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Competitive Strategy and Industry Environment

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The Industry Environment Positioning a company to sustain

competitive advantage over time in different kinds of industry environments

Different industry environments present different opportunities and threats

A company’s business model has to change to meet the environment

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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

for products (e.g. sand). Focus strategies predominate

(e.g. customer group, region).

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Strategies in Fragmented Industries

Competing in fragmented industries requires strategic consolidation by: Chaining (Kohl’s, Wal*Mart, Clear

Channel Radio) Franchising (McDonald’s) Horizontal mergers (Dillard’s) Using the Internet (eBay)

What is a business model?

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Embryonic and Growth Industries

Reasons for slow growth in market demand 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

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Embryonic and Growth Industries (cont’d) Mass markets typically start to

develop when Technological progress makes a 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

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Market Development and Customer Groups

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Market Share of Different Customer Groups

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Strategic Implications: Crossing the Chasm Crossing the chasm between early adopters

and the early majority Innovators and early adopters are technologically

sophisticated and will tolerate engineering imperfections (the early majority are not)

Innovators and early adopters are typically reached through specialized distribution channels (the early majority are not)

Innovators and early adopters are relatively few in number and not particularly price sensitive (the early majority are not)

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The Chasm: AOL and Prodigy

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Crossing the Chasm Correctly identify the needs of the first wave

of early majority users Alter the business model in response Alter the value chain and distribution

channels to reach the early majority Design the product to meet the needs of the

early majority and so that it can be modified and produced or provided at low cost

Anticipate the moves of competitors

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Strategic Implications of Market Growth Rates Different markets develop at different rates Growth rate measures the rate at which the

industry’s product spreads in the marketplace

Growth rates for new kinds of products seem to have accelerated over time Use of mass media Low-cost mass production

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Differences in Diffusion Rates

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Factors Affecting Market Growth Rates

Relative advantage economic or social

Compatibility with prior needs and experiences

Complexity e.g. Mac OS v DOS v Windows

Trialability can it be tested?

Observability can benefits be seen by others?

Availability of complementary products

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Strategic Implications of Differences in Growth Rates To increase demand for a new

technology or product Show its relative advantage, make it

compatible with customers’ prior needs and experiences, reduce its complexity, make it possible for customers to try or observe it, ensure that necessary complements are in place

Identify and court potential opinion leaders to promote viral diffusion

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Strategy in Mature Industries

Strategies for Deterring the Entry of Rivals

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Strategies to Manage Rivalry in Mature Industries

Capacity control strategies Preempt rival firms by building capacity ahead of

anticipated increases in demand. Indirect coordination with rival firms to keep

industry-wide capacity in line with demand. Mergers and acquisitions

Pricing Games Price Signaling Price leadership Predatory pricing Limit pricing/Dynamic limit pricing

Nonprice competition Product proliferation

Vertical integration or de-integration

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Product Proliferation in the Restaurant Industry

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Limit Pricing Strategy

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Interesting cases

Dell v Gateway v HP/Compaq How will this industry evolve?

Toys R Us v Wal*Mart Will Toys R Us product proliferation help?

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Factors that Determine the Intensity of Competition in Declining Industries

Not all segments in an industry decline at the same rate!

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Strategy Selection in a Declining Industry

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Exercises

The sales growth in the PC industry is slowing. Choose a company in the industry (Dell,

HP, IBM, Apple etc.) and develop a competitive strategy to deal with this development.

Ebay case: What is their competitive advantage?

How can it be undermined? Will they drop the ball? What should ebay do next?