1. Business- Level Strategy and the Industry Environment

2. Level of Strategies Industrial Environment Corporate level
Business Level
Functional Level

3. 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.

4. 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

5. 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. Fragmented Industries
Chaining
Fragmented Industries
IT and Internet
Franchising
Strategies
Chaining – networks of linked outlets to achieve cost leadership
Franchising – for rapid growth with proven business concepts, reputation, management skills and economies of scale
Horizontal Merger – acquisition to obtain economies and growth
IT and Internet – to develop new business models
Horizontal Merger

7. Competitive Features of 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 industry’s 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

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

9. 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.

10. 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.

11. 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

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

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

14. 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.

15. 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
Business-level strategy is a major determinant of industry profitability. The choice of business model and strategies can accelerate or retard market growth.

16. Strategic Implications of Market Growth Rates
Factors affecting market growth rates:
Relative advantage
Complexity
Compatibility
Observability
Availability of complementary products
Trialability

17. Differences in Diffusion Rates
Different markets develop at different growth rates

18. Navigating Through the Life Cycle to Maturity
Two crucial factors:
Competitive advantage of company’s business model
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
Embryonic stages – share building strategies
Development of distinctive competencies and competitive advantage
Requires capital to develop R&D and sales/service competencies
Growth stages – maintain relative competitive position
Strengthen business model to prepare to survive industry shakeout
Requires investment to keep up with rapid growth of the market
Shakeout stage – increase share during fierce competition
Invest in share-increasing strategies at expense of weak competitors
Weak companies should exit the industry during the harvest stage
Maturity stage – hold-and-maintain to defend business model
Dominant companies want to reap the reward of prior investments
A company’s investment depends on the level of competition and source of the company’s competitive advantage

19. Mature Industries Evolution of 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.

20. Mature Industries Deter entry into industry Manage industry rivalry
Strategies
Deter entry into industry
Product proliferation
Maintaining excess capacity
Price cutting
Manage industry rivalry
Price signaling
 Capacity control
Price leadership
 Nonprice competition

21. Strategies for Deterring Entry of Rivals
Filling the Niches: making it difficult for new competitors to break into a new industry & establish a beachhead
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

22. 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.

23. 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.

24. Four Nonprice Competitive Strategies

25. 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.

26. 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.

27. 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
Look Forward and Reason Back – Decision Trees
Look forward, think ahead, and anticipate how rivals will respond to whatever strategic moves they make
Reason backwards to determine which strategic moves to pursue today based on how rivals will respond to future strategic moves
Know Thy Rival – how is the rival likely to act
Find the Dominant Strategy – Payoff Matrix
One that makes you better off if you play that strategy
No matter what strategy your opponent uses
Strategy Shapes the Payoff Structure of the Game

28. A Decision Tree for UPS’s Pricing Strategy

29. A Payoff Matrix for a Cash-Rebate Program for GM and Ford

30. Altered Payoff Matrix for GM and Ford

31. 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

32. Declining Industries Declining Industries Harvest Niche Leadership
Strategies
Leadership – seeks to become dominant player in declining industry
Niche – focuses on pockets of demand that are declining more slowly
Harvest – optimizes cash flow
Divestment – sells business to others
Divestment

33. Factors for Intensity of Competition in Declining Industries

34. 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

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