Business-Level Strategy and the Industry Environment

Business-Level Strategy and the Industry Environment

Fragmentation

• Fragmented Industry: Composed of a large number of small and medium-sized companies.
  • Reasons for Fragmentation:
  • Lack of scale economies.
  • Local brand loyalty in the industry.
  • Low entry barriers due to the absence of scale economies and national brand loyalty.
• Focus Strategy: Best suited for fragmented industries.

Consolidating a Fragmented Industry Through Value Innovation

• Value Innovator: Defines value differently from established competitors.
  • Achieves lower cost through scale economies.

Chaining and Franchising

• Chaining:

  • Achieves cost leadership by establishing a network of interconnected merchandising outlets.
  • Uses information technology to function as a cohesive operation, enhancing national branding.

• Franchising:

  • Involves granting rights to franchisees to use the franchisor’s name and business model for a fee and a share of profits.
  • Advantages:
  • Rapid expansion through franchisee financing.
  • Franchisees are incentivized to optimize operations.
  • Innovations by franchisees can enhance performance across the system.
  • Disadvantages:
  • Tight operational control is challenging.
  • Significant portion of profits goes to franchisees.
  • Increased costs if franchisees face a higher cost of capital.

Horizontal Mergers

• Definition: Merging with or acquiring competitors to form a single more competitive entity.
  • Benefits:
  • Promotes economies of scale.
  • Builds a strong national brand.
  • Drawbacks:
  • Overpaying for the acquisition.
  • Potential inefficiency of acquisitions.
  • Cultural clashes between merging companies.

Strategies in Embryonic and Growth Industries

• Embryonic Industry:

  • Characterized by limited initial demand due to:
  • Product quality issues.
  • Customer unfamiliarity.
  • Underdeveloped distribution.
  • Absence of complementary products.
  • High production costs due to low volume.

• Growth Stage: Occurs as the mass market develops:

  • Triggered by increased product value from technological advances, development of complementary products, and lowered production costs leading to higher demand.

Strategic Implications in Market Development

• Competitive Chasm: Transition between early adopters and the mass market.
  • To cross the chasm:
  • Identify needs of early adopters.
  • Adjust business model (products, distributions, marketing).
  • Set competitive pricing.
  • Abandon outdated business models.

Market Segmentation Approaches

• Innovators and Early Adopters:

  • Technologically savvy and willing to overlook initial product flaws.
  • Targeted via specialized distribution.

• Early Majority:

  • Values reliability and ease of use.
  • Requires widespread distribution and mass advertising for acceptance.

Growth Rates and Strategic Implications

• Relative Advantage: The perception of better satisfaction of customer needs.
• Complexity: Easier-to-use products diffuse more quickly.
• Compatibility: Products aligning with existing needs diffuse faster.
• Trialability: Easier trial opportunities facilitate diffusion.
• Observability: Positive experiences we can showcase attract more users.

Strategies in Mature Industries

• Dominated by a few large companies influencing competition.
• Strive to moderate competition for profitability using strategies like:
  • Product Proliferation: Filling market niches to deter new entrants.
  • Limit Price Strategy: Setting low prices to signal an inability for newcomers to match.
  • Technology Upgrading: Investing in tech to deter new competitors.
  • Strategic Commitments: Long-term investments signaling market commitment.

Managing Rivalry

• Price Signaling: Adjusting prices to communicate intent to competitors.
• Price Leadership: One company leading pricing to benefit the industry.
• Non-Price Competition: Differentiating products to deter competition.

Capacity Control Strategies

• Strategies to manage expansion and prevent excess capacity.
  • Influencing factors:
  • New technologies exceeding output of old ones.
  • Industry recession leading to overcapacity.
  • Rapid growth in declining demand.

Choosing a Capacity-Control Strategy

• Forecasting demand and coordinating actions with competitors can reduce risks.
• Collusion on Timing: Illegally coordinating timings may violate antitrust laws.

Strategies in Declining Industries

• Leadership Strategy: Develop strategies to dominate in a shrinking market.
• Niche Strategy: Catering to less declining segments for profitability.
• Harvest Strategy: Minimizing asset use to maximize profit extraction.
• Divestment Strategy: Exiting through asset sales.