Chapter 6 Supplementing the Chosen Competitive Strategy
Strategic Alliances • Joint Ventures • Vertical Integration • Outsourcing • Mergers & Acquisitions
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.
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
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
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.
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
Vertical Integration • Will add value when: • Enhance critical activities that lower costs or increase differentiation • Benefits exceed the costs • Enhances competitive capabilities
Outsourcing • Farming out specific activities to others, allowing the firm to focus on more critical activities and core competencies
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
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
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
Mergers and Acquisitions Results Poor Performance Who Wins? Acquired Firm Shareholders
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%
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
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
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?
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
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.”
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