Competitive Strategy and Industry Environment

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Competitive Strategy and Industry Environment
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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 companys business model has to change to meet
  the environment

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Strategies in Fragmented Industries

• Fragmented industry characteristics
• Localized markets with low entry barriers (e.g.
  Moms Diner).
• Few economies of scale opportunities exist.
• High transportation costs for products (e.g.
  sand).
• Focus strategies predominate (e.g. customer
  group, region).

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Strategies in Fragmented Industries

• Competing in fragmented industries requires
  strategic consolidation by
• Chaining (Kohls, WalMart, Clear Channel Radio)
• Franchising (McDonalds)
• Horizontal mergers (Dillards)
• Using the Internet (eBay)
• What is a business model?

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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

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Embryonic and Growth Industries (contd)

• 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
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Market Share of Different Customer Groups
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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)

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The Chasm AOL and Prodigy
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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

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Strategic Implications of Market Growth Rates

• Different markets develop at different rates
• Growth rate measures the rate at which the
  industrys 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

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Differences in Diffusion Rates
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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

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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

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Strategy in Mature Industries

• Strategies for Deterring the Entry of Rivals

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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.
• 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

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Product Proliferation in the Restaurant Industry
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Limit Pricing Strategy
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Interesting cases

• Dell v Gateway v HP/Compaq
• How will this industry evolve?
• Toys R Us v WalMart
• Will Toys R Us product proliferation help?

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Factors that Determine the Intensity of
Competition in Declining Industries
Not all segments in an industry decline at the
same rate!
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Strategy Selection in a Declining Industry
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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?