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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
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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 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.
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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
IT and Internet ± to develop new business models
A fragmented industry is one composed of a largenumber of small and medium-sized companies.
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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.
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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 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.
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Market Developmentand Customer Groups
Both innovators and early adopters enter the marketwhile the industry is in its embryonic state.
Figure 6.1
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Market Share of DifferentCustomer Segments
Most market demand and industry profits ariseduring 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 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.
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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
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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.
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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
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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:
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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.
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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
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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
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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
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Four Nonprice CompetitiveStrategies
Figure 6.8
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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
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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.
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A Decision Treefor UPS¶s Pricing Strategy
Figure 6.10
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A Payoff Matrix for a Cash-RebateProgram for GM and Ford
Figure 6.11
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Altered Payoff Matrixfor GM and Ford
Figure 6.12
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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
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.
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Factors for Intensity of Competitionin Declining Industries
Figure 6.13
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Strategy Selectionin a Declining Industry
Choice of strategy isdetermined by:
Severity of theindustry decline Company strength
relative to theremaining pocketsof demand
Figure 6.14