Copyright © 2001 Houghton Mifflin Company. All rights reserved. Chapter 7 Competitive Strategy and the Industry Environment Strategic Charles W. L. Hill Management Gareth R. Jones Fifth Edition PowerPoint Presentation by Charlie Cook An Integrated Approach

Copyright © 2001 Houghton Mifflin Company. All rights reserved.7-2 Chapter Objectives Different kinds of competitive problems that exist in different industry environments Problems of developing competitive advantage in a fragmented industry Problems of maintaining a first-move advantage in embryonic and growth industries Main kinds of strategies for competing in mature industries Main strategies for handling declining industries

Copyright © 2001 Houghton Mifflin Company. All rights reserved.7-3 Overview Firms have to manage competitive relations with other firms, these relations will differ depending on the nature of the competitive environment Chapter 7 addresses how firms seek to maximize their competitive advantage in fragmented, embryonic, growth, mature and declining industry environments.

Copyright © 2001 Houghton Mifflin Company. All rights reserved.7-4 Strategies in Fragmented Industries Fragmented industry characteristics:  Localized markets with low entry barriers (e.g., Mom’s Diner).  Few economies of scale opportunities exist.  High transportation costs (e.g., sand) for products.  Focus strategies predominate (e.g., focus on customer group, need or region).

Copyright © 2001 Houghton Mifflin Company. All rights reserved.7-5 Strategies in Fragmented Industries One option though, is to try to consolidate the industry to take advantage of buying, economies of scale in advertising etc to pursue with a low cost or differentiation stragegy:  Chaining (Wal-Mart)  Franchising (also permits rapid growth) (McDonald’s)  Horizontal mergers (Dillard’s) therefore less competition and greater ability to influence price and output decisions  Using the Internet (eBay) Key challenge is how to overcome disadvantage of fragmentation so that the competitive advantages of cost, differentiation or focus can be realized

Copyright © 2001 Houghton Mifflin Company. All rights reserved.7-6 Strategies in Embryonic and Growth Industries Arise due to innovations by pioneers (Apple, Xerox, etc) High profits attract imitators seeking the big profits Competitive entry rate is very high (see next slide) Many innovators lose first mover advantage (Bowman, Apple) Key challenge in embryonic and growth industries is how to maintain that first mover advantage and build a long term sustainable competitive advantage

Copyright © 2001 Houghton Mifflin Company. All rights reserved.7-7 FIGURE 7.1 How an Innovator’s Profits Can Be Competed Away Number of Competitors in the Market Many Few Innovator’s Profit Rate High Low Time

Copyright © 2001 Houghton Mifflin Company. All rights reserved.7-8 Strategies in Embryonic and Growth Industries Three strategies for an innovator competing in a newly emerging market/industry:  Develop and market the technology itself.  Develop and market the technology jointly with another company through a strategic alliance.  License the technology to existing companies and let them develop the market. Which strategy to choose depends on three factors…

Copyright © 2001 Houghton Mifflin Company. All rights reserved.7-9 Strategies in Embryonic and Growth Industries An innovator’s optimal choice of growth industry strategy depends on:  Complementary assets the innovator has that can be used to exploit and market the innovation.  The height of barriers to imitation by competitors (e.g., patents).  The capability of competitors to quickly imitate the pioneering company.

Copyright © 2001 Houghton Mifflin Company. All rights reserved.7-10 Strategies for Profiting from Innovation: Putting it all together Strategy Does Innovator Have All Required Complementary Assets? Likely Height of Barriers to Imitation Number of Capable Competitors Going it alone YesHighFew Entering into alliance NoHighLimited License innovation NoLowMany TABLE 7.1

Copyright © 2001 Houghton Mifflin Company. All rights reserved.7-11 Body Shop What lesson can we learn from how Anita Roddick entered the U.S. market with Body Shop? If barriers to imitation are low, company lacks complementary assets and there are many capable competitors, sell or license technology to an established firm (or at least try an alliance).

Copyright © 2001 Houghton Mifflin Company. All rights reserved.7-12 Strategy in Mature Industries Due to fierce competition in the shake-out stage (try to survive this stage), industries become consolidated and a few, large companies emerge that are inter-dependent. They try to “manage” the industry so that they maximize individual firm profitability “and” industry profitability (seek stability). They do this by managing the five competitive forces (deter entry, reduce rivalry (not increase it), limit power of buyers and sellers and avoid substitutes).

Copyright © 2001 Houghton Mifflin Company. All rights reserved.7-13 FIGURE 7.2 Strategy in Mature Industries Strategies for Deterring the Entry of Rivals

Copyright © 2001 Houghton Mifflin Company. All rights reserved.7-14 FIGURE 7.3 Product Proliferation in the Restaurant Industry Where is “Mother Webbs?” McDonald’s

Copyright © 2001 Houghton Mifflin Company. All rights reserved.7-15 Strategies to Manage (a.k.a. “reduce”) Rivalry in Mature Industries Price signaling  Leading competitors use price changes to convey their intentions to other competitors (i.e., tit-for-tat). Price leadership  One company sets the industry price; other competitors reference their prices to that price. Non-price competition  Competition by any means other than price

Copyright © 2001 Houghton Mifflin Company. All rights reserved.7-16 FIGURE 7.4 Four Non-price Competitive Strategies

Copyright © 2001 Houghton Mifflin Company. All rights reserved.7-17 Strategies to Manage Rivalry in Mature Industries  Sometimes excess capacity is generated by companies trying to get ahead (to deter entry) in response to favorable conditions…everyone invests at the same time and everyone gets hurt.  Sometimes technology causes excess capacity  Sometimes falling demand causes it Capacity control strategies  Preempt rival firms by building capacity ahead of anticipated increases in demand in hopes that no one else follows  Indirect coordination with rival firms to keep industry-wide capacity in line with demand.

Copyright © 2001 Houghton Mifflin Company. All rights reserved.7-18 FIGURE 7.5 Changes in Industry Capacity and Demand

Copyright © 2001 Houghton Mifflin Company. All rights reserved.7-19 Supply and Distribution Strategy in Mature Industries How to control bargaining power of buyers and sellers Vertical integration  Backward towards input suppliers (Ford and IPL).  Forward into distribution to consumers (see Dell) Choice of integration depends on:  Need for close relationships with suppliers.  Japanese vs. American styles  Need to ensure customer relationships.  Complexity of product  Amount of product information required

Copyright © 2001 Houghton Mifflin Company. All rights reserved.7-20 Strategies in Declining Industries (steel, tobacco, vacuum tubes) Options: Leadership strategy  A firm seeks to become dominant in the industry. Niche strategy  Focuses on demand pockets declining more slowly than the industry as a whole. Harvest strategy  Limits investment and optimizes cash flow. Divestment strategy  Company exits the industry by selling out early to others, avoiding liquidation.

Copyright © 2001 Houghton Mifflin Company. All rights reserved.7-21 FIGURE 7.6 Factors That Determine the Intensity of Competition in Declining Industries

Copyright © 2001 Houghton Mifflin Company. All rights reserved.7-22 FIGURE 7.7 Strategy Selection in a Declining Industry

Copyright © 2001 Houghton Mifflin Company. All rights reserved.7-23 FIGURE 7.8 A Harvest Strategy