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BUSINESS LEVEL STRATEGY AND THE INDUSTRY

ENVIRONMENT
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 Strategies in fragmented industries

Fragmented industry is one composed of a large number of small and medium sized
companies.

Reasons that an industry may consist of many small companies rather than a few large ones:

• Low barriers of entry

• Specialised customer needs
• High transportation costs

In fragmented industry the focus business model is most profitable to pursue.

Strategies used to consolidate industry

Horizontal
Chaining Franchising
merger

IT and the
internet

Chaining : establishing the networks of linked merchandising outlets that are

interconnected by IT and function as one large company.
These companies have enormous buying power
They establish regional distribution centres
They also realise economies of scale
Example: Walmart
Franchising : the franchisor grants to its franchisee the right to use the parent’s name,
reputation and business model in a particular location or area in return for a franchise fee.
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 Franchisees own their business and hence are motivated to maintain the quality and
standards of the product.
Franchising lessens the financial burden of swift expansion
Franchised company can reap the benefit of large scale advertising
Example: McDonalds
Horizontal merger : here the companies are able to obtain economies of scale and secure
an national market for their product.
Using information technology and the internet : the development of new IT often gives a
company the opportunity to develop new business strategies to consolidate their respective
industries.

Strategy in embryonic and growth industries

Embryonic
Growth industries
industries
first-time demand
just begining to
is expanding
develop

Reasons for slow growth in market

demand:
❖ The limited performance
and poor quality of the first
products
❖ Customer unfamiliarity
with new products
❖ Poorly developed
distribution channels
❖ Lack of complementary
goods to increase the value
of the product for
customers
❖ High production costs
Mass markets starts to develop
when:
❖ Ongoing technological
progress makes a product
easier to use and increases
its value for the average
customers
❖ Complementary products
are developed
❖ Companies work to find
ways to reduce the costs of
making the new products

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 The changing nature of market demand

Embryonic stage
Innovaters: these people are delighted by
being the first to purchase and experiment
with the product based on new technology

Early adopters: these people envision how

the technology may be used in future and
they try to be the first to profit from its use

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 Early majority: these customers weigh the benefits of adopting its
Growth new products against their costs and wait to enter the market until
they are confident that they will benefit
stage
Late majority: the customers who purchase a new technology or
product only when it is obvious it has greater utility and is here to
stay

Laggards: the customers who are inherently conservative and

distrustful of new technology

Strategic implications : Crossing the Chasm

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 New strategies are required to strengthen a company’s business model as a market
develops over time for the following reasons:

Innovators and
Early majority
early adopters
Companies should focus
Companies should make
on increasing the
sure that the product is
performance of the
reliable and easy to use
product

Mass market distribution

Products are often sold channels and mass
by word of mouth media advertising is
required

Focus model Cost leadership model

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 Strategic implications : market growth rates
A final important issue that strategic managers must understand in embryonic and growth
industries is that different markets develop at different rates .
Growth rate: rate at which the industry’s product is bought by customers in that market.

Managers must understand the factors that affects the market’s growth rate so that they
can tailor their business model to a changing industry environment.
The factors that accelerates the customer’s demand are:

Product's
relative Compatibility Complexity
advantage

Trialability Observability

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 Strategy in mature industries

A mature industry is commonly dominated by a small number of large companies.

In mature industries, business-level strategy revolves around understanding how
established companies collectively try to reduce the strength of industry competition to
preserve both company and industry profitability.
Strategies in mature
industries

Strategies to deter entry

Strategies to manage
rivalry

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 Strategies for
detering entry
of rivalry

Maintaining
Product
Price Cutting Excess
Proliferation
Capacity

Product proliferation
The strategy of ‘filling the niches’ or catering to the needs of customers in all market
segments to deter entry, is known as product proliferation.
Price Cutting
Companies cut their prices whenever any new company enters the industry.
Companies may also cut their prices when any company is contemplating entry and then
again raise their prices once the new or potential entrant has withdrawn from the industry.
Maintaining excess capacity
Existing industry companies may deliberately develop some limited amount of excess
capacity to warn potential entrants that if they enter the industry, existing firms can
retaliate by increasing output and forcing down price until entry would become
unprofitable.

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 strategies to
manage
rivalry

price nonprice capacity

price signaling
leadership competition control

Price signalling
It is a process by which companies increase or decrease product prices to convey their
intentions to other companies and so influence the way they price their product.
Tit-for-tat strategy is a well-known price signalling strategy in which a company does exactly
what its rivals do.
Price leadership
Under this strategy a company assumes the responsibility for setting the pricing option that
maximises industry profitability.
Limitation: it helps companies with high cost structures by allowing them to survive without
having to implement the strategies to become more productive.
Non price competition

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 Capacity control

• Each company individually must try to pre-empt its rival and seize the initiative
• The companies collectively must find indirect means of coordinating with each other
so that they are all aware of the mutual effects of their actions.

Strategy in decline industries

Leadership strategy: it aims at growing in a declining

industry by picking up themarket share of companies that
are leaving the industry.

Niche strategy: it focuses on the pockets of demand in

the industry in which demand is stable or declining less
rapidly than the industry as a whole.

Harvest strategy: it requires the company to cut all new

investments in capital equipment, advertising, R&D and
the like.

Divestment strategy: it rests on the idea that a company

can recover most of its investment in an underperforming
business by selling it early, before the industry has
entered into a steep decline.

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