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Industry Environment

o  Different environments present different opportunities and threats.

o  Business model/strategies have to change to meet environment.

o  Face challenges developing/maintaining a competitive strategy in:

•  Fragmented Industries • Mature Industries •  Embryonic Industries • Declining Industries •  Growth Industries

Need to continually formulate/implement business-level strategies to sustain competitive advantage over time.

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Reasons for Fragmented Industries

o Low barriers to entry o Low entry barriers permit constant entry

by new companies o Specialized customer needs require

small job lots o Diseconomies of scale

“...composed of a large number of small and medium-sized companies.”

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Strategies for Fragmented Industries

ü Chaining– linked outlets to achieve cost leadership ü Franchising- rapid growth with proven business concepts, reputation, management skills and economies of scale ü Horizontal Merger – acquisition to obtain economies/growth ü IT/Internet- develop new business models 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6-3

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v Embryonic- just beginning to develop when technological innovation creates new market or product opportunities. v Growth- first-time demand is expanding rapidly as many new customers enter market.

Embryonic and Growth Industries

Companies must understand factors that affect a market’s growth rate – in order to tailor the business

model to the changing industry environment.

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Market Characteristics: Embryonic/Growth Industries

Reasons for Slow Growth: •  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 Characteristics: Embryonic/Growth Industries

Mass Markets Develop When: •  Technological progress makes

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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Innovators & Early Adopters Are:

o Technologically sophisticated and tolerant of engineering imperfections

o Typically reached through specialized distribution channels

o Relatively few in number and not particularly price-sensitive

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6 -8

Crossing the Chasm Companies must:

•  Correctly identify needs of first wave of early majority users.

•  Alter business model in response. •  Alter value chain & distribution channels to

reach early majority. •  Design product to meet needs of early

majority so product can be modified, produced, & provided at low cost.

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The Chasm: AOL and Prodigy

Business models to compete in embryonic market populated by early innovators very different than to compete in high-growth

mass market populated by early majority.

Figure 6.4

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Strategic Implications of Market Growth Rates

o  Different markets develop at different rates. o  Growth rate measures rate industry’s

product spreads. o  Growth rates for products accelerate over

time: •  Use of mass media • Low-cost mass

production o  Factors affecting market growth rates:

•  Relative advantage • Complexity •  Compatibility • Observability •  Availability of • Trialability

complementary products

Business-Level Strategy

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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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Crucial Factors of Investment Strategy

1.  Competitive advantage of company’s business model

2.  Stage of the industry life cycle

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Stages of Life Cycle o  Embryonic– share building

•  Distinctive competencies/competitive advantage •  Capital to develop R&D &sales/service competencies

o  Growth– maintain competitive position •  Strengthen business model to survive shakeout •  Investment to keep up with growth

o  Shakeout– competition is strongest •  Invest in share-increasing strategy •  Weak companies should invest in harvest strategy

o  Maturity– defend business model •  Dominant companies reap ROI •  Investment depends on competition & source

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Mature Industries o  Evolution

•  Consolidate due to fierce competition in shakeout •  Strategy based on established companies collectively

reduce strength competition •  Interdependent companies protect industry

profitability. o  Strategies

•  Deter entry w  Product proliferation w Maintain w  Price cutting excess capacity

•  Manage rivalry w Price signaling w Capacity control w Price leadership w Nonprice competition

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Nonprice Competitive Strategies

Figure 6.8

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Declining Industries Strategies

o Leadership – seeks to become dominant player

o Niche – focuses on pockets of demand declining more slowly

o Harvest – optimizes cash flow o Divestment – sells business to

others 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.