1. Business-Level Strategy and the Industry Environment

2. 6 | 2 The Industry Environment o oDifferent industry environments present different opportunities and threats. o oA company’s business model and strategies have to change to meet the environment. o oCompanies must face the challenges of developing and maintaining a competitive strategy in: o o Fragmented Industries Mature Industries o o Embryonic Industries Declining Industries o o Growth Industries o oDifferent industry environments present different opportunities and threats. o oA company’s business model and strategies have to change to meet the environment. o oCompanies must face the challenges of developing and maintaining a competitive strategy in: o o Fragmented Industries Mature Industries o o Embryonic Industries Declining Industries o o Growth Industries There is the need to continually formulate and implement business-level strategies to sustain competitive advantage over time in different industry environments.

3. STRATEGIES IN FRAGMENTED INDUSTRIES  A fragmented industry is one composed of a large number of small- and medium-sized companies (funeral services, RTW stores).  Reasons that an industry may consist of many small companies, rather than a few large ones: Low barriers to entry because these companies lack economies of scale. There may even be diseconomies of scale. An economic concept referring to a situation in which economies of scale no longer function for a firm. Rather than experiencing continued decreasing costs per increase in output, firms see an increase in marginal cost when output is increased.

4. 6-4 Low-entry barriers that permit new companies to constantly enter keep the industry fragmented. Customer needs are so specialized that only a small amount of product is required, hence, there is no scope for a large mass-production operation. STRATEGIES IN FRAGMENTED INDUSTRIES  Companies search for the business model and strategies that will allow them to consolidate a fragmented industry.

5. 6-5 STRATEGIES IN FRAGMENTED INDUSTRIES  Chaining is where companies establish networks of linked merchandise outlets that are interconnected by IT and function as one large company.  Chaining allows companies to negotiate large price reductions with suppliers.  Companies using chaining can overcome the barrier of high transportation costs by establishing regional distribution centers. Chaining

6. 6-6 STRATEGIES IN FRAGMENTED INDUSTRIES  In franchising, the parent company grants to its franchisees the right to use the parent’s name, reputation, and business model in a particular location in return for a franchise fee and often a percentage of the profits.  The franchisees own the business; therefore, they are motivated to make the company-wide business model work effectively, and ensure quality consistent with the customers’ needs. Franchising

7. 6-7 STRATEGIES IN FRAGMENTED INDUSTRIES  A horizontal merger is a merger where companies manufacturing similar kinds of commodities or running similar types of businesses merge.  Companies like Macy’s and Kroger chose a strategy of horizontal merger to consolidate their respective industries.  By pursuing horizontal merger, companies are able to obtain economics of scale and secure a national market for their product. Horizontal Merger

8. 6-8  An embryonic industry is one that is just beginning to develop.  A growth industry is one in which first-time demand is rapidly expanding as many new customers enter the market. STRATEGIES IN EMBRYONIC AND GROWTH INDUSTRIES

9. 6-9 STRATEGIES IN EMBRYONIC AND GROWTH INDUSTRIES  An embryonic industry emerges when a technological innovation creates a new product.  Customer demand for the products of an embryonic industry is initially limited (slow growth in the market) for a variety of reasons: 1)The limited performance and poor quality of the first product. 2)Customers’ unfamiliarity with what the new product can do for them. 3)Poorly developed distribution channels.

10. 6-10 4)A lack of complementary product to increase the value of the product for customers. 5)High production costs because of small volumes of production.  The growth stage begins to develop when three things happen: 1)Ongoing technological progress makes a product easier to use, and increases it value for the average customer. 2)Complementary products are developed. 3)Companies in the industry work to find ways to reduce the costs of making the new product.

11. 6-11 THE CHANGING NATURE OF DEMAND  Innovators are customers who are delighted to be the first to purchase and experiment with a product based on new technology (embryonic).  Early adopters understand that the technology may have important future applications and are willing to see if they pioneer new uses.  The early majority forms the leading wave of the mass market (beginning of growth stage).

12. 6-12 THE CHANGING NATURE OF DEMAND  The late majority are the customers who purchase a new technology only after it is obvious it has great utility and is here to stay  Laggards are customers who are inherently conservative and unappreciative of the uses of new technology.

13. STRATEGIC IMPLICATIONS: CROSSING THE CHASM  New strategies are often required to strengthen a company’s business model as a market develops over time for the reasons shown on the next slide.

14. 6-14  Innovators and early adopters are willing to tolerate the limitations of the product. The early majority, however, value ease of use and reliability. Companies competing in an embryonic market typically pay more attention to performance of a product than ease of use and reliability.  Innovators and early adopters are typically reached through specialized distribution channels or word of mouth.  Because this group is relatively small in number, companies serving them produce small quantities of a product.

15. 6-15 STRATEGIC IMPLICATIONS: CROSSING THE CHASM  The transition between the embryonic market and the mass market is not a smooth, seamless one.  Rather, it represents a competitive chasm or gulf that companies must cross.  According to Geoffrey Moore in his influential book, many companies do not (or cannot) develop the right business model, so they fall into the chasm and go out of business.

16. 6-16  An investment strategy determines the amount and type of resources and capital that must be spent to configure a company’s value chain so that it can successfully pursue a business model over time.  Crucial factors in choosing an investment strategy: 1)The competitive advantage a company’s business model gives it in an industry relative to a competitor. 2)The stage of the industry’s life cycle in which the company is competing. NAVIGATING THROUGH THE LIFE CYCLE TO MATURITY

17. 6-17  In the embryonic stage, the appropriate business- level strategy is a share-building strategy.  The aim is to build market share by developing a stable and distinct competitive advantage to attract customers who have no knowledge of the company’s product.  If a company gains the resources from outside investors or venture capitalists, it will be in a relatively strong competitive position.  If it fails to raise the resources, it probably will have to exit the industry. Embryonic Strategies

18. 6-18  At the growth stage, the appropriate investment strategy is the growth strategy.  The goal is to maintain its relative competitive position in a rapidly expanding market.  The growth stage is the time when companies attempt to secure their grip over customers in existing segments, and simultaneously enter new segments to increase their market share.  Companies in a weak competitive position at this stage engage in a market concentration: a focused business model to reduce its needs. Growth Strategies

19. 6-19  By the shakeout stage, customer demand is increasing, and competition by price or product characteristic becomes intense.  Companies in strong competitive positions need resources to invest in a share-increasing strategy to attract customers from weak companies exiting the market.  Weak companies exiting the industry engage in a harvest strategy by decreasing its investment and “milking” its investment as much as it can. Shakeout Strategies

20. 6-20  Until the maturity stage, profits have been reinvested in the business, and dividends have been small.  Investors in leading companies have obtained their rewards through the appreciation of their stock.  As market growth slows in the maturity stage, a company’s investment strategy depends on the level of competition in the industry and the source of the company’s competitive advantage.  Cost leaders and differentiators adopt a hold-and- maintain strategy to defend their business models and ward off threats. Maturity Strategies

21. 6-21 STRATEGY IN MATURE INDUSTRIES  A mature industry is commonly dominated by a small number of large companies.  If a mature company changes its strategies, their actions are likely to stimulate a competitive response from industry rivals.

22. 6-22  To reduce the threat of entry in a market, existing companies ensure that they are offering a product targeted at every segment of the market.  This strategy of “filling the niche” is known as product proliferation. Product Proliferation STRATEGIES TO DETER ENTRY Price Cutting  An entry-deterring strategy is to cut prices every time a new company enters the industry--then raise prices after the entrant has withdrawn.

23. 6-23 STRATEGIES TO DETER ENTRY  The established company initially charges a high price for a product and seizes a short-term profit, but then aggressively cuts prices to build market share; thus deterring potential entrants. Maintaining Excess Capacity  A third strategy is to maintain the physical capacity to produce more product than customers currently demand.  However, this threat to increase output must be a credible option.

24. 6-24 STRATEGIES TO MANAGE RIVALRY  Price signaling is the process by which companies increase or decrease product prices to convey their intentions to other companies.  Price leadership occurs when companies jointly set prices, which is illegal under antitrust laws.  Nonprice competition: Market penetration is accomplished by heavy advertising to promote a product differentiation. Product development is the creation of new or improved products to replace existing ones.

25. 6-25 STRATEGIES TO MANAGE RIVALRY Nonprice competition also includes: Market development where a company finds a new market segment for its products. Product proliferation generally means that large companies in an industry all have a product in each market segment and compete head-to-head for customers. It allows for stability based on product differentiation rather than on product price. Capacity control refers to preventing the accumulation of costly excess capacity.Technology allows firms to produce the same or more with less space—thus causing excess capacity.

26. STRATEGIES IN DECLINING INDUSTRIES  Strategies to adopt to deal with decline: 1)Leadership strategy 2)Niche strategy 3)Harvest strategy 4)Divestment strategy

27. 6-27 STRATEGIES IN A DECLINING INDUSTRY  A leadership strategy aims at growing in a declining industry by picking up the market share of companies that are leaving the industry.  A niche strategy focuses on pockets of demand where the demand is stable, or declining less rapidly than the industry as a whole.  A harvest strategy requires the company to halt all new investments in capital equipment, etc.  A disvestment strategy is selling an underperforming business before the industry enters into a steep decline.