6 Competitive Strategy and the Industry Environment.

6

Competitive Strategy and the

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


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


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


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


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)


Strategies in Fragmented Industries: Using IT

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


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


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


Market Development and Customer Groups


Market Share of Different Customer Groups


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)


The Chasm: AOL and Prodigy


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


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


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.


Factors Affecting Market Growth Rates

• Relative advantage

• Compatibility

• Complexity

• Trialability

• Observability

• Availability of complementary products


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


Strategy in Mature Industries

Strategies for deterring entry of rivals


Product Proliferation in the Restaurant Industry


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

• 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


Limit Pricing Strategy


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


Strategies to Manage Rivalry in Mature Industries

• Price signaling– Tit-for-tat strategy

• Price leadership– Formal price leadership is illegal

• Nonprice competition– Product differentiation


Four Nonprice Competitive Strategies


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


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


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


Factors that Determine the Intensity of Competition in Declining Industries


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


Strategy Selection in a Declining Industry

6 Competitive Strategy and the Industry Environment.

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