Chapter Six

BusinessLevel Strategy and the Industry Environment

All men can see these tactics whereby I conquer but what none can see is the strategy out of which victory evolves.
- Sun Tzu

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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 companys business model and strategies have to change to meet the environment.  Companies must face the challenges of developing and maintaining a competitive strategy in: Fragmented Industries Mature Industries Embryonic Industries Declining Industries Growth Industries
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Fragmented Industries
A fragmented industry is one 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 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

 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
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Embryonic and Growth Industries

 An embryonic industry is one that is just beginning to develop when technological innovation creates new market or product opportunities.  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 markets growth rate in order to tailor the business model to the changing industry environment.

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Market Characteristics: 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

 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.
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Market Development and Customer Groups

Both innovators and early adopters enter the market Figure 6.1 while the industry is in its embryonic state.

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Market Share of Different Customer Segments

Most market demand and industry profits arise during the early and late majority customer segments. Figure 6.2

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Strategic Implications: Crossing the Chasm

 Innovators and Early Adopters are (while the early
majority are NOT):
Technologically sophisticated and tolerant of engineering imperfections Typically reached through specialized distribution channels Relatively few in number and not particularly price-sensitive

 To cross the chasm between the early adopters and the early majority, companies must:
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 so that the product can be modified and produced or provided at low cost. Anticipate the moves of competitors.
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The Chasm: AOL and Prodigy

Figure 6.3

The business model and strategies required to compete in an embryonic market populated by early adopters and innovators are very different than those required to compete in a high-growth mass market populated by the early majority.
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Strategic Implications of Market Growth Rates

 Different markets develop at different rates.  Growth rate measures the rate at which the industrys product spreads in the marketplace.  Growth rates for new kinds of products seem to have accelerated over time:

Use of mass media Relative advantage Compatibility Availability of complementary products Low-cost mass production Complexity Observability Trialability

 Factors affecting market growth rates:

Business-level strategy is a major determinant of industry profitability. The choice of business model and strategies can accelerate or retard market growth.
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Differences in Diffusion Rates

Figure 6.4 Different markets develop at different growth rates.

Source: Peter Brimelow, The Silent Boom, Forbes, July 7, 1997, pp. 170-171. Reprinted by permission of Forbes Magazine 2002 Forbes, Inc.

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Navigating Through the Life Cycle to Maturity

Two crucial factors:
1. Competitive advantage of companys business model 2. Stage of the industry life cycle
 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 companys investment depends on the level of competition and source of the companys competitive advantage
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Mature Industries
A mature industry is dominated by a small number of large companies whose actions are so highly interdependent that success of one companys strategy depends on the response of its rivals.

 Evolution of mature industries

Industry becomes consolidated as a result of the fierce competition during the shakeout stage. Business level strategy is based on how established companies collectively try to reduce strength of competition. Interdependent companies try to protect industry profitability.

 Strategies
Deter entry into industry  Product proliferation  Maintaining  Price cutting excess capacity Manage industry rivalry  Price signaling  Capacity control  Price leadership  Nonprice competition
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Strategies for Deterring Entry of Rivals

Figure 6.5

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
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Product Proliferation in the Restaurant Industry

Figure 6.6 Where the product spaces have been filled, it is difficult for a new company to gain a foothold in the market and differentiate itself.

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Strategies for Managing Industry Rivalry

Figure 6.7

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 Market Signaling by offering products to secure with different coordination with features or applying rivals as a capacity different marketing control strategy and techniques: to reduce industry Market development investment risks. Market penetration Collusion on timing Product development of new investments Product proliferation is illegal.
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Four Nonprice Competitive Strategies

Figure 6.8

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Toyotas Product Lineup

Figure 6.9 Toyota has used market development to become a broad differentiator and has developed a vehicle for almost every main segment of the car market.

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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.

Basic principles that underlie game theory: 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

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A Decision Tree for UPSs Pricing Strategy

Figure 6.10

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

Figure 6.11

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Altered Payoff Matrix for GM and Ford

Figure 6.12

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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

    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.

Reasons: technological change, social trends, demographic shifts Intensity of competition is greater when:

Not all industry segments typically decline at the same rate Creating pockets of demand

 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
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Factors for Intensity of Competition in Declining Industries

Figure 6.13

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Strategy Selection in a Declining Industry

Figure 6.14 Choice of strategy is determined by: Severity of the industry decline Company strength relative to the remaining pockets of demand

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