Chapter 6: Business-Level Strategy and the Industry Environment

Task 1
1. Explain the principal strategies used by companies in mature industries to deter entry.
i) Product proliferation strategy
- Catering to the needs of all market segments to deter entry by competitors.

ii) Limit price strategy

- Charging a price that is lower than that required to maximize profits in the short run.
- Is above the cost structure of potential entrants.

iii) Strategic commitments

- Investments that signal an incumbent’s long-term commitment to a market or a segment of
the market.

2. Explain the principal strategies used by companies in mature industries to manage rivalry.
i) Price signalling
- Companies increase or decrease product prices to convey their intentions to other
companies and influence the price of an industry’s products.

ii) Price leadership

- When one company assumes the responsibility for determining the price strategy that
maximizes industry profitability.

iii) Non-price competition

- Use of product differentiation strategies to deter potential entrants and manage rivalry
within an industry.

iv) Market penetration

- Occurs when a company concentrates on expanding market share in its existing product
markets.

v) Product development
- Creation of new or improved products to replace existing products.

vi) Market development

- When a company searches for new market segments to increase the sale of its existing
products.

vii) Product proliferation

- Large companies in an industry have a product in each market segment.

3. Discuss the four main strategies a company can pursue when demand is falling.
i) Leadership strategy
- When a company develops strategies to become the dominant player in a declining
industry.

ii) Niche strategy

- When a company focuses on pockets of demand that are declining more slowly than the
industry as a whole to maintain profitability.

iii) Harvest strategy

- When a company reduces to a minimum the assets it employs in a business to reduce its
costs structure and extract maximum profits from its investment.

iv) Divestment strategy

- When a company decides to exit an industry by selling off its business assets to another
company.

4. Discuss the reason why there is limited customer demand for products of an embryonic
industry.
- limited performance and poor quality of the first products.
- customer unfamiliarity with the product.
- poorly developed distribution channel.
- lack of complementary products.
- high production costs because of small volumes of production.
Task 2
(a) Evaluate the impact of the external environment that had affected Mcdonalds’
performance in the industry. Provide examples from the above case to support your answer.
(20 marks)

i) Economic factors
- Effects of or changes in economic conditions and trends on the macro-environment of
McDonald’ that directly and indirectly influence the company’s business performance.
- Many affects consumer purchasing power and spending patterns.
- Example, rising US dollar cause other countries currency depreciate the lowering
purchasing power of consumer in other countries, going to eat is the first thing people cut in
tough economic times.

ii) Technological factors

- Impact of new technologies that affect McDonalds’ operations directly and customer’s
perception on effectiveness and usefulness of McDonalds services.
- Involve R&D in the industry or related industries that lead to developments of new more
productive or efficient technology or methods such as automation.
- Example, replacing gasoline-powered cars with energy-efficient cars, improving the dirve-
through windows to increase sales and efficiency.

iii) Socio-cultural factors

- A foreign country’s social conditions or changes in social environment that affect
McDonalds’ customers attitude towards the company.
- Social trends affect customers behaviour which in turn affect their intention to purchase
from or perception towards McDonalds.
- Example, rise of budget conscious consumers are cutting back on extravagances such as
expensive drinks like lattes.

iv) Competitive factors

- Factors that influence the competitive position of McDonalds’ in their domestic or foreign
industry or market.
- Includes the bargaining power of the buyers and suppliers, threat of new competitors and
competition between already existing competitors.
- Example, McDonalds’ attracted millions of new customers away from sit-down chains and
independent eateries and most restaurant chains that are struggling to survive.

v) Political factors
- Effects of governmental actions and policies that affect the operations of McDonalds’ which
can affect the speed and direction of McDonalds’ growth in a country.
- Usually relates to changes in either domestic or foreign government policies that are
targeted at protecting the country’s domestic industry.
- Example, half of McDonalds’ 31,000 locations and nearly two thirds of its revenues are
from outside the United States thus they are vulnerable to intervention by foreign
governments.

(b) Discuss the adoption of a strategic management process by Mcdonalds. Provide examples
of Mcdonalds winning strategy that enables them to survive in the weak economy. (20 marks)
[Total: 40 marks]

i) Select the corporate mission and major corporate goals.

- McDonalds’ main goal is globalization.
- For example, McDonalds’ added 650 new outlets in 2009 when many restaurants struggled
to keep their doors open.
- Nearly 80 percent of McDonalds’ are run by franchisees.
- McDonalds’ restaurants are in 210 countries.

ii) Analyse he organization’s external competitive environment to identify opportunities and

threats.
- For example, going out to eat is one of the first activities that customers cut in tough times.
- A rising US dollar is another external factor that hurts McDonalds’.

iii) Analyse the organization’s internal operating environment to identify the organization’s
strengths and weaknesses.
- To illustrate, McDonalds’ is that the firm now offers upscale coffee drinks like lattes and
cappuccinos in over 7,000 locations just as budget conscious consumers are cutting back on
such extravagances.

iv) Select strategies that:

- build on their organisation’s strength and correct its weaknesses in order to take advantage
of external opportunities and counter external threats.
- These strategies should be consistent with the mission and major goas of the organization.
They should be congruent and constitute a viable business model.
- Example, McDonalds’ for several years referred to their strategic plan as “Plan to Win”
- The “Plan to Win” strategy focused around five basic concepts for exceptional customer
experience: People, Products, Place, Price and Promotion.
McDonalds’ started to invest more into the flood, service, the ambiance, customer
satisfaction.

v) Implement the strategies.

- Example, this strategy has been to increase McDonalds’ sales at existing locations by
improving the menu, remodelling, dining rooms, extending hours and adding snacks.
- Other strategies being pursued currently by McDonalds’ include replacing gasoline-
powered cars with energy-efficient cars, lowering advertising rates, halting building new
outlets on street corners where nearby development shows signs of weakness, boosting the
firm’s coffee business and improving the drive-through windows to increase sales and
efficiency.