copyright © 2001 houghton mifflin company. all rights reserved. chapter 7 competitive strategy and...

Copyright © 2001 Houghton Mifflin Company. All rights reserved.

Chapter 7Chapter 7

Competitive Strategy and the Competitive Strategy and the Industry EnvironmentIndustry Environment

StrategicStrategic Charles W. L. HillCharles W. L. Hill

ManagementManagement Gareth R. JonesGareth R. Jones

Fifth EditionFifth Edition

PowerPoint Presentation PowerPoint Presentation by Charlie Cookby Charlie Cook

An Integrated ApproachAn Integrated Approach

Copyright © 2001 Houghton Mifflin Company. All rights reserved. 7-2

Chapter ObjectivesChapter Objectives

Different kinds of competitive problems that exist in Different kinds of competitive problems that exist in different industry environmentsdifferent industry environments

Problems of developing competitive advantage in a Problems of developing competitive advantage in a fragmented industryfragmented industry

Problems of maintaining a first-move advantage in Problems of maintaining a first-move advantage in embryonic and growth industriesembryonic and growth industries

Main kinds of strategies for competing in mature Main kinds of strategies for competing in mature industriesindustries

Main strategies for handling declining industriesMain strategies for handling declining industries


OverviewOverview

Firms have to manage competitive relations Firms have to manage competitive relations with other firms, these relations will differ with other firms, these relations will differ depending on the nature of the competitive depending on the nature of the competitive environmentenvironment

Chapter 7 addresses how firms seek to Chapter 7 addresses how firms seek to maximize their competitive advantage in maximize their competitive advantage in fragmented, embryonic, growth, mature and fragmented, embryonic, growth, mature and declining industry environments.declining industry environments.


Strategies in Fragmented Strategies in Fragmented IndustriesIndustriesFragmented industry characteristics:Fragmented industry characteristics:

Localized markets with low entry Localized markets with low entry barriers (e.g., Mom’s Diner).barriers (e.g., Mom’s Diner).

Few economies of scale Few economies of scale opportunities exist.opportunities exist.

High transportation costs High transportation costs (e.g., sand) for products.(e.g., sand) for products.

Focus strategies predominate Focus strategies predominate (e.g., focus on customer group, need or region).(e.g., focus on customer group, need or region).


Strategies in Fragmented Strategies in Fragmented IndustriesIndustriesOne option though, is to try to consolidate the One option though, is to try to consolidate the industry to take advantage of buying, economies of industry to take advantage of buying, economies of scale in advertising etc to pursue with a low cost or scale in advertising etc to pursue with a low cost or differentiation stragegy: differentiation stragegy:

Chaining (Wal-Mart)Chaining (Wal-Mart) Franchising (also permits rapid growth) (McDonald’s)Franchising (also permits rapid growth) (McDonald’s) Horizontal mergers (Dillard’s) therefore less competition and Horizontal mergers (Dillard’s) therefore less competition and

greater ability to influence price and output decisionsgreater ability to influence price and output decisions Using the Internet (eBay)Using the Internet (eBay)

Key challenge is how to overcome disadvantage of Key challenge is how to overcome disadvantage of fragmentation so that the competitive advantages of fragmentation so that the competitive advantages of cost, differentiation or focus can be realizedcost, differentiation or focus can be realized


Strategies in Embryonic and Growth Strategies in Embryonic and Growth IndustriesIndustriesArise due to innovations by pioneers (Apple, Xerox, Arise due to innovations by pioneers (Apple, Xerox, etc)etc)

High profits attract imitators seeking the big profitsHigh profits attract imitators seeking the big profits

Competitive entry rate is very high (see next slide)Competitive entry rate is very high (see next slide)

Many innovators Many innovators loselose first mover advantage first mover advantage (Bowman, Apple)(Bowman, Apple)

Key challenge in embryonic and growth industries is Key challenge in embryonic and growth industries is how to maintain that first mover advantage and build how to maintain that first mover advantage and build a long term sustainable competitive advantagea long term sustainable competitive advantage


FIGURE 7.1

How an Innovator’s ProfitsHow an Innovator’s ProfitsCan Be Competed AwayCan Be Competed Away

Nu

mb

er

of

Co

mp

eti

tors

in

th

e M

ark

et

Many

Few

Inn

ov

ato

r’s

Pro

fit

Ra

te

High

Low

Time

Time


Strategies in Embryonic and Strategies in Embryonic and Growth IndustriesGrowth Industries

Three strategies for an innovator competing in a Three strategies for an innovator competing in a newly emerging market/industry:newly emerging market/industry:

Develop and market the technology itself.Develop and market the technology itself. Develop and market the technology jointly with another Develop and market the technology jointly with another

company through a strategic alliance.company through a strategic alliance. License the technology to existing companies and let them License the technology to existing companies and let them

develop the market. develop the market.

Which strategy to choose depends on three factors…Which strategy to choose depends on three factors…


Strategies in Embryonic and Growth Strategies in Embryonic and Growth IndustriesIndustries

An innovator’s optimal choice of growth An innovator’s optimal choice of growth industry strategy depends on:industry strategy depends on:

Complementary assets the innovator has that can be Complementary assets the innovator has that can be used to exploit and market the innovation.used to exploit and market the innovation.

The height of barriers to imitation by competitors The height of barriers to imitation by competitors (e.g., patents).(e.g., patents).

The capability of competitors to quickly imitate the The capability of competitors to quickly imitate the pioneering company.pioneering company.


Strategies for Profiting from Strategies for Profiting from Innovation: Putting it all togetherInnovation: Putting it all together

StrategyStrategy Does Innovator Does Innovator Have All Required Have All Required Complementary Complementary Assets?Assets?

Likely Likely Height of Height of Barriers to Barriers to ImitationImitation

Number of Number of Capable Capable CompetitorsCompetitors

Going it aloneGoing it alone YesYes HighHigh FewFew

Entering into allianceEntering into alliance NoNo HighHigh LimitedLimited

License innovationLicense innovation NoNo LowLow ManyMany

TABLE 7.1


Body ShopBody Shop

What lesson can we learn from how Anita What lesson can we learn from how Anita Roddick entered the U.S. market with Body Roddick entered the U.S. market with Body Shop?Shop?

If barriers to imitation are low, company lacks If barriers to imitation are low, company lacks complementary assets and there are many complementary assets and there are many capable competitors, sell or license capable competitors, sell or license technology to an established firm (or at least technology to an established firm (or at least try an alliance).try an alliance).


Strategy in Mature IndustriesStrategy in Mature Industries

Due to fierce competition in the shake-out stage (try to Due to fierce competition in the shake-out stage (try to survive this stage), industries become consolidated and a few, survive this stage), industries become consolidated and a few, large companies emerge that are inter-dependent.large companies emerge that are inter-dependent.

They try to “manage” the industry so that they maximize They try to “manage” the industry so that they maximize individual firm profitability “and” industry profitability (seek individual firm profitability “and” industry profitability (seek stability).stability).

They do this by managing the five competitive forces (deter They do this by managing the five competitive forces (deter entry, reduce rivalry (not increase it), limit power of buyers entry, reduce rivalry (not increase it), limit power of buyers and sellers and avoid substitutes).and sellers and avoid substitutes).


FIGURE 7.2

Strategy in Mature IndustriesStrategy in Mature Industries

Strategies for Deterring the Entry of RivalsStrategies for Deterring the Entry of Rivals


FIGURE 7.3

Product Product Proliferation Proliferation in the in the Restaurant Restaurant IndustryIndustry

Where is “Mother Where is “Mother Webbs?”Webbs?”

McDonald’s


Strategies to Manage (a.k.a. Strategies to Manage (a.k.a. “reduce”) Rivalry in Mature “reduce”) Rivalry in Mature IndustriesIndustriesPrice signalingPrice signaling

Leading competitors use price changes to convey Leading competitors use price changes to convey their intentions to other competitors (i.e., tit-for-tat).their intentions to other competitors (i.e., tit-for-tat).

Price leadershipPrice leadership One company sets the industry price; other One company sets the industry price; other

competitors reference their prices to that price.competitors reference their prices to that price.

Non-price competitionNon-price competition Competition by any means other than priceCompetition by any means other than price


FIGURE 7.4

Four Non-price Competitive Four Non-price Competitive StrategiesStrategies


Strategies to Manage Rivalry in Strategies to Manage Rivalry in Mature IndustriesMature Industries

Sometimes excess capacity is generated by companies trying Sometimes excess capacity is generated by companies trying to get ahead (to deter entry) in response to favorable to get ahead (to deter entry) in response to favorable conditions…everyone invests at the same time and everyone conditions…everyone invests at the same time and everyone gets hurt.gets hurt.

Sometimes technology causes excess capacitySometimes technology causes excess capacity Sometimes falling demand causes itSometimes falling demand causes it

Capacity control strategiesCapacity control strategies Preempt rival firms by building capacity ahead of anticipated Preempt rival firms by building capacity ahead of anticipated

increases in demand in hopes that no one else followsincreases in demand in hopes that no one else follows Indirect coordination with rival firms to keep industry-wide Indirect coordination with rival firms to keep industry-wide

capacity in line with demand.capacity in line with demand.


FIGURE 7.5

Changes in Industry Capacity and Changes in Industry Capacity and DemandDemand


Supply and Distribution Strategy in Supply and Distribution Strategy in Mature IndustriesMature Industries

How to control bargaining power of buyers and How to control bargaining power of buyers and sellerssellersVertical integrationVertical integration

Backward towards input suppliers (Ford and IPL).Backward towards input suppliers (Ford and IPL). Forward into distribution to consumers (see Dell)Forward into distribution to consumers (see Dell)

Choice of integration depends on:Choice of integration depends on: Need for close relationships with suppliers.Need for close relationships with suppliers.

Japanese vs. American stylesJapanese vs. American styles Need to ensure customer relationships.Need to ensure customer relationships.

Complexity of productComplexity of product Amount of product information requiredAmount of product information required


Strategies in Declining Industries Strategies in Declining Industries (steel, tobacco, vacuum tubes)(steel, tobacco, vacuum tubes)Options:Options:

Leadership strategyLeadership strategy A firm seeks to become dominant in the industry.A firm seeks to become dominant in the industry.

Niche strategyNiche strategy Focuses on demand pockets declining more slowly than the Focuses on demand pockets declining more slowly than the

industry as a whole.industry as a whole.

Harvest strategyHarvest strategy Limits investment and optimizes cash flow.Limits investment and optimizes cash flow.

Divestment strategyDivestment strategy Company exits the industry by selling out early to others, Company exits the industry by selling out early to others,

avoiding liquidation.avoiding liquidation.


FIGURE 7.6

Factors That Determine the Intensity Factors That Determine the Intensity of Competition in Declining of Competition in Declining IndustriesIndustries


FIGURE 7.7

StrategStrategy y SelectioSelection n in a in a DeclininDeclining g IndustryIndustry


FIGURE 7.8

A Harvest StrategyA Harvest Strategy

copyright © 2001 houghton mifflin company. all rights reserved. chapter 7 competitive strategy and...

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