Strategic Managment

1. Chapter 6Chapter 6
BUSINESS-LEVELBUSINESS-LEVEL
STRATEGY AND THESTRATEGY AND THE
INDUSTRYINDUSTRY
ENVIRONMENTENVIRONMENT

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Learning ObjectivesLearning Objectives
• Explain why managers tailor their businessExplain why managers tailor their business
models to existing conditionsmodels to existing conditions
• Identify strategies managers use to increaseIdentify strategies managers use to increase
profitability in fragmented industriesprofitability in fragmented industries
• Discuss special problems in embryonic &Discuss special problems in embryonic &
growth industriesgrowth industries
• Understand competitive dynamics in matureUnderstand competitive dynamics in mature
industriesindustries
• Outline strategies managers use in decliningOutline strategies managers use in declining
industriesindustries

3. 6 -6 -33
““All men can seeAll men can see
these tactics wherebythese tactics whereby
I conquer but whatI conquer but what
none can see is thenone can see is the
strategy out of whichstrategy out of which
victory evolves.”victory evolves.”
- Sun Tzu- Sun Tzu
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4. 6 -6 - 44
Industry EnvironmentIndustry Environment
o Different environments present differentDifferent environments present different
opportunitiesopportunities andand threats.threats.
o Business model/strategies have to change toBusiness model/strategies have to change to
meet environment.meet environment.
o Face challenges developing/maintaining aFace challenges developing/maintaining a
competitive strategy in:competitive strategy in:
• Fragmented IndustriesFragmented Industries •• Mature IndustriesMature Industries
• Embryonic IndustriesEmbryonic Industries •• Declining IndustriesDeclining Industries
• Growth IndustriesGrowth Industries
Need to continually formulate/implement business-levelNeed to continually formulate/implement business-level
strategies to sustain competitive advantage over time.strategies to sustain competitive advantage over time.
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5. 6 -6 - 55
Reasons forReasons for
Fragmented IndustriesFragmented Industries
o Low barriers to entryLow barriers to entry
o Low entry barriers permit constant entryLow entry barriers permit constant entry
by new companiesby new companies
o Specialized customer needs requireSpecialized customer needs require
small job lotssmall job lots
o Diseconomies of scaleDiseconomies of scale
““......composed of a large number of small andcomposed of a large number of small and
medium-sized companies.”medium-sized companies.”
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6. 2-2-66
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ConsolidatingConsolidating
Fragmented IndustryFragmented Industry

7. Strategies forStrategies for
Fragmented IndustriesFragmented Industries
Chaining– linked outlets to achieve costChaining– linked outlets to achieve cost
leadershipleadership
Franchising- rapid growth with provenFranchising- rapid growth with proven
business concepts, reputation,business concepts, reputation,
management skills and economies ofmanagement skills and economies of
scalescale
Horizontal Merger – acquisition to obtainHorizontal Merger – acquisition to obtain
economies/growtheconomies/growth
IT/Internet- develop new businessIT/Internet- develop new business
modelsmodels2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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8. 6 -6 -88
Embryonic-Embryonic- just beginning to developjust beginning to develop
when technological innovation createswhen technological innovation creates
new market or product opportunities.new market or product opportunities.
Growth-Growth- first-time demand isfirst-time demand is
expanding rapidly as many newexpanding rapidly as many new
customers enter market.customers enter market.
EmbryonicEmbryonic
and Growth Industriesand Growth Industries
Companies must understand factors that affect aCompanies must understand factors that affect a
market’s growth ratemarket’s growth rate –– in order to tailor the businessin order to tailor the business
model to the changing industry environment.model to the changing industry environment.
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9. 6 -6 - 99
Market Characteristics:Market Characteristics:
Embryonic/Growth IndustriesEmbryonic/Growth Industries
Reasons for Slow Growth:Reasons for Slow Growth:
• Limited performance and poor quality ofLimited performance and poor quality of
the first productsthe first products
• Customer unfamiliarity with what theCustomer unfamiliarity with what the
new product can do for themnew product can do for them
• Poorly developed distribution channelsPoorly developed distribution channels
• Lack of complementary productsLack of complementary products
• High production costsHigh production costs
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10. Market Characteristics:Market Characteristics:
Embryonic/Growth IndustriesEmbryonic/Growth Industries
Mass Markets Develop When:Mass Markets Develop When:
• Technological progress makesTechnological progress makes
product easier to use and increasesproduct easier to use and increases
its value to the average customer.its value to the average customer.
• Key complementary products areKey complementary products are
developed that do the same.developed that do the same.
• Companies find ways to reduceCompanies find ways to reduce
production costs allowing them toproduction costs allowing them to
lower prices.lower prices.
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6 -6 -1111
Market DevelopmentMarket Development
and Customer Groupsand Customer Groups
Figure 6.2

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6 -6 - 1212
Market ShareMarket Share
of Customer Segmentsof Customer Segments
Market demand/profits rise in early/late majority segments.Market demand/profits rise in early/late majority segments.
Figure 6.3

13. Innovators & Early Adopters Are:Innovators & Early Adopters Are:
oTechnologically sophisticatedTechnologically sophisticated
and tolerant of engineeringand tolerant of engineering
imperfectionsimperfections
oTypically reached throughTypically reached through
specialized distribution channelsspecialized distribution channels
oRelatively few in number and notRelatively few in number and not
particularly price-sensitiveparticularly price-sensitive
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14. 6 -6 -1414
Crossing the ChasmCrossing the Chasm
Companies must:Companies must:
• Correctly identify needs of first wave ofCorrectly identify needs of first wave of
early majority users.early majority users.
• Alter business model in response.Alter business model in response.
• Alter value chain & distribution channels toAlter value chain & distribution channels to
reach early majority.reach early majority.
• Design product to meet needs of earlyDesign product to meet needs of early
majority so product can be modified,majority so product can be modified,
produced, & provided at low cost.produced, & provided at low cost.
• Anticipate moves of competitors.Anticipate moves of competitors.
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15. 6 -6 -1515
The Chasm: AOL and ProdigyThe Chasm: AOL and Prodigy
Business models to compete in embryonic market populated byBusiness models to compete in embryonic market populated by
early innovators very different than to compete in high-growthearly innovators very different than to compete in high-growth
mass market populated by early majority.mass market populated by early majority.
Figure 6.4
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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6 -6 - 1616
Strategic ImplicationsStrategic Implications
of Market Growth Ratesof Market Growth Rates
o Different markets develop at different rates.Different markets develop at different rates.
o Growth rate measures rate industry’sGrowth rate measures rate industry’s
product spreads.product spreads.
o Growth rates for products accelerate overGrowth rates for products accelerate over
time:time:
• Use of mass mediaUse of mass media •• Low-cost massLow-cost mass
productionproduction
o Factors affecting market growth rates:Factors affecting market growth rates:
• Relative advantageRelative advantage •• ComplexityComplexity
• CompatibilityCompatibility •• ObservabilityObservability
• Availability ofAvailability of •• TrialabilityTrialability
complementary productscomplementary products

17. Business-Level StrategyBusiness-Level Strategy
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Business-level strategy is a majorBusiness-level strategy is a major
determinant of industrydeterminant of industry
profitability. The choice ofprofitability. The choice of
business model and strategiesbusiness model and strategies
can accelerate or retard marketcan accelerate or retard market
growth.growth.

18. 6 -6 -1818
Crucial FactorsCrucial Factors
of Investment Strategyof Investment Strategy
1.1. Competitive advantageCompetitive advantage
of company’s businessof company’s business
modelmodel
2.2. Stage of the industry lifeStage of the industry life
cyclecycle
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19. Stages of Life CycleStages of Life Cycle
o EmbryonicEmbryonic– share building– share building
• Distinctive competencies/competitive advantageDistinctive competencies/competitive advantage
• Capital to develop R&D &sales/service competenciesCapital to develop R&D &sales/service competencies
o GrowthGrowth– maintain competitive position– maintain competitive position
• Strengthen business model to survive shakeoutStrengthen business model to survive shakeout
• Investment to keep up with growthInvestment to keep up with growth
o ShakeoutShakeout– competition is strongest– competition is strongest
• Invest in share-increasing strategyInvest in share-increasing strategy
• Weak companies should invest in harvest strategyWeak companies should invest in harvest strategy
o MaturityMaturity– defend business model– defend business model
• Dominant companies reap ROIDominant companies reap ROI
• Investment depends on competition & sourceInvestment depends on competition & source
advantageadvantage
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20. Mature IndustriesMature Industries
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““...dominated by a small...dominated by a small
number of large companiesnumber of large companies
whose actions are so highlywhose actions are so highly
interdependent that success ofinterdependent that success of
one company’s strategyone company’s strategy
depends on the response of itsdepends on the response of its
rivals.”rivals.”

21. 6 -6 -2121
Mature IndustriesMature Industries
o EvolutionEvolution
• Consolidate due to fierce competition in shakeoutConsolidate due to fierce competition in shakeout
• Strategy based on established companies collectivelyStrategy based on established companies collectively
reduce strength competitionreduce strength competition
• Interdependent companies protect industryInterdependent companies protect industry
profitability.profitability.
o StrategiesStrategies
• Deter entryDeter entry
 Product proliferationProduct proliferation  MaintainMaintain
 Price cutting excess capacityPrice cutting excess capacity
• Manage rivalryManage rivalry
 Price signalingPrice signaling  Capacity controlCapacity control
 Price leadershipPrice leadership  Nonprice competitionNonprice competition
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22. 6 -6 -2222
Strategies forStrategies for
Deterring Entry of RivalsDeterring Entry of Rivals
Figure 6.5
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23. 6 -6 -2323
Product Proliferation inProduct Proliferation in
the Restaurant Industrythe Restaurant Industry
Where productWhere product
spaces have beenspaces have been
filled, difficult forfilled, difficult for
new company tonew company to
gain foothold ingain foothold in
market andmarket and
differentiate itself.differentiate itself.
Figure 6.6
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24. 6 -6 -2424
Strategies forStrategies for
Managing Industry RivalryManaging Industry Rivalry
Figure 6.7
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25. 6 -6 -2525
Nonprice Competitive StrategiesNonprice Competitive Strategies
Figure 6.8
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26. 6 -6 -2626
Toyota’s Product LineupToyota’s Product Lineup
Toyota used market development to become a broad differentiator andToyota used market development to become a broad differentiator and
developed a vehicle for almost every main segment of the car market.developed a vehicle for almost every main segment of the car market.
Figure 6.9
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27. Declining IndustriesDeclining Industries
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““...one in which market...one in which market
demand has leveled off or isdemand has leveled off or is
falling and the size of totalfalling and the size of total
market starts to shrink.market starts to shrink.
Competition tends toCompetition tends to
intensify and industryintensify and industry
profits tend to fall.”profits tend to fall.”

28. 6 -6 -2828
Factors of Intensity ofFactors of Intensity of
Competition in Declining IndustriesCompetition in Declining Industries
Figure 6.10
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29. 6 -6 - 2929
Declining IndustriesDeclining Industries
StrategiesStrategies
o LeadershipLeadership –– seeks to becomeseeks to become
dominant playerdominant player
o Niche –Niche – focuses on pockets offocuses on pockets of
demand declining more slowlydemand declining more slowly
o Harvest –Harvest – optimizes cash flowoptimizes cash flow
o Divestment –Divestment – sells business tosells business to
othersothers
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30. 6 -6 -3030
Strategy SelectionStrategy Selection
in a Declining Industryin a Declining Industry
Determined byDetermined by::
Severity of theSeverity of the
industry declineindustry decline
Strength relativeStrength relative
to pockets ofto pockets of
demanddemand
Figure 6.11
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