Business-Level Strategy and The Industry Environment

Chapter
Six
Business-
Level Strategy
and the
Industry
Environment
Copyright Houghton Mifflin Company. All rights reserved.
6 | 2
The Industry Environment
Different industry environments present
different opportunities and threats.
A companys business model and strategies
have to change to meet the environment.
Companies must face the challenges of
developing and maintaining a competitive
strategy in:
Fragmented Industries Mature Industries
Embryonic Industries Declining Industries
Growth Industries

There is the need to continually formulate and implement
business-level strategies to sustain competitive
advantage over time in different industry environments.
6 | 3
Fragmented Industries

Reasons for fragmented industries
Low barriers to entry due to lack of economies 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
Diseconomies of scale

Strategies
Chaining networks of linked outlets to
achieve cost leadership
Franchising for rapid growth with proven business concepts,
reputation, management skills and economies of scale
Horizontal Merger acquisition to obtain economies and growth
IT and Internet to develop new business models

A fragmented industry is one composed of a large
number of small and medium-sized companies.
6 | 4
An embryonic industry is one that is just
beginning to develop when technological innovation
creates new market or product opportunities.
A growth industry is one in which first-
time demand is expanding rapidly as
many new customers enter the market.
Embryonic and Growth Industries
Strategy is determined by market demand
Innovators and early adopters have different needs from
the early and late majority
Company must be prepared to cross the chasm between
the early adopters and the later majority
Companies must understand the factors that affect a
markets growth rate in order to tailor the business
model to the changing industry environment.
6 | 5
Market Characteristics:
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
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.
6 | 6
Market Development
and Customer Groups
Both innovators and early adopters enter the market
while the industry is in its embryonic state.
Figure 6.1
6 | 7
Market Share of Different
Customer Segments
Most market demand and industry
profits arise during the early and
late majority customer segments.
Figure 6.2
6 | 8
Strategic Implications:
Crossing the Chasm
Innovators and Early Adopters are
(While the Early Majority are NOT):
Technologically sophisticated and tolerant of engineering
imperfections
Typically reached through specialized distribution channels
Relatively few in number and not particularly price-sensitive
To cross the chasm between the
Early Adopters and the Early Majority
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 so
that the product can be modified and produced or provided at
low cost.
Anticipate the moves of competitors.
6 | 9
The Chasm: AOL and Prodigy
The business model and strategies required to compete in an
embryonic market populated by Early Adopters and
Innovators are very different than those required to compete in
a high-growth mass market populated by the Early Majority.
Figure 6.3
6 | 10
Strategic Implications
of Market Growth Rates
Different markets develop at different rates.
Growth rate measures the rate at which the
industrys 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
Factors affecting market growth rates:
Relative advantage Complexity
Compatibility Observability
Availability of Trialability
complementary products
Business-level strategy is a major determinant of
industry profitability. The choice of business model
and strategies can accelerate or retard market growth.
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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.
Different markets develop at different growth rates.
Figure 6.4
6 | 12
Navigating Through the Life Cycle
to Maturity
Embryonic stages share building strategies
Development of distinctive competencies and competitive advantage.
Requires capital to develop R&D and sales/service competencies.
Growth stages maintain relative competitive position
Strengthen business model to prepare to survive industry shakeout.
Requires investment to keep up with rapid growth of the market.
Shakeout stage increase share during fierce competition
Invest in share-increasing strategies at expense of weak competitors.
Weak companies should exit the industry during the harvest stage.
Maturity stage hold-and-maintain to defend business model
Dominant companies want to reap the reward of prior investments.
A companys investment depends on the level of competition and
source of the companys competitive advantage.
1. Competitive advantage of companys business model
2. Stage of the industry life cycle
The amount and type of resources and capital needed to pursue
a companys business model depends on two crucial factors:
6 | 13
Mature Industries

Evolution of mature industries
Industry becomes consolidated as a result of the fierce
competition during the shakeout stage.
Business level strategy is based on how established companies
collectively try to reduce strength of competition.
Interdependent companies try to protect industry profitability.
Strategies
Deter entry into industry
Product proliferation Maintaining
Price cutting excess capacity
Manage industry rivalry
Price signaling Capacity control
Price leadership Nonprice competition
A mature industry is dominated by a small number of large
companies whose actions are so highly interdependent that success
of one companys strategy depends on the response of its rivals.
6 | 14
Product Proliferation in the
Restaurant Industry
Where the product
spaces have been
filled, it is difficult for
a new company to
gain a foothold in the
market and
differentiate itself.
Figure 6.6
6 | 15
Four Nonprice Competitive
Strategies
Figure 6.8
6 | 16
Toyotas Product Lineup
Toyota has used market development to become a broad differentiator and
has developed a vehicle for almost every main segment of the car market.
Figure 6.9
6 | 17
Game Theory
Basic principles that underlie game theory:
Look Forward and Reason Back Decision Trees
Look forward, think ahead, and anticipate how rivals will respond
to whatever strategic moves they make
Reason backwards to determine which strategic moves to pursue
today based on how rivals will respond to future strategic moves
Know Thy Rival how is the rival likely to act
Find the Dominant Strategy Payoff Matrix
One that makes you better off if you play that strategy
No matter what strategy your opponent uses
Strategy Shapes the Payoff Structure of the Game
Companies in an industry can be viewed as players that are all
simultaneously making choices about which business models
and strategies to pursue in order to maximize their profitability.
These basic principles of game theory can be used in
determining which business model and strategies to pursue.
6 | 18
A Decision Tree
for UPSs Pricing Strategy
Figure 6.10
6 | 19
A Payoff Matrix
for GM and Ford
Figure 6.11
6 | 20
Altered Payoff Matrix
for GM and Ford
Figure 6.12
6 | 21
Declining Industries

Reasons for and severity of the decline
Reasons - technological change, social trends, demographic shifts
Intensity of competition is greater when:
The decline is rapid versus slow and gradual.
The industry has high fixed costs.
The exit barriers are high.
The product is perceived as a commodity.
Not all industry segments typically decline at the same rate
Creating pockets of demand
Strategies
Leadership seeks to become dominant player in declining industry
Niche focuses on pockets of demand that are declining more slowly
Harvest optimizes cash flow
Divestment sells business to others

A declining industry is one in which market demand has
leveled off or is falling and the size of total market starts to shrink.
Competition tends to intensify and industry profits tend to fall.
6 | 22
Factors for Intensity of Competition
in Declining Industries
Figure 6.13
6 | 23
Strategy Selection
in a Declining Industry
Choice of strategy is
determined by:
Severity of the
industry decline
Company strength
relative to the
remaining pockets
of demand
Figure 6.14

Business-Level Strategy and The Industry Environment

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