Chapter 6. Business-Level Strategy and the Industry Environment Learning Objectives • Explain why managers tailor their business models to existing conditions • Identify strategies managers use to increase profitability in fragmented industries • Discuss special problems in embryonic & growth industries • Understand competitive dynamics in mature industries • Outline strategies managers use in declining industries © Cengage Learning Industry Environment Need to continually formulate/implement business-level strategies to sustain competitive advantage over time. • Different environments present different opportunities and threats. Business model/strategies have to change to meet environment. Face challenges developing/maintaining a competitive strategy in: • • • • • Fragmented Industries Embryonic Industries Growth Industries • Mature Industries • Declining Industries © Cengage Learning Reasons for Fragmented Industries “...composed of a large number of small and medium-sized companies.” • Low barriers to entry • Low entry barriers permit constant entry by new companies • Specialized customer needs require small job lots • Diseconomies of scale © Cengage Learning Crucial Factors of Investment Strategy 1. Competitive advantage of company’s business model 2. Stage of the industry life cycle © Cengage Learning Stages of Life Cycle • • • • Embryonic– share building – Distinctive competencies/competitive advantage – Capital to develop R&D &sales/service competencies Growth– maintain competitive position – Strengthen business model to survive shakeout – Investment to keep up with growth Shakeout– competition is strongest – Invest in share-increasing strategy – Weak companies should invest in harvest strategy Maturity– defend business model – Dominant companies reap ROI – Investment depends on competition & source advantage © Cengage Learning Embryonic and Growth Industries • Embryonic- just beginning to develop when technological innovation creates new market or product opportunities. • Growth- first-time demand is expanding rapidly as many new customers enter market. Companies must understand factors that affect a market’s growth rate – in order to tailor the business model to the changing industry environment. © Cengage Learning Market Characteristics: Embryonic/Growth Industries Reasons for Slow Growth: • 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 © Cengage Learning Innovators & Early Adopters Are: Companies must: • Correctly identify needs of first wave of early majority users. • Alter business model in response. • Alter value chain & distribution channels to reach early majority. • Design product to meet needs of early majority so product can be modified, produced, & provided at low cost. • Anticipate moves of competitors. © Cengage Learning Mature Industries “...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.” © Cengage Learning Mature Industries • Evolution – Consolidate due to fierce competition in shakeout – Strategy based on established companies collectively reduce strength competition – Interdependent companies protect industry profitability. • Strategies – Deter entry  Product proliferation  Maintain  Price cutting excess capacity – Manage rivalry  Price signaling  Capacity control  Price leadership  Nonprice competition © Cengage Learning Declining Industries “...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.” © Cengage Learning Factors of Intensity of Competition in Declining Industries Figure 6.10 © Cengage Learning Declining Industries Strategies • Leadership – seeks to become dominant player • Niche – focuses on pockets of demand declining more slowly • Harvest – optimizes cash flow • Divestment – sells business to others © Cengage Learning Strategy Selection in a Declining Industry Determined by: ▪ Severity of the industry decline ▪ Strength relative to pockets of demand © Cengage Learning Chapter 5. Building Competitive Advantage through BusinessLevel Strategy Learning Objectives • Explain why company must define business and how managers does this • Define competitive positioning, explain tradeoffs between differentiation, cost and pricing • Identify choices managers make to pursue business model • Explain why each business model allows company to outperform rivals • Discuss why some can successfully make the competitive positioning decisions © Cengage Learning “I skate to where the puck is going to be . . . not to where it has been.” - Wayne Gretsky © Cengage Learning Business-Level Strategy A successful business model results from businesslevel strategies that create a competitive advantage over its rivals. Firms must decide/evaluate: 1. Customer needs– WHAT is to be satisfied 2. Customer groups– WHO is to be satisfied 3. Distinctive competencies– HOW customers are to be satisfied © Cengage Learning Customer Needs and Product Differentiation • Customer needs- desires, wants, or cravings to be satisfied through product attributes  Customers choose product based on: 1. Way product differentiated from others 2. Price of product • Product differentiation- designing products to satisfy customers’ needs in ways competing products cannot © Cengage Learning Customer Groups and Market Segmentation • Market Segmentation- customers grouped based on differences in needs or preferences • Main Approaches to Segmenting Markets 1. Ignore differences in segments– make product for typical/average customer 2. Recognize differences between segments– make products that meet needs of all/most segments 3. Target specific segments– focus on/serve one or two selected segments © Cengage Learning Identifying Customer Groups and Market Segments © Cengage Learning Three Approaches to Market Segmentation © Cengage Learning The Emergence of Competitive Advantage How does competitive advantage emerge? External sources : •Changing customer demand •Changing prices •Technological change Resource heterogeneity among firms means differential impact Some firms faster and more effective in adapting to change Internal sources Some firms have greater creative and innovative capability © Cengage Learning Competitive Positioning at the Business Level Maximizing profitability of the business model is making the right choices on value creation through differentiation, costs, and pricing. © Cengage Learning Generic Business-Level Strategies 1. Cost Leadership- Lowest cost structure vis-à-vis competitors allowing price flexibility & higher profitability 2. Focused Cost Leadership- Cost leadership in selected market niches where it has a local or unique cost advantage 3. Differentiation - Features important to customers & distinct from competitors that allow premium pricing 4. Focused Differentiation- Distinctiveness in selected market niches where it better meets the needs of customers than the broad differentiators © Cengage Learning Generic Business Models and the Value Creation Frontier Four Principal Generic Strategies 1. 2. 3. 4. Cost Leadership Focused Cost Leadership Differentiation Focused Differentiation © Cengage Learning Cost Leadership Establishes a cost structure that allows them to provide goods/services at lower unit costs Strategic Choices • Cost leader does not try to be industry innovator. • Cost leader positions products to appeal to “average” or typical customer. • Overriding goal of cost leader is to increase efficiency & lower costs relative to industry rivals. © Cengage Learning Advantages of Cost Leadership Strategies • • • • • • Protected from competitors by cost advantage Less affected by increased prices of inputs if there are powerful suppliers Less affected by a fall in price of inputs if there are powerful buyers Purchases in large quantities increase bargaining power over suppliers Ability to reduce price to compete with substitute products Low costs and prices are a barrier to entry Cost leaders able to charge lower price or achieve superior profitability at same price. © Cengage Learning Disadvantages of Cost Leadership Strategies  Competitors may lower their cost structures.  Competitors may imitate cost leader’s methods.  Cost reductions may affect demand. © Cengage Learning Differentiation Companies with differentiation strategy create product different or distinct from competitors in important way. Strategic Choices- Differentiator »Strives to differentiate itself on as many dimensions as possible. »Focuses on quality, innovation, and responsiveness to customer needs. »May segment market in many niches. »Concentrates on organizational functions that provide source of distinct advantages. © Cengage Learning Advantages of Differentiation Strategies • • • • • • Customers develop brand loyalty. Powerful suppliers not problem because company geared more toward price it can charge than costs. Can pass price increases on to loyal customers. Powerful buyers not problem because product distinct. Differentiation & brand loyalty = barriers to entry. Threat of substitute products depends on competitors’ ability to meet customer needs. Differentiators create demand for their distinct products and charge a premium price, resulting in greater revenue and higher profitability. © Cengage Learning Disadvantages of Differentiation Strategies • Difficulty maintaining long-term distinctiveness in customers’ eyes. – Agile competitors can quickly imitate. – Patents and first-mover advantage are limited in duration. • Difficulty maintaining premium price. © Cengage Learning Focus Focuser strives to serve need of targeted niche market segment where it has either low-cost or differentiated competitive advantage. Strategic Choices- Focus • Focuser selects specific market based on: ➢ Geography ➢ Type of customer ➢ Segment of product line • Focused company positions self as either: ➢ Low-Cost or ➢ Differentiator © Cengage Learning Advantages of Focus Strategies • • • • • Focuser protected from rivals to extent can provide a product /service they cannot. Focuser has power over buyers because they cannot get same thing elsewhere Threat of new entrants limited by customer loyalty to focuser. Customer loyalty lessens threat from substitutes. Focuser stays close to customers and changing needs. © Cengage Learning Disadvantages of Focus Strategies • Focuser at disadvantage to powerful suppliers because it buys in small volume (but may pass costs to loyal customers). • Because of low volume, focuser may have higher costs than low-cost company. • Focuser’s niche may disappear because of technological change or changes in customers’ tastes. • Differentiators will compete for focuser’s niche. © Cengage Learning Broad Differentiation: Cost Leadership and Differentiation • • • • • • A broad differentiation business model may result when successful differentiator has pursued its strategy in a way that also allowed it to lower its cost structure: Using robots/flexible manufacturing cells reduces costs while producing different products. Standardizing component parts used in different end products can achieve economies of scale. Limiting customer options reduces production/marketing costs. JIT inventory can reduce costs/improve quality/reliability. Using the Internet/e-commerce can provide information to customers and reduce costs. Low-cost, differentiated products often produced in countries with low labor costs. © Cengage Learning Dynamics of Competitive Positioning Retail Industry Dynamics Many successful companies lose their position on the frontier at some point in their history. To turn around their declining performance, they need to change their business models. Companies that continually outperform rivals are rare. © Cengage Learning Competitive Positioning: Strategic Groups Groups of companies follow a business model similar to other companies within their strategic group, but are different from other companies in other groups. Strategic managers must: 1. 2. 3. 4. Map their competitors Better understand changes in industry Determine which strategies are successful Fine tune or radically alter business models & strategies to improve competitive position © Cengage Learning Failures in Competitive Positioning • Many companies: – Do not work continually to improve business model – Do not perform strategic group analysis – Often fail to identify/respond to changing opportunities/threats in industry environment • Companies lose position on value frontier when: – Lost source of competitive advantage – Rivals find ways to push out value creation frontier and leave them behind There is no more important task than ensuring company is optimally positioned against its rivals to compete for customers. © Cengage Learning
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