Business- Level Strategy and the Industry Environment

Level of Strategies Industrial Environment Corporate level Business Level Functional Level

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.

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

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

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

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

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

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.

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.

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

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

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

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.

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.

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

Differences in Diffusion Rates Different markets develop at different growth rates

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

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.

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

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

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.

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.

Four Nonprice Competitive Strategies

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.

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.

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

A Decision Tree for UPS’s Pricing Strategy

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

Altered Payoff Matrix for GM and Ford

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

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

Factors for Intensity of Competition in Declining Industries

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

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