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

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6-2
 “All men can see
these tactics whereby
I conquer but what
none can see is the
strategy out of which
victory evolves.”
- Sun Tzu

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6 -3
 Industry Environment
Need to continually formulate/implement business-level
strategies to sustain competitive advantage over time.
o Different environments present different
opportunities and threats.
o Business model/strategies have to change to
meet environment.
o Face challenges developing/maintaining a
competitive strategy in:
• Fragmented Industries • Mature Industries
• Embryonic Industries • Declining Industries
• Growth Industries
2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6-4
 Reasons for
Fragmented Industries
“...composed of a large number of small and
medium-sized companies.”
o Low barriers to entry
o Low entry barriers permit constant entry by
new companies
o Specialized customer needs require small
job lots
o Diseconomies of scale
2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6-5
 Consolidating
Fragmented Industry

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2-6
 Strategies for
Fragmented Industries
Chaining– linked outlets to achieve cost
leadership
Franchising- rapid growth with proven
business concepts, reputation,
management skills and economies of scale
Horizontal Merger – acquisition to obtain
economies/growth
IT/Internet- develop new business models

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6-7
 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.
2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6 -8
 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
2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6-9
 Market Characteristics:
Embryonic/Growth Industries
Mass Markets Develop When:
• Technological progress makes 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.
2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6-10
 Market Development
and Customer Groups

Figure 6.2
2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6 -11
 Market Share
of Customer Segments
Market demand/profits rise in early/late majority segments.

Figure 6.3
2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6 - 12
 Innovators & Early Adopters Are:

o Technologically sophisticated and

tolerant of engineering
imperfections
o Typically reached through
specialized distribution channels
o Relatively few in number and not
particularly price-sensitive
2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6-13
 Crossing the Chasm
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.
2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6 -14
 The Chasm: AOL and Prodigy

Figure 6.4
Business models to compete in embryonic market populated by
early innovators very different than to compete in high-growth
mass market populated by early majority.
2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6 -15
 Strategic Implications
of Market Growth Rates
o Different markets develop at different rates.
o Growth rate measures rate industry’s
product spreads.
o Growth rates for products accelerate over
time:
• Use of mass media • Low-cost mass
production
o Factors affecting market growth rates:
• Relative advantage • Complexity
• Compatibility • Observability
• Availability of • Trialability
complementary products
2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6 - 16
 Business-Level Strategy
Business-level strategy is a major
determinant of industry
profitability. The choice of
business model and strategies
can accelerate or retard market
growth.

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6-17
 Crucial Factors
of Investment Strategy

1. Competitive advantage
of company’s business
model
2. Stage of the industry life
cycle
2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6 -18
 Stages of Life Cycle
o Embryonic– share building
• Distinctive competencies/competitive advantage
• Capital to develop R&D &sales/service competencies
o Growth– maintain competitive position
• Strengthen business model to survive shakeout
• Investment to keep up with growth
o Shakeout– competition is strongest
• Invest in share-increasing strategy
• Weak companies should invest in harvest strategy
o Maturity– defend business model
• Dominant companies reap ROI
• Investment depends on competition & source advantage

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6-19
 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.”

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6-20
 Mature Industries
o Evolution
• Consolidate due to fierce competition in shakeout
• Strategy based on established companies collectively reduce
strength competition
• Interdependent companies protect industry profitability.
o Strategies
• Deter entry
 Product proliferation  Maintain
 Price cutting excess capacity
• Manage rivalry
 Price signaling  Capacity control
 Price leadership  Nonprice competition

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6 -21
 Strategies for
Deterring Entry of Rivals
Figure 6.5

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6 -22
 Product Proliferation in
the Restaurant Industry
Figure 6.6

Where product
spaces have been
filled, difficult for
new company to
gain foothold in
market and
differentiate itself.

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6 -23
 Strategies for
Managing Industry Rivalry

Figure 6.7

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6 -24
 Nonprice Competitive Strategies
Figure 6.8

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6 -25
 Toyota’s Product Lineup
Toyota used market development to become a broad differentiator and
developed a vehicle for almost every main segment of the car market.
Figure 6.9

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6 -26
 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.”
2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6-27
 Factors of Intensity of
Competition in Declining Industries

Figure 6.10

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6 -28
 Declining Industries
Strategies
o Leadership – seeks to become
dominant player
o Niche – focuses on pockets of
demand declining more slowly
o Harvest – optimizes cash flow
o Divestment – sells business to
others
2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6 - 29
 Strategy Selection
in a Declining Industry

Determined by:
Severity of the
industry decline
Strength relative
to pockets of
demand

Figure 6.11
2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6 -30