Business Unit Strategy: Contexts and

Special Dimensions
Strategy: A View from the Top
Chapter 7
Shana Hartford
April Miller
Brittany Snethkamp
Brian Cote
Carly Buell
Ryan Buell
Austin Stewart

Business Unit Strategy:

In order to identify a clear business unit strategy a

company must analyze the industry

characteristics in which it will be competing.
First, we look at three contexts that relate to the

various evolutionary stages of an industry:

emerging, growth, and mature and declining.
Next we discuss three industry environments that
pose a unique strategic challenges: fragmented,
deregulating, and hypercompetitive.
Speed and innovation are also discussed as

hypercompetitive characteristics continue to increase in

many industries.

Strategy in Emerging Industries

New industries emerge in a number of ways.
For example, technological breakthroughs

developed a new industry for the telephone industry

with cellular devices.
Improvements:
Technologies are typically immature meaning

competitors will seek to improve existing designs

and processes or even leapfrog them altogether
with next generation technology
Costs are typically high and unpredictable, entry
barriers are low, supplier relationships are
underdeveloped, and distribution channels are just
emerging making a lot of room for improvement and
market share increases.

Strategy in Emerging Industries

(cont.)
First Mover Advantage:
The first company to come out with a new product or

service has the first mover advantage.

Timing is critical!
Opportunity to shape customer standards and set the
competitive rules of the game.
Reduce Risk:
Ability to control product and process development

through superior technology, quality, or customer

knowledge
Ability to leverage existing relationships with suppliers
and distributors
Ability the leverage access to a core group of early, loyal
customers

Strategy in Growth Industries

Competitors tend to focus on expanding their

market shares which creates a host of challenges

in growing industries.
Cost control becomes an important element of

strategy as unit margins shrink and new products

and applications are harder to find
International markets must be considered as
globalization of competition continues to arise.

Strategy in Growth Industries (cont.)

During the early growth stages companies tend to

add more products, models, sizes, and flavors to

appeal to an increasingly segmented market
Toward the end of the growth stages cost
considerations become a priority.
Process innovation and redefinitions of supplier and

distributor relations are important dimensions of

cost control.
Finally horizontal integration becomes attractive

as a way of consolidating a companys market

position

New Entrants in Growing

Industries
New companies that enter the market during the

final stages of growth are known as followers

Advantages:
Opportunity to evaluate alternative technologies
Delay investment in risky projects
Initiate or leapfrog superior product and technology offerings

New Entrants in Growing Industries

(cont.)
Entrants must decide to enter into a market either

through internal development or acquisition.

In order to make this decision companies must
analyze what the structural barriers to entry are as
well as how existing firms will react to the intrusion
into the market
Structural barriers may include the level of investment

required, access to production or distribution facilities,

and the threat of overcapacity
Retaliation of competitors is lower in industries where
growth is low, products are highly differentiated, and
fixed costs are high
New entrants should focus on industries where the

reaction may be slow and therefore the firm can

influence the industry structure and where the
benefits of entry exceed costs.

Important issues as maturity sets and

decline threatens:
Carefully choosing balance between

differentiation and low cost postures

Deciding whether to compete in multiple or single
industry segments

Strategy in Mature and Declining Industries

Firms earn profits during the long maturity

stage of an industrys growth if:

1.

Concentrate on segments that offer chances for

higher growth or higher return
Manage product and process innovation aimed at
further differentiation , cost reduction, or
rejuvenating segment growth
Streamline production and delivery to cut costs
Gradually harvest the business in preparation for
a strategic shift to better products or industries

2.

3.

4.

1.
2.

3.
4.
5.
6.
7.

Mature and declining industries contain

strategic pitfalls that should be avoided:
An overly optimistic view of the industry or the
companys position within it
Lack of strategic clarity shown by a failure to
choose between a broad-based and a focused
competitive approach
Investing too much for too little return = cash
trap
Trading market share for profitability in response
to short-term performance pressures
Unwillingness to compete on price
Resistance to industry structural changes or new
practices
Placing too much emphasis on new product
development compared with improving existing
ones

Industry Evolution and Functional Priorities

Early development of a product market

typically
Has slow growth in sales
Emphasis on R&D
Rapid technological change in the product
Operating losses and
Need for slack to support temporarily
unprofitable operations
Success at this stage is associated with

Technical skills
Being the1st in the new markets
Marketing advantage that creates widespread

awareness

 Rapid Growth brings new competitors

Success factors
Brand awareness
Product differentiation
Financial resources to support:

Heavy marketing expenses

Price competition
Sales growth continues at a decreasing rate into

Maturity stage:
- # of industry segments increases, but
change in production design slows
considerably
- Promotional or pricing advantages &
differentiation become key strengths

When industry moves into the Decline

stage
Strengths center on
Cost advantages
Superior supplier
Customer relationships
Financial control

Competitive advantage can exist if a firm serves

gradually shrinking markets that competitors choose to

leave.

Strategy in Fragmented
Industries
Fragmented Industries
Retail sectors, Distribution businesses, Professional

service, Small manufacturing

Work best when:
Entry/exit barriers are low

Few economies of scale

Cost structures unattractive
Product services highly diverse
Local control

Entrepreneurial Venture
H. Wayne Huizinga
Waste Management Corporation went public in

1971
Hundreds of Mom-and-Pop garbage companies acquired

through stock
Gained capitalization of $5 million, and after Huizingas
departure in 1984, market share was $3 billion

Strategy in Deregulating
Industries
Deregulation- shaped many industries, important

dynamic is strategic move timing

Developed Pattern:
1. Large number of entrants rush in
2. industry profitability deteriorated
3. pattern of segmented profitability altered
4. Variance in profitability
5. 2 waves of merges and acquisitions
6. few competitors remained

Deregulation of Energy Markets

Competitors faced loss and opportunities

Deregulation began in 1996

Destroyed most California electrical power

companies
Pacific Gas and Electric

Reported $9 billion worth in debt and filed chapter 11

bankruptcy
2 primary reasons:
1. PG&E incurred billion in debt and werent able to
pass it along to customers
2. provision of deregulation disallowed company from
expanding power generators to other regions of US,
making power travel further and costs increased

Deregulation Challenges
4 distinct strategic postures:
1. broad based distribution companies
2. low cost entrants
3. focused segment marketers
4. shared utilities

Pricing in Newly Deregulated

Industries
Research by Florissen, Maurer, Schmidt,

Vahlenkamp
Found 4 factors Incumbents should use to adjust prices

correctly after deregulation

1. Competitors Prices
2. Switching Rates
3. Customer Value
4. Cost to Serve

Strategy in
Hypercompetitive Industries
Hypercompetitive industries are characterized by

intense rivalry.
Hypercompetitive strategies are designed to
enable the company to gain a quick advantage
over competitors by disrupting the market with
quick and innovative change.

Strategy in
Hypercompetitive Industries
The intense rivalry in a hypercompetitive

environment often results in short product life

cycles, the emergence of new technologies,
competition from unexpected players,
repositioning by current players, and major
shifts in market boundaries.
In a hypercompetitive market, successful
companies are able to manipulate competitive
conditions to create advantage for themselves
and destroy the advantages enjoyed by
others.

Success in a
Hypercompetitive Environment
Three major qualities:
Speed and innovation
Superior short-term strategic focus
Strong market awareness

Over the long term, sustainable profits are

possible only when entry barriers restrict

competition.

Competitive Reactions Under

Extreme Competition
Six actions that established companies can
consider to counter the fresh, aggressive,
and innovative moves of competitors.
1.
2.
3.
4.
5.
6.

Retool strategy and restore its importance

Manage transition economics
Fight aggregation with disaggregation
Seek out new demand and new growth
Use a portfolio of initiatives to increase
speed and flexibility
Count on strategic risk

Speed
Speed is emerging as a key success factor in a

growing number of industries

The pace of progress that a company displays in
responding to current or anticipated business
needs
Newest and least understood of the critical
success factors
Multiplying business applications of the Internet
have led to the elevation of speed
Speed merchants- Merchants who built their
strategies on the rapid pace of their operations
AAA, Dell, Dominos

Pressures to Speed
Pressures come from:
Customers- Demand responsiveness. New

emphasis on getting products quickly

Need for creating a new basis for competitive
advantage- Increasing the speed on which products
are innovated, developed, manufactured, and
distributed
Competitive pressures- Competitive viability often
mandates changes for the acceleration of speed
Industry shifts- Speed is important to survival in
industries with short product life cycles

Requirements of Speed
A speed initiative requires that every aspect of an

organization be focused on the pace at which

work is accomplished
Refocusing the Business Mission- Articulate a
long-term vision for a speed-oriented company
Creating a Speed Compatible Culture- A
company can facilitate speed by adopting an
evaluation system that rewards those that can
increase the organizations speed
Upgrading Communication- All parties expect
instantaneous communication between everyone

Requirements of Speed
Refocusing Business Process Reengineering-

Used to eliminate barriers that create distance

between employees and customers
Committing to New Performance Metrics- Sales
volume, innovation rate, customer satisfaction,
processing time, cost controls, and marketing
specifics
Methods to Speed- Three major categories:
streamlining operations, upgrading technology,
and forming partnerships

Methods to Speed
Streamlining Operations
Many companies enter new markets with insufficient

information
With a speed-enhanced ability to obtain postimplementation feedback and to respond with
unparalleled speed, successful innovations no longer
need to be flawless at introduction
Upgrading Technology
Using the latest informational technologies to create

speed, companies are able to roll out new product

information faster
Common goal is to connect manufacturers with retailers
to enhance information sharing and accelerate product
distribution
Forming Partnerships
Sharing business burdens is a way to shorten the time

needed to improve market responsiveness

Fords partnership with General Motors and

Creating Value Through Innovation

Sustaining Innovation-Innovation that focuses

on better products.

Incumbent industry leaders and competitors mostly

engage in this.
Some sustaining innovations are simple,
incremental, year-to-year improvements.
Others are dramatic, breakthrough technologies ex.
Transition from analog to digital and from digital to
optical.
These innovations provided a better product and
allowed companies to receive higher profit margins
through sales.

Creating Value Through Innovation

Disruptive Innovation-Launching products that

may not be as good as the existing products.

They come off not attractive to current customers.
Most times these products are simple and

affordable.
Referred to as disruptive innovation because it
disrupts the established basis of competition.
Strong evidence suggests that the only way to
survive a disruptive attack is by creating a separate
unit.

Creating Value Through Innovation

IBM is a good example of surviving a

disruptive attack.
Mainframe computers were disrupted by the

minicomputer, so IBM created a separate business

unit in Minnesota.
PC later disrupted the minicomputer, so IBM set up
a separate business unit in Florida.

Creating Value Through Innovation

Minnesota Mining & Manufacturings (3M)

reasons for success.

Support innovation from research and development

to customer sales and support.

Understand the future by trying to anticipate and
analyze future trends.
Establish stretch goals (a measure that encourages
growth).
Empower employees to meet goals.
Support board networking across the company.
Recognize and reward innovative people.

Creating Value Through Innovation

Successful companies common

characteristics for creating a innovating

environment.
Top-level commitment to innovation
Long-term focus
Flexible organization structure
Combination of loose and tight planning control
A system of appropriate incentives

Relationship Between Innovation and

Performance
Evidence on the relationship between R&D,
innovation, and financial performance is
inconsistent.
Booz Allen Hamilton: found no significant
statistical relationship.
Bostons Consulting Group: found that
innovation translates into superior longterm stock market performance.
Monitor Group: found a strong positive
correlation between innovation and longterm financial performance.

Innovation and Profitability

Research suggest that executives lack

confidence in their companies ability to use

innovation to drive profits.
EX: 67% of manufacturing firms considered

themselves more innovative than competitors, but

Only 7% actually meet their innovative
performance goals.
Reasons for the lack of success in translating

innovation into profitable performance:

Study concluded the single biggest growth inhibitor

for large companies was mismanagement of the

innovation process.
Another explanation is the lack of measurement
metrics or the failure to implement them effectively.

Main Reasons For R&D Failures

Failure to develop truly innovative products
2. Failure to successfully commercialize innovative
products once they are on the market
3. Failure to market innovative products in a timely
manner
1.

Probability of success with innovation is

small.

Reasons New Products Fail

It is estimated that it takes 125 to 150 new

initiatives to generate one marketplace success.

Koudal and Coleman found that more than 85%
of new product ideas never make it to marketof
those that do make it 50% - 70% fail.
Stevens and Burley found overall success rate of
60% from 360 industrial firms launching 576 new
products.
Ogawa and Pillar confirmed problems of new
product commercializationnew products suffer
failure rates of 50% or greater.
Delays in getting product to market can be
extremely costly. McKinsey & Co. found a
product 6 months late to market misses out on
33% of potential profits for products lifetime.

Recommendations for Improving

Performance Through Innovation
1.
2.

3.
4.

5.

6.

Plan synergy between strategy and innovation.

Areas where new opportunities and competitive
advantage exist provide a firms best chances to
profit from innovation.
Profits from innovation in business systems can
match those from product development.
Look outside of the companys internal environment
to increase the likelihood of success and reduce the
risks of innovation.
Alliances and corporate venture capital programs
allow a firm to share risks associated with
exploration investments.
Involve customers early and often in the innovation