Business-Level Strategy and the Industry

Environment

Strategic Management

Presented By Group 2:

Aishwary Shukla
Anirban Kaushik
Anisha R.
M.Raj Kumar
Shruti Bag 1
 The Industry Environment

• A company’s 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

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 Fragmented industry
A fragmented industry is one composed of a large
number of small and medium-sized companies.
• 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 3
 Embryonic Industries
An embryonic industry is one that is just
beginning to develop when technological
innovation creates new market or product
opportunities.

‒ Created by pioneers
‒ Technological innovation drives the
industry
‒ Slow growth in the 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 4
 Growth Industries
A growth industry is one in which
first-time demand is expanding
rapidly as many new customers
enter the market.

‒ Exploit Innovation
‒ Attract Imitators
‒
‒ Market
Reason demand drivesEmbryonic
for shift from the industry
to Growth Industry
1.Technology progress to increase value
2.Complementry products appear
3.Product/Process cost go down

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Market Development and Customer Groups

Both innovators and early adopters enter the market

while the industry is in its embryonic state. 6
 Market Share of Different Customer
Segments
Most market demand and industry profits arise during
the early and late majority customer segments.

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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, companies must:

– 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.

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 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.
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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
• 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

Different markets develop at different growth rates.

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 Navigating Through the Life Cycle to Maturity
Two crucial factors:
1. Competitive advantage of company’s business model
2. Stage of the industry life cycle

• 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 company’s investment depends on the level of competition and source of the
company’s competitive advantage
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 Strategy In Mature Markets

Strategies in
deterring entry
of rivals

Product Price Excess

Proliferation Cutting Capacity

 Filling the  Price War  Raise the level

niches of production

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 MANAGING RIVALRY

• Manage competitive interdependence and

decrease price rivalry
Four important strategies are
1. Price signaling
2. Price leadership
3. Nonprice competition
4. Capacity control

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 Price Signaling
• Companies increase or decrease product prices to
convey their intentions to other companies and so
influence their way of pricing

• Tit-for-tat strategy :
a company does exactly what it rivals do

• Over time the company sends a clear signal that it

will match any pricing moves
• The rivals will learn and stop price wars
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 Price Leadership
• One company assumes the responsibility to
choose the most favorable price
• Price set by the company with the highest cost
structure is often the basis for competitor’s
pricing.
Eg: US car makers set their price
• Make companies vulnerable to new low cost
firms

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 Non-price Competition

• Product Differentiation
Products with different or superior features or
by applying different marketing techniques

• Product and market segment dimensions are

used to identify four non-price competitive
strategies

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 Non-price Competition
Products
Existing New

Market Product
Existing Penetration Development
Marketing
Segments
Market Product
development proliferation
New

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 Capacity Control

• Price competition break out when excess

capacity exists in the industry
Causes of Excess capacity
• Shortfall in demand as in recession
• Companies simultaneously responding to
favorable conditions as an upsurge in demand
• Technological developments
• New entrants to the industry
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 Choosing a Capacity control Strategy
If the companies are always plagued by price cutting and price wars, they will
be unable to recoup the investments in their generic strategies which is also
not good for the overall industry

• Two strategic Choices

1. Each company individually try to preempt its rivals
• Forecast a large increase in demand, move rapidly and
achieve the first-mover advantage
• Extremely risky

2. Companies collectively coordinate with each other

• Announcing future investments and sharing information and
forecasts
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 Game Theory
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.

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
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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
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.
• 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

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Factors for Intensity of Competition in
Declining Industries

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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

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