CHAPTER 6

BUSINESS-LEVEL STRATEGY AND THE INDUSTRY

ENVIRONMENT
LEARNING OBJECTIVES
 Identify the strategies managers can develop to increase
profitability in fragmented industries
 Discuss the special problems that exist in embryonic and
growth industries and how companies can develop strategies
to effectively compete
 Understand competitive dynamics in mature industries and
discuss the strategies managers can develop to increase
profitability even when competition is intense
 Outline the different strategies that companies in declining
industries can use to support their business models and
profitability

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FRAGMENTED INDUSTRY
 Composed of a large number of small- and
medium-sized companies
 Reasons for fragmentation
 Lack of scale economies
 Brand loyalty in the industry is primarily local
 Low entry barriers due to lack of scale economies and
national brand loyalty
 Focus strategy works best for a fragmented
industry

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CONSOLIDATING A FRAGMENTED
INDUSTRY THROUGH VALUE INNOVATION
 Value innovator - Defines value differently than
established companies
 Offers the value at lowered cost through the creation of
scale economies
 Chaining: Obtaining the advantages of cost
leadership by establishing a network of linked
merchandising outlets
 Interconnected by information technology that
functions as one large company
 Aids in building a national brand

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CONSOLIDATING A FRAGMENTED
INDUSTRY THROUGH VALUE INNOVATION
 Franchising: Strategy in which franchisor grants
the franchisee the right to use the franchisor’s
name, reputation, and business model
 In return for a fee and a percentage of the profits
 Advantages
 Finances the growth of the system, resulting in rapid
expansion
 Franchisees have a strong incentive to ensure that the
operations are run efficiently
 New offerings developed by a franchisee can be used to
improve the performance of the entire system

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CONSOLIDATING A FRAGMENTED
INDUSTRY THROUGH VALUE INNOVATION
 Disadvantages
Tight control of operations is not possible
Major portion of the profit go to the franchisee
When franchisees face a higher cost of capital, it raises
system costs and lowers profitability
 Horizontal mergers - Merging with or acquiring
competitors and combining them into a single
large enterprise

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STRATEGIES IN EMBRYONIC AND
GROWTH INDUSTRIES
 Limited customer demand for products of an
embryonic industry is due to:
 Limited performance and poor quality of the first
products
 Customer unfamiliarity with the product
 Poorly developed distribution channels
 Lack of complementary products
 High production costs because of small volumes of
production

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STRATEGIES IN EMBRYONIC AND
GROWTH INDUSTRIES
 Industry enters the growth stage when a mass
market starts to develop for its products
 Mass market: One in which large numbers of customers
enter the market
 Occurs when:
 Product value increases, due to ongoing technological
progress and development of complementary products
 Production cost decreases, resulting in low prices and high
demand

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MARKET DEVELOPMENT AND
CUSTOMER GROUPS

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MARKET DEVELOPMENT AND
CUSTOMER GROUPS
Innovators

• First to purchase and experiment with a product based on new technology

Early adopters

• Understand that the technology may have important future applications

Early majority

• Practical and understand the value of new technology

Late majority

• Purchase a new technology only when it is obvious that it has great utility
and is here to stay

Laggards

• Unappreciative of the uses of new technology

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MARKET SHARE OF DIFFERENT
CUSTOMER SEGMENTS

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STRATEGIC IMPLICATIONS: CROSSING
THE CHASM
 New strategies are required to strengthen a
company’s business model as a market develops
 Customers in each segment have very different needs
 Competitive chasm - Transition between the
embryonic market and mass market
 Failure to do so results in the company going out of
business

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STRATEGIC IMPLICATIONS: CROSSING
THE CHASM
Innovators and early
Early majority
adopters
• Technologically sophisticated • Value ease of use and
and willing to tolerate the reliability
limitations of the product • Require mass-market
• Reached through specialized distribution and mass-media
distribution channels advertising campaigns
• Companies produce small • Require large-scale mass
quantities of product that production to produce high-
are priced high quality product at a low
price

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FACTORS THAT ACCELERATE CUSTOMER
DEMAND
Relative advantage

• Degree to which a new product is perceived as better at

satisfying customer needs than the product it supersedes

Complexity

• Products perceived as complex and difficult to use will

diffuse more slowly than those that are easy to use

Compatibility

• Degree to which a new product is perceived as being

consistent with the current needs or existing values of
potential adopters

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FACTORS THAT ACCELERATE CUSTOMER
DEMAND
Trialability

• Degree to which potential customers can experiment with a

new product during a hands-on trial basis

Observability

• Degree to which the results of using and enjoying a new

product can be seen and appreciated by other people

Viral model of infection

• Lead adopters in a market who become infected with a

product
• Infect other people, making them adopt and use the product

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STRATEGIES TO DETER ENTRY IN
MATURE INDUSTRIES
Product proliferation strategy

• Catering to the needs of all market segments to deter entry by

competitors

Limit price strategy

• Charging a price that is lower than that required to maximize

profits in the short run
• Is above the cost structure of potential entrants

Strategic commitments

• Investments that signal an incumbent’s long-term commitment

to a market or a segment of the market

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LIMIT PRICING

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STRATEGIES TO MANAGE RIVALRY

Price signaling

• Companies increase or decrease product prices to:

• Convey their intentions to other companies
• Influence the price of an industry’s products

Price leadership

• When one company assumes the responsibility for determining

the pricing strategy that maximizes industry profitability

Non-price competition

• Use of product differentiation strategies to deter potential entrants

and manage rivalry within an industry

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STRATEGIES TO MANAGE RIVALRY
Market penetration

• Occurs when a company concentrates on expanding market share in

its existing product markets

Product development

• Creation of new or improved products to replace existing products

Market development

• When a company searches for new market segments to increase the

sale of its existing products

Product proliferation

• Large companies in an industry have a product in each market

segment

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CAPACITY CONTROL
 Companies devise strategies to control or benefit
from capacity expansion programs
 Factors causing excess capacity
 New technologies that produce more than the old ones
 New entrants in an industry
 Economic recession that causes global overcapacity
 High growth of and demand in an industry that triggers
rapid expansion

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CAPACITY CONTROL
 Choosing a strategy
 Each company individually must try to preempt its rivals
 Companies must collectively coordinate with each to be
aware of the mutual effects of their actions

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FACTORS THAT DETERMINE THE INTENSITY OF
COMPETITION IN DECLINING INDUSTRIES

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CHOOSING A STRATEGY
 Leadership strategy: When a company develops
strategies to become the dominant player in a
declining industry
 Niche strategy: When a company focuses on
pockets of demand that are declining more
slowly than the industry as a whole to maintain
profitability

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CHOOSING A STRATEGY
 Harvest strategy: When a company reduces to a
minimum the assets it employs in a business to
reduce its cost structure and extract maximum
profits from its investment
 Divestment strategy: When a company decides
to exit an industry by selling off its business
assets to another company

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STRATEGY SELECTION IN A DECLINING
INDUSTRY

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