Chapter 6 Flashcards
What is fragmented industry
Small and medium sized companies where no company is big enough to influence the direction or growth of the industry
What are the reasons for fragmentation
- Lack of scale economies, customer needs are so specialized that only a small amount of product is required
- Brand loyalty is local and its hard to go beyond a particular region
- Lack of scale economies and brand loyalty which implies a low entry barriers resulting in a steady stream of new companies
What strategies work best in the fragmented industries
Focus strategies
What are fragmented industries wait for
Value innovation
What are the lessons behind fragmented industries
Wide open markets that wait for entrepreneurs to transform them to pursue value innovation
What is chaining
Involves opening additional stores that adhere to the same basic formula and this way a company can quickly build a national brand
What is franchising
Strategy that franchisor grants to its franchisees the right to used the franchisor name, reputation and business model for a franchisee free
What is a franchisor
Right to open and operate a new location to a franchisee in return for a fee
How does franchising work
Franchisee puts up some capital to establish operations which helps finance the growth of the system and can expand
What are the advantages of using the franchising strategy
- Finance growth and rapid expansion
- Operations are run efficiently
- Franchisees have a deep knowledge on the local markets which enable new offerings or processes
What are the disadvantages of franchising
- Less control
- Franchisee only captures a portion of economic profits
- High cost of capital resulting to high cost and lower profits
What are horizontal mergers
Companies merger or acquire with their competitors in a fragmented industry, resulting to realize scale economies and build a more compelling national brand
What are the draw backs of horizontal mergers
Companies pay too much for the business
Why is customer demand for products in an embryonic industry limited
- Limited performance and poor quality for first products
- Customer unfamiliarity with what the new product can do for them
- Poorly developed distribution channels to get the product to them
- Lack of complements
- High costs of production
When does mass market start to develop
In growth stage
What happens when mass market start to emerge
- On going technological progress makes the products easier to use and increase its value for the average customer
- Complementary products are developed to increase its value
- Companies work to find ways to reduce the costs of produce the new product in order to lower its price and stimulate high demand
What is a mass market
Large numbers of customers enter market
What happens when mass markets emerge
- Ongoing technological progress makes a product easier to use and increase value
- Complementary products are developed that it increases its value
- Companies in the industry work to find ways to reduce the costs of producing the new products so that they can lower their prices and stimulate demand
What are the different groups of customers
- Innovators -have technical talents and interests which drive them to own new technology
- Early adopters - willing to experiment with it to see if they can pioneer new uses for the technology
- Early majority - the leading wave of the mass market
- Late majority - purchase the new technology when many peers already have done so
- Laggards - Conservatives and unappreciative of uses of new technology
What are new strategies that often require strengthening a company’s business model as market develops over time
- Managers should identify the needs of early majority users which are the leading edge of the mass markets
- Adjust business models by developing new strategies to redesign products and create channels to satisfy the early majority
- Price should be reasonable as they enter the market
- Focus on business models that satisfy the need of early majority
What is s-shaped growth curve
Illustrates how different groups of customers with different needs enter the market overtime
How do innovators and early adopters customer needs differ from early majority
- More technologically sophisticated customers that tolerate limitations of the product
- Reached through specialized distribution channels and product is sold by WOM
- Few in number and not as price sensitive
What are strategic implications
The speed where a market develops can be measured by its growth rate
What is growth rate
Rate where customers in that market purchase the industry’s product
What is relative advantage
The degree where it better satisfies customer needs over the previous product
What is complexity
Difficult to use or easy to master
What is compatibility
The degree it is perceived as being consistent with current needs or values of potential shoppers
How can managers strategies in the embryonic and growth industries
- Understand that customer needs change
- Business model should be successful overtime
- Market growth rates allow managers to tailor their business model to changing industry environment
What is a mature industry
Commonly dominated by a small number of large companies who determine the nature of competition in the industry because they can influence the six competitive forces
What is the business level strategy in a mature industry
Revolves around understanding how established companies collectively attempt to moderate the intensity of industry competition to preserve company and industry profitability
What is the product proliferation strategy
Forestalling entry by making sure that every niche or segment in the market place is well served
What is limit price strategy
Involves charging a price that is lower than that required to maximize profits in the short run and is above the cost structure of potential entrants
What is technology upgrading
Investing in costly technology upgrades that potential entrants have a hard time matching
What is strategic commitments
Investments that signal an incumbents long term commitment to a market or segment of that market
What do companies have to be careful about with strategic commitments
A company must be careful not to fall foul of anti trust law
What are the strategies to manage rivalry
- Price signaling
- Price leadership
- Non price competition
- Capacity control
What is price signaling
The process where a company increases or decreases its product price to convey its intention to other companies and influence the way other companies price their products
What is tit for tat strategy
A strategy where a company does exactly what rivals do, namely raise or decrease prices to match
What is price leadership
A situation where one company (dominating) sets its prices which are closely followed by competitors
What are the characteristics of companies with price leadership
Has the lowest production cost and is in position to undercut the prices charged by any competitor who attempts to set its prices lower than the price point of the price leader
What is non price competition
Strategy that implies attracting customers and increasing sales
How do companies increase sales
- Superior product quality
- Unique selling proposition
- Great location
- Excellent service
What is market penetration
Heavy ads to promote and build product differentiation to increase market share
What is product development
The creation of new or improved products to replace existing ones and it is crucial for maintaining product differentiation and building market share
What is market development
Finds a new market segment for a company’s product and company wants to capitalize on the brand name it has developed one market by location g new market segments
What is product proliferation
Allows development of stable industry competition based on product differentiation n to price
What is capacity control
Cutting prices in hopes to sell its entire inventory
What is the competitive battle
- Uniqueness
- Quality
- Features
- Performance
When does excess capacity arise
Companies collectively product too much product and cut prices to dispose it
Where does excess capacity come from
Technological developments
When does excess capacity occur
New technology can produce more than the old technology
What causes over capacity
Caused by competitive factors within an industry and age of a company’s physical asset
What does low profitability caused by overcapacity lead to
Weak companies to exit the industry
What is preemptive strategy
Forecasting increase in demand in the product market and moving rapidly to establish large scale operations that will be able to satisfy predicted demand
What are the critical factors of intensity of competition
- Intensity is greater in industries that rapidly decline
- Intensity is greater where exit barriers are high
- Intensity is greater where fixed costs are high
- Intensity is greater where products are perceived as a commodity as opposed to being differentiated
What are the 4 main strategies that can deal with decline
- Leadership strategy
- Niche strategy
- Harvest strategy
- Divestment strategy
What is leadership strategy
Aims at growing in a declining industry by picking up the market share of companies that leave the industry
What are the tactical steps a company can use to achieve leadership
- Aggressive pricing and marketing to build market share
- Acquiring established competitors to consolidate the industry
What is a niche strategy
Focuses on pockets of demand in the industry where demand is stable or declining less rapidly than the industry
What is harvest strategy
- When a company forces a steep decline and intense future competition or when it lacks strengths relative to remaining pockets of demand
- Requires company to stop new investment
- Company accepts cash flow vs exchange in market share
- Cash flow will decline forcing the company to liquidate business
What is divestment strategy
Company can recover most of its investment by selling it early before the industry has entered into a steep decline
What is the drawback with divestment strategy
Depends on the company spotting the decline early enough that the assets are still valued by others
