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					      Chapter Six


Business- Level Strategy and
 the Industry Environment




                           6-1
      Level of Strategies


Industrial
                 Corporate
Environment      level



              Business Level




              Functional Level




                                 6-2
       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.




                                                                6-3
   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



                                             6-4
         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




                                                                       6-5
Fragmented Industries


               Chaining




 IT and     Fragmented
                           Franchising
 Internet    Industries



              Horizontal
              Merger
                                         6-6
     Embryonic Industries

An embryonic industry is one that is just
beginning to develop when technological
innovation creates new market or product
opportunities.




                                            6-7
       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
                      market’s growth rate – in order
                      to tailor the business model to
                           the changing industry
                                 environment.

                                                  6-8
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



                                                         6-9
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.

                                                  6-10
  Market Development
 and Customer Groups
Both innovators and early adopters enter the market
    while the industry is in its embryonic state.




                                                      6-11
Market Share of Different
 Customer Segments
Most market demand and industry profits arise during the
      early and late majority customer segments.




                                                           6-12
    The Chasm: AOL and Prodigy




• Technologically sophisticated and tolerant of
engineering imperfections
    • Reached through specialized distribution
                                                  6-13
    channels
       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.




                                                                  6-14
    Strategic Implications of Market
             Growth Rates
•    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




                                                        6-15
  Strategic Implications of Market
           Growth Rates
• Factors affecting market growth rates:
   – Relative advantage
   – Complexity
   – Compatibility
   – Observability
   – Availability of complementary products
   – Trialability




                                              6-16
Differences in Diffusion Rates

         Different markets develop at different growth rates




                                                         6-17
     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
     position

•    Shakeout stage – increase share during fierce
     competition

•    Maturity stage – hold-and-maintain to defend
     business model
                                                         6-18
                     Mature Industries
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.




                                                                   6-19
                  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

                                        6-20
                 Strategies for
            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
                                                                                           6-21
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.




                                                  6-22
              Strategies for Managing
                  Industry Rivalry




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.

                                                                                                       6-23
Four Nonprice Competitive
       Strategies




                            6-24
        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.




                                                                   6-25
                  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.




                                                         6-26
                     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




                                                           6-27
A Decision Tree for UPS’s Pricing
            Strategy




                                    6-28
A Payoff Matrix for a Cash-Rebate Program for
                 GM and Ford




                                                6-29
Altered Payoff Matrix
  for GM and Ford




                        6-30
                 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

                                                                    6-31
 Declining Industries


          Leadership




           Declining
Harvest                 Niche
          Industries



          Divestment

                                6-32
Factors for Intensity of Competition in Declining
                    Industries




                                                    6-33
  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




                                          6-34
                                Summary

Fragmented   Embryonic          Growth        Mature       Declining




                Corporate
                level
                                         Cost Leadership
                                         Differentiation
              Business Level             Focus



             Functional Level



                                                                  6-35

				
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