CHAPTER 6 BUSINESSLEVEL STRATEGY AND THE INDUSTRY ENVIRONMENT

CHAPTER 6 BUSINESS-LEVEL STRATEGY AND THE INDUSTRY ENVIRONMENT

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

Fragmented Industry Composed of a large number of small- and mediumsized 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 3

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 4

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 5

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 6

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. 6 -7

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: 1) Limited performance and poor quality of the first product. 2) Customer unfamiliarity with what the new product can do for them. 3) Poorly developed distribution channels. 6 -8 (continued)

4) Lack of complementary product to increase the value of the product for customers. 5) High production costs because of small volumes of production. § The growth stage begins to develop when three things happen: 1) Ongoing technological progress makes a product easier to use, and increases it value for the average customer. 2) Complementary products are developed. 3) Companies in the industry work to find ways to reduce the costs of making the new product. 6 -9

THE CHANGING NATURE OF DEMAND § In most product markets, the changing needs of customers lead to an S-shaped growth. 6 -10

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 6 -11 is here to stay. (continued)

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. 6 -12

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. 6 -13

Crossing the Chasm 14

Failed to compete with other competitors and fall in to chasm before entering into the mass market

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 16

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

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

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

Strategies to Deter Entry In mature industries Product proliferation strategy §To reduce 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. Limit price 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 20

Limit Pricing 21

Strategies to Deter Entry In mature industries Strategic commitments • 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 22

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

Strategies to Manage Rivalry 24

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

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 26

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 27

Factors that Determine the Intensity of Competition in Declining Industries 28

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 29

Strategy Selection in a Declining Industry 30

Illustrative Impacts of Changes in Business Strategy on Targeting and Positioning Strategies Changes in Business Strategy 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. Targeting strategies must be selected in new business areas. Positioning strategies must be developed (or acquired for the new business areas. Targeting strategy may be affected based on the nature and scope of the alliance. Operating relationships and assignment or responsibilities must be established. Diversification Strategic Alliance