Hill PPT 13e chp06

STRATEGIC MANAGEMENT, 13E
An Integrated Approach
Theory & Cases
Hill – Schilling - Jones
Hill, Strategic Management, 13e. © 2020 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or part.
CHAPTER 6
Business-Level Strategy and the
Industry Environment
copied or duplicated, or posted to a publicly accessible website, in whole or part.
LEARNING OBJECTIVES (1 of 2)
 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
copied or duplicated, or posted to a publicly accessible website, in whole or part. 3
LEARNING OBJECTIVES (2 of 2)
 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
FRAGMENTED INDUSTRY
 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.
CONSOLIDATING A FRAGMENTED INDUSTRY
THROUGH VALUE INNOVATION (1 of 3)
 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.
 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.
 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.
STRATEGIES IN EMBRYONIC AND
GROWTH INDUSTRIES (1 of 2)
 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.
STRATEGIES IN EMBRYONIC AND
GROWTH INDUSTRIES (2 of 2)
 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.
 complementary products are developed.
 production cost decreases, resulting in low prices and high
demand.
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.
CHANGING NATURE OF MARKET
DEMAND (1 of 2)
Figure 6.1 Market Development and Customer Groups
CHANGING NATURE OF MARKET
DEMAND (2 of 2)
Figure 6.2 Market Share of Different Customer Segments
STRATEGIC IMPLICATIONS: CROSSING
THE CHASM (1 of 2)
 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.
 Successful mangers must:
 identify the needs of early adopters.
 adjust their business model by redesigning products,
distribution channels, and marketing campaigns.
 sell at a reasonable price.
 abandon outdated business models.
COMPARISON OF MARKET
SEGMENTATION APPROACHES
Innovators and early adopters Early majority
 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 are production to produce high-
priced high. quality product at a low price.
CROSSING THE CHASM
Figure 6.3 The Chasm in the Smartphone Business
FACTORS THAT ACCELERATE CUSTOMER
DEMAND (1 of 2)
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.
FACTORS THAT ACCELERATE CUSTOMER
DEMAND (2 of 2)
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 diffusion
• Identify and aggressively court opinion leaders in a market.
• Opinion leaders help develop the technology and recommend
it.
STRATEGIES TO DETER ENTRY IN
MATURE INDUSTRIES
Product proliferation strategy
• 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 diffusion
• Identify and aggressively court opinion leaders in a market.
• Opinion leaders help develop the technology and recommend
it.
LIMIT PRICING STRATEGY
Figure 6.4 Limit Pricing
STRATEGIES TO MANAGE RIVALRY (1 of 2)
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.
STRATEGIES TO MANAGE RIVALRY (2 of 2)
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 for its existing
products to increase the sales.
Product proliferation
• Large companies in an industry have a product in each market segment.
PRODUCT AND MARKET
SEGMENTATION DIMENSIONS
Figure 6.5 Four Non-price Competitive Strategies
CAPACITY CONTROL (1 of 2)
 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.
CAPACITY CONTROL (2 of 2)
 Choosing a strategy
 Each company individually must try to preempt its
rivals.
 Must forecast demand increase and establish operations to
satisfy predicted demand.
 Extremely risky.
 Companies must collectively coordinate with each
other to be aware of the mutual effects of their actions.
 Must try to forecast competitors moves and share
information to balance supply and demand.
 Collusion on the timing is illegal (antitrust law).
 Reduces risk.
THE SEVERITY OF DECLINE
Figure 6.6 Factors that Determine the Intensity of Competition in Declining Industries
CHOOSING A STRATEGY (1 of 2)
 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.
CHOOSING A STRATEGY (2 of 2)
 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 exits an
industry by selling off its business assets to
another company.
FRAMEWORK FOR GUIDING STRATEGIC
CHOICE
Figure 6.7 Strategy Selection in a Declining Industry
APPENDIX
NOTE TO INSTRUCTOR: Choose from the following questions (also found in the text at the end of the chapter)
to conduct in-class discussions around key chapter concepts.
DISCUSSION:
 Why are industries fragmented? What are the
primary ways in which companies can turn a
fragmented industry into a consolidated
industry?
DISCUSSION:
 What are the key problems in maintaining a
competitive advantage in embryonic and growth
industry environments? What are the dangers
associated with being the leader in an industry?
DISCUSSION:
 What investment strategies should be made by:
(a) differentiators in a strong competitive
position, and (b) differentiators in a weak
competitive position, while managing a
company’s growth through the life cycle?
DISCUSSION:
 Discuss how companies can use: (a) product
differentiation, and (b) capacity control to
manage rivalry and increase an industry’s
profitability.
DISCUSSION:
 What strategies might these enterprises use to
strengthen their business models (a) a small
pizzeria operating in a crowded college market,
and (b) a detergent manufacturer seeking to
unveil new products in an established market?

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STRATEGIC MANAGEMENT, 13E

Innovators and early adopters Early majority

 Technologically sophisticated  Value ease of use and

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