Business- Level Strategy and the Industry Environment

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• Business- Level Strategy and the Industry
  Environment

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Level of Strategies
Industrial Environment
Corporate level
Corporate level
Business Level
Functional Level
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The Industry Environment
There is the need to continually formulate and
implement business-level strategies to sustain
competitive advantage over time in different
industry environments.

• Different industry environments present different
  opportunities and threats.
• A companys business model and strategies have to
  change to meet the environment.

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The Industry Environment

• Companies must face the challenges of developing
  and maintaining a competitive strategy in
• Fragmented Industries
• Embryonic Industries
• Growth Industries
• Mature Industries
• Declining Industries

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Fragmented Industries
A fragmented industry is one composed of a large
number of small and medium-sized companies.

• Low barriers to entry due to lack of economies of
  scale
• Low entry barriers permit constant entry by new
  companies
• Specialized customer needs require small job lots
  of products - no room for a mass-production
• Diseconomies of scale

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Fragmented Industries

Chaining
Fragmented Industries
IT and Internet
Franchising
Horizontal Merger
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Competitive Featuresof a Fragmented Industry

• Absence of market leaders with large market
  shares or widespread buyer recognition
• Product/service is delivered to neighborhood
  locations to be convenient to local residents
• Buyer demand is so diverse that many firms are
  required to satisfy buyer needs
• Low entry barriers
• Absence of scale economies
• Market for industrys product/service may be
  globalizing, thus putting many companies across
  the world in same market arena
• Exploding technologies force firms to specialize
  just to keep up in their area of expertise
• Industry is young and crowded with aspiring
  contenders, with no firm having yet developed
  recognition to command a large market share

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Embryonic Industries
An embryonic industry is one that is just
beginning to develop when technological
innovation creates new market or product
opportunities.
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Growth Industries
A growth industry is one in which first-time
demand is expanding rapidly as many new customers
enter the market.
Companies must understand the factors that affect
a markets growth rate in order to tailor the
business model to the changing industry
environment.
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Market Characteristics Growth Industries

• Mass markets typically start to develop when
• Technological progress makes a product easier to
  use and increases its value to the average
  customer.
• Key complementary products are developed that do
  the same.
• Companies find ways to reduce production costs
  allowing them to lower prices.

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Market Characteristics Embryonic Industries

• Reasons for slow growth in market demand
• Limited performance and poor quality of the first
  products
• Customer unfamiliarity with what the new product
  can do for them
• Poorly developed distribution channels
• Lack of complementary products
• High production costs

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Market Development and Customer
Groups
Both innovators and early adopters enter the
market while the industry is in its embryonic
state.
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Market Share of Different Customer Segments
Most market demand and industry profits arise
during the early and late majority customer
segments.
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Strategic Implications Crossing the Chasm

• To cross the chasm between the early adopters and
  the early majority, companies must
• Identify the needs early majority users.
• Alter the business model.
• Alter the value chain and distribution channels
  to reach the early majority.
• Design the product to meet the needs of the early
  majority
• Anticipate the moves of competitors.

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Strategic Implications of Market Growth Rates

• Different markets develop at different rates.
• Growth rate measures the rate at which the
  industrys product spreads in the marketplace.
• Growth rates for new kinds of products seem to
  have accelerated over time
• Use of mass media
• Low-cost mass production

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Strategic Implications of Market Growth Rates

• Factors affecting market growth rates
• Relative advantage
• Complexity
• Compatibility
• Observability
• Availability of complementary products
• Trialability

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Differences in Diffusion Rates
Different markets develop at different growth
rates
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Navigating Through the Life Cycle to Maturity
Two crucial factors

1. Competitive advantage of companys business model
2. Stage of the industry life cycle

• Embryonic stages share building strategies
• Growth stages maintain relative competitive
  position
• Shakeout stage increase share during fierce
  competition
• Maturity stage hold-and-maintain to defend
  business model

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Mature Industries
A mature industry is dominated by a small number
of large companies whose actions are so highly
interdependent that success of one companys
strategy depends on the response of its rivals.

• Evolution of mature industries
• Industry becomes consolidated.
• Business level strategy is based on how
  established companies collectively try to reduce
  strength of competition.
• Interdependent companies try to protect industry
  profitability.

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Mature Industries

• Strategies
• Deter entry into industry
• Product proliferation
• Maintaining excess capacity
• Price cutting
• Manage industry rivalry
• Price signaling
• ? Capacity control
• Price leadership
• ? Nonprice competition

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Strategies for Deterring
Entry of Rivals
Sending a Signal to potential new entrants
contemplating entry that new entry will be met
with price cuts
Warning of Retaliation by increasing output
and forcing down prices until market entry would
be unprofitable to entrants
Filling the Niches making it difficult for
new competitors to break into a new industry
establish a beachhead
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Product Proliferation in the Restaurant Industry
Where the product spaces have been filled, it is
difficult for a new company to gain a foothold in
the market and differentiate itself.
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Strategies for Managing Industry Rivalry
Convey intentions (e.g. Tit-for-Tat) regarding
pricing to other companies to allow the industry
to choose the most favorable pricing options.
Intent is to improve industry profitability.
Informal pricing when one company takes
the responsibility for choosing the most
favorable industry pricing option. Formal price
setting jointly by companies is illegal.

• Differentiation
• by offering products with different features or
  applying different marketing techniques
• Market development
• Market penetration
• Product development
• Product proliferation

Market Signaling to secure coordination
with rivals as a capacity control strategy and to
reduce industry investment risks. Collusion on
timing of new investments is illegal.
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Four Nonprice Competitive Strategies
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Toyotas Product Lineup
Toyota has used market development to become a
broad differentiator and has developed a vehicle
for almost every main segment of the car market.
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Game Theory
Companies in an industry can be viewed as players
that are all simultaneously making choices about
which business models and strategies to pursue in
order to maximize their profitability.
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Game Theory

• Basic principles that underlie game theory
• Look Forward and Reason Back Decision Trees
• Know Thy Rival how is the rival likely to act
• Find the Dominant Strategy Payoff Matrix
• Strategy Shapes the Payoff Structure of the Game

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A Decision Tree for UPSs Pricing Strategy
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A Payoff Matrix for a Cash-Rebate Program for GM
and Ford
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Altered Payoff Matrix
for GM and Ford
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Declining Industries
A declining industry is one in which market
demand has leveled off or is falling and the size
of total market starts to shrink. Competition
tends to intensify and industry profits tend to
fall.

• Reasons for and severity of the decline
• Reasons technological change, social trends,
  demographic shifts
• Intensity of competition is greater when
• The decline is rapid versus slow and gradual.
• The industry has high fixed costs.
• The exit barriers are high.
• The product is perceived as a commodity.
• Not all industry segments typically decline at
  the same rate
• Creating pockets of demand

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Declining Industries
Leadership
Declining Industries
Harvest
Niche
Divestment
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Factors for Intensity of Competition in Declining
Industries
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Strategy Selection in a
Declining Industry

• Choice of strategy is determined by
• Severity of the
• industry decline
• Company strength
• relative to the
• remaining pockets
• of demand

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Summary
Fragmented
Embryonic
Growth
Mature
Declining
Corporate level
Corporate level
Cost Leadership Differentiation Focus
Business Level
Functional Level