Competitive Strategy and the Industry Environment 6 Competitive Strategy and the Industry Environment

The Industry Environment Positioning a company to sustain competitive advantage over time in different kinds of industry environments Different industry environments present different opportunities and threats A company’s business model has to change to meet the environment

Fragmented Industries An industry 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 Diseconomies 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 operation

Strategies in Fragmented Industries: Chaining Establishing networks of linked merchandising outlets that function as one large business entity To obtain the advantages of cost leadership

Strategies in Fragmented Industries: Franchising The franchisor grants to franchisees the right to use the parent’s name, reputation, and business skills To maintain control over many small outlets and retain differentiated appeal To lessen the financial burden of swift expansion and permit rapid growth To reap economies of scale in advertising, purchasing, management, and distribution

Strategies in Fragmented Industries: Horizontal Merger Acquiring or merging with industry competitors To obtain economies of scale To secure a national market To pursue a cost-leadership or differentiation strategy (or both)

Strategies in Fragmented Industries: Using IT Using new technology to develop new business models To consolidate a fragmented industry Price, selection, geography

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

Embryonic and Growth Industries (cont’d) 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

Market Share of Different Customer Groups

Strategic Implications: Crossing the Chasm Crossing the chasm between early adopters and the early majority Innovators and early adopters are technologically sophisticated and will tolerate engineering imperfections (the early majority are not) Innovators and early adopters are typically reached through specialized distribution channels (the early majority are not) Innovators and early adopters are relatively few in number and not particularly price sensitive (the early majority are not)

The Chasm: AOL and Prodigy

Crossing the Chasm 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 and so that it can be modified and produced or provided at low cost Anticipate the moves of competitors

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

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.

Factors Affecting Market Growth Rates Relative advantage Compatibility Complexity Trialability Observability Availability of complementary products

Strategic Implications of Differences in Growth Rates To increase demand for a new technology or product Show its relative advantage, make it compatible with customers’ prior needs and experiences, reduce its complexity, make it possible for customers to try or observe it, ensure that necessary complements are in place Identify and court potential opinion leaders to promote viral diffusion

Strategy in Mature Industries Strategies for deterring entry of rivals

Product Proliferation in the Restaurant Industry

Pricing Games Predatory pricing Limit pricing Using revenue generated in one product market to support pricing below the company’s costs of production in another to drive rivals out Limit pricing The established companies charge a price below the profit-maximizing quantity and price that is below the average cost structure of new entrants but above their own average cost structure

Limit Pricing Strategy

Maintaining Excess Capacity Maintaining the physical capability to produce more of a product than what is in demand to warn potential entrants that if they enter, output can be increased and prices driven down

Strategies to Manage Rivalry in Mature Industries Price signaling Tit-for-tat strategy Price leadership Formal price leadership is illegal Nonprice competition Product differentiation

Four Nonprice Competitive Strategies

Strategies to Manage Rivalry in Mature Industries (cont’d) Market penetration Expanding market share in existing markets Product development Creating new or improved products to replace existing ones Market development Finding new market segments for a company’s products

Strategies to Manage Rivalry in Mature Industries (cont’d) Product proliferation Large companies in an industry all have a product in each market segment; competition is based on product differentiation Capacity control Try to preempt rivals and seize initiative Coordinate with rivals indirectly

Supply and Distribution Strategy in Mature Industries Many companies in the mature stage of an industry may either become more involved in the value chain (vertical integration) or they may de-integrate Anonymous approach An arms-length, short-term relationship Relational approach A long-term relationship

Factors that Determine the Intensity of Competition in Declining Industries

Strategy in Declining Industries Leadership A company seeks to become the dominant player Niche Focusing on pockets of demand that are declining more slowly than the industry as a whole Harvest Optimizing cash flow Divestment Selling off the business

Strategy Selection in a Declining Industry