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

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. 6-2 Learning Objectives Explain why managers tailor their business models to existing conditionsExplain why managers tailor their business models to existing conditions Identify strategies managers use to increase profitability in fragmented industriesIdentify strategies managers use to increase profitability in fragmented industries Discuss special problems in embryonic & growth industriesDiscuss special problems in embryonic & growth industries Understand competitive dynamics in mature industriesUnderstand competitive dynamics in mature industries Outline strategies managers use in declining industriesOutline strategies managers use in declining industries

3. 6 -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 - Sun Tzu 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.

4. 6 - 4 Industry Environment oDifferent environments present different opportunities and threats. oBusiness model/strategies have to change to meet environment. oFace challenges developing/maintaining a competitive strategy in: Fragmented Industries Mature Industries Fragmented Industries Mature Industries Embryonic Industries Declining Industries Embryonic Industries Declining Industries Growth Industries Growth Industries Need to continually formulate/implement business-level strategies to sustain competitive advantage over time. 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.

5. 6 - 5 Reasons for Fragmented Industries o Low barriers to entry oLow entry barriers permit constant entry by new companies oSpecialized customer needs require small job lots oDiseconomies of scale “... composed of a large number of small and medium-sized 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.

6. 2-6 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. Consolidating Fragmented Industry

7. Strategies for Fragmented Industries Chaining– linked outlets to achieve cost leadership Chaining– linked outlets to achieve cost leadership Franchising- rapid growth with proven business concepts, reputation, management skills and economies of scale Franchising- rapid growth with proven business concepts, reputation, management skills and economies of scale Horizontal Merger – acquisition to obtain economies/growth Horizontal Merger – acquisition to obtain economies/growth IT/Internet- develop new business models 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. 6-7

8. 6 -8  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. Embryonic and Growth Industries 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.

9. 6 - 9 Market Characteristics: Embryonic/Growth Industries Reasons for Slow Growth: Reasons for Slow Growth: Limited performance and poor quality of the first productsLimited performance and poor quality of the first products Customer unfamiliarity with what the new product can do for themCustomer unfamiliarity with what the new product can do for them Poorly developed distribution channelsPoorly developed distribution channels Lack of complementary productsLack of complementary products High production costsHigh 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.Technological progress makes product easier to use and increases its value to the average customer. Key complementary products are developed that do the same.Key complementary products are developed that do the same. Companies find ways to reduce production costs allowing them to lower prices.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. 6-10

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. 6 -11 Market Development and Customer Groups Figure 6.2

12. 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. 6 - 12 Market Share of Customer Segments Market demand/profits rise in early/late majority segments. Figure 6.3

13. Innovators & Early Adopters Are: o Technologically sophisticated and tolerant of engineering imperfections o Typically reached through specialized distribution channels o 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. 6-13

14. 6 -14 Crossing the Chasm Companies must: Correctly identify needs of first wave of early majority users.Correctly identify needs of first wave of early majority users. Alter business model in response.Alter business model in response. Alter value chain & distribution channels to reach early majority.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.Design product to meet needs of early majority so product can be modified, produced, & provided at low cost. Anticipate moves of competitors.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.

15. 6 -15 The Chasm: AOL and Prodigy 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. Figure 6.4 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.

16. 6 - 16 Strategic Implications of Market Growth Rates oDifferent markets develop at different rates. oGrowth rate measures rate industry’s product spreads. oGrowth rates for products accelerate over time: Use of mass media Low-cost mass production Use of mass media Low-cost mass production oFactors affecting market growth rates: Relative advantage Complexity Relative advantage Complexity Compatibility Observability Compatibility Observability Availability of Trialability complementary products Availability of Trialability complementary products

17. Business-Level Strategy 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. 6-17 Business-level strategy is a major determinant of industry profitability. The choice of business model and strategies can accelerate or retard market growth.

18. 6 -18 Crucial Factors of Investment Strategy 1. Competitive advantage of company’s business model 2. Stage of the industry life cycle 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.

19. Stages of Life Cycle oEmbryonic– share building Distinctive competencies/competitive advantageDistinctive competencies/competitive advantage Capital to develop R&D &sales/service competenciesCapital to develop R&D &sales/service competencies oGrowth– maintain competitive position Strengthen business model to survive shakeoutStrengthen business model to survive shakeout Investment to keep up with growthInvestment to keep up with growth oShakeout– competition is strongest Invest in share-increasing strategyInvest in share-increasing strategy Weak companies should invest in harvest strategyWeak companies should invest in harvest strategy oMaturity– defend business model Dominant companies reap ROIDominant companies reap ROI Investment depends on competition & source advantageInvestment 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. 6-19

20. Mature 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. 6-20 “...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.”

21. 6 -21 Mature Industries o Evolution Consolidate due to fierce competition in shakeoutConsolidate due to fierce competition in shakeout Strategy based on established companies collectively reduce strength competitionStrategy based on established companies collectively reduce strength competition Interdependent companies protect industry profitability.Interdependent companies protect industry profitability. o Strategies Deter entryDeter entry  Product proliferation  Maintain  Price cutting excess capacity Manage rivalryManage 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.

22. 6 -22 Strategies for Deterring Entry of Rivals Figure 6.5 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.

23. 6 -23 Product Proliferation in the Restaurant Industry Where product spaces have been filled, difficult for new company to gain foothold in market and differentiate itself. Figure 6.6 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. 6 -24 Strategies for Managing Industry Rivalry Figure 6.7 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.

25. 6 -25 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.

26. 6 -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 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.

27. Declining 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. 6-27 “...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.”

28. 6 -28 Factors of Intensity of Competition in Declining Industries Figure 6.10 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.

29. 6 - 29 Declining Industries Strategies oLeadership – seeks to become dominant player oNiche – focuses on pockets of demand declining more slowly oHarvest – optimizes cash flow oDivestment – 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.

30. 6 -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.