Business- Level Strategy and
the Industry Environment
Level of Strategies
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 company’s business model and strategies
have to change to meet the environment.
The Industry Environment
• Companies must face the challenges of
developing and maintaining a competitive
– Fragmented Industries
– Embryonic Industries
– Growth Industries
– Mature Industries
– Declining 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
IT and Fragmented
An embryonic industry is one that is just
beginning to develop when technological
innovation creates new market or product
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
market’s growth rate – in order
to tailor the business model to
the changing industry
Market Characteristics: Embryonic
• Reasons for slow growth in
– Limited performance and poor
quality of the first products
– Customer unfamiliarity with what
the new product can do for them
– Poorly developed distribution
– Lack of complementary products
– High production costs
Market Characteristics: Growth
• 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
and Customer Groups
Both innovators and early adopters enter the market
while the industry is in its embryonic state.
Market Share of Different
Most market demand and industry profits arise during the
early and late majority customer segments.
The Chasm: AOL and Prodigy
• Technologically sophisticated and tolerant of
• Reached through specialized distribution
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
– Anticipate the moves of competitors.
Strategic Implications of Market
• Different markets develop at different rates.
• Growth rate measures the rate at which the industry’s
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
Strategic Implications of Market
• Factors affecting market growth rates:
– Relative advantage
– Availability of complementary products
Differences in Diffusion Rates
Different markets develop at different growth rates
Navigating Through the Life
Cycle to Maturity
Two crucial factors:
1. Competitive advantage of company’s business model
2. Stage of the industry life cycle
• Embryonic stages – share building strategies
• Growth stages – maintain relative competitive
• Shakeout stage – increase share during fierce
• Maturity stage – hold-and-maintain to defend
A mature industry is dominated by a small number of large companies
whose actions are so highly interdependent that success of one company’s
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.
– Deter entry into industry
Maintaining excess capacity
– Manage industry rivalry
Deterring Entry of Rivals
Filling the Niches: Sending a Signal: Warning of Retaliation:
making it difficult for new to potential new entrants by increasing output and
competitors to break into a new contemplating entry that new forcing down prices until
industry & establish a entry will be met with price cuts market entry would be
beachhead unprofitable to entrants
Product Proliferation in the
Where the product
spaces have been
filled, it is difficult for
a new company to
gain a foothold in the
Strategies for Managing
Convey intentions Informal pricing Differentiation Market Signaling
(e.g. Tit-for-Tat) regarding when one company by offering products with to secure coordination
pricing to other takes the responsibility different features or with rivals as a capacity
companies to allow the for choosing the most applying different control strategy and to
industry to choose the favorable industry marketing techniques: reduce industry
most favorable pricing pricing option. Formal • Market development investment risks.
options. Intent is to price setting jointly by • Market penetration Collusion on timing of
improve industry companies is illegal. • Product development new investments is
profitability. • Product proliferation illegal.
Four Nonprice Competitive
Toyota’s 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.
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.
• 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
A Decision Tree for UPS’s Pricing
A Payoff Matrix for a Cash-Rebate Program for
GM and Ford
Altered Payoff Matrix
for GM and Ford
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
– 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
Factors for Intensity of Competition in Declining
in a Declining Industry
Choice of strategy is
• Severity of the
• Company strength
relative to the
Fragmented Embryonic Growth Mature Declining
Business Level Focus