Chapter
Six
BusinessLevel Strategy
and the
Industry
Environment
“All men can see
these tactics whereby
I conquer but what
none can see is the
strategy out of which
victory evolves.”
- Sun Tzu
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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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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 firsttime 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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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.
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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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The Chasm: AOL and Prodigy
Figure 6.3
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
Compatibility
Availability of
complementary products
•
•
•
Complexity
Observability
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
Figure 6.4
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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Strategies for
Deterring Entry of Rivals
Figure 6.5
Filling the Niches:
making it difficult for new
competitors to break into a
new industry & establish a
beachhead
Sending a Signal:
to potential new entrants
contemplating entry that
new entry will be met with
price cuts
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Warning of Retaliation:
by increasing output and
forcing down prices until
market entry would be
unprofitable to entrants
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Product Proliferation in the
Restaurant Industry
Figure 6.6
Where the product
spaces have been
filled, it is difficult for
a new company to
gain a foothold in the
market and
differentiate itself.
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“We built our company by
focusing upon a pretty simple,
but focused premise of Quality,
Service, Cleanliness, and Value.”
- Ray Kroc,
Founder of
McDonalds
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www.mcdonalds.com
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Strategies for Managing
Industry Rivalry
Figure 6.7
Convey intentions
(e.g. Tit-for-Tat)
regarding pricing
to other companies
to allow the industry
to choose the most
favorable pricing
options.
Intent is to improve
industry profitability.
Informal pricing
when one company
takes the
responsibility for
choosing the most
favorable industry
pricing option.
Formal price setting
jointly by companies
is illegal.
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Differentiation
by offering products
with different
features or applying
different marketing
techniques:
• Market development
• Market penetration
• Product development
• Product proliferation
Market Signaling
to secure
coordination with
rivals as a capacity
control strategy and
to reduce industry
investment risks.
Collusion on timing
of new investments
is illegal.
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Four Nonprice Competitive
Strategies
Figure 6.8
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Toyota’s Product Lineup
Figure 6.9
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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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
Figure 6.10
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A Payoff Matrix
for GM and Ford
Figure 6.11
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Altered Payoff Matrix
for GM and Ford
Figure 6.12
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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
Figure 6.13
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Strategy Selection
in a Declining Industry
Figure 6.14
Choice of strategy is
determined by:
• Severity of the
industry decline
• Company strength
relative to the
remaining pockets
of demand
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“Whatever you shoot is dead for
a while before it starts to stink.
The same goes for strategies.”
- Gary Hamel
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