Chapter Six

Business- Level Strategy and the Industry Environment

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Level of Strategies

Industrial Environment

Corporate level

Business Level

Functional Level

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The Industry Environment

There is the need to continually formulate and implement businesslevel 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.

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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

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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

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Fragmented Industries

Chaining

IT and Internet

Fragmented Industries

Franchising

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

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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 markets growth rate in order to tailor the business model to the changing industry environment.
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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

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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.
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Market Development and Customer Groups

Both innovators and early adopters enter the market 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.

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The Chasm: AOL and Prodigy

Technologically sophisticated and tolerant of engineering imperfections Reached through specialized distribution channels

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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.

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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 Low-cost mass production

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Strategic Implications of Market Growth Rates

Factors affecting market growth rates: Relative advantage Complexity Compatibility Observability Availability of complementary products Trialability

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Differences in Diffusion Rates

Different markets develop at different growth rates

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Navigating Through the Life Cycle to Maturity

Two crucial factors:
1. 2. Competitive advantage of companys 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
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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. Business level strategy is based on how established companies collectively try to reduce strength of competition. Interdependent companies try to protect industry profitability.

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Mature Industries
Strategies Deter entry into industry Product proliferation Maintaining excess capacity Price cutting Manage industry rivalry Price signaling Capacity control Price leadership Nonprice competition
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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 6-21

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.

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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. 6-23

Four Nonprice Competitive Strategies

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Toyotas 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.

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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.

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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

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A Decision Tree for UPSs Pricing Strategy

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

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Altered Payoff Matrix for GM and Ford

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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

Not all industry segments typically decline at the same rate

Creating pockets of demand
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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.

Declining Industries

Leadership

Harvest

Declining Industries

Niche

Divestment
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Factors for Intensity of Competition in Declining Industries

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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

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Summary
Fragmented Embryonic Growth Mature Declining

Corporate level

Business Level

Cost Leadership Differentiation Focus

Functional Level

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