Business Strategy – Shilpa Chadichal 1

Business- Level
Strategy and the
Industry Environment
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The Industry Environment

There is the need to continually formulate and implement
business-level strategies to sustain competitive
advantage over time in different industry environments.
• 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
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Fragmented Industries
A fragmented industry is one composed of a large
number of small and medium-sized companies.

• 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
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Example :Clear Channel Creates a National chain of local

radio stations

• Clear channel communication started out with only one

radio station in San Antonio in 1995.
• Radio broadcasting industry was fragmented because
federal law did not allow one company to own more than
40 stations nationwide.
• Clear channel took advantage of the repeal of this law in
1996 to purchase radio stations and, most importantly,
develop a business model (which today is one of the broad
differentiation) that would allow it to obtain the gains from
consolidating this fragmented industry, by 2000s.
• Operated more than 1,200 united states radio stations.
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Embryonic and Growth Industries

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.
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.
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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.
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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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The Chasm: AOL and Prodigy

The business model and strategies required to compete in an

embryonic market populated by Early Adopters and
Innovators are very different than those required to compete in
a high-growth mass market populated by the Early Majority.
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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 complementary products • Trialability

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

Different markets develop at different growth rates.

Source: Peter Brimelow, “The Silent Boom,” Forbes, July 7, 1997, pp. 170-171. Reprinted by permission of Forbes Magazine © 2002 Forbes, Inc.
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Navigating Through the Life Cycle to Maturity

The amount and type of resources and capital needed to pursue
a company’s business model depends on two crucial factors:
1. Competitive advantage of company’s business model
2. Stage of the industry life cycle
• 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.
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Mature Industries
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.
• 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
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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.
Business Strategy – Shilpa Chadichal 7-16

Strategies to Manage Rivalry in Mature Industries

Price signaling
• Leading competitors use price changes to convey their
intentions to other competitors (i.e., tit-for-tat).
Price leadership
• One company sets the industry price; other competitors
reference their prices to that price.
Nonprice competition
• Competition by any means other than price.
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Four Nonprice Competitive Strategies

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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.
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Strategies to Manage Rivalry in Mature Industries

Capacity control strategies

• Preempt rival firms by building capacity ahead of anticipated
increases in demand.
• Indirect coordination with rival firms to keep industry-wide
capacity in line with demand.
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Changes in Industry Capacity and Demand

FIGURE 7.5
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Game Theory
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.
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
These basic principles of game theory can be used in
determining which business model and strategies to pursue.
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A Decision Tree for UPS’s Pricing Strategy

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A Payoff Matrix for GM and Ford

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Altered Payoff Matrix for GM and Ford

http://www.flipkart.com/flipkart-first?otracker=hp_ch_vn_flipkart-first
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Declining Industries
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.

• 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
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Factors for Intensity of Competition in Declining Industries

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Strategies in Declining Industries

Leadership strategy
• A firm seeks to become dominant in the industry.
Niche strategy
• Focuses on demand pockets declining more slowly than
the industry as a whole.
Harvest strategy
• Limits investment and optimizes cash flow.
Divestment strategy
• Company exits the industry by selling out early to
others, avoiding liquidation.
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Strategy Selection in a Declining Industry

Choice of strategy is
determined by:
• Severity of the
industry decline
• Company strength
relative to the
remaining pockets
of demand
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Thank you