Chapter Eight

Tailoring Strategy to Fit Specific Industry and Company Situations

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.

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.

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.

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

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 market’s growth rate – in order to tailor the business

model to the changing industry environment.

Market Development and Customer Groups

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

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 productsBusiness-level strategy is a major determinant of industry

profitability. The choice of business model and strategies can accelerate or retard market growth.

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 company’s investment depends on the level of competition and source of the

company’s competitive advantage.

1. Competitive advantage of company’s business model2. Stage of the industry life cycle

The amount and type of resources and capital needed to pursue a company’s 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 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 Non-price competition

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.

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.

Toyota’s Product LineupToyota 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

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.

A Decision Tree for UPS’s Pricing Strategy

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.

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

Matching Strategy to a Company’s Situation

Most important

drivers shaping a

firm’s strategic

options fall into

two categoriesFirm’s competitive

capabilities, market position,

best opportunities

Nature of industry

and competitive

conditions

New and unproven market Proprietary technology Lack of consensus regarding which of several competing

technologies will win out Low entry barriers Experience curve effects may permit cost reductions as

volume builds Buyers are first-time users and marketing involves inducing

initial purchase and overcoming customer concerns First-generation products are expected to be rapidly improved

so buyers delay purchase until technology matures Possible difficulties in securing raw materials Firms struggle to fund R&D, operations and build resource

capabilities for rapid growth

Features of an Emerging Industry

Strategy Options for Competing in Emerging Industries

Pursue new customers and user applications

Enter new geographical areas

Make it easy and cheap for first-time buyers to try product

Focus advertising emphasis on

Increasing frequency of use

Creating brand loyalty

Use price cuts to attract price-sensitive buyers

End-Game Strategies for Declining Industries

An end-game strategy can take either of two paths

Slow-exit strategy involving

Gradual phasing down of operations

Getting the most cash flow from the business

Fast-exit strategy involving

Disengaging from an industry during early stages of decline

Quick recovery of as much of a company’s investment as possible

Features of High-Velocity MarketsRapid-fire technological change

Short product life-cycles

Entry of important new rivals

Frequent launches of new competitive moves

Rapidly evolving customer expectations

Meeting the Challenge of High-Velocity Change

Three Strategy Horizons for Sustaining Rapid Growth

Risks of PursuingMultiple Strategy Horizons

Firm should not pursue all options to avoid stretching itself too thin

Pursuit of medium- and long-jump initiatives may cause firm to stray too far from its core competencies

Competitive advantage may be difficult to achieve in medium- and long-jump businesses that do not mesh well with firm’s present resource strengths

Payoffs of long-jump initiatives may prove elusive

Thank you