Project 2: Tool Analysis (Week 4)

Supporting the Business-Level Strategy: Competitive
and Cooperative Moves
LEARNING OBJECTIVES
After reading this chapter, you should be able to understand and articulate answers to the following
questions:

  1. What different competitive moves are commonly used by firms?
  2. When and how do firms respond to the competitive actions taken by their rivals?
  3. What moves can firms make to cooperate with other firms and create mutual benefits?
    Can Merck Stay Healthy?
    On June 7, 2011, pharmaceutical giant Merck & Company Inc. announced the formation of a strategic
    alliance with Roche Holding AG, a smaller pharmaceutical firm that is known for excellence in medical
    testing. The firms planned to work together to create tests that could identify cancer patients who might
    benefit from cancer drugs that Merck had under development. [1]
    This was the second alliance formed between the companies in less than a month. On May 16, 2011, the
    US Food and Drug Administration approved a drug called Victrelis that Merck had developed to treat
    hepatitis C. Merck and Roche agreed to promote Victrelis together. This surprised industry experts
    because Merck and Roche had offered competing treatments for hepatitis C in the past. The Merck/Roche
    alliance was expected to help Victrelis compete for market share with a new treatment called Incivek that
    was developed by a team of two other pharmaceutical firms: Vertex and Johnson & Johnson.
    Experts predicted that Victrelis’s wholesale price of $1,100 for a week’s supply could create $1 billion of
    annual revenue. This could be an important financial boost to Merck, although the company was already
    enormous. Merck’s total of $46 billion in sales in 2010 included approximately $5.0 billion in revenues
    from asthma treatment Singulair, $3.3 billion for two closely related diabetes drugs, $2.1 billion for two
    closely related blood pressure drugs, and $1.1 billion for an HIV/AIDS treatment.
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    Despite these impressive numbers, concerns about Merck had reduced the price of the firm’s stock from
    nearly $60 per share at the start of 2008 to about $36 per share by June 2011. A big challenge for Merck
    is that once the patent on a drug expires, its profits related to that drug plummet because generic
    drugmakers can start selling the drug. The patent on Singulair is set to expire in the summer of 2012, for
    example, and a sharp decline in the massive revenues that Singulair brings into Merck seemed
    inevitable. [2]
    A major step in the growth of Merck was the 2009 acquisition of drugmaker Schering-Plough. By 2011,
    Merck ranked fifty-third on the Fortune 500 list of America’s largest companies. Rivals Pfizer (thirty-first)
    and Johnson & Johnson (fortieth) still remained much bigger than Merck, however. Important questions
    also loomed large. Would the competitive and cooperative moves made by Merck’s executives keep the
    firm healthy? Or would expiring patents, fearsome rivals, and other challenges undermine Merck’s
    vitality?
    Friedrich Jacob Merck had no idea that he was setting the stage for such immense stakes when he took
    the first steps toward the creation of Merck. He purchased a humble pharmacy in Darmstadt, Germany, in
  4. In 1827, the venture moved into the creation of drugs when Heinrich Emanuel Merck, a descendant
    of Friedrich, created a factory in Darmstadt in 1827. The modern version of Merck was incorporated in
  5. More than three hundred years after its beginnings, Merck now has approximately ninety-four
    thousand employees.
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    Merck’s origins can be traced back more than three centuries to Friedrich Jacob Merck’s purchase
    of this pharmacy in 1688.
    Image courtesy of
    Wikimedia,http://upload.wikimedia.org/wikipedia/commons/e/eb/ENGEL_APHOTHEKE.png.
    For executives leading firms such as Merck, selecting a generic strategy is a key aspect of business-level
    strategy, but other choices are very important too. In their ongoing battle to make their firms more
    successful, executives must make decisions about what competitive moves to make, how to respond to
    rivals’ competitive moves, and what cooperative moves to make. This chapter discusses some of the more
    powerful and interesting options. As our opening vignette on Merck illustrates, often another company,
    such as Roche, will be a potential ally in some instances and a potential rival in others.
    [1] Stynes, T. 2011, June 7. Merck, Roche focus on tests for cancer treatments. Wall Street Journal. Retrieved from
    online.wsj.com/article/SB100014240527023044323045 76371491785709756.html?mod=googlenews_wsj
    [2] Statistics drawn from Standard & Poor’s stock report on Merck.
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    6.1 Making Competitive Moves
    Figure 6.1 Making Competitive Moves
    Image courtesy of 663highland, http://en.wikipedia.org/wiki/File:Enchoen27n3200.jpg
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    LEARNING OBJECTIVES
  6. Understand the advantages and disadvantages of being a first mover.
  7. Know how disruptive innovations can change industries.
  8. Describe two ways that using foothold can benefit firms.
  9. Explain how firms can win without fighting using a blue ocean strategy.
  10. Describe the creative process of bricolage.
    Being a First Mover: Advantages and Disadvantages
    A famous cliché contends that “the early bird gets the worm.” Applied to the business world, the cliché
    suggests that certain benefits are available to a first mover into a market that will not be available to later
    entrants (Figure 6.1 “Making Competitive Moves”). A first-mover advantage exists when making the
    initial move into a market allows a firm to establish a dominant position that other firms struggle to
    overcome. For example, Apple’s creation of a user-friendly, small computer in the early 1980s helped
    fuel a reputation for creativity and innovation that persists today. Kentucky Fried Chicken (KFC)
    was able to develop a strong bond with Chinese officials by being the first Western restaurant chain
    to enter China. Today, KFC is the leading Western fast-food chain in this rapidly growing market.
    Genentech’s early development of biotechnology allowed it to overcome many of the
    pharmaceutical industry’s traditional entry barriers (such as financial capital and distribution networks)
    and become a profitable firm. Decisions to be first movers helped all three firms to be successful in their
    respective industries. [1]
    On the other hand, a first mover cannot be sure that customers will embrace its offering, making a first
    move inherently risky. Apple’s attempt to pioneer the personal digital assistant market, through its
    Newton, was a financial disaster. The first mover also bears the costs of developing the product and
    educating customers. Others may learn from the first mover’s successes and failures, allowing them to
    cheaply copy or improve the product. In creating the Palm Pilot, for example, 3Com was able to build on
    Apple’s earlier mistakes. Matsushita often refines consumer electronic products, such as compact disc
    players and projection televisions, after Sony or another first mover establishes demand. In many
    industries, knowledge diffusion and public-information requirements make such imitation increasingly
    easy.
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    One caution is that first movers must be willing to commit sufficient resources to follow through on their
    pioneering efforts. RCA and Westinghouse were the first firms to develop active-matrix LCD display
    technology, but their executives did not provide the resources needed to sustain the products spawned by
    this technology. Today, these firms are not even players in this important business segment that supplies
    screens for notebook computers, camcorders, medical instruments, and many other products.
    To date, the evidence is mixed regarding whether being a first mover leads to success. One research study
    of 1,226 businesses over a fifty-five-year period found that first movers typically enjoy an advantage over
    rivals for about a decade, but other studies have suggested that first moving offers little or no advantages.
    Perhaps the best question that executives can ask themselves when deciding whether to be a first mover
    is, how likely is this move to provide my firm with a sustainable competitive advantage? First moves that
    build on strategic resources such as patented technology are difficult for rivals to imitate and thus are
    likely to succeed. For example, Pfizer enjoyed a monopoly in the erectile dysfunction market for five years
    with its patented drug Viagra before two rival products (Cialis and Levitra) were developed by other
    pharmaceutical firms. Despite facing stiff competition, Viagra continues to raise about $1.9 billion in sales
    for Pfizer annually. [2]
    In contrast, E-Trade Group’s creation in 2003 of the portable mortgage seemed doomed to fail because it
    did not leverage strategic resources. This innovation allowed customers to keep an existing mortgage
    when they move to a new home. Bigger banks could easily copy the portable mortgage if it gained
    customer acceptance, undermining E-Trade’s ability to profit from its first move.
    Disruptive Innovation
    Some firms have the opportunity to shake up their industry by introducing a disruptive innovation—an
    innovation that conflicts with, and threatens to replace, traditional approaches to competing within an
    industry. The iPad has proved to be a disruptive innovation since its introduction by Apple in 2010.
    Many individuals quickly abandoned clunky laptop computers in favor of the sleek tablet format offered
    by the iPad. And as a first mover, Apple was able to claim a large share of the market.
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    The iPad story is unusual, however. Most disruptive innovations are not overnight sensations. Typically, a
    small group of customers embrace a disruptive innovation as early adopters and then a critical mass of
    customers builds over time. An example is digital cameras. Few photographers embraced digital cameras
    initially because they took pictures slowly and offered poor picture quality relative to traditional film
    cameras. As digital cameras have improved, however, they have gradually won over almost everyone that
    takes pictures. Executives who are deciding whether to pursue a disruptive innovation must first make
    sure that their firm can sustain itself during an initial period of slow growth.
    Footholds
    In warfare, many armies establish small positions in geographic territories that they have not occupied
    previously. These footholds provide value in at least two ways. First, owning a
    foothold can dissuade other armies from attacking in the region. Second, owning a foothold gives an army
    a quick strike capability in a territory if the army needs to expand its reach.
    Similarly, some organizations find it valuable to establish footholds in certain markets. Within the context
    of business, a foothold is a small position that a firm intentionally establishes within a market in which it
    does not yet compete.[3] Swedish furniture seller IKEA is a firm that relies on footholds. When IKEA enters
    a new country, it opens just one store. This store is then used as a showcase to establish IKEA’s brand.
    Once IKEA gains brand recognition in a country, more stores are established. [4]
    Pharmaceutical giants such as Merck often obtain footholds in emerging areas of medicine. In December
    2010, for example, Merck purchased SmartCells Inc., a company that was developing a possible new
    treatment for diabetes. In May 2011, Merck acquired an equity stake in BeiGene Ltd., a Chinese firm that
    was developing novel cancer treatments and detection methods. Competitive moves such as these offer
    Merck relatively low-cost platforms from which it can expand if clinical studies reveal that the treatments
    are effective.
    Blue Ocean Strategy
    It is best to win without fighting.
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    Sun-Tzu, The Art of War
    A blue ocean strategy involves creating a new, untapped market rather than competing with rivals in an
    existing market. [5] This strategy follows the approach recommended by the ancient master of strategy
    Sun-Tzu in the quote above. Instead of trying to outmaneuver its competition, a firm using a blue ocean
    strategy tries to make the competition irrelevant. Baseball legend Wee Willie Keeler offered a similar idea
    when asked how to become a better hitter: “Hit ’em where they ain’t.” In other words, hit the baseball where
    there are no fielders rather than trying to overwhelm the fielders with a ball hit directly at them.
    Nintendo openly acknowledges following a blue ocean strategy in its efforts to invent new markets. In
    2006, Perrin Kaplan, Nintendo’s vice president of marketing and corporate affairs for Nintendo of
    America noted in an interview, “We’re making games that are expanding our base of consumers in Japan
    and America. Yes, those who’ve always played games are still playing, but we’ve got people who’ve never
    played to start loving it with titles like Nintendogs, Animal Crossing and Brain Games. These games are
    blue ocean in action.” [6] Other examples of companies creating new markets include FedEx’s invention of
    the fast-shipping business and eBay’s invention of online auctions.
    Bricolage
    Bricolage is a concept that is borrowed from the arts and that, like blue ocean strategy, stresses moves that
    create new markets. Bricolage means using whatever materials and resources happen to be available as
    the inputs into a creative process. A good example is offered by one of the greatest inventions in the
    history of civilization: the printing press. As noted in the Wall Street Journal, “The printing press is a
    classic combinatorial innovation. Each of its key elements—the movable type, the ink, the paper and the
    press itself—had been developed separately well before Johannes Gutenberg printed his first Bible in the
    15th century. Movable type, for instance, had been independently conceived by a Chinese blacksmith
    named Pi Sheng four centuries earlier. The press itself was adapted from a screw press that was being
    used in Germany for the mass production of wine.” [7] Gutenberg took materials that others had created
    and used them in a unique and productive way.
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    Executives apply the concept of bricolage when they combine ideas from existing businesses to create a
    new business. Think miniature golf is boring? Not when you play at one of Monster Mini Golf’s more than
    twenty-five locations. This company couples a miniature golf course with the thrills of a haunted house. In
    April 2011, Monster Mini Golf announced plans to partner with the rock band KISS to create a “customdesigned, frightfully fun course [that] will feature animated KISS and monster props lurking in all 18
    fairways” in Las Vegas. [8]
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    Braveheart meets heavy metal when TURISAS takes the stage.
    Image courtesy of Cecil, http://en.wikipedia.org/wiki/File:Turisas_-Jalometalli_2008
    _02.JPG.
    Many an expectant mother has lamented the unflattering nature of maternity clothes and the boring
    stores that sell them. Coming to the rescue is Belly Couture, a boutique in Lubbock, Texas, that combines
    stylish fashion and maternity clothes. The store’s clever slogan—“Motherhood is haute”—reflects the
    unique niche it fills through bricolage. A wilder example is TURISAS, a Finnish rock band that has created
    a niche for itself by combining heavy metal music with the imagery and costumes of Vikings. The band’s
    website describes their effort at bricolage as “inspirational cinematic battle metal brilliance.” [9]No one
    ever claimed that rock musicians are humble.

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