Topic 6 Industry Environments Rationalizing Diversification and Integration Behavioral Considerations Affecting Strategic Choice

Different Industry Environments?? You also may want to evaluate different strategies to build competitive advantages …. given the fact that you may be operating in any one of a number of different industry environments

“Typical” Industry Settings Emerging Industries Industries Transitioning to Maturity Mature and Declining Industries Fragmented Industries Global Industries

Characteristics of Markets in Emerging Industries Proprietary technology and technological uncertainty Competitor uncertainty due to inadequate information High initial cost structure Few entry barriers*** First-time buyers require initial inducements

Strategic Options/Opportunities for Emerging Industries shape industry’s structure rapidly improve product quality establish favorable relations with key suppliers** acquire a core group of loyal customers forecast future competitors

Characteristics of Maturing Industries Intense competition for market share Increased sales to experienced, repeat buyers New products and new applications harder to come by Increase in international competition Declining profitability

Strategic Options for Maturing Industries Prune the product line Emphasize cost reductions Focus on selecting loyal buyers Pursue horizontal integration Expand internationally

Characteristics of already Mature/Declining Industries Demand grows more slowly than economy, or even declines Slowing growth is caused by Technological substitution Demographic shifts Shifts in consumer needs

Strategic Options for already Mature/Declining Industries Focus on key market segments offering growth opportunity Emphasize product innovation and quality improvement Emphasize production and distribution efficiency Gradually harvest the business

Characteristics of Fragmented Industries No firm has a significant market share No firm can significantly influence industry outcomes Examples Professional services Retailing Wood and metal fabrication Agricultural products Funeral industry

Strategic Options for Fragmented Industries Tightly managed decentralization Standardized, efficient, low-cost facilities at multiple locations Specialization (Product type, customer type, type of order, geographic areas) Bare bones/no frills

Strategic Options: Pursuing Global Market Coverage … export products License foreign firms foreign-based plants and distribution

Questions Related to Diversification and Integration #1 Are there opportunities for sharing infrastructure and capabilities?

Critical Elements for Shared Opportunities to Be Meaningful Shared opportunities must be a significant portion of the value chain of businesses involved Businesses involved must truly have shared needs or there is no basis for synergy in the first place

Questions Related to Diversification and Integration #2 2. Are we capitalizing on our core competencies?

Evaluating the Role of Core Competencies Is each core competency providing a relevant competitive advantage to the intended businesses? Are businesses in the portfolio related in ways that make the company’s core competence(s) beneficial? Are our combination of competencies unique or difficult to create?

Questions Related to Diversification and Integration #3 Does the company’s business portfolio balance financial resources? A number of portfolio techniques

The BCG Growth-Share Matrix Cash Generation (Market Share) High Low Market share: Dividing point is usually … only the two-three largest competitors in any market fall into the high market share region Star Problem Child High Cash Use (Growth Rate) Low Cash Cow Dog Growth Rate: Dividing point is usually the GNP’s growth rate

Behavioral Considerations Affecting Strategic Choice Role of current strategy What is the amount of time and resources invested in previous strategies? How close are new strategies to the old? How successful were previous strategies? Degree of firm’s external dependence How powerful are firm’s owners, customers, competitors, unions, and its government? How flexible is firm with its environment?

Behavioral Considerations Affecting Strategic Choice Attitudes toward risk Risk-oriented managers prefer offensive, opportunistic strategies Risk-averse managers prefer defensive, conservative strategies Managerial priorities different from stockholder interests Agency theory suggests managers frequently place their own interests above those of their shareholders

Behavioral Considerations Affecting Strategic Choice Internal political considerations Major sources of company power are CEO, key subunits, and key departments Power can affect corporate decisions over analytical considerations Competitive reaction Probable impact of competitor response must be considered during strategy design process Competitor response can alter the success of strategy