BUSINESS-LEVEL STRATEGIES AND INDUSTRY ENVIRONMENTS

1. BUSINESS-LEVEL STRATEGIES AND INDUSTRY ENVIRONMENTS HILL & JONES, Chpt. 6 BUS 189, SPRING 2013 DR. MARK FRUIN

2. ENVIRONMENTS RULE • FIRM STRATEGIES MUST FIT THE ENVIRONMENTS IN WHICH THEY COMPETE • DONUT RING MODEL AS APPROXIMATION • BASIC LAW OF EVOLUTION = ADAPT OR FAIL/DIE • LEVELS OF THE ONION RING OR DONUT FROM INSIDE • ORGANIZATIONAL ENVIRONMENT • COMPETITIVE ENVIRONMENT • INDUSTRY ENVIRONMENT • INSTITUTIONAL ENVIRONMENT • MACRO-ECONOMIC ENVIRONMENT

3. SUSTAINING COMP ADVANT IN DIFF INDUSTRY ENVIRONMENTS • RECOGNIZE DIFFERENT IND ENVIRONMENTS • FRAGMENTED VS CONCENTRATED INDUSTRIES • FRAGMENTED INDUSTRY STRATEGIES: see below • CONCENTRATED INDUSTRIES HAVE STAGES DRIVEN BY TECH & MRKT MATURATION • EMBRYONIC • GROWTH (PRE- AND POST-SHAKEOUT) • MATURE • DECLINING

4. FRAGMENTED INDUSTRY NEW • LARGE NUMBERS OF SMALL AND MED-SIZED COMPANIES • LOW BARRIERS TO ENTRY • HARD TO REALIZE ECONOMIES OF SCALE & SCOPE • BETWEEN GENERIC STRATEGIES, WHICH ONE APPLIES IN FRAGMENTED INDUST??? • COST LEADERSHIP OR DIFFERENTIATION?

5. OVERCOMING FRAGMENTATION • CHAINING STRATEGY (WAL-MART) • FRANCHISING (CENTURY 21, McD) • HORIZONTAL MERGER (BUDWEISER, NOW IN-BEV) • CONSOLIDATE W/ NEW TECHNOLOGIES • AMAZON, eBAY, GOOGLE (?) • HIGH LEVELS OF PERSONAL/PROFESSIONAL SERVICE PROVIDERS • HIGH END HEALTH CLUBS, LAW FIRMS, MEDICAL GROUPS

6. LEADING IN EVOLVING INDUSTRIES (THAT WILL BECOME CONCENTRATED) • INDUSTRIES ARE COMPOSED OF SEGMENTS & DRIVEN BY TECHNOLOGY • SEGMENTS ARE DEFINED AS? • PRODUCT ____ • CUSTOMER ____ • LOCAL DIFFERENCES • UNDERSTAND WHAT’S HAPPENING IN INDUSTRY • TARGET PRODUCT/ MARKET SEGMENTS ACCORDINGLY • OF COURSE, HAVE TO TARGET WHERE INDUSTRY IS GOING RATHER THAN WHERE IT IS TODAY • NEED “RIGHT” RESOURCES & CAPABILITIES TO PERFORM

7. EMBRYONIC/EMERGING/GROWTHINDUSTRIES • EMBRYONIC INDUSTRY = WHEN TECH BEGINNING TO DEVELOP • TECH INNOVATION DRIVES INDUSTRY • WHICH INDUSTRIES EMBRYONIC TODAY? • EMERGING/GROWTH INDUSRY WHEN MARKET DEMAND GROWS RAPIDLY • MARKET DEMAND DRIVES INDUSTRY • OBVIOUSLY DEMAND GROWTH TAKES TIME • SOME FIRMS CATCH THE WAVE & SOME DON’T

8. E/E/G INDUSTRIES • SLOW GROWTH AT FIRST BECAUSE • LIMITED PERFORMANCE/POOR QUALITY • CUSTOMERS UNFAMILIAR W/ NEW TECH • LACK COMPLEMENTARY PRODUCTS • PRODUCTION COSTS ARE HIGH • INDUSTRY GOES FROM EMBRYONIC -> HIGH GROWTH - WHY? • TECH PROGRESS MAKES PRODUCT EASIER TO USE & INCREASES THEIR VALUE • COMPLEMENTARY PRODUCTS APPEAR • PRODUCT/PROCESS COSTS GO DOWN

9. TECHNOLOGY/S-CURVE HINGES PARTLY ON CUSTOMER DEMAND • INNOVATORS (1%) • TECHIES, GEEKS • EARLY ADOPTERS (5%) • ENGINEERS, ENTREPRENEURS • EARLY MAJORITY (24%) • PRAGMATISTS • LATE MAJORITY (45%) • STUCK IN THE MUD BUT NOT LUDDITES • EXTRA CREDIT: WHO ARE LUDDITES? • LAGGARDS (24%)

10. CROSSING THE CHASM • GORDON MOORE, FORMER CEO OF INTEL & ORIGINATOR MOORE’S LAW (WHICH IS ?) • MANY COMPANIES CANNOT TRANSITION FROM EMBRYONIC TO GROWTH MARKETS • THERE MAY BE TWO OR THREE “CHASMS” • THEY FAIL TO DEVELOP MASS MARKETS NEEDED TO GROW PRODUCT • FAIL ON PROD FEATURES AND/OR CUST CHAR • APPLE (I) AS FIRM THAT FELL IN THE CHASM? • WHY IS APPLE II SO SUCCESSFUL? WHAT CHANGED?

11. TIPPING POINT • BIG CHANGES CAN HAPPEN SUDDENLY • THINGS BUILD UP & BUILD UP GRADUALLY, AND THEN BANG! • TIPPING POINT THEORY FROM EPIDEMIOLOGY AS ANALOGY FOR HOW MARKETS EXPLODE • STATE OF CONTAGIOUSNESS • GRADUALLY, ALMOST IMPERCEPTIBLY CHANGE RAPIDLY ACCELERATES AT A CERTAIN POINT • CRITICAL MASS CAN UNLEASH EPIDEMIC MOVEMENT: SUDDENLY EVERYONE’S INFECTED

12. TIPPING PT • EPIDEMICS ARE A FUNCTION OF: • # OF PEOPLE WHO TRANSMIT INFECTION (# OF INFECTIOUS AGENTS) • INFECTIOUS AGENT ITSELF (HOW VIRULENT; HOW TRANSMITTED?) • ENVIRONMENT IN WHICH INFECTIOUS AGENT OPERATES (HUMAN BEINGS MORE SENSITIVE IN CERTAIN ENVIRONMENTS THAN OTHERS; CERTAIN ENVIR CONDUCIVE TO INFECTION) • SUPPORT FOR IRAQ WAR (ESP. W/ DEMO CONGRESS) • ATTITUDES TOWARD GLOBAL WARMING • LIKELIHOOD OF BUYING A PRIUS (BEFORE & NOW)

13. FACTORS AFFECTING RATE OF PRODUCT ADOPTION • A PRODUCT’S RELATIVE ADVANTAGES • COMPATIBILITY WITH EXISTING NEEDS AND HABITS; SWITCHING COSTS • COMPLEXITY/DEGREE OF DIFFICULTY IN UNDERSTANDING AND/OR USING • TRIALABILITY • OBSERVABILITY • EXISTENCE OF COMPLEMENTARY PRODS

14. RATES OF DIFFUSION • DIFFERENCES BETWEEN 45 DEGREE RATES OF DIFFUSION & NEARLY 90 DEGREE RATES? • AUTOS, ELECTRICITY & TELEPHONE @ 45 DEGREES • VS. TELEVISION, VCR & CELL PHONE @ 90 DEGREES • WHICH IS MORE IMPORTANT IN DRIVING DIFFUSION – MARKETS, FIRMS OR TECHNOLOGIES? • PUSH OR PULL? • CAN ANYTHING DIFFUSE MORE RAPIDLY THAN CELL PHONES? • RATE OF DIFFUSION DEPENDS ON? • ? • ?

15. HOW SOON WILL RIVALS APPEAR? • 1) HOW IMPORTANT ARE COMPLEMENTARY ASSETS & HOW MANY SOURCES OF COMPLEMENTARY ASSETS ARE AVAILABLE? • 2) HEIGHT OF BARRIERS TO IMITATION IN PRODUCTS & PROCESSES? • 3) HOW MANY CAPABLE RIVALS? • 4) GO IT ALONE, LICENSE OR PARTNER? • TAKE IT ALL BY ONESELF • MAKE MONEY ON THE FRONT END • SHARE BUT NOT ALWAYS SHARE & SHARE ALIKE

16. GO IT ALONE, PARTNER OR LICENSE? • EASE OF IMITATION/REPLICATION (INCLUDING REVERSE ENGINEERING) • EASY/NOT-SO-EASY • IMPORTANCE OF COMPLEMENTARY ASSETS/RESOURCES/TECHNOLOGIES • IMPORTANT/NOT-SO-IMPORTANT • NUMBER OF CAPABLE COMPETITORS • FEW vs MANY • DOMESTIC vs GLOBAL (WHY IMPORTANT?)

17. TIPPING PTS & VIRAL MRTNG • SOME PEOPLE ARE VERY INFLUENTIAL • LEAD ADOPTERS & LEAD SUPPLIERS, FOR EXAMPLE • SOME PEOPLE CAN “INFECT/AFFECT” MANY OTHERS (ESP. IF YOU USE A TECHNOLOGY WITH SCALE, SCOPE & LEVERAGE, LIKE THE INTERNET) • RECENT EXAMPLES: 2008 PRESIDENTIAL CAMPAIGN • ANGELA JOLIE AND MADONNA ADOPTING CHILDREN FROM AFRICA • LINSANITY

18. B-L (PRODUCT/MARKET SEGMENT) STRATEGIES IN MATURE INDUSTRIES • B-L STRATEGIES ABOUT HOW FIRMS COLLECTIVELY REDUCE STRENGTH OF COMPETITION (IN MATURE INDUSTRIES) • STRATEGIES TO DETER ENTRY • STRATEGIES TO MANAGE RIVALRY • STRATEGIES TO CONTROL SUPPLY AND DISTRIBUTION • THEY’VE MADE IT & NOW THEY WANT TO REAP THE FRUITS OF THEIR EFFORTS

19. MATURE INDUSTRY STRATGIES • REMEMBER PRODUCT DIFFERENCES ARE ACHIEVED IN 4 WAYS IN A FUNCTIONAL SENSE • EFFICIENCY, QUALITY, INNOVATION & CUSTOMER RESPONSIVENESS/SATISFACTION • STRATEGIES TO DETER ENTRY • PRODUCT PROLIFERATION • FILL ALL THE NICHES • PRICE CUTTING • NEW FIRMS TYPICALLY HAVE HIGHER COSTS • MAINTAINING EXCESS CAPACITY • PUT NEW ENTRANTS ON NOTICE THAT YOU’RE WILLING & ABLE TO RAMP UP PROD & FILL PRODUCT PIPELINE

20. COMPETITIVE ADVANTAGES • ARE ACHIEVED BY MAKING CHOICES • WHICH PRODUCT FEATURES? • WHICH CUSTOMERS? • WHERE AND WHEN? • RESPONSIVENESS & VARIETY OF PROD. OFFERINGS BASED ON ORGANIZATIONAL CAPABILITIES • REQUIRE CONTINUED UPGRADING • INVESTING • PRACTICING (ORG. LEARNING) • EVALUATING/ASSESSING/COMPARING & CONTRASTING • MAKING DISCRETIONARY CHOICES = MANAGEMENT

21. STRATS TO MANAGE RIVALRY • PRICE SIGNALING • A CREDIBLE THREAT TO CUT PRICES? • NEED TO BE WILLING & ABLE TO CUT PRICES • PRICE LEADERSHIP • TAKE LEADERSHIP IN SETTING PRICES OR RESPONDING RAPIDLY WHEN OTHERS DO • CAPACITY CONTROL: MANAGE OUTPUT • NON-PRICE COMPETITION (AS OPPOSED TO?) • PRODUCT DIFFERENTIATION • MARKET PENETRATION (E.G., ADVERTISING) • PRODUCT DEVELOPMENT (NEW PROD DEVELOPMENT) • MARKET DEVELOPMENT (NEW MARKET DEVELOPMENT) • PRODUCT PROLIFERATION

22. STRATEGIES TO CONTROL SUPPLY & DISTRIBUTION • VERTICAL INTEGRATION STRATEGIES • TO MAKE OR BUY DECISIONS • COMPLEXITY OF PRODUCTS/PROCESSES • AFTER MARKET CARE • VERTICAL DIS-INTEGRATION STRATEGIES • WHY OUTSOURCE/OFFSHORE? • NOT OUR DISTINCTIVE COMPETENCE • SOMEONE ELSE CHEAPER, BETTER & FASTER • RESULTS OF OUTSOURCING FOR CAPABILITIES? (AS OPPOSED TO OUTSOURCING FOR PRODUCTS)

23. DOMINANT STRATEGY • A STRATEGY WHERE YOU ARE BETTER OFF, NO MATTER WHAT RIVALS DO • HOWEVER, AS PRISONER DILEMMA (2 PERSON/FIRM GAME) SHOWS • IF NEITHER FIRM CAN TRUST THE OTHER • BOTH ARE MORE LIKELY TO SUFFER • IN MANY COP SHOWS, THE KEY ISSUE • BE FIRST TO CUT A DEAL • IN MANY COMPETITIVE SITUATIONS, THE KEY ISSUE • SHOULD I REMOVE REBATES OR NOT? • SHOULD I CUT PRICES FIRST OR NOT?

24. STRATEGY IN DECLINING IND • ONCE DEMAND STARTS TO FALL, AN INDUSTRY IS IN DECLINE • HOWEVER, TECHNOLGY PRIMARILY DRIVES THE INDUSTRY LIFE CYCLE, NOT DEMAND • HENCE, IF MAJOR PLAYERS INNOVATE IN VARIOUS WAYS, INDUSTRY MAY NOT DECLINE FOR LONG TIME • INTENSITY OF COMPETITION IN DECLINING INDUSTRIES VARIES WITH • RATE OF DECLINE • HEIGHT OF EXIT BARRIERS, INCLUDING REPUTATION EFFECTS • AMOUNT OF SUNK COSTS • IF PRODUCTS ARE DIFFERENTIATED OR NOT

25. MATURE VS. DECLINING INDUSTRIES • MATURE • SALES FALL OFF TO 1-2% GROWTH • REPLACEMENT SALES PREDOMINATE • # OF FIRMS DECLINES; EACH WITH BIG MKT SHARE • NO (OR LITTLE) PROPRETAIRY TECHNOLOGY • DECLINING • FALLING SALES • CUSTOMERS DO NOT REPLACE PRODUCTS • EVEN FEWER FIRMS • OCCASIONALLY, NEW WRINKLES ON TECHNOLOGY BUT MOSTLY FIRMS ARE UNWILLING TO INVEST IN NEW TECH BECAUSE INDUSTRY IN DECLINE

26. STRATEGIES FOR DECLINING INDUSTRIES • SELECTION DEPENDS ON • INTENSITY OF COMPETITION • COMPANY STRENGTHS RELATIVE TO COMPETITION • LEADERSHIP STRATEGY • BUY OUT RIVALS, PICK UP MKT SHARE • NICHE STRATEGY • FIND PROFITABLE SEGMENTS (W/I A DECLINING INDUSTRY OVERALL) • HARVEST STRATEGY • OPTIMIZE CASH FLOW AS EXIT INDUSTRY • DIVESTMENT STRATEGY • SELL OUT FAST (BEFORE OTHERS CATCH ON)

27. QUESTIONS • WHAT ARE THE DANGERS ASSOC WITH BEING LEADER IN EMBRYONIC AND GROWTH INDUSTRIES? • FIRST-TO-MARKET vs FAST FOLLOWER • WHICH IS BETTER AND WHY; BE SPECIFIC • TO WHAT EXTENT CAN FIRMS CONTROL INDUSTRY PROFITABILITY? • WHEN, WHERE & HOW? (AT WHAT STAGE??) • ECONOMIES OF SPEED • WHEN IS THIS LEGAL-ILLEGAL? • WHEN THERE’S NO ACTUAL AGREEMENT; PRICE SIGNALING, AS EXAMPLE OF LEGAL COLLUSION • WHAT’S REQUIRED TO SUSTAIN A CONSPIRACY?

28. MORE QUESTIONS • HOW DO GENERIC COMPETITIVE STRATEGIES INTERSECT/INTERACT W/ INDUSTRY LIFE CYCLE? • GENERIC COMP. STRAT. TOO SIMPLISTIC, AFTER THIS CHAPTER!! • COST LEADERSHIP & DIFFERENTIATION MEAN DIFFERENT THINGS AT DIFFERENT STAGES/SUB-STAGES OF ILC • WITH PRODUCT LIFE CYCLE? • ARE EFFECTS OF PRODUCT LIFE CYCLE CONSISTENT ACROSS ALL INDUSTRY SEGMENTS? • SAME QUESTIONS WITH REGARD TO F-L STRATEGIES • SAME SORT OF QUESTIONS WITH RESPECT TO EARLY ADOPTER/CUSTOMER SEGMENTS MODEL • IN OTHER WORDS, INTERACTION EFFECTS: STRATEGIES & STAGES MUST FIT/BE IN SYNC