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Chapter 6

Chapter 6. Supplementing the Chosen Competitive Strategy. Strategic Alliances Joint Ventures Vertical Integration Outsourcing Mergers & Acquisitions. Cooperative Strategies.

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Chapter 6

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  1. Chapter 6 Supplementing the Chosen Competitive Strategy

  2. Strategic Alliances • Joint Ventures • Vertical Integration • Outsourcing • Mergers & Acquisitions

  3. Cooperative Strategies • Strategic Alliance – formal agreement between two or more companies in which there is a strategically relevant collaboration. • Joint Venture – when two or more firms contribute resources to the creation of a third organization in an effort to pursue some mutually beneficial activity.

  4. Advantages of Alliances/JVs • Gain access to new global markets • Gain knowledge about unfamiliar markets or cultures • Gain access or master new technologies • Gain access to complementary resources

  5. Keys to Alliance/JV Success • Picking the right partner • Sensitivity to cultural differences • Must be win-win • Mutual commitment • Swift decision making structures • Managing the learning process • Maintaining flexibility

  6. Who Makes a Geo? Geo Storm was actually manufactured by Isuzu. The Storm is the Isuzu Impulse. Geo Prizm = Toyota Corolla Geo Tracker = Suzuki Sidekick Geo Metro = Suzuki Esteem or Swift w/hatchback No Geo cars were actually made by General Motors. They were all imported from foreign manufacturers.

  7. Vertical Integration Operating in more than one stage of the industry value chain • partial/taper or full integration • forward or backward Benefits • can not be held hostage – reduces buyer/supplier power • greater control over operations • access to new business/technologies • reduce procurement and sales efforts Risks • increased overhead, capital and administrative costs • loss of flexibility • different competencies may be requires • unbalanced capacities and increased risk • reaction of competitors

  8. Vertical Integration • Will add value when: • Enhance critical activities that lower costs or increase differentiation • Benefits exceed the costs • Enhances competitive capabilities

  9. Outsourcing • Farming out specific activities to others, allowing the firm to focus on more critical activities and core competencies

  10. Outsourcing Works When: • Others can do it better and cheaper • Not a core competency • Reduces the companies’ risk to technology changes • Improves the company’s innovation • Streamlines operations and increases flexibility • Assemble diverse expertise

  11. Mergers and Acquisitions Reasons of Acquisitions Cost Efficiencies Geographic Expansion Product/Market Extensions Increased Speed Lower Risk New Technologies Invest in New Industry or Create Convergence

  12. Mergers and Acquisitions Problems with Acquisitions Integration of two firms Overpayment/Debt Overestimation of Synergy Overdiversification Managerial energy absorption Become too large Substitute for innovation

  13. Mergers and Acquisitions Results Poor Performance Who Wins? Acquired Firm Shareholders

  14. Monday October 27th WSJ • Bank of American – Boston Fleet Financial • BoA down $8.29, or 10%, BFF rose 23% • Anthem – WellPoint Health Networks • Anthem down 8.2%, WellPoint up 8.8% • United Health – MidAtlantic Med Services • UH down 4.9%, MAMS up 9.7%

  15. Failures of Acquisitions 30 - 40% average acquisition premium Acquiring firm’s value drops 4% in the 3 months following acquisitions 30 - 50% of acquisitions are later divested Acquirers underperform S&P by 14%, peers by 4% 3 month performance before and after • 30% substantial losses, 20% some losses, 33% marginal returns, 17% substantial returns

  16. Why, then, do executives acquire? Often, for personal reasons Firm size and executive compensation are related When do executives loss their jobs? • 1) Acquired - larger firms harder to acquire • 2) Performing poorly - employment risk is reduced as returns are less volatile

  17. Competitive Dynamics • Competitive action within an industry • Strategic and tactical action does not occur within a vacuum • What industries have high competitive dynamics? • What sort of actions/tactics are taken?

  18. Drivers of Competitive Dynamics • numerous/equally balanced competitors • slow growth • high fixed/storage costs • lack of differentiation/switching costs • high exit barriers • Etc… Competitive Dynamics Rivalry

  19. Competition in the Pharmaceutical Industry • Reps quadrupled to 120K last 10-15 years • 12B on sales force, 2.76B on ads • Managed care bet – Pfizer from 14th to 1st • 529 visits yearly, average length – 2.5 min • 8% remember • Glaxo can reach 80% of the Drs in a week • “Is this necessary. No, but if my competitors do it and I can’t, then I’m at a disadvantage. This has been an arms race in the worst possible manner.”

  20. Types of Competitive Responses • First Movers - initial competitive action • advantages and disadvantages • Fast Followers or Capable Competitors- respond quickly to first movers • Late Entrants - day late and a dollar short

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