Chapter 5: Business strategies in different industry and sectoral contexts Foundations of Strategy Rebecca Eggerman Alexander Johnson Miguel Lopez Hannah Stephens Carissa Tarnowski

Purpose of this chapter To help us understand how managers adapt their strategies to fit their environments, how they go about predicting change and adapting their strategies to cope with change.

Introduction and objectives One of management’s greatest challenges=ensuring enterprise adapts to its environment and it’s changes Changes in environment are driven by: technology, consumer need, politics, economic growth, and a host of other influences

Competition as a strategy? Creates a dynamic process where firms compete for a competitive advantage, to only see it eroded through imitation and innovation by rivals.

Different industries= different patterns Different industry patterns of change help to predict how industries are likely to evolve over time Every industry follows a unique development path Look for common drivers

Industry life cycle Extent to which industries follow a common development pattern, examine the changes in industry structure over the cycle and explore the implications for business strategy. Starting point in understanding how managers operating in various environments adapt their strategies and anticipate change

Life cycle diagram

Opening case: The evolution of Personal Computers Early 1970s- the personal computer (PC) was originated through Intel’s microprocessor Mid 70’s- pre-assembled machines came on to the market that included a basic operating system and software Tandy, Commodore, Apple By 1981-market of about $3000 million with about 150 companies processing microcomputers Apple~20%, Tandy~15%, Commodore~7% All used very different strategies

IMB vs. Apple Previously neglected PC market and focused on mainframe computers until 1980s Adopted an open strategy that allowed third-parties to access the technical details so complementary products could be developed Very little of their PC was exclusive and was very easily copied Produced as much of his PCs in house as possible This strategy had long term benefits, but short- term was very costly Lost its lead position in the market by producing highly differentiated, more expensive products that were incompatible with IBM standard Developed particular niches in the home, education, and desk-top publishing markets

Downturn of the PC PC evolved as a general machine made versatile by adding new software functions Created a more complex, less secure, less reliable and less fit-for-use than single purpose devices The PC has increasingly become only one of many devices adopted by users Under threat as the platform in which software is written because an array of other devices are growing in popularity and tablet computers are starting to have an impact on low-end laptop sales

How technology companies are resurrecting their fortunes Apple- Created devices such as the iPod, the iPhone, and the iPad Digital camera manufacturers- developed products that download direct to printers Game manufacturers- consoles primarily for gaming also connect to internet

Product vs. industry life cycles Product life cycle Industry life cycle Introduction Growth Maturity Decline Introduction Growth Maturity Decline

What is the difference? Supply side of the product live cycle Extent the industry product live cycle by introducing multiple generations of a product

Let’s look at the graphs Industry Product

Let’s take a closer look Product Life Cycle Industry Life Cycle

Forces Behind Demand Growth Introduction stage Growth stage Sales are small, and rate of market penetration is low Growth stage Market penetration is accelerated Maturity stage Market becomes saturated Declined stage Challenge Industry

The production and diffusion of knowledge Introduction stage Technology advances rapidly Potential consumers know little about the product Growth stage The transition phase reflects the emergence of dominant designs and technical standards Focus away from product innovation towards process innovation

Dominant designs and technical standards Dominant design: a product architecture that defines the look, functionality, and production method for the product and becomes accepted by the industry as a whole Underwood Model 5 Introduced 1899 Establish the architecture and main features Moving carriage Ability to see the characters being typed Shift function or upper case and a replaceable

Dominant designs and technical standards Technical standard: a technology or specification that is important for compatibility Dominant design and technical standard are closely related But dominant design may or may not have a technical standard

How general is the life cycle pattern? It varies greatly from industry to industry Railroad Introduction phase extended from the building of the first railroad in 1827 Entered the growth phase in 1870’s In the 1959s, it started to enter the decline stage Digital audio player Introduction phase 1997-1998 2001, entered its growth stage 2008-2009, entered the maturity stage

Introduction Growth Maturity Decline Demand Technology Products Limited to early adopters: high income Avant-garde Rapidly increasing market penetration Mass market replacement/repeat buying. Customers knowledgeable and price sensitive obsolescence Technology Competing technologies. Rapid product innovation Standardization around dominant technology. Rapid process innovation Well-diffused technical knowhow: quest for technological improvements Little product or process innovation Products Poor quality wide variety of features and technologies. Frequent design changes. Design and quality improve. Emergence of dominant design. Trend to commoditization Attempts to differentiate by branding, quality, bundling Commodities the norm: differentiation difficult and unprofitable Manufacturing Short production runs. High skilled labor content. Specialized distribution channels Capacity shortages mass production. Competition for distribution Emergence of overcapacity. Deskilling of production. Long production runs. Dist. Carry fewer lines Exports from countries with lowest labor costs. Trade Producers and consumers in advanced countries Exports form advanced countries to rest of world Production shifts to newly industrializing then developing countries Exports from countries with lowest labor costs Competition Few companies Entry, mergers and exits Shakeout. Price competition increases Price wars, exits Key success factors Product innovation. Establishing credible image of firm and product. Design for manufacture. Access to distribution. Brand building. Fast product development. Process innovation. Cost efficiency through capital intensity, scale efficiency and low input costs Low overheads Buyer selection. Signaling commitment. Rationalizing capacity

Life cycle strategies: Introduction De novo –start ups and de alio- diversifying firms. Basis of entry is innovation Wide variety of product types and diversity of technology. Born global companies

Growth phase Skill in controlling manufacturing ability is key Access to distribution Financial resources Reduce costs

Maturity phase Efficiency is the key to survival Shakeouts Low wages, low overhead and cost of production Shakeouts High rate of firm failure New niche markets are created Labor moves to nations where costs are lowest (developing nations)

Decline phase Due to excess capacity Lack of technical change Declining number of competitors High age of physical and human resources Aggressive price competition Balance between capacity and output and nature of demand. Must capture residual market demand

Public Sectors Ownership vested in government Produce public goods Controlled by politicians Produce public goods Ex. Street lighting, flood prevention, national defense Paid for by taxation For public benefit Approved by law Not required to make profit

Non-Profit Sectors Philanthropic goals Overlap of a social enterprise Seek profit to distribute a limited amount to those that “own capital” Profit not main goal Ex. Engaging in fair trade, disadvantaged equality

Key differences Private Public Shaped by political considerations Must account for public constraints Correct market failure or cut off from market forces State controlled monopolies, ex. Postal services Little freedom to change rules Subject to public scrutiny Slower market to change Prioritizing shareholder's interests Does not have to assess public needs Price and resource mechanisms absent Weak customer influence in monopolies Great flexibility in regulation No obligation to public satisfaction High-tech and constantly changing

Non-profit Uniqueness Employment of volunteers Promote employment based on philanthropic goal interests Fundraising Becoming more competitive

Oster’s Six Forces Model

Stakeholder Analysis Definition: the process of identifying, understanding and prioritizing the needs of key stakeholders so that the questions of how stakeholders can participate in strategy formulation and how relationships with stakeholders are best managed can be addressed

Key Steps Identify the list of potential stakeholders Rank stakeholders Identify criteria stakeholders will likely use to judge performance Decide how the organization is doing from its stakeholders’ perspective Identify what can be done to satisfy each stakeholder Identify and record longer term issues with individual stakeholders and stakeholders as a group

Power Interest Grids Definition: array stakeholders in a matrix with stakeholder interest forming one dimension and stakeholder power the other Stakeholder interest Political interest Stakeholder power Ability to affect the organization’s future Used to identify which stakeholder interests and power bases should be taken into account Helps identify what coalitions amongst stakeholders managers may wish to encourage or discourage

Power Interest Grids Players Subjects Context Setters Crowd Both interest and significant power Subjects Interest but little power Context Setters Power but little direct interest Crowd Neither interest nor power

SH Power/Interest Grid Whole Foods Market provides a retail sales outlet for thousands of organic and locally- produced items and was the first food retailer in the United States to address animal welfare and seafood sustainability issues in the supply chain. We’ve done this in partnership with a variety of multi-stakeholder groups that include customers, vendors and non-profit and government agencies, depending on the issue of concern. We’re very proud of the part we have played in leading positive change in the composition of food retailing and global citizenship for thirty years—and counting.

Response to SHs’ Positions

Whole Foods Market

Scenario Planning Scenario analysis Not forecasting Quantitative a systematic way of thinking about how the future might unfold that builds on what we know about current trends and signals Not forecasting Quantitative Models events and run simulations to identify likely outcomes Qualitative Narratives Useful in engaging insight and imagination of decision-makers Similar to productive paranoia

An Example with WFM Check flexibility of strategy in case of major drought 1-5 years Higher prices with decreased product availability Create the scenarios that are likely to happen in a major drought Identify red flags for each drought scenario Ask “what if” for each scenario to evaluate strategic flexibility

Key Steps in Building and Using Define the purpose of the analysis Decide on the time horizon Identify key trends Identify key uncertainties Create scenarios and check for internal consistency Identify indicators that might signal which scenario is unfolding Assess the strategic implications of each scenario

Now that we have completed this chapter you should be able to… Recognize, the different stages of industry development and understand the factors that drive the process of industry evolution the particular challenges that face managers engaged in strategic decision making in public sector and not-for- profit-contexts Identify the key success factors associated with industries at different stages of their development and the strategies appropriate to different stages in the industry life cycle Use stakeholder analysis to gain an understanding of political priorities Use scenarios to explore industry and organizational futures

Questions? Comments?