business- level strategy and the industry environment
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Business- Level Strategy and the Industry Environment. Level of Strategies. Industrial Environment. Corporate level. Corporate level. Business Level. Functional Level. The Industry Environment. Different industry environments present different opportunities and threats. - PowerPoint PPT PresentationTRANSCRIPT
Business- Level Strategy and the
Industry Environment
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Level of Strategies
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Business Level
Corporate level
Functional Level
Corporate level
Industrial Environment
The Industry Environment
• Different industry environments present different opportunities and threats.
• A company’s business model and strategies have to change to meet the environment.
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There is the need to continually formulate and implement business-level strategies to sustain competitive advantage over time in different industry environments.
The Industry Environment
• Companies must face the challenges of developing and maintaining a competitive strategy in:– Fragmented Industries– Embryonic Industries – Growth Industries – Mature Industries – Declining Industries
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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
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A fragmented industry is one composed of a large number of small and medium-sized companies.
Fragmented Industries
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Chaining
IT and Internet
Fragmented Industries Franchising
Horizontal Merger
Competitive Featuresof a Fragmented Industry
• Absence of market leaders with large market shares or widespread buyer recognition
• Product/service is delivered to neighborhood locations to be convenient to local residents
• Buyer demand is so diverse that many firms are required to satisfy buyer needs
• Low entry barriers • Absence of scale economies• Market for industry’s product/service may be globalizing, thus putting
many companies across the world in same market arena• Exploding technologies force firms to specialize just to keep up in
their area of expertise • Industry is young and crowded with aspiring contenders, with no firm
having yet developed recognition to command a large market share
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Embryonic Industries
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An embryonic industry is one that is just beginning to develop when technological innovation creates new market or product opportunities.
Growth Industries
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A growth industry is one in which first-time demand is expanding rapidly as many new customers enter the market.
Companies must understand the factors that affect a
market’s growth rate – in order to tailor the business model to
the changing industry environment.
Market Characteristics: Growth Industries
• 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.
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Market Characteristics: Embryonic 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
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Market Development and Customer
Groups
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Both innovators and early adopters enter the market while the industry is in its embryonic state.
Market Share of Different Customer Segments
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Most market demand and industry profits arise during the early and late majority customer segments.
Strategic Implications: Crossing the Chasm
• To cross the chasm between the early adopters and the early majority, companies must:– Identify the needs early majority users.– Alter the business model.– Alter the value chain and distribution
channels to reach the early majority.– Design the product to meet the needs of the
early majority– Anticipate the moves of competitors.
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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
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Strategic Implications of Market Growth Rates
• Factors affecting market growth rates:–Relative advantage–Complexity–Compatibility–Observability–Availability of complementary products–Trialability
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Differences in Diffusion Rates
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Different markets develop at different growth rates
Navigating Through the Life Cycle to Maturity
• Embryonic stages – share building strategies • Growth stages – maintain relative competitive
position
• Shakeout stage – increase share during fierce competition
• Maturity stage – hold-and-maintain to defend business model
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1. Competitive advantage of company’s business model2. Stage of the industry life cycle
Two crucial factors:
Mature Industries
Evolution of mature industries– Industry becomes consolidated. – Business level strategy is based on how established
companies collectively try to reduce strength of competition.
– Interdependent companies try to protect industry profitability.
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A mature industry is dominated by a small number of large companies whose actions are so highly interdependent that success of one company’s strategy depends on the response of its rivals.
Mature Industries
Strategies– Deter entry into industry
Product proliferation Maintaining excess capacity Price cutting
– Manage industry rivalry Price signaling Capacity control Price leadership Nonprice competition
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Strategies for Deterring Entry of Rivals
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Filling the Niches: making it difficult for new
competitors to break into a new industry & establish a
beachhead
Sending a Signal: to potential new entrants
contemplating entry that new entry will be met with price cuts
Warning of Retaliation: by increasing output and forcing down prices until market entry would be unprofitable to entrants
Product Proliferation in the Restaurant Industry
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Where the product spaces have been
filled, it is difficult for a new company to
gain a foothold in the market and
differentiate itself.
Strategies for Managing Industry Rivalry
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Convey intentions (e.g. Tit-for-Tat) regarding pricing to other companies to allow the industry to choose the most favorable pricing options. Intent is to improve industry profitability.
Informal pricing when one company takes the responsibility for choosing the most favorable industry pricing option. Formal price setting jointly by companies is illegal.
Differentiation by offering products with different features or applying different marketing techniques: • Market development• Market penetration• Product development• Product proliferation
Market Signaling to secure coordination with rivals as a capacity control strategy and to reduce industry investment risks. Collusion on timing of new investments is illegal.
Four Nonprice Competitive Strategies
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Toyota’s Product Lineup
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Toyota has used market development to become a broad differentiator and has developed a vehicle for almost every main segment of the car market.
Game Theory
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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.
Game Theory
• Basic principles that underlie game theory:– Look Forward and Reason Back – Decision
Trees– Know Thy Rival – how is the rival likely to act– Find the Dominant Strategy – Payoff Matrix– Strategy Shapes the Payoff Structure of the Game
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A Decision Tree for UPS’s Pricing Strategy
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A Payoff Matrix for a Cash-Rebate Program for GM and Ford
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Altered Payoff Matrix for GM and
Ford
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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
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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.
Declining Industries
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Leadership
Harvest Declining Industries Niche
Divestment
Factors for Intensity of Competition in Declining Industries
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Strategy Selection in a Declining
Industry
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Choice of strategy is determined by:• Severity of the industry decline• Company strength relative to the remaining pockets of demand
Summary
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Business Level
Corporate level
Functional Level
Corporate level
Cost LeadershipDifferentiationFocus
Fragmented Embryonic Growth Mature Declining