CHP.

9
Competitive Strategy In
Fragmented Industries
 INTRODUCTION

• An industry in which no firm has a significant market share and can strongly
influence the industry outcome.
• The essential notion that makes these industries a unique environment in
which to compete is the absence of market leaders with the power to shape
industry events
• Fragmented industries are found in many areas of an economy, whether in
the United States or some other country, and are com- mon in areas such as
the following:
• services; retailing; distribution; wood and metal fabrication; agricultural products;
"creative" businesses.
 What Makes an Industry Fragmented?
• Low Overall Entry Barriers
• Absence of Economies of Scale or Experience Curve
• High Transportation Costs
• High Inventory Costs or Erratic Sales Fluctuations
• No Advantages of Size in Dealing with Buyers or Suppliers
• Diseconomies of Scale in Some Important Aspect
• Diverse Market Needs
• High Product Differentiation, Particularly if Based on Image
• Exit Barriers
• Local Regulation
• Government Prohibition of Concentration
• Newness
 Overcoming Fragmentation

• Overcoming fragmentation can be a very significant strategic opportunity.

The payoff to consolidating a fragmented industry can be high because the
costs of entry into it are by definition low, and there tend to be small and
relatively weak competitors who offer little threat of retaliation
 COMMON APPROACHES TO CONSOLIDATION

• Create Economies of Scale or Experience Curve

• Standardize Diverse Market Needs
• Neutralize or Split Off Aspects Most Responsible for Fragmentation
• Make Acquisitions for a Critical Mass
• Recognize Industry Trends Early
 INDUSTRIES THAT ARE "STUCK"

• Many industries are fragmented, not for fundamental economic reasons,

but because they are "stuck" in a fragmented state. Industries become stuck
for a number of reasons :
• Existing Firms Lack Resources or Skills
• Existing Firms Are Myopic or Complacent
• Lack of Attention by Outside Firms
 Coping with Fragmentation
• Fragmented industries are characterized not only by many competitors but
also by a generally weak bargaining position with suppliers and buyers.
Marginal profitability can be the result. In such an environment, strategic
positioning is of particularly crucial significance :
• Tightly Managed Decentralization
• "Formula" Facilities
• Increased Value Added
• Specialization by Product Type or Product Segment
• Specialization by Customer Type
• Specialization by Type of Order
• A Focused Geographic Area
• Bare Bones/No Frills
• Backward Integration
 Potential Strategic Traps

• Seeking Dominance
• Strategic Discipline
• Assumption that Competitors Have the Same Overhead and Objectives
• Overreactions to New Products
Formulating Strategy
 CHP. 10
Competitive Strategy in
Emerging Industries
 INTRODUCTION

• Emerging industries are newly formed or re-formed industries that have

been created by technological innovations, shifts in relative cost
relationships, emergence of new consumer needs, or other economic and
sociological changes that elevate a new product or service to the level of a
potentially viable business opportunity.
• The essential characteristic of an emerging industry from the viewpoint of
formulating strategy is that there are no rules of the game. The absence of
rules is both a risk and a source of opportunity; in any case it must be
managed.
 The Structural Environment
• COMMON STRUCTURAL CHARACTERISTICS
• Technological Uncertainty
• Strategic Uncertainty
• High Initial Costs but Steep Cost Reduction
• First-Time Buyers
• Short Time Horizon
• Subsidy
• EARLY MOBILITY BARRIERS
• proprietary technology;
• access to distribution channels;
• access to raw materials and other inputs (skilled labor) of ap- propriate cost and quality;
• cost advantages due to experience, made more significant by the technological and
competitive uncertainties;
• risk, which raises the effective opportunity cost of capital and thereby effective capital
barriers.
 Problems Constraining Industry Development
• Inability to Obtain Raw Materials and Components
• Period of Rapid Escalation of Raw Materials Prices
• Absence of Infrastructure
• Absence of Product or Technological Standardization
• Perceived Likelihood of Obsolescence
• Customers' Confusion
• Erratic Product Quality
• Image and Credibility with the Financial Community
• Regulatory Approval
• High Costs
• Response of Threatened Entities
 Early and Late Markets
• An important question for emerging industries is which markets will be
receptive to the new product. A number of criteria determine the answer to
this question.
• Nature of the Benefit
• State of the Art Required to Yield Significant Benefits
• Cost of Product Failure
• Introduction or Switching Costs
• Support Services
• Cost of Obsolescence
• Asymmetric Government, Regulatory, or Labor Barriers
• Resources to Change
• Perception of Technological Change
• Personal Risk to the Decision Maker
 Strategic Choices

• Shaping Industry Structure

• Externalities in Industry Development
• Changing Role of Suppliers and Channels
• Shifting Mobility Barriers
 TIMING ENTRY

• A crucial strategic choice for competing in emerging industries is the

appropriate timing of entry.
• Early entry is appropriate when a pioneer can develop an enhanced
reputation, initiate a learning process that will be difficult to imitate, acquire
customer loyalty, and cost advantages from commitments by suppliers, and
distribution channels. Early entry will be risky when the skills acquired by
early entry are quickly replaced by shifts in industry, entry costs are great
and cannot be made proprietary, and technological change will quickly
make startup investments obsolete giving later entrants an advantage.
 COPING WITH COMPETITORS

• Coping with competitors in an emerging industry may be a difficult

problem, particularly for firms that have been pioneers and have enjoyed
major market shares.
• Pioneers in an industry may spend too much on defending against new
entrants when they should be spending more on building their own
strengths and developing the industry's image. Other firms in an industry
can help in the areas of needed technological development and in widening
the market for the industry's products.
 Which Emerging Industries to Enter

• The choice of which emerging industry to enter is dependent on the

outcome of a predictive exercise such as the one described above. An
emerging industry is attractive if its ultimate structure (not its initial
structure) is one that is consistent with above-average returns and if the
firm can create a defendable position in the indUstry in the long run. The
latter will depend on its resources relative to the mobility barriers that will
evolve
 Chapter 11
The Transition to Industri
Maturity
 Industry Change during Transition
• Slowing growth means more competition fpr market share.
• Firms in the industry increasingly are selling to experienced, repeat buyers.
• Compettion often shifts toward greater emphasis on cost and service.
• There is a topping-out problem in adding industry capacity and personnel.
• Manufacturing, marketing, distributing, selling, and research methods are
often undergoing change.
• New products and applications are harder to come by.
• International competition increases.
• Industries profits often fall during the transition period, sometimes
temporarily and sometimes permanently.
• Dealers’ margins fall, but their power increases.
 Some Strategy Implication of Transition
• Overall cost leadership vs diffentiate vs focus – the strategic dilemma made
acute by maturity
• Sophisticated cost analysis
• Process innovation and design for manufacture
• Increasing scope of purchases
• Buy cheap assets
• Buyer section
• Different cost curves
• Competing internationally
• Should transition be a attempted at all?
 Strategy Pitfalls in Transition
• A company’s self-perceptions and its perception of the industry
• Caught in the middle
• The cash trap – investments to build share in mature market
• Giving up market share to easily in favor of short-run-profits
• Resentment and irrational reaction to price competition (“we will not compete on price”)
• Resentment and irrationala reaction to changes in industry practices (“they are hurting the
industry”)
• Overemphasis on “creative.” ”new” products rather than improving and aggressively selling
existing ones
• Clinging to “higher quality” as an excuse for not meeting aggressive pricing and marketing
moves of competitors.
• Overhanging excess capacity
 Organizational Implication of Maturity

• Scaled down expectations for financial performance

• More discipline from the organization
• Scaled-down expectations for advancement
• More attention on the human dimension
• Recentralization
 Industry Transition and the General Manager

• The implication of industry transition for the general manager carries an

important message not only for the general manager him self but also
for the corporate management of diversified companies.
 Chapter 12
Competitive Strategy in
Declining Industries
 Structural Determinants of Competition in
Decline

• Condition of demand
• Exit Barriers
• Volatility of Rivaly
 Strategic Alternatives in Decline

• Leadership
• Niche
• Harvest
• Quick Divestment
 Choosing a Strategy for Decline
• Is the structure of the industry conducive to a hospitable (potentially
profitable) decline phase based on the conditions in Section I?
• What are the exit barriers facing each and every significant competitor?
Who will exit quickly and who will remain?
• Of the firms that stay, what are their relative strengths for competing in
the pockets of demand that will remain in the industry? How seriously
must their position be eroded before exit is likely, given their exit
barriers?
• What are the exit barriers facing the firm?
• What are the firm's relative strengths vis-à-vis the pockets of
• demand that remain?
 Pitfalls in Declines

• Failure to Recognize Decline

• A war of a Attrition
• Harvesting without clear strengths
 Preparing for Decline

• Minimize investments or other actions that will raise exit barriers from
any of the sources outlined above.
• Place strategic emphasis on market segments that will be favorable
under decline conditions.
• Create switching costs in these segments.
 Chapter 13
Competitive in Global
Industries
 Sources and Impediments to Global
Competition

• Sources of global competitive adventage

• Impediments to global competition
 Evolution to Global Industries

• Environmental triggers to globalization

• Strategic innovations stimulating globalization
• Access to the U.S Market
 Competition in Global Industries

• Industrial Policy and competitive behavior

• Relationship with host governments in Major Markets
• Systemic competition
• Difficult in competitor analysis
 Stragic Alternatives in Global Industries

• Broad line global competition

• Global focus
• National focus
• Protected niche
 Trends Affecting Global Competition

• Reduction in differnces among countries

• More aggressive industrial policy