1. BUSINESS-LEVEL STRATEGY AND THE INDUSTRY ENVIRONMENT
Chapter 6
BUSINESS-LEVEL STRATEGY AND THE INDUSTRY ENVIRONMENT

2. Learning Objectives
Explain why managers tailor their business models to existing conditions
Identify strategies managers use to increase profitability in fragmented industries
Discuss special problems in embryonic & growth industries
Understand competitive dynamics in mature industries
Outline strategies managers use in declining industries
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3. “All men can see these tactics whereby I conquer but what none can see is the strategy out of which victory evolves.”
- Sun Tzu
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4. 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
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5. 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
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6. Consolidating Fragmented Industry
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7. 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
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8. 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.
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9. 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.

10. 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.

11. Market Development and Customer Groups
Figure 6.2
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12. Market Share of Customer Segments
Market demand/profits rise in early/late majority segments.
Figure 6.3
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13. 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
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14. 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.
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15. The Chasm: AOL and Prodigy
Figure 6.4
Business models to compete in embryonic market populated by early innovators very different than to compete in high-growth mass market populated by early majority.
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16. Strategic Implications of Market Growth Rates
Different markets develop at different rates.
Growth rate measures rate industry’s product spreads.
Growth rates for products accelerate 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
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17. Business-Level Strategy
Business-level strategy is a major determinant of industry profitability. The choice of business model and strategies can accelerate or retard market growth.
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18. Crucial Factors of Investment Strategy
Competitive advantage of company’s business model
Stage of the industry life cycle
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19. 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.

20. 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.”
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21. 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
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22. Strategies for Deterring Entry of Rivals
Figure 6.5
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23. Product Proliferation in the Restaurant Industry
Figure 6.6
Where product spaces have been filled, difficult for new company to gain foothold in market and differentiate itself.
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.

24. Strategies for Managing Industry Rivalry
Figure 6.7
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25. Nonprice Competitive Strategies
Figure 6.8
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26. 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
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27. 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.”
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28. Factors of Intensity of Competition in Declining Industries
Figure 6.10
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29. 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
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30. Strategy Selection in a Declining Industry
Determined by:
Severity of the industry decline
Strength relative to pockets of demand
Figure 6.11
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.