BLS II

1. Chapter
Six
Business-
Level Strategy
and the
Industry
Environment

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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
• Growth Industries
There is the need to continually formulate and implement
business-level strategies to sustain competitive
advantage over time in different industry environments.

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Fragmented Industries
 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
 Strategies
• 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
A fragmented industry is one composed of a large
number of small and medium-sized companies.

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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.
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
Companies must understand the 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 and Growth Industries
 Reasons for slow growth in market demand
• 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
 Mass markets typically start to develop when:
• 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
Both innovators and early adopters enter the market
while the industry is in its embryonic state.
Figure 6.1

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Market Share of Different
Customer Segments
Most market demand and industry
profits arise during the early and
late majority customer segments.
Figure 6.2

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Strategic Implications:
Crossing the Chasm
 Innovators and Early Adopters are
(While the Early Majority are NOT):
• Technologically sophisticated and tolerant of engineering
imperfections
• Typically reached through specialized distribution channels
• Relatively few in number and not particularly price-sensitive
 To cross the chasm between the
Early Adopters and the Early Majority
• 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 so
that the product can be modified and produced or provided at
low cost.
• Anticipate the moves of competitors.

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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
complementary products
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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Mature Industries
 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.
 Strategies
• Deter entry into industry
 Product proliferation  Maintaining
 Price cutting excess capacity
• Manage industry rivalry
 Price signaling  Capacity control
 Price leadership  Nonprice 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.

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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.
Figure 6.6

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Four Nonprice Competitive
Strategies
Figure 6.8

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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.
Figure 6.9

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Declining Industries
 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
 Strategies
• 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.