Chapter 6 Hill Textbook

7/29/2019 Chapter 6 Hill Textbook

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Chapter

Six

Business-

Level Strategyand theIndustry

Environment


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Copyright Houghton Mifflin Company. All rights reserved. 6 | 2

All men can seethese tactics wherebyI conquer but what

none can see is thestrategy out of whichvictory evolves.

- Sun Tzu

RoyaltyFree/ David DeLossy/ Getty Images


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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 competitivestrategy in: Fragmented Industries Mature Industries Embryonic Industries Declining Industries

Growth Industries

There is the need to continually formulate and implementbusiness-level strategies to sustain competitiveadvantage over time in different industry environments.


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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 ofproducts - no room for a mass-production

Diseconomies of scale

Strategies

Chainingnetworks of linked outlets toachieve cost leadership Franchisingfor rapid growth with proven business concepts,

reputation, management skills and economies of scale

Horizontal Mergeracquisition to obtain economies and growth IT and Internetto develop new business models

A fragmented industryis one composed of a largenumber of small and medium-sized companies.


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An embryonic industryisone that is justbeginning to develop when technological innovationcreates new market or product opportunities.

A growth industry isone in which first-

time demand is expanding rapidly asmany 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 betweenthe early adopters and the later majority

Companies must understand the factors that affect amarkets growth rate in order to tailor the business

model to the changing industry environment.


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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 forthem

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 andincreases its value to the average customer.

Key complementary products are developed that do the same.

Companies find ways to reduce production costs allowingthem to lower prices.


7/28Copyright Houghton Mifflin Company. All rights reserved. 6 | 7

Market Developmentand Customer Groups

Both innovators and early adopters enter the marketwhile the industry is in its embryonic state.

Figure 6.1



Market Share of DifferentCustomer Segments

Most market demand and industryprofits arise during the early andlate majority customer segments.

Figure 6.2



Strategic Implications:Crossing the Chasm

Innovators and Early Adopters are(While the Early Majority are NOT):

Technologically sophisticated and tolerant of engineeringimperfections

Typically reached through specialized distribution channels

Relatively few in number and not particularly price-sensitive

To cross the chasm between theEarly 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 distributionchannels to reach the early majority.

Design the product to meet the needs of the early majority sothat the product can be modified and produced or provided atlow cost.

Anticipate the moves of competitors.



The Chasm: AOL and Prodigy

The business model and strategies required to compete in anembryonic market populated by Early Adopters and

Innovators are very different than those required to compete ina high-growth mass market populated by the Early Majority.

Figure 6.3



Strategic Implicationsof 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 Trialabilitycomplementary products

Business-level strategy is a major determinant ofindustry profitability. The choice of business model

and strategies can accelerate or retard market growth.



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



Navigating Through the Life Cycleto Maturity

Embryonic stagesshare building strategies

Development of distinctive competencies and competitive advantage. Requires capital to develop R&D and sales/service competencies.

Growth stagesmaintain relative competitive position Strengthen business model to prepare to survive industry shakeout. Requires investment to keep up with rapid growth of the market.

Shakeout stageincrease 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 stagehold-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 model2. Stage of the industry life cycle

The amount and type of resources and capital needed to pursuea companys business model depends on two crucial factors:



Mature Industries

Evolution of mature industries Industry becomes consolidated as a result of the fierce

competition during the shakeout stage. Business level strategy isbased 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 Priceleadership Nonprice competition

A mature industryis dominated by a small number of largecompanies whose actions are so highly interdependent that successof one companys strategy depends on the response of its rivals.



Strategies forDeterring Entry of Rivals

Filling the Niches:making it difficult for new

competitors to break into anew industry & establish a

beachhead

Sending a Signal:to potential new entrantscontemplating entry that

new entry will be met withprice cuts

Warning of Retaliation:by increasing output andforcing down prices untilmarket entry would beunprofitable to entrants

Figure 6.5



Product Proliferation in theRestaurant Industry

Where the productspaces have been

filled, it is difficult fora new company to

gain a foothold in themarket and

differentiate itself.

Figure 6.6



- Ray Kroc,

Founder ofMcDonalds

We built our company byfocusing upon a pretty simple,

but focused premise of Quality,Service, Cleanliness, and Value.

www.mcdonalds.com



Strategies for ManagingIndustry Rivalry

Convey intentions(e.g. Tit-for-Tat)

regarding pricingto other companiesto allow the industryto choose the most

favorable pricingoptions.

Intent is to improveindustry profitability.

Informal pricingwhen one company

takes theresponsibility for

choosing the mostfavorable industry

pricing option.Formal price settingjointly by companies

is illegal.

Differentiationby offering products

with differentfeatures or applyingdifferent marketing

techniques:Market development Market penetration Product development Product proliferation

Market Signalingto secure

coordination withrivals as a capacitycontrol strategy andto reduce industryinvestment risks.

Collusion on timingof new investments

is illegal.

Figure 6.7


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Four Nonprice CompetitiveStrategies

Figure 6.8


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Toyotas Product Lineup

Toyota has used market development to become a broad differentiator andhas developed a vehicle for almost every main segment of the car market.

Figure 6.9


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Game Theory

Basic principles that underlie game theory:

Look Forward and Reason BackDecision Trees

Look forward, think ahead, and anticipate how rivals will respondto 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 Rivalhow is the rival likely to act Find the Dominant StrategyPayoff 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 allsimultaneously making choices about which business modelsand strategies to pursue in order to maximize their profitability.

These basic principles of game theory can be used indetermining which business model and strategies to pursue.


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A Decision Treefor UPSs Pricing Strategy

Figure 6.10


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A Payoff Matrixfor GM and Ford

Figure 6.11


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Altered Payoff Matrixfor GM and Ford

Figure 6.12


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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

Leadershipseeks to become dominant player in declining industry Nichefocuses on pockets of demand that are declining more slowly Harvest optimizes cash flow Divestmentsells business to others

A declining industry is one in which market demand hasleveled off or is falling and the size of total market starts to shrink.Competition tends to intensify and industry profits tend to fall.


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Factors for Intensity of Competitionin Declining Industries

Figure 6.13


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Strategy Selectionin a Declining Industry

Choice of strategy isdetermined by:

Severity of theindustry decline

Company strengthrelative to theremaining pocketsof demand

Figure 6.14


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Whatever you shoot is dead fora while before it starts to stink.

The same goes for strategies.- Gary Hamel

Chapter 6 Hill Textbook

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