CHAPTER 6

BUSINESS-LEVEL STRATEGY AND THE INDUSTRY

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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

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CONSOLIDATING A FRAGMENTED
INDUSTRY THROUGH VALUE INNOVATION
 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

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CONSOLIDATING A FRAGMENTED
INDUSTRY THROUGH VALUE INNOVATION
 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

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CONSOLIDATING A FRAGMENTED
INDUSTRY THROUGH VALUE INNOVATION
 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

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CHALLENGES IN THE EMBRYONIC AND
GROWTH INDUSTRIES
 Limited customer demand for products of an embryonic industry is due to:
 Limited performance and poor quality of the first products which can result in
products that do not meet customer expectations.
 Customer unfamiliarity with the product customers may not yet understand
what it is or how it works. This can lead to reluctance to try the product, or a lack
of awareness that the product even exists.
 Poorly developed distribution channels If the product is not widely available, it
can be difficult for customers to find and purchase it. This can be especially
challenging if the product requires specialized knowledge or equipment to use.
 Lack of complementary products . If the product is not compatible with other
products that customers already use or are familiar with, it can be difficult to
persuade them to adopt it.
 High production costs because of small volumes of production Since the
technology or product is new, production processes may not yet be fully
optimized, which can result in high costs. Additionally, since demand is limited, it
can be difficult to achieve economies of scale that would help to reduce costs.

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CHALLENGES IN THE EMBRYONIC AND
GROWTH INDUSTRIES
 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 and
development of complementary products As the technology behind
the product improves, it may become more powerful, easier to use,
or more versatile, which can increase its value to customers
 Production cost decreases, resulting in low prices and high demand
As production processes become more efficient and economies of
scale are achieved, the cost of producing the product may decrease.

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MARKET DEVELOPMENT AND
CUSTOMER GROUPS

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MARKET DEVELOPMENT AND
CUSTOMER GROUPS
• First to purchase and experiment with a product based on new technology They are
risk-takers who are always looking for the latest and greatest products. An example of
innovators are tech enthusiasts who purchase new smartphones as soon as they are released,
even if the phone's features are not yet fully optimized.
1.Early adopters: Early adopters are customers who understand that a new technology may have
important future applications. They are willing to take a risk on new products, but are more
cautious than innovators. An example of early adopters are the people who purchased the first
electric cars, even though they were still relatively expensive and not widely available.
2.Early majority: The early majority are customers who are practical and understand the value of
new technology. They wait until a new product has been tested and proven before they purchase
it. An example of the early majority are the people who purchased smartphones after they had
been on the market for a few years and had become widely adopted.
3.Late majority: The late majority are customers who purchase a new technology only when it is
obvious that it has great utility and is here to stay. They are more skeptical of new products and
need to see evidence that they are reliable and useful. An example of the late majority are the
people who purchased DVD players only after they had become widely adopted and prices had
come down.
4.Laggards: Laggards are the final group of customers to adopt a new technology. They are
unappreciative of the uses of new technology and may resist changing their behavior or habits.
An example of laggards are people who still use dial-up internet, despite the widespread
availability of high-speed broadband

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MARKET SHARE OF DIFFERENT
CUSTOMER SEGMENTS

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STRATEGIC IMPLICATIONS: CROSSING
THE CHASM
 New strategies are required: As an industry develops, new strategies are required to
strengthen a company's business model. This may involve adjusting the product or service to
better meet the needs of the mass market, developing new marketing and sales strategies,
or finding ways to reduce costs and improve efficiency.
 Different customer needs: Customers in each segment have very different needs.
Companies need to be able to identify these needs and develop products, services, and
marketing messages that are tailored to each segment. This may require market research
and customer feedback to better understand the needs of each group.
 Competitive chasm: The transition between the early adopters and the mass market is often
referred to as the "competitive chasm." This is a critical period for companies, as failure to
successfully make the transition can result in the company going out of business. Companies
need to be prepared to adjust their strategies and operations to successfully navigate this
transition.
 Example: One example of a company that successfully crossed the chasm is Apple. When
Apple first introduced the iPod, it was primarily marketed to early adopters who were tech
enthusiasts. However, Apple was able to successfully transition to the mass market by
developing new versions of the iPod that were more user-friendly and appealing to a wider
audience. Additionally, Apple developed new marketing campaigns that emphasized the
simplicity and convenience of the iPod, which helped to attract a larger number of
customers.
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STRATEGIC IMPLICATIONS: CROSSING
THE CHASM
1.Innovators and early adopters: Innovators and early adopters are
typically technologically sophisticated and willing to tolerate the
limitations of a new product. To reach this group, companies may need to
use specialized distribution channels, such as tech blogs or specialized
trade shows. Companies may also produce small quantities of the product
that are priced high, as early adopters are often willing to pay a premium
for the latest technology.
2.Early majority: The early majority, in contrast, value ease of use and
reliability. To reach this group, companies need to develop mass-market
distribution channels and mass-media advertising campaigns. Companies
also need to focus on large-scale mass production to produce high-quality
products at a low price. Additionally, companies need to focus on building
a strong brand and reputation for reliability to appeal to the early majority.

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FACTORS THAT ACCELERATE CUSTOMER DEMAND

1.Relative advantage: Relative advantage refers to the degree to which a new product is
perceived as better at satisfying customer needs than the product it supersedes. If
customers perceive that a new product offers significant advantages over existing products,
they are more likely to adopt it.
2.Complexity: Products that are perceived as complex and difficult to use will diffuse
more slowly than those that are easy to use. If a product is difficult to understand or use, it
may take longer for customers to adopt it.
3.Compatibility: Compatibility refers to the degree to which a new product is perceived as
being consistent with the current needs or existing values of potential adopters. If a product
is perceived as compatible with customers' existing values and needs, they are more likely
to adopt it.
4.Trialability: Trialability refers to the degree to which potential customers can
experiment with a new product during a hands-on trial basis. If customers are able to try a
product before committing to it, they may be more likely to adopt it.
5.Observability: Observability refers to the degree to which the results of using and
enjoying a new product can be seen and appreciated by other people. If customers can see
others enjoying a product, it may increase their likelihood of adopting it as well.
6.Viral model of infection: The viral model of infection refers to the process by which
lead adopters in a market become infected with a product and then infect other people,
making them adopt and use the product. This model relies on early adopters spreading the
word about the product to their social networks, creating a ripple effect of adoption.

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STRATEGIES TO DETER ENTRY IN
MATURE INDUSTRIES
1.Product proliferation strategy: The product proliferation strategy involves
catering to the needs of all market segments to deter entry by competitors. By
offering a wide range of products that meet the needs of different customer
groups, an incumbent company can make it difficult for new entrants to gain a
foothold in the market.
2.Limit price strategy: The limit price strategy involves charging a price that is
lower than that required to maximize profits in the short run, but is still above
the cost structure of potential entrants. By setting a price that is difficult for new
entrants to match, incumbent companies can deter new competition from
entering the market.
3.Strategic commitments: Strategic commitments involve making investments
that signal an incumbent's long-term commitment to a market or a segment of
the market. By making these investments, incumbent companies can send a
signal to potential entrants that they are willing to invest in the market for the
long term, making it less attractive for new competitors to enter.

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LIMIT PRICING

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STRATEGIES TO MANAGE RIVALRY
1.Price signaling: Price signaling involves companies increasing or
decreasing product prices to convey their intentions to other companies and
influence the price of an industry's products. By signaling their intentions
through pricing, companies can manage rivalry within the industry and
maintain a competitive advantage.
2.Price leadership: Price leadership occurs when one company assumes the
responsibility for determining the pricing strategy that maximizes industry
profitability. This company sets the price for its products, and other
companies in the industry follow suit. This can help to manage rivalry within
the industry by reducing price competition and increasing profitability.
3.Non-price competition: Non-price competition involves the use of product
differentiation strategies to deter potential entrants and manage rivalry within
an industry. By differentiating their products from those of their competitors,
companies can make it more difficult for new entrants to gain market share
and reduce the intensity of rivalry within the industry.

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STRATEGIES TO MANAGE RIVALRY
Market penetration

• Occurs when a company concentrates on expanding market share in

Product development

• Creation of new or improved products to replace existing products

Market development

• When a company searches for new market segments to increase the

Product proliferation

• Large companies in an industry have a product in each market

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 CAPACITY CONTROL
 Companies devise strategies to control or benefit from capacity
expansion programs
 Factors causing excess capacityNew technologies that produce more than
the old ones: The development of new technologies that produce more
than the old ones can lead to excess capacity if existing production
capacity becomes obsolete or is no longer in demand.
 New entrants in an industry: The entry of new competitors into an
industry can lead to excess capacity if the total supply of products in the
market exceeds demand.
 Economic recession that causes global overcapacity: Economic recessions
can cause global overcapacity as demand for products decreases and
companies are left with excess production capacity.
 High growth and demand in an industry that triggers rapid expansion:
High growth and demand in an industry can trigger rapid expansion and
overinvestment in production capacity, leading to excess capacity when
growth slows down.

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CAPACITY CONTROL
 Preempting rivals: Preempting rivals involves taking action to
control capacity before competitors do. By being the first to
implement a capacity control strategy, companies can gain a
competitive advantage and potentially deter rivals from
entering the market.
 Coordination with competitors: Coordination with
competitors involves working with other companies in the
industry to collectively manage capacity expansion programs.
By coordinating capacity expansion programs, companies can
avoid excess capacity and ensure that new capacity is added
in a sustainable manner.

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FACTORS THAT DETERMINE THE INTENSITY OF
COMPETITION IN DECLINING INDUSTRIES

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1. Speed of decline: The speed of decline refers to the rate at which demand
for products within an industry is declining. The faster the decline, the more
intense the competition is likely to be as companies compete for a shrinking
pool of customers.
2. Height of exit barriers: Exit barriers are the costs associated with leaving an
industry or discontinuing a particular product line. The higher the exit
barriers, the more intense the competition is likely to be, as companies are
reluctant to exit the market and are therefore more likely to engage in price
competition to maintain their market share.
3. Level of fixed costs: Fixed costs are the costs associated with production
that do not vary with the level of output. In industries with high fixed costs,
such as the automobile industry or the airline industry, the intensity of
competition is likely to be high, as companies must maintain high levels of
production to cover their fixed costs.
4. Commodity nature of product: The commodity nature of a product refers to
the degree to which it is perceived as being similar to other products within
the industry. In industries with highly commoditized products, such as the
oil industry or the agriculture industry, the intensity of competition is likely
to be high, as companies compete on price to maintain their market share.

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CHOOSING A STRATEGY
 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

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CHOOSING A STRATEGY
 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 decides
to exit an industry by selling off its business
assets to another company

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STRATEGY SELECTION IN A DECLINING
INDUSTRY

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