Business- Level Strategy and the

Industry Environment

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Level of Strategies

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Business Level

Corporate level

Functional Level

Corporate level

Industrial Environment

The Industry Environment

• Different industry environments present different opportunities and threats.

• A company’s business model and strategies have to change to meet the environment.

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There is the need to continually formulate and implement business-level strategies to sustain competitive advantage over time in different industry environments.

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

• 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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A fragmented industry is one composed of a large number of small and medium-sized companies.

Fragmented Industries

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Chaining

IT and Internet

Fragmented Industries

Franchising

Horizontal Merger

Competitive Featuresof 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

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Embryonic Industries

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

Growth Industries

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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.

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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 Development and Customer

Groups

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

Market Share of Different Customer Segments

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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.

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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

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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

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Different markets develop at different growth rates

Navigating Through the Life Cycle to Maturity

• 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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1. Competitive advantage of company’s business model2. Stage of the industry life cycle

Two crucial factors:

Mature Industries

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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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.

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

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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

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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

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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

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Toyota’s Product Lineup

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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

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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

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A Decision Tree for UPS’s 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

• 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

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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.

Declining Industries

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Leadership

HarvestDeclining Industries

Niche

Divestment

Factors for Intensity of Competition in Declining Industries

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Strategy Selection in a Declining

Industry

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

Summary

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Business Level

Corporate level

Functional Level

Corporate level

Cost LeadershipDifferentiationFocus

Fragmented Embryonic Growth Mature Declining