Hill 8e Basic Ch06

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Theory of Strategic Management with Cases, 8e

Hills, Jones

Chapter Six Industry Environment and Business- Level Strategy


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.

Companies must face the challenges of developing and maintaining a competitive strategy in:

• Fragmented Industries • Mature Industries• Embryonic Industries • Declining Industries• Growth Industries

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


Fragmented Industries

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

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


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.

Embryonic and Growth Industries

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: 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.


Market Development and Customer Groups

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

Figure 6.1


Market Share of Different Customer Segments

Most market demand and industry profits arise during the early and late majority

customer segments.

Figure 6.2


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.


The Chasm: AOL and Prodigy

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.

Figure 6.3


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

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

complementary products

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


Differences in Diffusion Rates

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

Different markets develop at different growth rates.

Figure 6.4


Navigating Through the Life Cycle to Maturity

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 company’s investment depends on the level of competition and

source of the company’s competitive advantage

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 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

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.


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.

Figure 6.6


Four Nonprice Competitive Strategies

Figure 6.8


Toyota’s 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.

Figure 6.9


Game Theory

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

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.


A Decision Tree for UPS’s Pricing Strategy

Figure 6.10


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

Figure 6.11


Altered Payoff Matrix for GM and Ford

Figure 6.12


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

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

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.


Factors for Intensity of Competition in Declining Industries

Figure 6.13


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

Figure 6.14

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Hill 8e Basic Ch06