strategic management bab 6

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³All men can see³All men can seethese tactics whereby these tactics whereby I conquer but what I conquer but what

none can see is thenone can see is thestrategy out of whichstrategy out of whichvictory evolves.´ victory evolves.´

-- Sun TzuSun Tzu

© RoyaltyFree/ David DeLossy/ Getty Images




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 competitivestrategy in: Fragmented Industries Mature Industries

Embryonic Industries Declining Industries

Growth Industries

T here is the need to continually formulate and implement business-level strategies to sustain competitiveadvantage over time in different industry environments.




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

IT and Internet ± to develop new business models

A fragmented industry is one composed of a largenumber of small and medium-sized companies.




An embryonic industry is one that is justbeginning to develop when technologicalinnovation creates new market or product

opportunities. A growth industry is one in which first-timedemand is expanding rapidly as many newcustomers enter the market.

Embryonic and Growth Industries

Companies must understand the factors that affect amarket¶s growth rate ± in order to tailor the business

model to the changing industry environment.




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 andincreases its value to the average customer.

Key complementary products are developed that do the same.

Companies find ways to reduce production costs allowingthem to lower prices.




Market Developmentand Customer Groups

Both innovators and early adopters enter the marketwhile the industry is in its embryonic state.

Figure 6.1




Market Share of DifferentCustomer Segments

Most market demand and industry profits ariseduring the early and late majority customer

segments.

Figure 6.2




Strategic Implications:Crossing the Chasm

Innovators and Early Adopters are (while the early majority are NO T):

Technologically sophisticated and tolerant of engineeringimperfections

Typically reached through specialized distribution channels

Relatively few in number and not particularly price-sensitive

To cross the chasm between the early adopters andthe early majority, companies must:

Correctly identify the needs of the first wave of early majorityusers.

Alter the business model in response.

Alter the value chain and distribution channels to reach theearly majority.

Design the product to meet the needs of the early majority sothat the product can be modified and produced or provided atlow cost.

Anticipate the moves of competitors.




The Chasm: AOL and Prodigy

The business model and strategies required to compete in anembryonic market populated by early adopters and innovators are

very different than those required to compete in a high-growthmass market populated by the early majority.

Figure 6.3




Strategic Implicationsof Market Growth Rates

Different markets develop at different rates.

Growth rate measures the rate at which theindustry¶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 Trialabilitycomplementary products

Business-level strategy is a major determinant of industry profitability. The choice of business model

and strategies can accelerate or retard market growth.




Differences in Diffusion Rates

Source: Peter Brimelow, ³The Silent Boom,´ Forbes, July 7, 1997, pp. 170-171. Reprinted by permission of Forbes Magazine © 2002 Forbes, Inc.

Different markets develop at different growth rates.

Figure 6.4




Navigating Through the Life Cycleto 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

1. Competitive advantage of company¶s business model

2. Stage of the industry life cycle

T wo crucial factors:




Mature Industries

Evolution of mature industries

Industry becomes consolidated as a result of the fiercecompetition during the shakeout stage.

Business level strategy is based on how established companiescollectively 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 largecompanies whose actions are so highly interdependent that successof one company¶s strategy depends on the response of its rivals.




Strategies for Deterring Entry of Rivals

Filling the Niches:making it difficult for new

competitors to break into anew industry & establish a

beachhead

Sending a Signal:to potential new entrantscontemplating entry that

new entry will be met withprice cuts

Warning of Retaliation:by increasing output andforcing down prices untilmarket entry would beunprofitable to entrants

Figure 6.5




Product Proliferation in theRestaurant Industry

Where the productspaces have been

filled, it is difficult for

a new company togain a foothold in the

market anddifferentiate itself.

Figure 6.6




Strategies for ManagingIndustry Rivalry

Convey intentions(e.g. Tit-for-Tat)

regarding pricingto other companiesto allow the industryto choose the most

favorable pricingoptions.

Intent is to improveindustry profitability.

Informal pricingwhen one company

takes theresponsibility for

choosing the mostfavorable industry

pricing option.Formal price setting jointly by companies

is illegal.

Differentiationby offering products

with differentfeatures or applyingdifferent marketing

techniques: Market development Market penetration Product development Product proliferation

Market Signalingto secure

coordination withrivals as a capacitycontrol strategy andto reduce industryinvestment risks.

Collusion on timingof new investments

is illegal.

Figure 6.7




Four Nonprice CompetitiveStrategies

Figure 6.8




Toyota¶s Product Lineup

Toyota has used market development to become a broad differentiator andhas developed a vehicle for almost every main segment of the car market.

Figure 6.9




Game Theory

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 pursuetoday based on how rivals will respond to future strategic moves

Know Thy Rival ± how is the rival likely to act

Find the Dominant Strategy ± Pay off M at rix 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 allsimultaneously making choices about which business modelsand strategies to pursue in order to maximize their profitability.




A Decision Treefor UPS¶s Pricing Strategy

Figure 6.10




A Payoff Matrix for a Cash-RebateProgram for GM and Ford

Figure 6.11




Altered Payoff Matrixfor GM and Ford

Figure 6.12




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

C reat ing pocket s 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 leveledoff or is falling and the size of total market starts to shrink.

Competition tends to intensify and industry profits tend to fall.




Factors for Intensity of Competitionin Declining Industries

Figure 6.13




Strategy Selectionin a Declining Industry

Choice of strategy isdetermined by:

Severity of theindustry decline Company strength

relative to theremaining pocketsof demand

Figure 6.14

strategic management bab 6

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