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All men can see these tactics whereby I conquer but what none can see is the strategy out of which victory evolves.
- Sun Tzu
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Different industry environments present different opportunities and threats. A companys business model and strategies have to change to meet the environment. Companies must face the challenges of developing and maintaining a competitive strategy in: Fragmented Industries Mature Industries Embryonic Industries Declining Industries Growth Industries
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Fragmented Industries
A fragmented industry is one composed of a large
number of small and medium-sized companies.
Strategies
Chaining networks of linked outlets to
achieve cost leadership Franchising for rapid growth with proven business concepts, reputation, management skills and economies of scale Horizontal Merger acquisition to obtain economies and growth IT and Internet to develop new business models
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Companies must understand the factors that affect a markets growth rate in order to tailor the business model to the changing industry environment.
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Figure 6.2
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Technologically sophisticated and tolerant of engineering imperfections Typically reached through specialized distribution channels Relatively few in number and not particularly price-sensitive
To cross the chasm between the Early Adopters and the Early Majority
Correctly identify the needs of the first wave of early majority users. Alter the business model in response. Alter the value chain and distribution channels to reach the early majority. Design the product to meet the needs of the early majority so that the product can be modified and produced or provided at low cost. Anticipate the moves of competitors.
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The business model and strategies required to compete in an embryonic market populated by Early Adopters and Innovators are very different than those required to compete in a high-growth mass market populated by the Early Majority.
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Use of mass media Relative advantage Compatibility Availability of complementary products Low-cost mass production Complexity Observability Trialability
Business-level strategy is a major determinant of industry profitability. The choice of business model and strategies can accelerate or retard market growth.
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Source: Peter Brimelow, The Silent Boom, Forbes, July 7, 1997, pp. 170-171. Reprinted by permission of Forbes Magazine 2002 Forbes, Inc.
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Mature Industries
A mature industry is dominated by a small number of large
companies whose actions are so highly interdependent that success of one companys strategy depends on the response of its rivals.
Strategies
Deter entry into industry Product proliferation Maintaining Price cutting excess capacity Manage industry rivalry Price signaling Capacity control Price leadership Nonprice competition
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Filling the Niches: making it difficult for new competitors to break into a new industry & establish a beachhead
Sending a Signal: to potential new entrants contemplating entry that new entry will be met with price cuts
Warning of Retaliation: by increasing output and forcing down prices until market entry would be unprofitable to entrants
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We built our company by focusing upon a pretty simple, but focused premise of Quality, Service, Cleanliness, and Value.
- Ray Kroc, Founder of McDonalds
www.mcdonalds.com
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Convey intentions (e.g. Tit-for-Tat) regarding pricing to other companies to allow the industry to choose the most favorable pricing options. Intent is to improve industry profitability.
Informal pricing when one company takes the responsibility for choosing the most favorable industry pricing option. Formal price setting jointly by companies is illegal.
Differentiation by offering products with different features or applying different marketing techniques: Market development Market penetration Product development Product proliferation
Market Signaling to secure coordination with rivals as a capacity control strategy and to reduce industry investment risks. Collusion on timing of new investments is illegal.
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Game Theory
Companies in an industry can be viewed as players that are all simultaneously making choices about which business models and strategies to pursue in order to maximize their profitability.
Basic principles that underlie game theory: Look Forward and Reason Back Decision Trees
Look forward, think ahead, and anticipate how rivals will respond to whatever strategic moves they make Reason backwards to determine which strategic moves to pursue today based on how rivals will respond to future strategic moves
Know Thy Rival how is the rival likely to act Find the Dominant Strategy Payoff Matrix
One that makes you better off if you play that strategy No matter what strategy your opponent uses
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Declining Industries
A declining industry is 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.
Reasons - technological change, social trends, demographic shifts Intensity of competition is greater when:
Strategies
Not all industry segments typically decline at the same rate Creating pockets of demand Leadership seeks to become dominant player in declining industry Niche focuses on pockets of demand that are declining more slowly Harvest optimizes cash flow Divestment sells business to others
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