1. Competitive Strategy and the Industry Environment6
Competitive Strategy and the Industry Environment

2. Levels of Strategic Management From Chapter 1

3. Product/Market/Distinctive-Competency Choices and Generic Competitive Strategies

4. Choosing an Investment Strategy at the Business Level

5. The Industry Environment
Positioning a company to sustain competitive advantage over time in different kinds of industry environments
Different industry environments present different opportunities and threats
A company’s business model has to change to meet the environment

6. Fragmented Industries
An industry composed of a large number of small and medium-sized companies
Reasons for fragmented industries
Low barriers to entry due to lack of economies of scale
Diseconomies 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 operation

7. Strategies in Fragmented Industries: Chaining
Establishing networks of linked merchandising outlets that function as one large business entity
To obtain the advantages of cost leadership

8. Strategies in Fragmented Industries: Franchising
The franchisor grants to franchisees the right to use the parent’s name, reputation, and business skills
To maintain control over many small outlets and retain differentiated appeal
To lessen the financial burden of swift expansion and permit rapid growth
To reap economies of scale in advertising, purchasing, management, and distribution

9. Strategies in Fragmented Industries: Horizontal Merger
Acquiring or merging with industry competitors
To obtain economies of scale
To secure a national market
To pursue a cost-leadership or differentiation strategy (or both)
“Networks” of similar-size companies

10. Strategies in Fragmented Industries: Using IT
Using new technology to develop new business models
To consolidate a fragmented industry
Price, selection, geography

11. Embryonic and Growth 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

12. Embryonic and Growth Industries (cont’d)
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

13. Market Development and Customer Groups

14. Market Share of Different Customer Groups

15. Strategic Implications: Crossing the Chasm
Crossing the chasm between early adopters and the early majority
Innovators and early adopters are technologically sophisticated and will tolerate engineering imperfections (the early majority are not)
Innovators and early adopters are typically reached through specialized distribution channels (the early majority are not)
Innovators and early adopters are relatively few in number and not particularly price sensitive (the early majority are not)

16. The Chasm: AOL and Prodigy

17. Exercise
Strategy in Action 6.2: Why did Prodigy fail to cross the chasm?

18. Crossing the Chasm
Correctly identify the needs of the first wave of early majority users
Alter the business model in response
Alter the value chain and distribution channels to reach the early majority
Design the product to meet the needs of the early majority and so that it can be modified and produced or provided at low cost
Anticipate the moves of competitors

19. 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

20. Differences in Diffusion Rates
Source: Peter Brimelow, “The Silent Boom,” Forbes, July 7, 1997, pp Reprinted by permission of Forbes Magazine © 2002 Forbes, Inc.

21. Factors Affecting Market Growth Rates
Book
Relative advantage
Compatibility
Complexity
Trialability
Observability
Availability of complementary products
Also consider: emergence of a standard

22. Strategic Implications of Differences in Growth Rates
To increase demand for a new technology or product
Show its relative advantage, make it compatible with customers’ prior needs and experiences, reduce its complexity, make it possible for customers to try or observe it, ensure that necessary complements are in place
Identify and court potential opinion leaders to promote viral diffusion

23. Strategy in Mature Industries
Strategies for deterring entry of rivals

24. Pricing Games Predatory pricing
Using revenue generated in one product market to support pricing below the company’s costs of production in another to drive rivals out

25. Pricing Games - continued
Limit pricing -The established companies charge a price below the profit-maximizing quantity and price that is below the average cost structure of new entrants but above their own average cost structure

26. Limit Pricing Strategy

27. Maintaining Excess Capacity
Maintaining the physical capability to produce more of a product than what is in demand to warn potential entrants that if they enter, output can be increased and prices driven down

28. Strategies to Manage Rivalry in Mature Industries
Price signaling
Tit-for-tat strategy
Price leadership
Formal price leadership is illegal
Nonprice competition
Product differentiation

29. Exercise
Strategy in Action 6.4: Fast Food Is A Ruthless Business

30. Product Proliferation in the Restaurant Industry

31. Four Nonprice Competitive Strategies

32. Strategies to Manage Rivalry in Mature Industries (cont’d)
Market penetration
Expanding market share in existing markets
Product development
Creating new or improved products to replace existing ones
Market development
Finding new market segments for a company’s products

33. Strategies to Manage Rivalry in Mature Industries (cont’d)
Product proliferation
Large companies in an industry all have a product in each market segment; competition is based on product differentiation
Capacity control
Try to preempt rivals and seize initiative
Coordinate with rivals indirectly

34. Supply and Distribution Strategy in Mature Industries
Many companies in the mature stage of an industry may either become more involved in the value chain (vertical integration) or they may de-integrate
Anonymous approach
An arms-length, short-term relationship
Relational approach
A long-term relationship

35. Factors that Determine the Intensity of Competition in Declining Industries

36. Strategy in Declining Industries
Leadership
A company seeks to become the dominant player
Niche
Focusing on pockets of demand that are declining more slowly than the industry as a whole
Harvest
Optimizing cash flow
Divestment
Selling off the business

37. Strategy Selection in a Declining Industry