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Business-Level Strategy and the Industry Environment

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Huda Mulla

on 10 December 2014

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Transcript of Business-Level Strategy and the Industry Environment

Strategies in Fragmented Industries
Strategies in Embryonic and growth industries
Industry Life Cycle
Strategies to Manage Rivalry
Thank You for Being Here
What is Strategy?

A plan of action or policy designed to achieve a major overall aim.

What is it?

It is a series of stages of development an industry moves through.
The period of time from the introduction and development of an industry to its decline.
A fragment industry is one composed of large number of small and medium sized companies.
dry cleaning companies, restaurants, health club and legal services.

Reasons for fragmented industries:

Low barriers to entry due to lack of economies of scale.
Low entry barriers permit constant entry by new companies
Specialized customer needs require small job lots of products - no room for a mass-production
An embryonic industry

is one that is just beginning to develop when technological innovation creates new market or product opportunities.

A growth industry

is one in which first- time demand is expanding rapidly as many new customers enter the market.

What is Rivalry?
Any Questions
Hanan Khalifa
Huda Al Mulla
Salma Humaid

Chapter 6:
Business-Level Strategy and the Industry Environment

Types of Strategy:
Business Level Strategy

Action plan the firm develops to compete in its chosen industry or market segment.

Details how the firm intend to compete in the marketplace on a continues basis to satisfy customers’ needs.

Refers to the plan of action that strategic managers adopt for using a company’s resources and distinctive competencies to gain a competitive advantage over its rivals in a market or industry.

Purpose of Business Level Strategy:

Competitive Advantage
Or to create differences between position of a firm and its competitors
Relationship Between Customers and Business Strategy:

Customers are the foundation of successful business strategies:
Who will be served by the firm
What needs those target customers have that firm will satisfy
How those needs will be satisfied by the firm
Competing in Fragmented Industries Requires Strategic Consolidation By:

Chaining (Wal-Mart)
Franchising (McDonald’s)
Horizontal mergers (Dillard’s)
Using the Internet (eBay)
Franchising (McDonald’s):

Is a business level strategy in which the franchisor ( parent company) grants to its franchisees the right to use the franchisor’s name, reputation and business model in return for a franchise fee and often a percentage of the profit.

Owning a franchise allows you to go into business for yourself.

A franchise provides an established product or service which may already enjoy widespread brand-name recognition. This gives the franchisee the benefits of a pre-sold customer base which would ordinarily takes years to establish.

The franchisee is not completely independent. Franchisees are required to operate their businesses according to the procedures and restrictions set forth by the franchisor in the franchisee agreement.

In addition to the initial franchise fee, franchisees must pay ongoing royalties and advertising fees.

The term (duration) of a franchise agreement is usually limited and the franchisee may have little or no say about the terms of a termination.
Horizontal Merger:

A merger occurring between companies in the same industry. Horizontal merger is a business consolidation that occurs between firms who operate in the same space, often as competitors offering the same good or service.

Macy’s (clothing company):
Arranged the merger of regional store chains to become one of the largest U.S clothing companies.

Companies are able to obtain economies of scale.
Companies are able to pursue a cost leadership or a differentiation business model.

Extra cost involved in seeking to harmonize like wage rates and accounting systems in the two companies
The Changing Nature of Market Demand:

Reasons for slow growth in market demand:
Limited performance and poor quality of the first products
Customer unfamiliarity with what the new product can do for them
Poorly developed distribution channels

Market development & Customer Groups:

3- Shakeout Strategies

Slowing growth
Demand reaches saturation levels
Intense competition
Early stages of consolidation
Declining profitability.

The aim of this stage is to maintain and increase market share.

Invest in share-increasing strategies at expense of weak competitors.
Weak companies should exit the industry during the harvest stage.
4- Maturity Strategies

Little or no growth
Industry consolidation
market share stabilizes
Relatively high barriers to entry

The aim of this stage is to hold and maintain defend business model:

Dominant companies want to reap the reward of prior investments.
A company’s investment depends on the level of competition and source of the company’s competitive advantage.
What are these Strategies?
Price Signaling
Price Leadership
Market Penetration
Product Development
Price Signaling.
What is it?
leading competitors use price changes to convey their intentions to other competitors.
In simpler words, it is when a company announces a price change in the hope other companies follow the same.
How it works/Example
Price signaling occurs when banking companies:

Disclose prices to competitors in private
Disclose information (in public or in private) for the purpose of substantially lessening competition in a market.
Price Leadership.
What is it?
The setting of the price of a product or service by a dominant firm at a level that competitors can match, in order to avoid a price war.
How it works/Example
Company A manufactures windshield wipers. It is one of five windshield manufacturers in the country, but its products have the widest distribution. As a result, Company A charges only $10 for a wholesale of wipers; its competitors charge $13 or more for virtually the same thing. Company A is a price leader in windshield wipers.

Accordingly, A's competitors might need to drop their prices down to $10 in order to compete and keep their market share. If they can afford it, they might even drop below $10 in an effort to scoop up more market share. As you can see, Company A sets the price level, and all its competitors can do is react to it.

Why it Matters?

Price leadership is usually a challenge for companies that aren't price leaders, because they are in the position of either defending their higher prices or reacting to the strategies of another company.
Market Penetration.
What is it?
It is the percentage of individuals in a target existing market who consume something versus those who do not.
How it works/Example
If a company determines that product ABC has a market of 50 million people and of those 10 million purchase it, then product ABC's market penetration would be 20%.

Market penetration can be used to describe the percentage of a company's sales versus total sales for a specific product.
Why it Matters?

The smaller a product's market penetration, the more a company should invest in its strategy for marketing that item. For this reason, high market penetration indicates that a product has become established and the company is a market leader.
Product Development.
What is it?
It is creating an entirely new products or modifying and updating them to replace existing ones,
How it works/Example
Why it Matters?

Product development is an essential component of business success.
According to
George Gruenwald in New Product Development: Responding to Market Demand,
"Everyone in industry knows that new products are essential for viability: If we do not continue to grow, we die. To grow, a company must continue to learn (research) and to make a difference in its industry (pioneer)….
Navigating through the life cycle to maturity
1- Growth Strategies

Demand increases rapidly
Growing sales
Significant profitability
Lack of competition.

The aim is to maintain or grow its relative competitive position in expanding market:

Strengthen business model to prepare to survive industry shakeout.
Requires investment to keep up with rapid growth of the market.
Navigating Through The Life Cycle to Maturity
1- Embryonic Strategy

New products
High price
Low Demand
Slow Growth
Weak revenue
High-risk investments

The Aim of this stage is to build market share by developing a competitive Advantage to attract customers

Development of distinctive competencies and competitive advantage.
Requires capital to develop R&D and sales/service competencies.
2- Growth Strategies

Demand increases rapidly
Growing sales
Significant profitability
Lack of competition.

The aim is to maintain or grow its relative competitive position in expanding market.

Strengthen business model to prepare to survive industry shakeout.
Requires investment to keep up with rapid growth of the market.
Porter five forces analysis
Full transcript