Transcript Chapter 7 Strategy in High

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Competitive Strategy and the
Industry Environment
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The Industry Environment
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Positioning a company to sustain
competitive advantage over time in
different kinds of industry environments
Different industry environments present
different opportunities and threats
A company’s business model has to
change to meet the environment
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Fragmented Industries
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An industry composed of a large number of
small and medium-sized companies
Reasons for fragmented industries
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Low barriers to entry due to lack of economies of
scale
Diseconomies 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
operation
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Strategies in Fragmented
Industries: Chaining
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Establishing networks of linked
merchandising outlets that function as
one large business entity
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To obtain the advantages of cost
leadership
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Strategies in Fragmented
Industries: Franchising
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The franchisor grants to franchisees the
right to use the parent’s name,
reputation, and business skills
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To maintain control over many small
outlets and retain differentiated appeal
To lessen the financial burden of swift
expansion and permit rapid growth
To reap economies of scale in advertising,
purchasing, management, and distribution
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Strategies in Fragmented
Industries: Horizontal Merger
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Acquiring or merging with industry
competitors
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To obtain economies of scale
To secure a national market
To pursue a cost-leadership or
differentiation strategy (or both)
“Networks” of similar-size companies
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To obtain economies of scale
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Strategies in Fragmented
Industries: Using IT
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Using new technology to develop new
business models
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To consolidate a fragmented industry
Price, selection, geography
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Embryonic and Growth
Industries
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Reasons for slow growth in market
demand
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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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Embryonic and Growth
Industries (cont’d)
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Mass markets typically start to develop
when
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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 Development and
Customer Groups
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Market Share of Different
Customer Groups
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Strategic Implications:
Crossing the Chasm
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Crossing the chasm between early adopters
and the early majority
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Innovators and early adopters are technologically
sophisticated and will tolerate engineering
imperfections (the early majority are not)
Innovators and early adopters are typically
reached through specialized distribution channels
(the early majority are not)
Innovators and early adopters are relatively few in
number and not particularly price sensitive (the
early majority are not)
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The Chasm: AOL and Prodigy
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Crossing the Chasm
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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 and so that it can
be modified and produced or provided
at low cost
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Anticipate the moves of competitors
Strategic Implications of
Market Growth Rates
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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
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Use of mass media
Low-cost mass production
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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.
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Factors Affecting Market
Growth Rates
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Book
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Relative advantage
Compatibility
Complexity
Trialability
Observability
Availability of complementary products
Also consider: emergence of a standard
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Strategic Implications of
Differences in Growth Rates
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To increase demand for a new
technology or product
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Show its relative advantage, make it
compatible with customers’ prior needs and
experiences, reduce its complexity, make it
possible for customers to try or observe it,
ensure that necessary complements are in
place
Identify and court potential opinion leaders
to promote viral diffusion
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Strategy in Mature Industries
Strategies for deterring entry of rivals
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Product Proliferation in the
Restaurant Industry
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Pricing Games
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Predatory pricing
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Using revenue generated in one product
market to support pricing below the
company’s costs of production in another
to drive rivals out
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Pricing Games - continued
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Limit pricing -The established
companies charge a price below the
profit-maximizing quantity and price
that is below the average cost structure
of new entrants but above their own
average cost structure
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Limit Pricing Strategy
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Maintaining Excess Capacity
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Maintaining the physical capability to
produce more of a product than what is
in demand to warn potential entrants
that if they enter, output can be
increased and prices driven down
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Strategies to Manage Rivalry
in Mature Industries
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Price signaling
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Price leadership
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Tit-for-tat strategy
Formal price leadership is illegal
Nonprice competition
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Product differentiation
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Four Nonprice Competitive
Strategies
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Strategies to Manage Rivalry
in Mature Industries (cont’d)
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Market penetration
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Product development
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Expanding market share in existing
markets
Creating new or improved products to
replace existing ones
Market development
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Finding new market segments for a
company’s products
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Strategies to Manage Rivalry
in Mature Industries (cont’d)
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Product proliferation
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Large companies in an industry all have a
product in each market segment;
competition is based on product
differentiation
Capacity control
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Try to preempt rivals and seize initiative
Coordinate with rivals indirectly
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Supply and Distribution
Strategy in Mature Industries
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Many companies in the mature stage of
an industry may either become more
involved in the value chain (vertical
integration) or they may deintegrate
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Anonymous approach
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An arms-length, short-term relationship
Relational approach
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A long-term relationship
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Factors that Determine the
Intensity of Competition in
Declining Industries
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Strategy in Declining
Industries
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Leadership
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Niche
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Focusing on pockets of demand that are declining
more slowly than the industry as a whole
Harvest
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A company seeks to become the dominant player
Optimizing cash flow
Divestment
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Selling off the business
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Strategy Selection in a
Declining Industry
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