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 (Clear Channel) – Embryonic & Growth Industries ( How Prodigy...) – Mature Industries (Dell has to…) – Declining Industries (How to make money in…) ► MBA-II, General1

6 | 2 Fragmented Industries Clear Channel Creates a National Chain of Local Radio Stations 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 – Overcoming fragmentation: Chaining, Franchising, Horizontal Merger, IT and Internet – Coping up with fragmentation: Focused strategy ►

6 | 3 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 Growth→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 ►

6 | 4 Market Development and Customer Groups Both innovators and early adopters enter the market while the industry is in its embryonic state. Software Engg - PCs Internet – Jeff Bezos of Amazaon, 1994 PCs Users, 1981, IBM standard Late PCs Users Users forced to use PC

6 | 5 Strategic Implications: Crossing 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.

6 | 6 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 ►

How Prodigy Fell Into the Chasm Between Innovators and the Early Majority Prodigy did a wonderful job of attracting innovators and early adopters, but stumbled when making the transition to a mass market. They failed to consider how the needs of mass-market customers differed from those that they had served so well in the past. In addition, they were cautious in making changes and let their rivals get ahead in innovation. Finally, they failed to update their business model, even when other models were demonstrably superior. This is a cautionary tale for managers about how a successful firm can go horribly wrong, and quickly. ► MBA-II, General7

6 | 8 Differences in Diffusion Rates Source: Peter Brimelow, “The Silent Boom,” Forbes, July 7, 1997, pp Reprinted by permission of Forbes Magazine © 2002 Forbes, Inc. Different markets develop at different growth rates.

6 | 9 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 (cell) Complexity (cell vs. early PC) – Compatibility (cell) Observability (blackberry/ Palm Pilot) – Availability of Trialability (cell vs. early PC) complementary products

6 | 10 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 ►

6 | 11 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 Deter entry into industry – Manage industry rivalry Manage industry rivalry

6 | 12 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 | 13 Strategies for Managing Industry Rivalry

6 | 14 Four Nonprice Competitive Strategies

6 | 15 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.

Dell Has to Rethink Its Business-Level Strategies The case describes Dell’s struggle to remain on the value creation frontier. Product and market development, as well as product proliferation is a never-ending process, especially when technology changes quickly. Dell cannot rest on its cost cutting laurels, but must continue to innovate its business-level strategies. ► MBA-II, General16

6 | 17 Declining Industries 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, Niche, Harvest, Divestment

6 | 18 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

How to Make Money in the Vacuum Tube Business MBA-II, General19 1.Using internet to consolidate 2.Strategies Price Non-price market penetration, as the firm moves into every segment of its industry

NIKE’S WINNING WAYS Nike’s success story suggests that a company’s business model cannot remain static. It shows how managers of a successful business model still need to continually formulate and implement new business-level strategies to sustain their firm’s competitive advantage as the industry environment changes ► MBA-II, General20