1. Chapter 6 Business-Level Strategy and the Industry Environment

2. Learning Objectives Strategies for fragmented industries
Strategies for embryonic and growth industries
Strategies for mature industries
Strategies for declining industries

3. Fragmented Industry
Composed of a large number of small- and medium-sized companies
Reasons for fragmentation
Lack of scale economies
Brand loyalty in the industry is primarily local
Low entry barriers due to lack of scale economies and national brand loyalty
Focus strategy works best for a fragmented industry

4. Consolidating a fragmented industry through value innovation
Value innovator - Defines value differently than established companies
Offers the value at lowered cost through the creation of scale economies
Chaining: Obtaining the advantages of cost leadership by establishing a network of linked merchandising outlets
Interconnected by information technology that functions as one large company
Aids in building a national brand

5. Consolidating a fragmented industry through value innovation
Franchising: Strategy in which franchisor grants the franchisee the right to use the franchisor’s name, reputation, and business model
In return for a fee and a percentage of the profits
Advantages
Finances the growth of the system, resulting in rapid expansion
Franchisees have a strong incentive to ensure that the operations are run efficiently
New offerings developed by a franchisee can be used to improve the performance of the entire system

6. Consolidating a fragmented industry through value innovation
Disadvantages
Tight control of operations is not possible
Major portion of the profit go to the franchisee
When franchisees face a higher cost of capital, it raises system costs and lowers profitability
Horizontal mergers - Merging with or acquiring competitors and combining them into a single large enterprise

7. STRATEGIES IN EMBRYONIC AND GROWTH INDUSTRIES
An embryonic industry is one that is just beginning to develop.
A growth industry is one in which first-time demand is rapidly expanding as many new customers enter the market.

8. STRATEGIES IN EMBRYONIC AND GROWTH INDUSTRIES
An embryonic industry emerges when a technological innovation creates a new product.
Customer demand for the products of an embryonic industry is initially limited for a variety of reasons:
Limited performance and poor quality of the first product.
Customer unfamiliarity with what the new product can do for them.
Poorly developed distribution channels.
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9. The growth stage begins to develop when three things happen:
Lack of complementary product to increase the value of the product for customers.
High production costs because of small volumes of production.
The growth stage begins to develop when three things happen:
Ongoing technological progress makes a product easier to use, and increases it value for the average customer.
Complementary products are developed.
Companies in the industry work to find ways to reduce the costs of making the new product.

10. THE CHANGING NATURE OF DEMAND
In most product markets, the changing needs of customers lead to an S-shaped growth.

11. THE CHANGING NATURE OF DEMAND
Innovators are the first group of customers to enter the market and who are delighted to be the first to purchase and experiment with a product based on new technology.
Early adopters understand that the technology may have important future applications and are willing see if they can pioneer new uses.
The early majority forms the leading wave of the mass market (beginning of growth stage).
The late majority are the customers who purchase a new technology only after it is obvious it has great utility and is here to stay.
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12. THE CHANGING NATURE OF DEMAND
Laggards are customers who are inherently conservative and unappreciative of the uses of new technology.
Note that innovators and early adopters are a very small percentage of the market.

13. STRATEGIC IMPLICATIONS: CROSSING THE CHASM
The transition between the embryonic market and the mass market is not a smooth, seamless one.
Rather, it represents a competitive chasm or gulf that companies must cross.
According to Geoffrey Moore in his influential book, Crossing the Chasm, many companies do not (or cannot) develop the right business model, so they fall into the chasm and go out of business.

14. Crossing the Chasm

16. Strategic implications: crossing the chasm
New strategies are required to strengthen a company’s business model as a market develops
Customers in each segment have very different needs
Competitive chasm - Transition between the embryonic market and mass market
Failure to do so results in the company going out of business

17. Strategic implications: crossing the chasm
Innovators and early adopters
Technologically sophisticated and willing to tolerate the limitations of the product
Reached through specialized distribution channels
Companies produce small quantities of product that are priced high
Early majority
Value ease of use and reliability
Require mass-market distribution and mass-media advertising campaigns
Require large-scale mass production to produce high- quality product at a low price

18. Strategic implications of differences in market growth rates
Degree to which a new product is perceived as better at satisfying customer needs than the product it supersedes
Relative advantage
Products perceived as complex and difficult to use will diffuse more slowly than those that are easy to use
Complexity
Degree to which a new product is perceived as being consistent with the current needs or existing values of potential adopters
Compatibility

19. Factors that accelerate customer demand
Degree to which potential customers can experiment with a new product during a hands-on trial basis
Trialability
Degree to which the results of using and enjoying a new product can be seen and appreciated by other people
Observability
Lead adopters in a market who become infected with a product
Infect other people, making them adopt and use the product
Viral model of infection

20. Strategies to Deter Entry In mature industries
To reduce the threat of entry in a market, existing companies ensure that they are offering a product targeted at every segment of the market.
This strategy of “filling the niche” is known as product proliferation.
Product proliferation strategy
To cut prices every time a new company enters the industry--then raise prices after the entrant has withdrawn.
Charging a price that is lower than that required to maximize profits in the short run
Is above the cost structure of potential entrants
Limit price strategy

21. Limit Pricing

22. Strategies to Deter Entry In mature industries
Investments that signal an incumbent’s long-term commitment to a market or a segment of the market
To invest in excess productive capacity
To invest significantly in basic research, product development or advertising beyond what is required to be competitive
Strategic commitments

23. Strategies to Manage Rivalry
Companies increase or decrease product prices to:
Convey their intentions to other companies
Used to improve industry profitability
Price signaling
When one company assumes the responsibility for determining the pricing strategy that maximizes industry profitability
Price leadership
Use of product differentiation strategies to deter potential entrants and manage rivalry within an industry
Non-price competition

24. Strategies to Manage Rivalry

25. Strategies to Manage Rivalry
Occurs when a company concentrates on expanding market share in its existing product markets
Market penetration
Creation of new or improved products to replace existing products
Product development
When a company searches for new market segments to increase the sale of its existing products
Market development
Large companies in an industry have a product in each market segment, competing head-to-head for customers
Allows for stability based on product differentiation rather than on product price
Product proliferation

26. Capacity Control
Companies devise strategies to control or benefit from capacity expansion programs
Factors causing excess capacity
New technologies that produce more than the old ones
New entrants in an industry
Economic recession that causes global overcapacity
High growth of and demand in an industry that triggers rapid expansion

27. Capacity Control Choosing a strategy
Each company individually must try to preempt its rivals
Companies must collectively coordinate with each to be aware of the mutual effects of their actions

28. Factors that Determine the Intensity of Competition in Declining Industries

29. Choosing a Strategy
Leadership strategy: When a company develops strategies to become the dominant player in a declining industry
Niche strategy: When a company focuses on pockets of demand that are declining more slowly than the industry as a whole to maintain profitability
Harvest strategy: When a company reduces to a minimum the assets it employs in a business to reduce its cost structure and extract maximum profits from its investment
Divestment strategy: When a company decides to exit an industry by selling off its business assets to another company

30. Strategy Selection in a Declining Industry

31. Illustrative Impacts of Changes in Business Strategy on Targeting and Positioning Strategies
Market Targeting Impact
Positioning Impact
Rapid Growth/ Retrenchment
Market scope may not change although targets may be increased or reduced.
Substantial changes in resource allocation, (e.g. advertising expenditures
Changing the Product Mix
No change is necessary unless increase in product scope creates opportunities in new segments.
Changes in product strategy, methods of distribution, and promotional strategies may be necessary.
Changing the Market Scope
Targeting is likely to change to include new targets.
Positioning strategy must be developed for each new target.
Repositioning
Should not have a major effect on targeting strategy.
Product, distribution, price, and promotion strategies may be affected.
Value Chain Integration
Should have no effect on targeting strategy.
Primary impact on channel, pricing and promotion strategies.
Diversification
Targeting strategies must be selected in new business areas.
Positioning strategies must be developed (or acquired for the new business areas.
Strategic Alliance
Targeting strategy may be affected based on the nature and scope of the alliance.
Operating relationships and assignment or responsibilities must be established.