BUSINESS-LEVEL STRATEGIES AND INDUSTRY ENVIRONMENTS

BUSINESS 189 (chpt. 6)

Fall 2009

DR. MARK FRUIN

ENVIRONMENTS RULE• FIRMS MUST FIT THEIR STRATEGIES TO THE

ENVIRONMENTS IN WHICH THEY EXIST• DONUT RING MODEL AS APPROXIMATION• BASIC LAW OF EVOLUTION = ADAPT OR DIE OUT

– INDUSTRY ENVIRONMENT

– COMPETITIVE ENVIRONMENT

– INSTITUTIONAL ENVIRONMENT

– MACRO-ECONOMIC ENVIRONMENT

– ORGANIZATIONAL ENVIRONMENT

SUSTAINING COMP ADVANT IN DIFF INDUSTRY ENVIRONMENTS

• RECOGNIZE DIFF INDUSTRY ENVIRONMENTS

• FRAGMENTED VERSUS CONCENTRATED INDUSTRIES– FRAGMENTED INDUSTRY STRATEGIES:

• CONCENTRATED INDUSTRIES HAVE STAGES DRIVEN BY TECH & MRKT MATURATION– EMBRYONIC– GROWTH (EMERGING & SHAKEOUT)– MATURE – DECLINING

FRAGMENTED INDUSTRY NEW • LARGE NUMBERS OF SMALL AND MED-

SIZED COMPANIES

• LOW BARRIERS TO ENTRY

• HARD TO REALIZE ECONOMIES OF SCALE & SCOPE

• BETWEEN GENERIC STRATEGIES, WHICH ONE APPLIES???– COST LEADERSHIP OR DIFFERENTIATION?

OVERCOMING FRAGMENTATION• CHAINING STRATEGY (WAL-MART)• FRANCHISING (CENTURY 21, McD)• HORIZONTAL MERGER (BUDWEISER,

NOW IN-BEV)• CONSOLIDATE W/ NEW TECH

– AMAZON, eBAY, GOOGLE (?)

• HIGH LEVELS OF PERSONAL/PROFESSIONAL SERVICE– HIGH END HEALTH CLUBS, LAW FIRMS

LEADING IN EVOLVING INDUSTRIES (THAT WILL BE CONCENTRATED)

• INDUSTRIES ARE COMPOSED OF SEGMENTS & DRIVEN BY TECHNOLOGY

• SEGMENTS ARE DEFINED AS?– PRODUCT ____– CUSTOMER ____– LOCAL DIFFERENCES

• UNDERSTAND WHAT’S GOING ON IN INDUSTRY – TARGET PRODUCT/ MARKET SEGMENTS ACCORDINGLY– OF COURSE, HAVE TO TARGET WHERE INDUSTRY IS

GOING RATHER THAN WHERE IT IS TODAY

EMBRYONIC/EMERGING/GROWTHINDUSTRIES

• EMBRYONIC INDUSTRY = WHEN TECH BEGINNING TO DEVELOP – TECH INNOVATION DRIVES INDUSTRY– WHICH INDUSTRIES EMBRYONIC TODAY?

• EMERGING/GROWTH IND WHEN MARKET DEMAND BEGINS TO GROW RAPIDLY– MARKET DEMAND DRIVES INDUSTRY– OBVIOUSLY DEMAND GROWTH TAKES TIME– SOME FIRMS CATCH THE WAVE & SOME DON’T

E/E/G INDUSTRIES• SLOW GROWTH AT FIRST BECAUSE

– LIMITED PERFORMANCE/POOR QUALITY– CUSTOMERS UNFAMILIAR W/ NEW TECH– LACK COMPLEMENTARY PRODUCTS– PRODUCTION COSTS ARE HIGH

• INDUSTRY GOES FROM EMBRYONIC -> HIGH GROWTH - WHY?– TECH PROGRESS MAKES PRODUCT EASIER TO

USE & INCREASES THEIR VALUE– COMPLEMENTARY PRODUCTS APPEAR– PRODUCT/PROCESS COSTS GO DOWN

TECHNOLOGY/S-CURVE HINGES PARTLY ON CUSTOMER DEMAND

• INNOVATORS (1%)– TECHIES, GEEKS

• EARLY ADOPTERS (5%)– ENGINEERS, ENTREPRENEURS

• EARLY MAJORITY (24%)– PRAGMATISTS

• LATE MAJORITY (45%)– STUCK IN THE MUD BUT NOT LUDDITES– EXTRA CREDIT: WHO ARE LUDDITES?

• LAGGARDS (24%)

CROSSING THE CHASM

• GORDON MOORE, FORMER CEO OF INTEL & ORIGINATOR MOORE’S LAW (WHICH IS ?)– MANY COMPANIES CANNOT TRANSITION

FROM EMBRYONIC TO GROWTH MARKETS• THERE MAY BE TWO OR THREE “CHASMS”

– THEY FAIL TO DEVELOP MASS MARKETS NEEDED TO GROW PRODUCT

– FAIL ON PROD FEATURES AND/OR CUST CHAR– APPLE (I) AS FIRM THAT FELL IN THE CHASM?

TIPPING POINT• BIG CHANGES CAN HAPPEN SUDDENLY

– THINGS BUILD UP & BUILD UP, AND THEN BANG!

• TIPPING PT THEORY FROM EPIDEMIOLOGY– STATE OF CONTAGIOUSNESS

– GRADUAL, ALMOST IMPERCEPTIBLE CHANGE RAPIDLY ACCELERATES AT A CERTAIN POINT

– CRITICAL MASS CAN UNLEASH EPIDEMIC MOVEMENT: SUDDENLY EVERYONE’S INFECTED

TIPPING PT • EPIDEMICS ARE A FUNCTION OF:

– THE PEOPLE WHO TRANSMIT INFECTION (INFECTIOUS AGENTS)

– INFECTIOUS AGENT ITSELF (HOW VIRULENT; HOW TRANSMITTED?)

– ENVIRONMENT IN WHICH INFECTIOUS AGENT OPERATES (HUMAN BEINGS ARE MORE SENSITIVE IN CERTAIN ENVIRONMENTS THAN OTHERS; CERTAIN ENVIR MORE CONDUCIVE)

• SUPPORT FOR IRAQ WAR (ESP. W/ DEMO CONGRESS)• ATTITUDES TOWARD GLOBAL WARMING • LIKELIHOOD OF BUYING A PRIUS

FACTORS AFFECTING RATE OF ADOPTION

• PRODUCT’S RELATIVE ADVANTAGE

• COMPATIBILITY WITH EXISTING NEEDS AND HABITS

• COMPLEXITY/DEGREE OF DIFFICULTY IN UNDERSTANDING AND/OR USING

• TRIALABILITY

• OBSERVABILITY

• EXISTENCE OF COMPLEMENTARY PROD

FIGURE 6.4 RATES OF DIFFUSION• WHAT’S THE DIFFERENCES BETWEEN THE 45

DEGREE RATES OF DIFFUSION AND THE NEARLY 90 DEGREE RATES?– AUTOS, ELECTRICITY & TELEPHONE VS. TELEVISION,

VCR & CELL PHONE

• WHICH IS MORE IMPORTANT IN DRIVING DIFFUSION - FIRMS OR TECHNOLOGIES?– PUSH OR PULL?

• CAN ANYTHING DIFFUSE MORE RAPIDLY THAN CELL PHONES?– RATE OF DIFFUSION DEPENDS ON?

HOW SOON WILL RIVALS APPEAR?

• HOW IMPORTANT ARE COMPLEMENTARY ASSETS & HOW MANY SOURCES ARE AVAILABLE?

• HEIGHT OF BARRIERS TO IMITATION IN PRODUCTS & PROCESSES?

• HOW MANY CAPABLE RIVALS?

• GO IT ALONE, LICENSE OR PARTNER?

GO IT ALONE, PARTNER OR LICENSE?

• EASE OF IMITATION/REPLICATION (INCLUDES REVERSE ENGINEERING)– EASY/NOT-SO-EASY

• IMPORTANCE OF COMPLEMENTARY ASSETS/RESOURCES/TECHNOLOGIES– IMPORTANT/NOT-SO-IMPORTANT

• NUMBER OF CAPABLE COMPETITORS– FEW vs MANY– DOMESTIC vs GLOBAL

TIPPING PTS & VIRAL MRTNG• SOME PEOPLE ARE VERY INFLUENTIAL• LEAD ADOPTERS/LEAD SUPPLIERS, FOR EXAMPLE• SOME PEOPLE CAN “INFECT/AFFECT” MANY

OTHERS (ESP. IF YOU USE A TECH. WITH SCALE, SCOPE & LEVERAGE, LIKE INTERNET)– RECENT EXAMPLES: OBAMA & PRES CAMPAIGN

– ANGELA JOLIE AND MADONNA

B-L (PRODUCT/MARKET SEGMENT) STRATEGIES IN MATURE INDUSTRIES

• B-L STRATEGY ABOUT HOW FIRMS COLLECTIVELY REDUCE STRENGTH OF COMPETITION (IN MATURE INDUSTRIES)– STRATEGIES TO DETER ENTRY– STRATEGIES TO MANAGE RIVALRY– STRATEGIES TO CONTROL SUPPLY AND

DISTRIBUTION

MATURE INDUSTRY STRATGIES• REMEMBER PRODUCT DIFFERENTIATION

ACHIEVED IN 4 WAYS IN FUNCTIONAL SENSE– EFFICIENCY, QUALITY, INNOVATION & CUSTOMER

RESP/SAT

• STRATEGIES TO DETER ENTRY– PRODUCT PROLIFERATION

• FILL ALL THE NICHES

– PRICE CUTTING• NEW FIRMS TYPICALLY HAVE HIGHER COSTS

– MAINTAINING EXCESS CAPACITY• PUT NEW ENTRANTS ON NOTICE THAT YOU’RE WILLING

& ABLE TO RAMP UP PROD & FILL PRODUCT PIPELINE

COMPETITIVE ADVANTAGES• ARE ACHIEVED BY MAKING CHOICES

– PRODUCT FEATURES– WHICH CUSTOMERS/WHERE– BASED ON ORGANIZATIONAL CAPABILITIES

• REQUIRE CONTINUED UPGRADING– INVESTING– PRACTICING (ORG. LEARNING)– EVALUATING/ASSESSING/COMPARING &

CONTRASTING– MAKING DISCRETIONARY CHOICES =

MANAGEMENT

STRATEGIES TO MNG RIVALRY • PRICE SIGNALING

– CREDIBLE WILLINGNESS TO CUT PRICES

– NEED TO BE WILLING & ABLE TO CUT PRICES

• PRICE LEADERSHIP– TAKE LEADERSHIP IN SETTING PRICES OR RESPOND

RAPIDLY WHEN OTHERS DO

• CAPACITY CONTROL: MANAGE OUTPUT• NON-PRICE COMPETITION (AS OPPOSED TO?)

– PRODUCT DIFFERENTIATION• MARKET PENETRATION (E.G., ADVERTISING)

• PRODUCT DEVELOPMENT (NEW PROD DEVELOPMENT)

• MARKET DEVELOPMENT (NEW MARKET DEVELOPMENT)

• PRODUCT PROLIFERATION

STRATEGIES TO CONTROL SUPPLY & DISTRIBUTION

• VERTICAL INTEGRATION STRATEGIES– TO MAKE OR BUY DECISIONS– COMPLEXITY OF PRODUCTS/PROCESSES– AFTER MARKET CARE

• VERTICAL DIS-INTEGRATION STRATEGIES– WHY OUTSOURCE/OFFSHORE

• NOT OUR DISTINCTIVE COMPETENCE

• SOMEONE ELSE CHEAPER, BETTER & FASTER

• RESULTS OF OUTSOURCING FOR CAPABILITIES

DOMINANT STRATEGY• A STRATEGY WHERE YOU ARE BETTER OFF, NO

MATTER WHAT RIVALS DO• HOWEVER, AS PRISONER DILEMMA (2

PERSON/FIRM GAME) SHOWS– IF NEITHER FIRM CAN TRUST THE OTHER

– BOTH MORE ARE LIKELY TO SUFFER

– IN MANY COP SHOWS, THE KEY ISSUE• BE FIRST TO CUT A DEAL

– IN MANY COMPETITIVE SITUATIONS, THE KEY ISSUE• SHOULD I REMOVE REBATES OR NOT?

STRATEGY IN DECLINING IND• ONCE DEMAND STARTS TO FALL, AN INDUSTRY

IS IN DECLINE– HOWEVER, IT’S TECHNOLGY THAT DRIVES

INDUSTRY LIFE CYCLE, NOT DEMAND– SO, IF MAJOR PLAYERS INNOVATE IN VARIOUS

WAYS, INDUSTRY MAY NOT BE IN DECLINE

• INTENSITY OF COMPETITION IN DECLINING INDUSTRIES VARIES WITH– RATE OF DECLINE– HEIGHT OF EXIT BARRIERS, INCLUDING REPUTATION

EFFECTS– AMOUNT OF SUNK COSTS– IF PRODUCTS ARE DIFFERENTIATED OR NOT

MATURE VS. DECLINING INDUSTRIES

• MATURE– SALES FALL OFF TO 1-2% GROWTH– REPLACEMENT SALES PREDOMINATE– # OF FIRMS DECLINES– NO (OR LITTLE) PROPRETAIRY TECHNOLOGY

• DECLINING– FALLING SALES– CUSTOMERS DO NOT REPLACE PRODUCTS– EVEN FEWER FIRMS– OCCASIONALLY, NEW WRINKLES ON TECHNOLOGY

BUT MOSTLY FIRMS ARE UNWILLING TO INVEST IN NEW TECH

STRATEGIES FOR DECLINING INDUSTRIES

• SELECTION DEPENDS ON – INTENSITY OF COMPETITION– COMPANY STRENGTHS RELATIVE TO COMPETITION

• LEADERSHIP STRATEGY– BUY OUT RIVALS, PICK UP MKT SHARE

• NICHE STRATEGY– FIND PROFITABLE SEGMENTS (W/I DECLINING

INDUSTRY)

• HARVEST STRATEGY– OPTIMIZE CASH FLOW AS EXIT INDUSTRY

• DIVESTMENT STRATEGY– SELL OUT FAST (BEFORE OTHERS CATCH ON)

QUESTIONS• WHAT ARE THE DANGERS ASSOC WITH BEING

LEADER IN EMBRYONIC AND GROWTH INDUSTRIES?– FIRST-TO-MARKET vs FAST FOLLOWER

• TO WHAT EXTENT CAN FIRMS CONTROL INDUSTRY PROFITABILITY?– WHEN, WHERE & HOW? (AT WHAT STAGE?)

– ECONOMIES OF SPEED

– WHEN IS THIS LEGAL-ILLEGAL?• WHEN THERE’S NO ACTUAL AGREEMENT; PRICE

SIGNALING, AS EXAMPLE OF LEGAL COLLUSION

– WHAT REQUIRED TO SUSTAIN A CONSPIRACY?

MORE QUESTIONS• HOW DO GENERIC COMPETITIVE STRATEGIES

INTERSECT/INTERACT W/ INDUSTRY LIFE CYCLE?– GENERIC COMP. STRAT. TOO SIMPLISTIC, AFTER THIS

CHAPTER!!• COST LEADERSHIP & DIFFERENTIATION MEAN DIFFERENT

THINGS AT DIFFERENT STAGES OF ILC

• WITH PRODUCT LIFE CYCLE?• ARE PRODUCT LIFE CYCLE EFFECTS CONSISTENT

ACROSS ALL INDUSTRY SEGMENTS?• SAME SORT OF QUESTIONS WITH REGARD TO F-L

STRATEGIES• SAME SORT OF QUESTION WITH RESPECT TO

EARLY ADOPTER/CUSTOMER SEGMENTS MODEL• IN OTHER WORDS, INTERACTION EFFECTS