Chapter 6, 7 & 8 BUSINESS-LEVEL STRATEGY AND THE INDUSTRY ENVIRONMENT STRATEGY AND TECHNOLOGY

Industry Environment Need to continually formulate/implement business-level strategies to sustain competitive advantage over time. Different environments present different opportunities and threats. Business model/strategies have to change to meet environment. Face challenges developing/maintaining a competitive strategy in: Fragmented Industries • Mature Industries Embryonic Industries • Declining Industries Growth Industries 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Reasons for Fragmented Industries “...composed of a large number of small and medium-sized companies.” Low barriers to entry Low entry barriers permit constant entry by new companies Specialized customer needs require small job lots Diseconomies of scale 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Strategies for Fragmented Industries Chaining– linked outlets to achieve cost leadership Franchising- rapid growth with proven business concepts, reputation, management skills and economies of scale Horizontal Merger – acquisition to obtain economies/growth IT/Internet- develop new business models 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Embryonic and Growth Industries Embryonic- just beginning to develop when technological innovation creates new market or product opportunities. Growth- first-time demand is expanding rapidly as many new customers enter market. Companies must understand factors that affect a market’s growth rate – in order to tailor the business model to the changing industry environment. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Market Characteristics: Embryonic/Growth Industries Reasons for Slow Growth: 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 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Market Characteristics: Embryonic/Growth Industries Mass Markets Develop When: Technological progress makes 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. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Market Development and Customer Groups Figure 6.2 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Innovators & Early Adopters Are: Technologically sophisticated and tolerant of engineering imperfections Typically reached through specialized distribution channels Relatively few in number and not particularly price-sensitive 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Crossing the Chasm Companies must: Correctly identify needs of first wave of early majority users. Alter business model in response. Alter value chain & distribution channels to reach early majority. Design product to meet needs of early majority so product can be modified, produced, & provided at low cost. Anticipate moves of competitors. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Stages of Life Cycle Embryonic– share building Distinctive competencies/competitive advantage Capital to develop R&D &sales/service competencies Growth– maintain competitive position Strengthen business model to survive shakeout Investment to keep up with growth Shakeout– competition is strongest Invest in share-increasing strategy Weak companies should invest in harvest strategy Maturity– defend business model Dominant companies reap ROI Investment depends on competition & source advantage 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Mature Industries “...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.” 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Mature Industries Evolution Consolidate due to fierce competition in shakeout Strategy based on established companies collectively reduce strength competition Interdependent companies protect industry profitability. Strategies Deter entry Product proliferation  Maintain Price cutting excess capacity Manage rivalry Price signaling  Capacity control Price leadership  Nonprice competition 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Strategies for Deterring Entry of Rivals Strategies for managing rivalry

Nonprice Competitive Strategies Figure 6.8 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Toyota’s Product Lineup Toyota used market development to become a broad differentiator and developed a vehicle for almost every main segment of the car market. Figure 6.9 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Declining Industries “...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.” 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Strategy Selection in a Declining Industry Figure 6.11 Determined by: Severity of the industry decline Strength relative to pockets of demand 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Factors of Intensity of Competition in Declining Industries Strategies Leadership – seeks to become dominant player Niche – focuses on pockets of demand declining more slowly Harvest – optimizes cash flow Divestment – sells business to others 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

High-Technology Industries “…those in which the underlying scientific knowledge that companies in the industry use is advancing rapidly… (as) are the attributes of the products/services that result from its application are also advancing rapidly.” Technology is: Scientific knowledge used in production of goods or services Accounting for a larger share of economic activity Revolutionizing the product or production system in industries not thought of as high-tech 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Technical Standards and Format Wars “…standards are a set of technical specifications that producers adhere to when making the product or a component of it. Format wars One standard will come to dominate a market. Many battles in high-tech industries are companies competing to set standard. Product differentiation and competitive advantage are based on a technical standard. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Technical Standards for Personal Computers Figure 7.1 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Benefits of Standards Guarantee compatibility between products & compliments Reduce consumer confusion Reduce production costs Reduce risks associated with supplying complementary products Standards lead to low-cost and differentiation advantages for companies. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3 Ways Standards Emerge: Firms lobby government to mandate industry standard- public domain. Standards often set by cooperation among firms/forums. Standards often selected by market demand. Network effects Positive feedback loop Lockout 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Positive Feedback in VCR Market Figure 7.2 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Winning a Format War Successful strategies revolve around finding ways to make network effects work in their favor and against their competitors: Ensure supply of complement- Plus product itself Killer applications- New products so compelling customers adopt rapidly killing demand for competition Aggressively price/market- Price product low to increase installed base, price complements high for profits Cooperate with competitors-Speed up adoption License format- Reduce incentive for competitors to develop own 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

First-Mover Advantages First to develop/pioneer revolutionary products can lead to enduring competitive advantage 5 key Advantages: Opportunity to exploit network effects and positive feedback loops Ability to establish significant brand loyalty Ability to ramp up sales volume early Ability to create switching costs for customers Ability to accumulate valuable knowledge Being first-mover does not guarantee success. Success depends on first-mover strategy pursued. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

First-Mover Disadvantages Pioneering cost- develop technology & distribution channels & educate customer Prone to mistakes- uncertainties in new market Risk building wrong resources & capabilities- mass-market may differ from the needs of early adopters May invest in inferior/obsolete technology- if underlying technology advancing rapidly 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Strategies for Profiting from Innovation Table 7.1 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Technological Paradigm Shifts New technologies emerge that: Revolutionize structure of industry Dramatically alter nature of competition Requires firms adopt new strategies More likely to occur with: Natural limits to technology- established technology is mature & approaching natural limit New disruptive technology- entered marketplace and taking root in niches poorly served by firms using established technology 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Global/National Environments Implications of trend toward globalization: Industries becoming global in scope- industry boundaries no longer stop at borders. Shift from national to global markets has intensified competition. Steady decline in barriers to cross-border trade & investment has opened once protected markets to companies based elsewhere. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Increasing Profitability Through Global Expansion Expand leveraging products- goods/services developed at home & selling internationally Economies from global volume- economies of scale Location economies- economic benefits from performing value creation in optimal location Leveraging skills of global subsidiaries- applied elsewhere Must also consider transportation costs, trade barriers, as well as political and economic risks. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Pressures for Cost Reduction & Local Responsiveness Figure 8.2 Strategy depends on pressures: Cost Reductions or Local Responsiveness 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Pressures for Cost Reductions Greatest in industries producing commodity-type products where price is the competitive weapon: Differentiation on non-price factors difficult Competitors are based in low-cost location Consumers are powerful & face low switching costs Persistent excess capacity Liberalization of world trade & investment 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Pressures for Local Responsiveness Differences In: Customer tastes & preferences Infrastructure & traditional practices Distribution channels Host government demands Dealing with these contradictory pressures is a difficult strategic challenge, primarily because being locally responsive tends to raise costs. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Four Basic Strategies     Figure 8.3 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Choosing a Global Strategy Globalization Standard- Reaping cost reductions from economies of scale & location Localization- Customizing goods & services to provide good match to tastes & preferences in different national markets 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Choosing a Global Strategy Transnational- business model that simultaneously: Achieves low costs Differentiates across markets Fosters a flow of skills between subsidiaries International- multinational companies sell products serving universal needs (minimal need to differentiate) & don’t face significant competitors (low cost pressure). 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Changes in Strategy over Time Figure 8.4 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Choice of Entry Mode Exporting- most use to begin expansion but later switch to another mode. Licensing- licensee buys rights to produce product & puts up most of overseas capital. Franchising- franchiser sells intangible property & insists franchisee follow rules on doing business. Joint Ventures- typically a 50/50 venture & favored mode for entering new market Wholly-Owned Subsidiaries- parent company owns 100% of subsidiary’s stock 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Advantages & Disadvantages of Entry Modes Table 8.1 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Choosing An Entry Strategy Distinctive Competencies & Entry Mode Technological know-how- wholly-owned subsidiary preferred over licensing & joint ventures to minimize risk of losing control. Management know-how- franchising, joint ventures, or subsidiaries preferred as risk is low of losing management know-how. Pressures for Cost Reduction & Entry Mode Export finished goods from wholly-owned subsidiary Marketing subsidiaries oversee distribution- tight control over local operations allows company to use profits generated in one market to improve position in other markets. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Global Strategic Alliances Cooperative agreements between companies… that are actual/potential competitors… range from short-term contractual… to formal joint ventures with equity participation. Advantages Facilitate entry Share fixed costs & associated risks Bring together complementary skills & assets Set technological standards for industry Disadvantages Give competitors low-cost route to gain technology & market access 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Some alliances benefit the company. Alliance Warning Some alliances benefit the company. Beware, alliances can end up giving away technology and market access with very little gained in return. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.