribution allies
worthwhile.
l When selling directly to end users allows a manufacturer
to make greater use of build-to-order
manufacturing and assembly, which if met with growing buyer

approval would increase the rate at
which sales migrate from distribution allies to the company’s
website; such migration could lead to
streamlining the company’s value chain and boosting its profit
margins.
Brick-and-Click Strategies
Some companies employ brick-and-click strategies, whereby
they sell to consumers both at their own websites
and at their own company-owned retail stores (or the stores of
independent retailers). Brick-and-click strategies
have two big appeals: They are an economic means of
expanding a company’s geographic reach, and they give
both existing and potential customers another choice of how to
communicate with the company, shop for product
information, make purchases, or resolve customer service
problems. Software developers, for example, have
come to rely on the Internet as a highly effective distribution
channel to complement sales at brick-and-mortar
retailers. Allowing end users to make an online purchase and
download it immediately has the big advantage
of eliminating the costs of producing and packaging CDs and
cutting out the costs and margins of software
wholesalers and retailers (often 35 to 50 percent of the retail
price). Chain retailers like Walmart, Costco, Kohl’s,
Wayfair, and Best Buy operate online stores for their products
primarily as a convenience to customers who
prefer to buy online and have the items shipped or available for
pickup at nearby stores.
Many brick-and-mortar retailers can enter online retailing at
relatively low cost—all they need is a web store for
displaying products, accepting customer orders, and systems for
filling and delivering orders. Brick-and-mortar
retailers (as well as manufacturers with company-owned retail
stores) can use personnel at their distribution

centers and/or retail stores to fill and ship the orders of online
buyers, and they can allow online buyers to pick
up their orders at the nearest local retail store. Walgreens, a
leading drugstore chain, lets customers order a
prescription online and then pick it up at the drive-through
window or inside counter of a local store. Allowing
customers to order online and then pick up their orders at local
stores has become a popular strategy for many
retailers because it enables them to better compete with
Amazon. In banking, a brick-and-click strategy allows
customers to use local branches and ATMs for depositing
checks and getting cash while using online systems to
pay bills, monitor account balances, and transfer funds. Bed
Bath & Beyond uses its web store to display and sell
the items stocked in its stores but also to display and sell a
wider number of brands, colors, and selections in the
same product categories that, for reasons of limited shelf space,
are not available in its stores—such a strategy
gives customers a much wider selection and boosts its online
sales.
Strategies for Online Enterprises
A company that elects to use its website as the exclusive
channel for accessing buyers is essentially an online
business—all customer-related transactions occur at the
company’s website. Thousands of enterprises have
chosen this strategic approach, including Netflix, TripAdvisor,
Quicken Loans, eBay, Booking.com, and Chewy,
an online pet products retailer. For a company to succeed in
using online sales as its exclusive distribution
channel, its product or service must be one for which buying
online holds strong appeal. The strategies adopted
by online enterprises must address several issues:
l How it will deliver unique value to buyers. Online
businesses must usually attract buyers on the basis of

low price, convenience, superior product information, build-to-
order options, or attentive online service.
l Whether it will pursue competitive advantage based on
lower costs, differentiation, or better value for
the money. For an online-only sales strategy to succeed in head-
to-head competition with brick-and-
mortar and brick-and-click rivals, an online seller’s value chain
approach must hold potential for a low-
cost advantage, competitively valuable differentiating
attributes, or a best-cost provider advantage.
l Whether it will have a broad or a narrow product offering.
A one-stop shopping strategy like that
employed by Amazon.com (which offers “Earth’s Biggest
Selection” of items for sale at 13 international
websites) has the appealing economics of helping spread fixed
operating costs over a wide number of
items and a large customer base. Online sellers like Quicken
Loans (the largest online provider of home
mortgages), which also markets under the Rocket Mortgage
brand name, and Hotels.com have adopted
classic focus strategies and cater to a sharply defined target
audience shopping for a particular product
or product category.
l Whether to outsource order fulfillment activities or

perform them internally. Most online sellers find it
more economical to outsource order fulfillment activities to
specialists who make a business of providing
warehouse space, stocking inventories, and installing the
capabilities to pick, pack, and ship orders
cost-efficiently for a number of different online retailers. Only
very high-volume online retailers, like
Wayfair, Chewy, and Overstock.com can develop and install the
capabilities to perform order fulfillment
activities internally at costs below those of outside specialists.
Amazon has over 3 million small- and
medium-sized selling partners that use its online store to market
and sell their products; a big percentage
of these selling partners pay an order fulfillment fee to Amazon
to stock their products and ship them
to buyers, allowing them to focus exclusively on online sales.
However, in China, the vast majority
of small businesses that use Alibaba’s online platforms to
display and sell their products online are
responsible for handling their own order fulfillment activities.
l How it will draw traffic to its website and then convert
page views into revenues. Websites must be
cleverly marketed. Unless web surfers hear about the site, like
what they see on their first visit (and
perhaps make a purchase), and are intrigued enough to return
again and again to both view information
and make purchases, the site is unlikely to generate adequate
revenues. The best test of effective marketing
and the appeal of an online company’s product offering is the
ratio at which page views are converted
into revenues (the “look-to-buy” ratio). The difficulty small
online enterprises have in drawing traffic to
their own websites is why so many have opted to utilize the
high-traffic online platforms of Amazon and
Alibaba to conduct their sales activities.

OUTSOURCING STRATEGIES
Outsourcing strategies involve a conscious decision to abandon
or forgo attempts to perform certain value
chain activities internally and to instead farm them out to
outside specialists and strategic allies.20 Many PC
makers, for example, have shifted from assembling units in-
house to outsourcing the entire assembly process to
manufacturing specialists that assemble many brands of PCs
(and thus can capture all the available economies of scale),
are better able to bargain down the prices of PC components
(by buying in large volumes), and have developed best
practice capabilities in performing specific assembly tasks
accurately and cheaply. Most all name brand apparel firms
have in-house capability to design, market, and distribute
their products but they outsource all fabric manufacture and
garment-making activities to contract manufacturers
in low-wage countries. Starbucks finds purchasing coffee beans
from independent growers in most of the world’s
coffee-growing regions far more advantageous than having its
own coffee-growing operation.
CORE CONCEPT
Outsourcing involves farming out certain value
chain activities to outside vendors and narrowing
the scope of its internal operations.

Outsourcing certain value chain activities can be strategically
advantageous whenever:
l An activity can be performed better or more cheaply by
outside specialists. A company should generally
not perform any value chain activity internally that outsiders
can perform more efficiently or effectively.
The chief exception is when a particular activity is strategically
crucial and internal control over that
activity is deemed essential. Fashion retailer Dolce and
Gabbana outsources manufacture of its brand of
sunglasses to Luxottica—a company considered to be the
world’s best producer of top-quality fashion
sunglasses and high-tech prescription eyewear; Luxottica is
known for its Ray-Ban, Oakley, and Oliver
Peoples brands.
l The activity is not crucial to the firm’s ability to achieve
sustainable competitive advantage. Out-
sourcing of maintenance services, data processing and data
storage, fringe benefit management,
website operations, call center operations, and similar
administrative support activities to specialists
is commonplace. Colgate has reduced its information systems
costs by more than 10 percent annually
through an outsourcing agreement with IBM. Many small
companies outsource such HR activities as
benefit administration, payroll activities, and training.
l It streamlines company operations in ways that improve
organizational flexibility or speeds the time
to get new products to market. Outsourcing of parts and
components gives a company the flexibility
to switch suppliers in the event one or more of its present
suppliers fall behind competing suppliers.
To the extent that its suppliers can speedily get next-generation

parts and components into production,
a company can get its own next-generation product offerings
into the marketplace quicker. Moreover,
seeking new suppliers with the needed capabilities already in
place is frequently quicker, easier, less
risky, and cheaper. Firms that internally produce the parts and
components they need are periodically
confronted with sometimes formidable costs to update obsolete
parts-making capabilities or to install
and master new parts-making technologies.
l It reduces the company’s risk exposure to changing
technology or shifting buyer preferences. When
a company outsources certain parts, components, and services,
its suppliers must bear the burden of
incorporating state-of-the-art technologies and/or undertaking
redesigns and upgrades to accommodate
a company’s plans to introduce next-generation products. If
what a supplier provides is designed out of
next-generation products or rendered unnecessary by
technological change, it is the supplier’s business
that suffers rather than the company’s business.
l It improves a company’s ability to innovate. Collaborative
partnerships with world-class suppliers who
have cutting-edge intellectual capital and are early adopters of
the latest technology give a company
access to ever better parts and components—such supplier-
driven innovations, when incorporated into
a company’s own product offering, fuel a company’s ability to
introduce its own new and improved
products.
l It allows a company to assemble diverse kinds of
expertise speedily and efficiently. A company can
nearly always gain quicker access to first-rate capabilities and

expertise by partnering with suppliers
who already have them in place rather than trying to build them
from scratch with its own company
personnel.
l It allows a company to concentrate on its core business,
leverage its key resources, and do even better
what it already does best. A company is better able to build and
develop its own competitively valuable
competences and capabilities when it concentrates its full
resources and energies on performing those
value chain activities that it can perform better than outsiders
and/or that it needs to have under its
direct control. Nike, for example, devotes its energy to
designing, marketing, and distributing athletic
footwear, sports apparel, and sports equipment, while
outsourcing the manufacture of all its products to
contract factories. Apple outsources production of its iPod,
iPhone, and iPad models to Chinese contract
manufacturer Foxconn. Hewlett-Packard and IBM have sold
some of their manufacturing plants to
outsiders and contracted to repurchase the output from the new
owners.
The Big Risk of Outsourcing Value Chain Activities
The biggest danger of outsourcing is that a company will farm
out too many or the wrong types of activities, thereby

unduly narrowing the scope of its capabilities in ways that
unwittingly reduce its long-term competitiveness.21 For
example, in recent years, companies anxious to reduce operating
costs have opted to outsource such strategically
important activities as product development, engineering
design, and sophisticated manufacturing tasks—the very
capabilities that underpin a company’s ability to lead
sustained product innovation. While these companies
have apparently been able to lower their operating costs
by outsourcing these functions to outsiders, their ability to
lead the development of innovative new products is weakened
because so many of the cutting-edge ideas and
technologies for next-generation products come from outsiders.
For example, most U.S. brands of laptops and cell
phones are now not only manufactured but also designed in
Asia.22 It is strategically dangerous for a company to
be dependent on outsiders to provide it with the skills,
knowledge, and capabilities that over the long run heavily
influence its competitiveness and market success. Companies
like Cisco are alert to the danger of farming out the
performance of strategy-critical value chain activities and take
actions to protect against being held hostage by
outside suppliers. Cisco guards against loss of control and
protects its manufacturing expertise by designing the
production methods its contract manufacturers must use. Cisco
keeps the source code for its designs proprietary,
thereby controlling the initiation of all improvements and
safeguarding its innovations from imitation. Further,
Cisco has developed online systems to monitor the factory
operations of contract manufacturers around the
clock, so that it knows immediately when problems arise and
can decide whether to get involved.
VERTICAL INTEGRATION STRATEGIES:
OPERATING ACROSS MORE STAGES
OF THE INDUSTRY VALUE CHAIN

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. Thus,
if a manufacturer invests in facilities to produce certain
component parts that it formerly purchased from outside
suppliers, it has engaged in backward vertical integration
and extended its competitive scope backward into the
production of component parts, but its business remains
in the same industry as before. The only change is that it
has operations in two stages of the industry value chain.
Similarly, if a paint manufacturer—Sherwin-Williams, for
example—elects to integrate forward by opening 500
retail stores to market its paint products directly to consumers,
its entire business is still in the paint industry even
though its competitive scope extends from manufacturing to
retailing.
A firm can pursue vertical integration by starting its own
operations in other stages in the industry’s activity
chain or by acquiring a company already performing the
activities it wants to bring in-house. Vertical integration
strategies can aim at full integration (participating in all stages
of the industry value chain) or partial integration
(building positions in selected stages of the industry’s total
value chain).
The Advantages of a Vertical Integration Strategy
The two best reasons for investing company resources in
vertical integration are to strengthen the firm’s
competitive position and/or boost its profitability.23 Vertical
integration has no real payoff with respect to profits or
strategy unless it produces sufficient cost savings/profit
increases to justify the extra investment, adds materially
to a company’s competitive strengths, and/or helps differentiate
the company’s product offering in ways buyers

deem valuable.
A company must guard against outsourcing
activities that can unwittingly degrade its
capabilities to be a master of its own destiny.
CORE CONCEPT
A vertically integrated firm is one whose business
activities extend across several portions or stages
of an industry’s overall value chain.
Integrating Backward to Achieve Greater Competitiveness It is
harder than one might think to
generate cost savings or boost profitability by integrating
backward into activities such as parts and components
manufacture (which could otherwise be purchased from
suppliers with specialized expertise in making these
parts and components). For backward integration to be a viable
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 a slam dunk. To
begin with, a company’s in-house requirements are often too
small to reach the optimum size for low-cost operation—for
instance, if it takes a minimum production volume of one
million units to achieve mass production economies and a
company’s in-house requirements are just 250,000 units,

then it falls way short of being able to capture the scale
economies of outside suppliers (who may readily find
buyers for one million or more units). Furthermore, matching
the production efficiency of suppliers is fraught
with problems when suppliers have high-caliber production
capabilities of their own, 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 parts and components, or keep pace with advances in
parts/components manufacturing processes.
That said, occasions still arise when a company can improve its
cost position and competitiveness by performing
a broader range of value chain activities internally rather than
having some of these activities performed by
outside suppliers. The best potential for being able to reduce
costs via a backward integration strategy exists in
situations where a company must deal with a few suppliers with
substantial bargaining power, where suppliers
have outsized profit margins, where the item being supplied is a
major cost component, and where the requisite
technological/production capabilities are easily mastered or can
be gained by acquiring a supplier with most or
all of the needed capabilities. Situations also arise when
integrating backward can enable a company to reduce
costs by facilitating the coordination of production flows from
one stage to the next and avoiding bottlenecks
and delays that disrupt production schedules. Furthermore, if a
company has proprietary know-how that it wants
to keep from rivals, then in-house performance of value chain
activities related to this know-how is beneficial
even if outsiders can perform such activities. Backward
integration also spares a company the risk of being
heavily dependent on suppliers for crucial components or
support services and reduces exposure to supplier
price increases.

Apple decided to backward integrate into the production of
chips, other electronic components, and hardware
used in its iPhone and computers because they were major cost
components, suppliers had bargaining power, and
in-house production would help coordinate design tasks and
protect Apple’s proprietary technology. International
Paper Company backward integrated into pulp mills and located
them adjacent to its paper plants to reap the
benefits of coordinated production flows, reduced energy usage,
and negligible costs of transporting freshly
produced paper pulp directly to the production line in its paper
plants.
Backward vertical integration can produce a differentiation-
based competitive advantage when a company, by
performing activities internally, ends up with a better-quality or
better-performing product, improved customer
service capabilities, or is able to deliver added value to
customers in other ways. On occasion, integrating into more
stages along the industry value chain can add to a company’s
differentiation capabilities by allowing it to build
or strengthen its core competences, better master strategy-
critical capabilities, or add features that deliver greater
customer value. Panera Bread has been quite successful with a
backward vertical integration strategy to produce
fresh dough that company-owned and franchised bakery-cafés
use in making baguettes, pastries, bagels, and other
types of bread—not only does internally producing fresh dough
promote consistent-quality bakery products at
Panera’s 2,150 locations and lower store costs for baking, but it
has also enhanced Panera’s profitability.
Integrating Forward to Enhance Competitiveness The strategic
impetus for forward integration is
to gain better access to end users, improve market visibility,

and enhance brand name awareness. In many
industries, independent sales agents, wholesalers, and retailers
handle competing brands of the same product.
Because they have no allegiance to any one company’s brand,
they concentrate their energies on pushing
CORE CONCEPT
Backward vertical integration involves entry
into activities performed by suppliers or other
enterprises positioned in earlier stages of an
industry’s overall value chain.
whatever brand sells and earns them the biggest profits.
Independent insurance agencies, for example, represent
a number of different insurance companies; in trying to find the
best match between a customer’s insurance
requirements and the policies of alternative insurance
companies, they have the opportunity to promote the
policies of certain insurers and downplay the policies of
other insurers. Consequently, insurers like State Farm and
Allstate have integrated forward and set up local sales
offices with local agents to exclusively market and service
their insurance policies. Likewise, it can be advantageous
for a manufacturer to integrate forward into wholesaling or
retailing via company-owned distributorships or a chain of
retail stores rather than depend on the marketing and sales
efforts of independent distributors/retailers that stock

multiple brands and steer customers to those brands earning
them the highest profits. To avoid dependence on
distributors/dealers with divided loyalties, Goodyear has
integrated forward into company-owned and franchised
retail tire stores. Consumer-goods companies like Restoration
Hardware, Coach, Under Armour, Nike, Tommy
Hilfiger, Pepperidge Farm, Calvin Klein, Gap, Ann Taylor, and
Polo Ralph Lauren have integrated forward and
operate company-operated retail stores as well as their own
branded stores in factory outlet malls that enable
them to move overstocked items, slow-selling items, and items
with minor production flaws. Growing numbers
of manufacturers have integrated forward and begun selling
directly to end-users at company websites, thus
reducing dependence on traditional wholesale and retail
channels and taking advantage of the massive shift of
consumers to shopping online.
The Disadvantages of a Vertical Integration Strategy
Vertical integration has some important drawbacks, however.
The biggest of these include the following:24
l Vertical integration boosts a firm’s capital investment in
the industry, thereby increasing business risk
(what if industry growth and profitability unexpectedly go
sour?).
l Integrating backward or forward creates a vested interest
for a firm to continue performing the integrated
system of value chain activities it has invested money and effort
into establishing (even if internal
performance of certain of these value chain activities later
becomes suboptimal). Why? Because there
are barriers to quickly or easily exiting the performance of
value chain activities spanning two or more
stages on the industry’s value chain, including facilities

shutdowns, costly write-offs of undepreciated
assets, employee layoffs, and disrupted performance of related
value chain activities. However, a
company that obtains parts and components from outside
suppliers can always shop the market for
the newest, best, or cheapest parts and components. A company
that does not have its own network of
company-owned distributorships and retail stores can switch
distributors and/or distribution channel
emphasis whenever it is advantageous to do so.
l Some vertically integrated companies are slow to adopt
new technologies or production methods
because of reluctance to write off undepreciated assets or
because they assign higher priority to spending
capital for other company projects or because they see benefits
in sticking with the present technology
or production methods a while longer. It is a constant struggle
for manufacturers that have integrated
backward to keep up with all the ongoing advances in
technology and best practice production techniques
for each of the many parts and components they make in-house.
The faster the pace of change in an
industry’s value chain, the bigger the risk of a vertical
integration strategy.
l Integrating backward into parts and components
manufacture reduces a company’s flexibility to
implement a cheaper/better product design or adjust its lineup
of product offerings in response to shifting
buyer preferences. It is one thing to eliminate use of a
component made by a supplier and another to
stop using a component being made in-house (which can mean
laying off employees and writing off the
associated investment in equipment and facilities or else making
new investments needed to produce the

CORE CONCEPT
Forward vertical integration involves entering into
the performance of industry value chain activities
located closer to end users.
new or cheaper or better part/component). It is more disruptive
and costly to delete or add new products
when a company not only assembles its own products but also
operates facilities to produce many of the
associated parts/components. Most of the world’s automakers,
despite their manufacturing expertise,
have concluded that purchasing a majority of their parts and
components from best-in-class suppliers
results in greater design flexibility, higher quality, and lower
costs than producing most of the needed
parts/components in-house.
l Vertical integration poses all kinds of capacity-matching
problems. In motor vehicle manufacturing,
for example, the most efficient scale of operation for making
axles is different from the most economic
volume for radiators, and different yet again for both engines
and transmissions. Building the capacity
to produce just the right number of axles, radiators, engines,
and transmissions in-house—and doing so
at the lowest unit cost for each—poses significant challenges in

cost-effectively producing each different
part/component.
l Integrating forward or backward typically requires new or
different skills and business capabilities.
Parts and components manufacturing, assembly operations,
wholesale distribution, retailing, and
direct sales via the Internet involve using different know-how,
resources, and capabilities to master the
performance of different value chain activities. A manufacturer
that integrates backward into parts and
components production has to become proficient in different
technologies and production methods and
very likely source needed materials from different suppliers. A
manufacturing company contemplating
forward integration needs to consider carefully whether it
makes good business sense to invest time
and money in developing the expertise and merchandising skills
to be successful in wholesaling and/
or retailing. Many manufacturers learn the hard way that
company-owned wholesale/retail networks
present many headaches, fit poorly with what they do best, and
don’t always add the kind of value to
their core business as originally planned. Selling to customers
online poses still another set of problems
when aiming to achieve proficient performance of strikingly
different value chain activities.
In today’s world of close working relationships with suppliers
and efficient supply chain management systems,
relatively few companies can make a strong economic case for
integrating backward into the business of suppliers.
The best materials and components suppliers stay abreast of
advancing technology and best practices and are
adept in making good quality items, delivering them on time,
and keeping their costs and prices competitive.

Weighing the Pros and Cons of Vertical Integration All in all,
therefore, a strategy of vertical integration can
have both important strengths and weaknesses. The tip of the
scales depends on (1) the difficulties and costs of
acquiring or developing the resources and capabilities needed to
operate in another stage of the industry value
chain, (2) the size of the benefits vertical integration offers in
terms of lowering costs or enhancing differentiation
and the value delivered to customers; (3) the impact of vertical
integration on investment costs, flexibility,
and response times, (4) the administrative costs of coordinating
operations across more value chain activities;
and (5) whether the integration substantially enhances a
company’s competitiveness and profitability. Vertical
integration strategies have merit according to which capabilities
and value chain activities truly need to be
performed in-house and which can be performed better or
cheaper by outsiders. Absent solid benefits in relation
to the associated costs and risks, integrating forward or
backward is not likely to be an attractive strategy option.
STRATEGIC ALLIANCES AND PARTNERSHIPS
Companies in all types of industries and in all parts of
the world have elected to form strategic alliances and
partnerships to complement their own strategic initiatives
and strengthen their competitiveness in domestic and
international markets. A strategic alliance is a formal
agreement between two or more separate companies in
which there is strategically relevant collaboration of some sort,
joint contribution of resources, shared risk,
shared control, and mutual dependence. Collaborative
relationships between partners may entail a contractual
CORE CONCEPT
Strategic alliances are collaborative arrangements

where two or more companies join forces to
achieve mutually beneficial outcomes.
agreement but they commonly stop short of formal ownership
ties (although sometimes an alliance member may
have minority ownership of another member).
When an alliance involves formal ownership ties, it is called a
joint venture. 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 profits (losses) of the venture according to their
ownership percentages. In many joint ventures,
it is formally agreed that one of the owners (typically a majority
owner) will exercise operating control over the
venture. Because a joint venture involves mutual ownership, it
tends to be more durable than an alliance where a
partner can just abruptly decide to abandon the alliance. A joint
venture owner who wants out of the venture must
negotiate arrangements to be bought out or else get the other
owners to agree to dissolve the venture.
An alliance or joint venture becomes “strategic”—as opposed to
just a useful collaborative arrangement—when
it serves any of the following purposes or intended outcomes:25
l It facilitates achievement of an important business

objective (like reducing risk to a company’s business,
lowering costs, or delivering more value to customers in the
form of better quality, extra features, and
greater durability).
l It helps build or strengthen a company’s competitively
valuable resources and capabilities.
l It helps remedy an important resource deficiency or
competitive weakness.
l It speeds the development of competitively important new
technologies and/or product innovations.
l It facilitates entry into new geographic markets or pursuit
of important market opportunities.
l It helps block or defend against a competitive threat or
mitigate a significant risk to a company’s
business.
l It enhances a company’s bargaining power versus
suppliers or buyers.
Recent high interest in making strategic alliances a key
component of a company’s overall strategy is an about-
face from times past, when the vast majority of companies
confidently believed they already had or could
independently develop whatever resources and capabilities were
needed to be successful in their markets. But
in today’s world, large corporations—even those that are
successful and financially strong—have concluded it
doesn’t always make good strategic and economic sense to be
totally independent and self-sufficient with regard
to every resource and capability it may need or every market
opportunity it wants to pursue. Joint ventures

are a favored partnership arrangement where two or more
companies conclude they each want to pursue an
attractive business opportunity but lack the resources and
capabilities to do so independently. By joining forces
and pooling their resources and capabilities in a joint venture,
the resource/capability deficiencies can be readily
corrected and overcome; joint pursuit of a mutually attractive
business opportunity therefore becomes less risky
and more likely to succeed.
Why and How Strategic Alliances Are Advantageous
The most common reasons why companies enter into strategic
alliances are to expedite the development of
promising new technologies or products, to overcome deficits in
their own expertise and capabilities, to bring
together the personnel and expertise needed to create
desirable new skill sets and capabilities, 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.26 When a company
needs to correct particular resource/capability gaps or
deficiencies, it may be faster and cheaper to partner with other
enterprises that have the missing resources and
capabilities. Moreover, partnering offers greater flexibility
should a company’s competitive requirements later
The best strategic alliances are highly selective,
focusing on particular value chain activities and on
obtaining a specific competitive benefit. They tend
to enable a firm to build on its strengths and learn.

change. Manufacturers frequently pursue alliances with parts
and components suppliers to wring cost savings out
of supply chain activities, to improve the quality of parts and
components, to better assure reliable supplies and
on-time deliveries, and to speed new products to market. In
industries where technology is advancing rapidly,
alliances are all about fast cycles of learning, staying abreast of
the latest developments, and gaining quick access
to the latest round of technological know-how and capability. In
bringing together firms with different skills
and intellectual capital, alliances open up learning opportunities
that help partner firms strengthen their own
portfolios of resources, core competences, and capabilities and
thereby become more competitive.27
Companies find strategic alliances particularly valuable in
several other instances. A company racing for global
market leadership needs alliances to:28
l Get into critical country markets quickly and accelerate
the process of building a competitively potent
global market presence.
l Gain inside knowledge about unfamiliar markets and
cultures through alliances with local partners. For
example, U.S., European, and Japanese companies wanting to
build market footholds in China and other
fast-growing Asian markets have pursued local partnership
arrangements to help guide them through the
maze of government regulations, to supply knowledge of local
markets, to provide guidance on adapting
their products to better match local buying preferences, to set

up local manufacturing capabilities, and/
or to assist in distribution, marketing, and promotional
activities.
l Access valuable skills and competences that are
concentrated in particular geographic locations
(such as software design competences in the United States,
fashion design skills in Italy, and efficient
manufacturing skills in Japan, Taiwan, China, and other
Southeast Asian countries).
A company that is racing to stake out a strong position in an
industry of the future needs alliances to:29
l Establish a stronger beachhead for participating in the
target industry.
l Master new technologies and build valuable expertise and
capabilities faster than would be possible
through internal efforts alone.
l Open up broader opportunities in the target industry by
melding the firm’s own resources and capabilities
with the resources and capabilities of partners to create
competitively effective resource/capability
bundles.
Because of the varied benefits of strategic alliances, many large
corporations have become involved in 30 to 50
alliances, and a number have formed hundreds of alliances.
Genentech, a leader in biotechnology and human
genetics, has formed R&D alliances with more than 30
companies to boost its prospects for developing new
cures for various diseases and ailments. Samsung Group, which
includes Samsung Electronics, has an ecosystem
of over 1,000 alliance partners involving activities pertaining to

R&D, global procurement, and local marketing.
Hoffman-La Roche, a multinational healthcare company, set up
Roche Partnering to manage its more than
190 alliances. During the COVID-19 pandemic, dozens of
pharmaceutical companies entered into strategic
alliances or partnerships to speed the development of COVID-
19 treatments and vaccines. Increasing numbers of
companies with a host of alliances now manage their alliances
like a portfolio—terminating those that no longer
serve a useful purpose or that have produced meager results,
forming promising new alliances, and restructuring
certain existing alliances to correct performance problems
and/or redirect the collaborative effort.30
Many Alliances Are Short-Lived or Break Apart Most alliances
that aim at technology-sharing or
providing market access turn out to be temporary, fulfilling
their purpose after a few years because the benefits
of mutual learning have occurred and because both partners’
businesses have developed to the point where
they are ready to go their own ways. The likelihood that such
alliances will be temporary makes it important
for each partner to learn thoroughly and rapidly about the other
partner’s technology, business practices, and
organizational capabilities and then promptly transfer valuable
ideas and practices into its own value chain

activities. Alliances tend to be longer lasting when (1) they
involve collaboration with suppliers or distribution
allies, (2) each party’s contribution involves activities in
different portions of the industry value chain, or (3) both
parties conclude that continued collaboration is in their mutual
interest.
Most alliance partners don’t hesitate to terminate their
collaboration when the payoffs run out or when alliance
members conclude the expected benefits are unlikely to
materialize. A 1999 study by Accenture, a global business
consulting organization, revealed that 61 percent of alliances
were either outright failures or “limping along.”
In 2004, McKinsey & Company estimated that the overall
success rate of alliances was around 50 percent, based on
whether the alliance achieved the stated objectives.31 A
2007 study found that, even though the number of strategic
alliances was increasing about 25 percent annually, the
failure rate of alliances hovered between 60 to 70 percent.32
The high “divorce rate” among strategic allies
has several causes—an inability to work well together,
tendencies among alliance members to share only
limited information about their valuable skills and expertise
(which prevented other members from learning
much of value), changing conditions that render the purpose of
the alliance obsolete, growing disagreement
among alliance members about the purpose, priorities, and/or
targeted benefits of the alliance, the emergence
of more attractive paths to capture the intended benefits, and
emerging marketplace rivalry between certain
alliance members.33 Experience indicates that alliances stand a
reasonable chance of helping a company reduce
competitive disadvantage but rarely can entering into an
alliance enable a company to boost the competitive
power of its resources and capabilities by enough to outcompete
rivals or gain a competitive advantage.

The Strategic Dangers of Relying Heavily on Alliances and
Cooperative Partnerships The
Achilles heel of alliances and strategic cooperation is becoming
dependent on other companies for essential
expertise and capabilities. To be a market leader (and perhaps
even a serious market contender), a company
must ultimately develop its own capabilities in areas where
internal strategic control is pivotal to protecting its
competitiveness and building competitive advantage. Moreover,
some alliances and cooperative arrangements
hold only limited potential when a partner maintains full control
over its most valuable skills and expertise and
is unwilling to give other alliance members much access to
these capabilities. As a consequence, acquiring or
merging with a company possessing the needed resources and
capabilities is often a better solution.
MERGER AND ACQUISITION STRATEGIES
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.34 Ownership ties are more
permanent than partnership ties, allowing the operations of
the merger/acquisition participants to be tightly integrated
and creating more in-house control and autonomy. A
merger is the combining of two or more companies into a
newly created company that usually takes 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. The resources and
capabilities of the newly created enterprise end up much
the same whether the combination is the result of acquisition or

merger.
The main impetus for merger and acquisition strategies is to
fundamentally alter a company’s trajectory and
improve its business outlook. Such strategies typically aim at
achieving any of four objectives:35
1. Creating a more cost-efficient operation out of the combined
companies. Many mergers and acquisitions
are undertaken with the objective of transforming two or more
otherwise high-cost companies into one
Large numbers of strategic alliances fail to live
up to expectations and are dissolved after a
few years.
CORE CONCEPT
A merger is the combining of two or more
companies into a newly created company that
usually has a different name. An acquisition
is a combination in which one company, the
acquirer, purchases and absorbs the operations
of another, the acquired.
lean competitor with average or below-average costs. When a
company acquires another company in
the same industry, there’s usually enough overlap

in operations that certain inefficient plants can be
closed or distribution activities partly combined
and downsized (when nearby centers serve some
of the same geographic areas) or sales force
and marketing activities can be combined and
downsized (when each company has salespeople
calling on the same customer). The combined
companies may also be able to reduce supply chain
costs because of buying in greater volume from
common suppliers and from closer collaboration with supply
chain partners. Likewise, it is usually
feasible to squeeze out cost savings in administrative activities,
again by combining and downsizing
such administrative activities as finance and accounting,
information technology, human resources, and
so on.
2. Strengthening the resulting company’s resources,
capabilities, and competitiveness in important ways.
Combining the operations of two or more companies, via merger
and/or acquisition, is often aimed
at significantly bolstering the competitive power of the
resulting company’s resources, know-how,
skills and expertise—and doing so quickly (as compared to
undertaking a time-consuming and perhaps
expensive internal effort to accomplish the same result). From
2000 through February 2021, Cisco
Systems purchased 134 companies to give it more technological
reach and product breadth, thereby
enhancing its standing as the world’s biggest provider of
hardware, software, and services for building
and operating Internet networks.
3. Expanding a company’s geographic coverage. One of the best
and quickest ways to expand a company’s
geographic coverage is to acquire rivals with operations in the

desired locations. And if there is some
geographic overlap, then a side benefit is being able to reduce
costs by eliminating duplicate facilities in
those geographic areas where undesirable overlap exists. Banks
like Wells Fargo and Bank of America
have pursued geographic expansion by making a series of
acquisitions over the years, enabling them
to establish a market presence in an ever-growing number of
states and localities. Food products
companies like Nestlé, Kraft, Unilever, and Procter & Gamble
have made acquisitions an integral part
of their strategies to expand internationally. Travel company
Expedia acquired HomeAway, an online
vacation rental enterprise, to extend its coverage in the vacation
rental marketplace both internationally
and across the United States.
4. Extending the company’s business into new product
categories. Many times, a company has gaps in
its product line that need to be filled. Acquisition can be a
quicker and more potent way to broaden
a company’s product line than going through the lengthy
exercise of doing the R&D, design and
engineering, and testing to put the company in position to
prepare to manufacture and then introduce
an assortment of new products to grow its lineup of product
offerings. PepsiCo acquired Quaker
Oats chiefly to bring Gatorade into the Pepsi family of
beverages. While Coca-Cola has expanded its
beverage lineup by introducing its own new products (like
Powerade and Dasani), it has also expanded
its lineup by acquiring Minute Maid (juices and juice drinks),
Odwalla (juices), Hi-C (ready-to-drink
fruit beverages), and dozens of other brands of beverages.
Going into 2021, Coca-Cola had a portfolio
of over 500 brands and 4,700 choices of beverage products,

some internally developed and most
the result of an active and longstanding acquisition program. In
2020, financial services and wealth
management firm Morgan Stanley acquired online stockbroker
E*TRADE Financial Corp. as a means
of extending its financial services offerings to include online
stock trading, a service already offered
by rivals Merrill Lynch and Charles Schwab. Also in 2020, Uber
Technologies acquired privately held
Postmates to expand its footprint and capabilities in the home
delivery business. Postmates entered the
home delivery marketplace in 2011 and specialized in delivering
restaurant-prepared meals and other
goods to residents and businesses; it had operations in some
3,000+ localities in the United States as of
late 2020.
Combining the operations of two companies, via
merger or acquisition, is an attractive strategic
option for fundamentally altering a company’s
trajectory—achieving operating economies,
strengthening the resulting company’s resources,
capabilities, and competitiveness in important
ways, and opening up avenues of new market
opportunity.
Many Mergers and Acquisitions Are Not Successful Mergers

and acquisitions often do not result in the
hoped-for outcomes. The failure rate of mergers and
acquisitions is between 70 and 90 percent.36 The reasons are
numerous.37 The anticipated revenue growth may not occur.
Cost savings may prove smaller than expected. Gains
in competitive capabilities may take substantially longer to
realize, or worse, never materialize at all. Efforts
to mesh the cultures can be defeated by formidable resistance
from organizational members. Key employees
at the acquired company can become disenchanted with newly
instituted changes and leave. Differences in
management styles and operating procedures can prove hard to
resolve. Personnel at the acquired company may
stonewall changes, arguing forcefully for doing certain things
the way they were done prior to the acquisition.
Unsuccessful mergers and acquisitions can be costly. Ford
reportedly lost over $10 billion trying to make
successes of its $2.5 billion acquisition of Jaguar (1989) and
$2.7 billion acquisition of Land Rover (2000);
frustrated by poor results, Ford sold the operations of both
brands to India’s Tata Motors in 2008 for $2.3
billion.38 Bank of America’s supposedly bargain-priced $2.5
billion acquisition of ethically challenged and
financially troubled Countrywide Financial in January 2008
was, according to a prominent banking and finance
professor, “the worst deal in the history of American finance.
Hands down.”39 Countrywide, a big originator of
questionable subprime and adjustable-rate mortgages that
helped trigger the Fall 2008 collapse of the housing
market, cost Bank of America almost $57 billion in real estate
losses, settlements with federal and state agencies
for selling toxic mortgage loans that were falsely represented as
quality investments, and payments for legal
fees.40 Google’s $12.5 billion acquisition of struggling
smartphone manufacturer Motorola Mobility in 2012

turned out to be minimally beneficial in helping to “supercharge
Google’s Android ecosystem” (Google’s stated
reason for making the acquisition). When Google’s efforts to
rejuvenate Motorola’s smartphone business by
spending over $1.3 billion on new product R&D and revamping
Motorola’s product line resulted in disappointing
sales and huge operating losses, Google sold Motorola Mobility
to China-based PC maker, Lenovo, for $2.9
billion in 2014 (however, Google retained ownership of
Motorola’s extensive patent portfolio). While Lenovo
had great ambitions for utilizing Motorola Mobility as a vehicle
for transforming both the Lenovo and Motorola
brands of smartphones into major contenders in the global
smartphone market, six years later the results were
disappointing. During the first three quarters of 2020 the
combined global market shares of the two brands was
in the low single digits, far behind the four best-selling
brands—Samsung (~18.8%), Apple (~14.8%), Huawei
(~13.5%), and Xiaomi (~10.8%)—and also trailing three other
brands.41 German chemical manufacturer Bayer’s
$63 billion acquisition of Monsanto in June 2018 proved
problematic because a subsequent public uproar over
the safety of food products produced with Monsanto’s
genetically modified seeds caused many farmers to refuse
to use such seeds and, further, because of the subsequent filing
of an estimated 125,000 lawsuits alleging that
Monsanto’s popular best-selling Roundup weedkiller caused
cancer—damages resulting from the settlement
of about 85,000 lawsuits amounted to about $12 billion as of
early 2021. These two developments triggered a
38 percent drop in Bayer’s stock price in the 14 months
following the closing of the acquisition (in early 2021
Bayer’s stock price was almost 50 percent below Bayer’s June
2018 stock price), led to investor protests about
the performance of Bayer’s recently appointed CEO, prompted
Bayer to drop the use of the Monsanto name, and

forced a major restructuring of Bayer’s business makeup and
internal operations to cope with the financial fallout
and the debt Bayer incurred in acquiring Monsanto.42
CHOOSING APPROPRIATE FUNCTIONAL-AREA
STRATEGIES
A company’s strategy is not complete until company managers
have made strategic choices about how the
various functional parts of the business—R&D, production,
human resources, sales and marketing, finance,
and so on—will be managed in support of its basic competitive
strategy approach and the other important
competitive moves being taken. Normally, functional-area
strategy choices rank third on the menu of choosing
among the various strategy options, as shown in Figure 6.1. But
whether commitments to particular functional
strategies are made before or after the choices of
complementary strategic options (shown in Figure 6.1) is
beside the point—what’s really important is what the functional
strategies are and how they mesh to enhance the
success of the company’s higher-level strategic actions.
In many respects, the nature of functional strategies is dictated
by the choice of competitive strategy. For example,
a manufacturer employing a low-cost provider strategy needs
(1) an R&D and product design strategy that
emphasizes efficient assembly and cheap-to-incorporate

features, (2) a production strategy that stresses capture
of scale economies and actions to achieve low-cost manufacture
(such as high labor productivity, efficient supply
chain management, and automated production processes), and
(3) a low-budget marketing strategy. A business
pursuing a high-end differentiation strategy needs a production
strategy geared to top-notch quality and product
performance, and a marketing strategy aimed at touting
differentiating features and using advertising and a
trusted brand name to “pull” sales through the chosen
distribution channels.
Beyond general prescriptions, it is difficult to say just what the
content of the different functional-area strategies
should be without first knowing what higher-level strategic
choices a company has made, the industry environment
in which it operates, the valuable resources and capabilities that
can be leveraged, and so on. Suffice it to say here
that lower-ranking company personnel who have strategy-
making responsibilities must be clear about which
higher-level strategies top executives have chosen and then
must tailor the company’s functional-area strategies
accordingly.
TIMING A COMPANY’S STRATEGIC MOVES
When to make a strategic move is often as crucial as what
move to make. Timing is especially important when first-
mover advantages or disadvantages exist.43 Being first to
initiate a strategic move can have a high payoff when:
l Pioneering helps build a firm’s image and
reputation with buyers and creates strong brand
loyalty. For example, Open Table’s early moves
to establish its online restaurant reservation service built a
strong brand and loyal user following that
fueled its expansion worldwide.

l An early lead enables a first mover to gain an absolute
cost advantage over rivals because it captures
economies of scale sooner and enjoys volume-based cost
advantages or because it is able to move down
a steep learning curve ahead of rivals and lower its unit costs as
its experience accumulates in working
with the associated technology or production methods.
l A first-mover’s customers will thereafter face significant
costs in switching to the product offerings of
later entrants. High switching costs can emerge when customers
make large investments of time and
money in learning how to use a specific company’s new product
or when they purchase complementary
products that can only be used with the first-mover’s product.
l Moving first constitutes a preemptive strike (like securing
an especially favorable location or acquiring
an appealing company with uniquely valuable resources or
capabilities).
l A first-mover’s actions are protected by patents,
copyrights, or other forms of property rights, thus
thwarting the efforts of would-be followers to copy what the
first mover did.
l A first-mover’s actions prove so overwhelmingly popular
that its product sets the technical standard for
the industry.
Whenever buyers respond well to a pioneer’s initial move, the
pioneer may be able to reap temporary monopoly
benefits—such as faster recovery of its initial investment, a cost
advantage, and good profits—until rivals are
able to enter the same market space. The bigger the first-mover

advantages, the more attractive making the first
move becomes and the more difficult it becomes for later
movers to dislodge the advantages.44
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.
To sustain any advantage that initially accrues to a pioneer, a
first mover must be a fast learner and continue to
move aggressively to capitalize on any initial pioneering
advantage. It helps immensely if the first mover has
deep financial pockets, important competences and competitive
capabilities, and astute managers. If a first-
mover’s skills, know-how, and actions are easily copied or even
surpassed, then followers and even late movers
can catch or overtake the first mover in a relatively short
period. What makes being a first mover strategically
important is not being the first company to do something but
rather being the first competitor to put together
the precise combination of features, customer value, and sound
revenue/cost/profit economics that gives it an
edge over rivals in battling for market leadership.45 If the
marketplace quickly takes to a first mover’s innovative
product offering, a first mover must have large-scale

production, marketing, and distribution capabilities if it is
to remain ahead of fast followers who possess competitively
valuable resources and capabilities. In cases where
the industry’s technology is advancing at a pace that enables
rapid introduction of next-generation products, a
first mover cannot hope to sustain an early lead without having
strong capabilities in R&D and fast-cycle product
development, along with the financial strength to fund these
activities.
Sometimes, though, markets are slow to accept the innovative
product offering of a first mover, in which case
a strategically astute fast follower with substantial resources
and marketing muscle can overtake a first mover
(as Fox News did in surpassing first-mover CNN to become the
most-watched cable news network). Sometimes
furious technological change or product innovation makes a
first mover vulnerable to quickly appearing next-
generation technology or products. For instance, former market
leaders in cell phones Nokia and BlackBerry
were quickly victimized by Apple’s far more innovative iPhone
models and new Samsung smart phones based
on Google’s Android operating system. Hence, there are no
guarantees that a first mover can sustain an early
competitive advantage.46
The Potential for Late-Mover Advantages or First-Mover
Disadvantages
There are times, however, when being an adept follower rather
than a first mover actually has its advantages.
Such late-mover advantages (or first-mover disadvantages) arise
in six instances:
l When pioneering leadership is more costly than imitating
followership, and only negligible experience
or learning-curve benefits accrue to the leader—a condition that

MGT 4337 Business Policy and Decision Making Module 3 .docx

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