Business-Level Strategy and The Industry Environment: Gareth R. Jones /charles W. L. Hill

GARETH R. JONES /CHARLES W. L.
HILL
Theory of Strategic Management 10th ed.
Chapter
Business-Level
6
Strategy and the
Industry
Environment
Student Version
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as Prepared by C. Douglas Cloud
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Professor Emeritus of Accounting
Pepperdine University
Learning Objective: After reading this chapter
you should be able to identify the strategies
managers can develop to increase profitability
in fragmented industries.
STRATEGIES IN FRAGMENTED INDUSTRIES

 A fragmented industry is one composed of a
large number of small- and medium-sized
companies (dry cleaning, health clubs).
 Reasons that an industry may consist of many
small companies, rather than a few large ones:
 Low barriers to entry because these
companies lack economies of scale.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
(continued)
 There may even be diseconomies of scale.

 Low-entry barriers that permit new companies
to constantly enter keep the industry
fragmented.
 Customer needs are so specialized that only
a small amount of product is required, hence,
there is no scope for a large mass-production
operation.
 Companies search for the business model and
strategies that will allow them to consolidate a
fragmented industry.
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6-3
Chaining
 Chaining is where companies establish networks

of linked merchandise outlets that are
interconnected by IT and function as one large
company.
 Chaining allows companies to negotiate large
price reductions with suppliers.
 Companies using chaining can overcome the
barrier of high transportation costs by
establishing regional distribution centers.
Franchising
 In franchising, the parent company grants to its

franchisees the right to use the parent’s name,
reputation, and business model in a particular
location in return for a franchise fee and often a
percentage of the profits (McDonalds, KOA).
 The franchisees own the business; therefore,
they are motivated to make the company-wide
business model work effectively, and ensure
quality consistent with the customers’ needs.
Horizontal Merger
 A horizontal merger is a merger where
companies manufacturing similar kinds of
commodities or running similar types of
businesses merge.
 Companies like Macy’s and Kroger chose a
strategy of horizontal merger to consolidate their
respective industries.
 By pursuing horizontal merger, companies are
able to obtain economics of scale and secure a
national market for their product.
you should be able to discuss the special
problems that exist in embryonic and growth
industries and how companies can develop
successful business models to effectively
compete.
STRATEGIES IN EMBRYONIC AND

GROWTH INDUSTRIES
 An embryonic industry is one that is just
beginning to develop.
 A growth industry is one in which first-time
demand is rapidly expanding as many new
customers enter the market.
STRATEGIES IN EMBRYONIC AND
GROWTH INDUSTRIES
 An embryonic industry emerges when a

technological innovation creates a new product.
 Customer demand for the products of an
embryonic industry is initially limited (slow
growth in the market) for a variety of reasons:
1) The limited performance and poor quality of the
first product.
2) Customers’ unfamiliarity with what the new
product can do for them.
3) Poorly developed distribution channels.
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. (continued) 6-8
4) A lack of complementary product to increase the
value of the product for customers.
5) High production costs because of small volumes
of production.
 The growth stage begins to develop when three
things happen:
1) Ongoing technological progress makes a product
easier to use, and increases it value for the
average customer.
2) Complementary products are developed.
3) Companies in the industry work to find ways to
reduce the costs of making the new product.
THE CHANGING NATURE OF DEMAND
 Innovators are customers who are delighted to

be the first to purchase and experiment with a
product based on new technology (embryonic).
 Early adopters understand that the technology
may have important future applications and are
willing to see if they pioneer new uses.
 The early majority forms the leading wave of
the mass market (beginning of growth stage).
(continued)
THE CHANGING NATURE OF DEMAND
 The late majority are the customers who

purchase a new technology only after it is
obvious it has great utility and is here to stay
 Laggards are customers who are inherently
conservative and unappreciative of the uses of
new technology.
you should be able to explain why strategic
managers need to align their business models
with the conditions that exist in different
kinds of industry environments.
STRATEGIC IMPLICATIONS:
CROSSING THE CHASM
 New strategies are often required to

strengthen a company’s business model as a
market develops over time for the reasons
shown on the next slide.
(continued)
 Innovators and early adopters are willing to
tolerate the limitations of the product.
 The early majority, however, value ease of use
and reliability.
 Companies competing in an embryonic market
typically pay more attention to performance of a
product than ease of use and reliability.
 Innovators and early adopters are typically
reached through specialized distribution
channels or word of mouth.
 Because this group is relatively small in
number, companies serving them produce
small quantities of a product.
STRATEGIC IMPLICATIONS:
CROSSING THE CHASM
 The transition between the embryonic market
and the mass market is not a smooth,
seamless one.
 Rather, it represents a competitive chasm or
gulf that companies must cross.
 According to Geoffrey Moore in his influential
book, many companies do not (or cannot)
develop the right business model, so they fall
into the chasm and go out of business.
NAVIGATING THROUGH THE LIFE
CYCLE TO MATURITY
 An investment strategy determines the amount and
type of resources and capital that must be spent to
configure a company’s value chain so that it can
successfully pursue a business model over time.
 Crucial factors in choosing an investment strategy:
1) The competitive advantage a company’s
business model gives it in an industry relative
to a competitor.
2) The stage of the industry’s life cycle in which
the company is competing.
Embryonic Strategies
 In the embryonic stage, the appropriate business-
level strategy is a share-building strategy.
 The aim is to build market share by developing a
stable and distinct competitive advantage to attract
customers who have no knowledge of the
company’s product.
 If a company gains the resources from outside
investors or venture capitalists, it will be in a
relatively strong competitive position.
 If it fails to raise the resources, it probably will have
to exit the industry.
Growth Strategies
 At the growth stage, the appropriate investment
strategy is the growth strategy.
 The goal is to maintain its relative competitive
position in a rapidly expanding market.
 The growth stage is the time when companies
attempt to secure their grip over customers in
existing segments, and simultaneously enter new
segments to increase their market share.
 Companies in a weak competitive position at this
stage engage in a market concentration: a
focused business model to reduce its needs.
Shakeout Strategies
 By the shakeout stage, customer demand is
increasing, and competition by price or product
characteristic becomes intense.
 Companies in strong competitive positions need
resources to invest in a share-increasing
strategy to attract customers from weak
companies exiting the market.
 Weak companies exiting the industry engage in a
harvest strategy by decreasing its investment and
“milking” its investment as much as it can.
Maturity Strategies
 Until the maturity stage, profits have been reinvested
in the business, and dividends have been small.
 Investors in leading companies have obtained their
rewards through the appreciation of their stock.
 As market growth slows in the maturity stage, a
company’s investment strategy depends on the level
of competition in the industry and the source of the
company’s competitive advantage.
 Cost leaders and differentiators adopt a hold-and-
maintain strategy to defend their business models
and ward off threats .
you should be able to understand competitive
dynamics in mature industries and discuss the
strategies managers can develop to increase
profitability even with competition is intense.
STRATEGY IN MATURE INDUSTRIES
 A mature industry is commonly dominated by a

small number of large companies.
 If a mature company changes its strategies, their
actions are likely to stimulate a competitive
response from industry rivals.
STRATEGIES TO DETER ENTRY
Product Proliferation
 To reduce the threat of entry in a market, existing

companies ensure that they are offering a
product targeted at every segment of the market.
 This strategy of “filling the niche” is known as
product proliferation.
Price Cutting
 An entry-deterring strategy is to cut prices every
time a new company enters the industry--then
raise prices after the entrant has withdrawn.
(continued)
STRATEGIES TO DETER ENTRY
 The established company initially charges a high

price for a product and seizes a short-term profit,
but then aggressively cuts prices to build market
share; thus deterring potential entrants.
Maintaining Excess Capacity
 A third strategy is to maintain the physical
capacity to produce more product than
customers currently demand.
 However, this threat to increase output must be a
credible option.
STRATEGIES TO MANAGE RIVALRY
 Price signaling is the process by which

companies increase or decrease product prices to
convey their intentions to other companies.
 Price leadership occurs when companies jointly
set prices, which is illegal under antitrust laws.
 Nonprice competition:
 Market penetration is accomplished by heavy
advertising to promote a product differentiation.
 Product development is the creation of new or
improved products to replace existing ones.
(continued)
STRATEGIES TO MANAGE RIVALRY
Nonprice competition also includes:

 Market development where a company finds a new
market segment for its products.
 Product proliferation generally means that large
companies in an industry all have a product in each
market segment and compete head-to-head for
customers. It allows for stability based on product
differentiation rather than on product price.
 Capacity control refers to preventing the
accumulation of costly excess capacity.Technology
allows firms to produce the same or more with less
space—thus causing excess capacity.
you should be able to outline the different
strategies that companies in declining industries
can use to support their business models and
profitability.
STRATEGIES IN DECLINING INDUSTRIES
 Strategies to adopt to deal with decline:

1) Leadership strategy
2) Niche strategy
3) Harvest strategy
4) Divestment strategy
STRATEGIES IN A DECLINING INDUSTRY
 A leadership strategy aims at growing in a

declining industry by picking up the market share
of companies that are leaving the industry.
 A niche strategy focuses on pockets of demand
where the demand is stable, or declining less
rapidly than the industry as a whole.
 A harvest strategy requires the company to halt
all new investments in capital equipment, etc.
 A disvestment strategy is selling an
underperforming business before the industry
enters into a steep decline.

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GARETH R. JONES /CHARLES W. L.

Theory of Strategic Management 10th ed.

STRATEGIES IN FRAGMENTED INDUSTRIES

 There may even be diseconomies of scale.

 Chaining is where companies establish networks

 In franchising, the parent company grants to its

STRATEGIES IN EMBRYONIC AND

 An embryonic industry emerges when a

 Innovators are customers who are delighted to

 The late majority are the customers who

 New strategies are often required to

STRATEGY IN MATURE INDUSTRIES

 A mature industry is commonly dominated by a

 To reduce the threat of entry in a market, existing

 The established company initially charges a high

 Price signaling is the process by which

Nonprice competition also includes:

STRATEGIES IN DECLINING INDUSTRIES

 Strategies to adopt to deal with decline:

 A leadership strategy aims at growing in a

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