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Competitive Strategy and the Industry Environment

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Levels of Strategic ManagementFrom Chapter 1

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Product/Market/Distinctive-Competency Choices and Generic Competitive Strategies

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Choosing an Investment Strategy at the Business Level

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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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Fragmented Industries An industry composed of a large number of

small and medium-sized companies Reasons for fragmented industries

Low barriers to entry due to lack of economies of scale

Diseconomies of scale Low entry barriers permit constant entry by new

companies Specialized customer needs require small job lots

of products; no room for a mass-production operation

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Strategies in Fragmented Industries: Chaining

Establishing networks of linked merchandising outlets that function as one large business entity To obtain the advantages of cost

leadership

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Strategies in Fragmented Industries: Franchising

The franchisor grants to franchisees the right to use the parent’s name, reputation, and business skills To maintain control over many small

outlets and retain differentiated appeal To lessen the financial burden of swift

expansion and permit rapid growth To reap economies of scale in advertising,

purchasing, management, and distribution

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Strategies in Fragmented Industries: Horizontal Merger Acquiring or merging with industry

competitors To obtain economies of scale To secure a national market To pursue a cost-leadership or

differentiation strategy (or both) “Networks” of similar-size

companies To obtain economies of scale

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Strategies in Fragmented Industries: Using IT

Using new technology to develop new business models To consolidate a fragmented industry Price, selection, geography

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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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Exercise

Strategy in Action 6.2: Why did Prodigy fail to cross the chasm?

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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

Source: Peter Brimelow, “The Silent Boom,” Forbes, July 7, 1997, pp. 170-171. Reprinted by permission of Forbes Magazine © 2002 Forbes, Inc.

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Factors Affecting Market Growth Rates Book

Relative advantage Compatibility Complexity Trialability Observability Availability of complementary products

Also consider: emergence of a standard

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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 entry of rivals

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Pricing Games

Predatory pricing Using revenue generated in one

product market to support pricing below the company’s costs of production in another to drive rivals out

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Pricing Games - continued

Limit pricing -The established companies charge a price below the profit-maximizing quantity and price that is below the average cost structure of new entrants but above their own average cost structure

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Limit Pricing Strategy

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Maintaining Excess Capacity

Maintaining the physical capability to produce more of a product than what is in demand to warn potential entrants that if they enter, output can be increased and prices driven down

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Strategies to Manage Rivalry in Mature Industries

Price signaling Tit-for-tat strategy

Price leadership Formal price leadership is illegal

Nonprice competition Product differentiation

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Exercise

Strategy in Action 6.4: Fast Food Is A Ruthless Business

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Product Proliferation in the Restaurant Industry

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Four Nonprice Competitive Strategies

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Strategies to Manage Rivalry in Mature Industries (cont’d)

Market penetration Expanding market share in existing

markets Product development

Creating new or improved products to replace existing ones

Market development Finding new market segments for a

company’s products

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Strategies to Manage Rivalry in Mature Industries (cont’d)

Product proliferation Large companies in an industry all

have a product in each market segment; competition is based on product differentiation

Capacity control Try to preempt rivals and seize

initiative Coordinate with rivals indirectly

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Supply and Distribution Strategy in Mature Industries

Many companies in the mature stage of an industry may either become more involved in the value chain (vertical integration) or they may de-integrate Anonymous approach

An arms-length, short-term relationship Relational approach

A long-term relationship

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Factors that Determine the Intensity of Competition in Declining Industries

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Strategy in Declining Industries Leadership

A company seeks to become the dominant player Niche

Focusing on pockets of demand that are declining more slowly than the industry as a whole

Harvest Optimizing cash flow

Divestment Selling off the business

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Strategy Selection in a Declining Industry