Chapter 8 tailoring strategy bus 690Presentation Transcript
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
There is the need to continually formulate and implement business-level strategies to sustain competitive advantage over time in different industry environments.
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
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 Features of 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
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
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. 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
Business-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.
Competitive advantage of company’s business model
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:
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.
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 Lineup Toyota has used market development to become a broad differentiator and has developed a vehicle for almost every main segment of the car market.
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
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
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
relative to the
Matching Strategy to a Company ’ s Situation Most important drivers shaping a firm’s strategic options fall into two categories
Firm’s competitive capabilities, market position, best opportunities
Nature of industry and competitive conditions
New and unproven market
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 Markets
Rapid-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 Pursuing Multiple 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