Chapter 5: Business strategies in different industry and sectoral contextsFoundations of Strategy

Rebecca EggermanAlexander Johnson

Miguel LopezHannah StephensCarissa Tarnowski

Purpose of this chapterTo help us understand how

managers adapt their strategies to fit their environments, how they go about predicting change and adapting their strategies to cope with change.

Introduction and objectives

One of management’s greatest challenges=ensuring enterprise adapts to its environment and it’s changes

Changes in environment are driven by: technology, consumer need, politics, economic growth, and a host of other influences

Competition as a strategy?Creates a dynamic process where

firms compete for a competitive advantage, to only see it eroded through imitation and innovation by rivals.

Different industries= different patterns

Different industry patterns of change help to predict how industries are likely to evolve over time

Every industry follows a unique development path

Look for common drivers

Industry life cycle

Extent to which industries follow a common development pattern, examine the changes in industry structure over the cycle and explore the implications for business strategy.Starting point in understanding

how managers operating in various environments adapt their strategies and anticipate change

Life cycle diagram

Opening case: The evolution of Personal ComputersEarly 1970s- the personal computer (PC)

was originated through Intel’s microprocessor

Mid 70’s- pre-assembled machines came on to the market that included a basic operating system and software◦Tandy, Commodore, Apple

By 1981-market of about $3000 million with about 150 companies processing microcomputers◦Apple~20%, Tandy~15%, Commodore~7%◦All used very different strategies

IMB vs. Apple

Previously neglected PC market and focused on mainframe computers until 1980s

Adopted an open strategy that allowed third-parties to access the technical details so complementary products could be developed

Very little of their PC was exclusive and was very easily copied

Produced as much of his PCs in house as possible

This strategy had long term benefits, but short-term was very costly

Lost its lead position in the market by producing highly differentiated, more expensive products that were incompatible with IBM standard

Developed particular niches in the home, education, and desk-top publishing markets

Downturn of the PCPC evolved as a general machine made

versatile by adding new software functionsCreated a more complex, less secure, less

reliable and less fit-for-use than single purpose devices

The PC has increasingly become only one of many devices adopted by users

Under threat as the platform in which software is written because an array of other devices are growing in popularity and tablet computers are starting to have an impact on low-end laptop sales

How technology companies are resurrecting their fortunesApple- Created devices such as

the iPod, the iPhone, and the iPadDigital camera manufacturers-

developed products that download direct to printers

Game manufacturers- consoles primarily for gaming also connect to internet

Product vs. industry life cycles

Introduction

Growth

Maturity

Decline

Introduction

Growth

Maturity

Decline

Product life cycle Industry life cycle

What is the difference?Supply side of the product live

cycle

Extent the industry product live cycle by introducing multiple generations of a product

Industry

Let’s look at the graphs

Product

Let’s take a closer look

Product Life Cycle

Industry Life Cycle

Forces BehindDemand Growth

◦Introduction stage Sales are small, and rate of market

penetration is low

◦Growth stage Market penetration is accelerated

◦Maturity stage Market becomes saturated

◦Declined stage Challenge Industry

The production and diffusion of knowledgeIntroduction stage

◦Technology advances rapidly◦Potential consumers know little

about the productGrowth stage

◦The transition phase reflects the emergence of dominant designs and technical standards

◦Focus away from product innovation towards process innovation

Dominant designs and technical standards

Dominant design: a product architecture that defines the look, functionality, and production method for the product and becomes accepted by the industry as a whole◦Underwood Model 5

Introduced 1899 Establish the architecture and main features

Moving carriage Ability to see the characters being typed Shift function or upper case and a replaceable

Dominant designs and technical standardsTechnical standard: a

technology or specification that is important for compatibility

Dominant design and technical standard are closely related

But dominant design may or may not have a technical standard

How general is the life cycle pattern?It varies greatly from industry to

industry◦Railroad

Introduction phase extended from the building of the first railroad in 1827

Entered the growth phase in 1870’s In the 1959s, it started to enter the decline

stage

◦Digital audio player Introduction phase 1997-1998 2001, entered its growth stage 2008-2009, entered the maturity stage

Introduction Growth Maturity Decline

Demand Limited to early adopters: high income Avant-garde

Rapidly increasing market penetration

Mass market replacement/repeat buying. Customers knowledgeable and price sensitive

obsolescence

Technology Competing technologies. Rapid product innovation

Standardization around dominant technology. Rapid process innovation

Well-diffused technical knowhow: quest for technological improvements

Little product or process innovation

Products Poor quality wide variety of features and technologies. Frequent design changes.

Design and quality improve. Emergence of dominant design.

Trend to commoditization Attempts to differentiate by branding, quality, bundling

Commodities the norm: differentiation difficult and unprofitable

Manufacturing

Short production runs. High skilled labor content. Specialized distribution channels

Capacity shortages mass production. Competition for distribution

Emergence of overcapacity. Deskilling of production. Long production runs. Dist. Carry fewer lines

Exports from countries with lowest labor costs.

Trade Producers and consumers in advanced countries

Exports form advanced countries to rest of world

Production shifts to newly industrializing then developing countries

Exports from countries with lowest labor costs

Competition

Few companies Entry, mergers and exits

Shakeout. Price competition increases

Price wars, exits

Key success factors

Product innovation. Establishing credible image of firm and product.

Design for manufacture. Access to distribution. Brand building. Fast product development. Process innovation.

Cost efficiency through capital intensity, scale efficiency and low input costs

Low overheads Buyer selection. Signaling commitment. Rationalizing capacity

Life cycle strategies: IntroductionDe novo –start ups and de alio-

diversifying firms. Basis of entry is innovation

◦Wide variety of product types and diversity of technology.

Born global companies

Growth phaseSkill in controlling manufacturing

ability is key◦Access to distribution◦Financial resources◦Reduce costs

Maturity phaseEfficiency is the key to survival

◦Low wages, low overhead and cost of production

Shakeouts◦High rate of firm failure◦New niche markets are created◦Labor moves to nations where costs

are lowest (developing nations)

Decline phaseDue to excess capacityLack of technical changeDeclining number of competitors High age of physical and human

resourcesAggressive price competition

◦Balance between capacity and output and nature of demand.

◦Must capture residual market demand

Public SectorsOwnership vested in government

◦Controlled by politiciansProduce public goods

◦Ex. Street lighting, flood prevention, national defense

Paid for by taxationFor public benefit

◦Approved by lawNot required to make profit

Non-Profit SectorsPhilanthropic goalsOverlap of a social enterpriseSeek profit to distribute a limited

amount to those that “own capital”

Profit not main goal◦Ex. Engaging in fair trade,

disadvantaged equality

Key differences

1. Shaped by political considerations

2. Must account for public constraints

3. Correct market failure or cut off from market forces

4. State controlled monopolies, ex. Postal services

5. Little freedom to change rules

6. Subject to public scrutiny7. Slower market to change

1. Prioritizing shareholder's interests

2. Does not have to assess public needs

3. Price and resource mechanisms absent

4. Weak customer influence in monopolies

5. Great flexibility in regulation

6. No obligation to public satisfaction

7. High-tech and constantly changing

Public Private

Non-profit UniquenessEmployment of volunteers

◦Promote employment based on philanthropic goal interests

Fundraising◦Becoming more competitive

Oster’s Six Forces Model

Stakeholder AnalysisDefinition: the process of identifying,

understanding and prioritizing the needs of key stakeholders so that the questions of how stakeholders can participate in strategy formulation and how relationships with stakeholders are best managed can be addressed

Key Steps

1) Identify the list of potential stakeholders

2) Rank stakeholders

3) Identify criteria stakeholders will likely use to

judge performance

4) Decide how the organization is doing from its stakeholders’ perspective

5) Identify what can be done to satisfy each

stakeholder

6) Identify and record longer term issues with individual stakeholders and stakeholders as a group

Power Interest Grids Definition: array stakeholders in a matrix with

stakeholder interest forming one dimension and stakeholder power the other

Stakeholder interest◦ Political interest

Stakeholder power

◦ Ability to affect the organization’s future

Used to identify which stakeholder interests and power bases should be taken into account

Helps identify what coalitions amongst stakeholders managers may wish to encourage or discourage

Power Interest GridsPlayers

◦ Both interest and significant power

Subjects◦ Interest but little power

Context Setters◦ Power but little direct interest

Crowd◦ Neither interest nor power

SH Power/Interest Grid

Response to SHs’ Positions

Whole Foods Market

Scenario Planning

Scenario analysis◦ a systematic way of thinking about how the future might unfold

that builds on what we know about current trends and signals

Not forecasting

Quantitative ◦ Models events and run simulations to identify likely outcomes

Qualitative◦ Narratives◦ Useful in engaging insight and imagination of decision-makers

Similar to productive paranoia

An Example with WFMCheck flexibility of strategy in case of major

drought

1-5 years

Higher prices with decreased product availability

Create the scenarios that are likely to happen in a

major drought

Identify red flags for each drought scenario

Ask “what if” for each scenario to evaluate

strategic flexibility

Key Steps in Building and Using Define the purpose of the analysis

Decide on the time horizon

Identify key trends

Identify key uncertainties

Create scenarios and check for internal consistency

Identify indicators that might signal which scenario

is unfolding

Assess the strategic implications of each scenario

Now that we have completed this chapter you should be able to… Recognize,

◦ the different stages of industry development and understand the factors that drive the process of industry evolution

◦ the particular challenges that face managers engaged in strategic decision making in public sector and not-for-profit-contexts

Identify the key success factors associated with industries at different stages of their development and the strategies appropriate to different stages in the industry life cycle

Use stakeholder analysis to gain an understanding of political priorities

Use scenarios to explore industry and organizational futures

Questions? Comments?