Competitive Strategy and Industry Environment. The Industry Environment. Positioning a company to sustain competitive advantage over time in different kinds of industry environments Different industry environments present different opportunities and threats
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The Industry Environment • Positioning a company to sustain competitive advantage over time in different kinds of industry environments • Different industry environments present different opportunities and threats • A company’s business model has to change to meet the environment
Strategies in Fragmented Industries • Fragmented industry characteristics: • Localized markets with low entry barriers (e.g. Mom’s Diner). • Few economies of scale opportunities exist. • High transportation costs for products (e.g. sand). • Focus strategies predominate (e.g. customer group, region).
Strategies in Fragmented Industries • Competing in fragmented industries requires strategic consolidation by: • Chaining (Kohl’s, Wal*Mart, Clear Channel Radio) • Franchising (McDonald’s) • Horizontal mergers (Dillard’s) • Using the Internet (eBay) • What is a business model?
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
Embryonic and Growth Industries (cont’d) • 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
Strategic Implications: Crossing the Chasm • Crossing the chasm between early adopters and the early majority • Innovators and early adopters are technologically sophisticated and will tolerate engineering imperfections (the early majority are not) • Innovators and early adopters are typically reached through specialized distribution channels (the early majority are not) • Innovators and early adopters are relatively few in number and not particularly price sensitive (the early majority are not)
Crossing the Chasm • 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 and so that it can be modified and produced or provided at low cost • Anticipate the moves of competitors
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 • economic or social • Compatibility • with prior needs and experiences • Complexity • e.g. Mac OS v DOS v Windows • Trialability • can it be tested? • Observability • can benefits be seen by others? • Availability of complementary products
Strategic Implications of Differences in Growth Rates • To increase demand for a new technology or product • Show its relative advantage, make it compatible with customers’ prior needs and experiences, reduce its complexity, make it possible for customers to try or observe it, ensure that necessary complements are in place • Identify and court potential opinion leaders to promote viral diffusion
Strategy in Mature Industries • Strategies for Deterring the Entry of Rivals
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. • Mergers and acquisitions • Pricing Games • Price Signaling • Price leadership • Predatory pricing • Limit pricing/Dynamic limit pricing • Nonprice competition • Product proliferation • Vertical integration or de-integration
Interesting cases • Dell v Gateway v HP/Compaq • How will this industry evolve? • Toys R Us v Wal*Mart • Will Toys R Us product proliferation help?
Factors that Determine the Intensity of Competition in Declining Industries Not all segments in an industry decline at the same rate!
Exercises • The sales growth in the PC industry is slowing. • Choose a company in the industry (Dell, HP, IBM, Apple etc.) and develop a competitive strategy to deal with this development. • Ebay case: • What is their competitive advantage? How can it be undermined? Will they drop the ball? What should ebay do next?