DEPARTMENT OF MANAGEMENT STUDIES STRATEGIC MANAGEMENT - UNIT 2 Strategic groups 4/26/2018 Dr. V. Ramadevi/AP - Strategic Management

What is Strategic group? Groups of companies in which each company follows a strategy that is similar to that pursued by other companies in the group but different from the strategies followed by companies in other groups. 4/26/2018 Dr. V. Ramadevi/AP - Strategic Management

Implications of strategic groups First, because all the companies in a strategic group are pursuing a similar business model, customers tend to view the products of such enterprises as direct substitutes for each other. The most immediate threat to a company’s profitability comes from rivals within its own strategic group. For example, in the retail industry, there is a group of companies that might be characterized as discounters. Included in this group are Wal-Mart, Kmart, Target, Costco, and Fred Meyer. 4/26/2018 Dr. V. Ramadevi/AP - Strategic Management

Dr. V. Ramadevi/AP - Strategic Management 2. A second competitive implication is that different strategic groups can have a different standing with respect to each of the competitive forces; thus, each strategic group may face a different set of opportunities and threats. For example, in the pharmaceutical industry companies in the proprietary group have historically been in a very powerful position in relation to buyers because their products are patented and there are no substitutes. 4/26/2018 Dr. V. Ramadevi/AP - Strategic Management

Strategic Groups in the Pharmaceutical Industry 4/26/2018 Dr. V. Ramadevi/AP - Strategic Management

Dr. V. Ramadevi/AP - Strategic Management 4/26/2018 Dr. V. Ramadevi/AP - Strategic Management

Dr. V. Ramadevi/AP - Strategic Management Mobility Barriers Managers, after having analyzed their industry, might identify a strategic group where competitive forces are weaker and higher profits can be made. Sensing an opportunity - change their business model - move to compete in that strategic group. It may be difficult because of mobility barriers between strategic groups. Mobility barriers are within-industry factors that inhibit the movement of companies between strategic groups. They include the barriers to entry into a group and the barriers to exit from a company’s existing group. 4/26/2018 Dr. V. Ramadevi/AP - Strategic Management

Dr. V. Ramadevi/AP - Strategic Management Mobility Barriers For example, Forest Labs would encounter mobility barriers if it attempted to enter the proprietary group in the pharmaceutical industry because it lacks R&D skills and building these skills would be an expensive proposition. Essentially, over time, companies in different groups develop different cost structures and skills and competences that give them different pricing options and choices. 4/26/2018 Dr. V. Ramadevi/AP - Strategic Management

Types of Strategic Groups 1. Defenders These are essentially companies with a limited product line focusing on improving efficiency of their existing operations. 2. Prospectors These companies focus on product innovation and market opportunities. 3. Analysers These are the firms which operate in atleast two different market areas - one stable and other variable. 4. Reactors These firms do not have a consistent strategy. 4/26/2018 Dr. V. Ramadevi/AP - Strategic Management

Competitive changes during industry evolution A useful tool for analyzing the effects of industry evolution on competitive forces is the industry life cycle model, which identifies five sequential stages in the evolution of an industry that lead to five distinct kinds of industry environments: the embryonic, growth, shakeout, mature, and decline stages. Objective: The task facing managers is to anticipate how the strength of competitive forces will change as the industry environment evolves and to formulate strategies that take advantage of opportunities as they arise and that counter emerging threats. 4/26/2018 Dr. V. Ramadevi/AP - Strategic Management

The Industry Life Cycle Model Stages in the industry life cycle: 4/26/2018 Dr. V. Ramadevi/AP - Strategic Management

Dr. V. Ramadevi/AP - Strategic Management Embryonic Industries An embryonic industry is just beginning to develop (for example, personal computers and biotechnology in the 1970s and nanotechnology today). An embryonic industry may also be the creation of one company’s innovative efforts, as happened with microprocessors (Intel) and photocopiers (Xerox). 4/26/2018 Dr. V. Ramadevi/AP - Strategic Management

Dr. V. Ramadevi/AP - Strategic Management Growth Industries In a growth industry, first-time demand is expanding rapidly as many new customers enter the market. An industry grows when customers become familiar with the product, prices fall because experience and scale economies have been attained, and distribution channels develop. 4/26/2018 Dr. V. Ramadevi/AP - Strategic Management

Dr. V. Ramadevi/AP - Strategic Management Industry Shakeout The stage of industry evolution in which demand growth goes down, competition intensifies, and weaker competitors exit the industry. As an industry enters the shakeout stage, rivalry between companies becomes intense. The result can be a price war, which drives many of the most inefficient companies into bankruptcy and is enough to deter any new entry. 4/26/2018 Dr. V. Ramadevi/AP - Strategic Management

Dr. V. Ramadevi/AP - Strategic Management Mature Industries The shakeout stage ends when the industry enters its mature stage: the market is totally saturated, demand is limited primarily to replacement demand, and growth is low or zero. As an industry enters maturity, barriers to entry increase, and the threat of entry from potential competitors decreases. Often the result is a price war, as has happened in the airline industry, for example. To survive the shakeout, companies begin to focus on cost minimization and building brand loyalty. The airlines tried to cut operating costs by hiring nonunion labor and to build brand loyalty by introducing frequent-flyer programs. 4/26/2018 Dr. V. Ramadevi/AP - Strategic Management

Dr. V. Ramadevi/AP - Strategic Management Declining Industries Eventually, most industries enter a decline stage: growth becomes negative for a variety of reasons, including technological substitution (for example, air travel for rail travel), social changes (greater health consciousness hitting tobacco sales), demographics (the declining birth rate hurting the market for baby and child products), and international competition (Cheap chinese products flooding the world markets). Within a declining industry, the degree of rivalry among established companies usually increases. The main problem in a declining industry is that falling demand leads to the emergence of excess capacity. https://www.youtube.com/watch?v=18gV8n_c-O8 https://www.youtube.com/watch?v=sasC2KpnJuQ 4/26/2018 Dr. V. Ramadevi/AP - Strategic Management

Globalization and Industry Structure Globally dispersed production lowers costs and increases quality. Global markets are replacing national markets. Trend implications No isolated national markets More competitors, more intense competition More rapid innovation and shorter product life cycles 4/26/2018 Dr. V. Ramadevi/AP - Strategic Management

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