Ch 06

• Fragmented industry


  Composed of a large number of small- and medium-sized companies
• Reasons for fragmentation


  • Lack of scale economies
  • Specialized customer needs
  • Diseconomies of scale
  • Local brand loyalty
  • Low entry barriers
• Focus strategy works best for a fragmented industry
• Value innovator


  Defines value differently than established companies, offers the value at lowered cost through the creation of scale economies
• Fragmented industries are wide open market spaces—blue oceans—just waiting for entrepreneurs to transform them through the pursuit of value innovation
• Chaining


  Obtaining the advantages of cost leadership by establishing a network of linked merchandising outlets interconnected by information technology that functions as one large company, aids in building a national brand
• Chaining examples


  • Argos
  • Tesco
  • Agora
  • Unimart
  • Starbucks
• Franchising


  Strategy in which franchisor grants the franchisee the right to use the franchisor's name, reputation, and business model in return for a fee and a percentage of the profits
• Advantages of franchising


  • Finances the growth of the system, resulting in rapid expansion
  • Franchisees have a strong incentive to ensure that the operations are run efficiently
  • New offerings developed by a franchisee can be used to improve the performance of the entire system
• Disadvantages of franchising


  • Tight control of operations is not possible
  • Major portion of the profit go to the franchisee
  • When franchisees face a higher cost of capital, it raises system costs and lowers profitability
• Horizontal mergers


  Merging with or acquiring competitors and combining them into a single large enterprise
• Embryonic industry


  Limited customer demand due to limited performance and poor quality of the first products, customer unfamiliarity, poorly developed distribution channels, lack of complementary products, high production costs
• Growth stage


  Industry enters the growth stage when a mass market starts to develop for its products
• Mass market


  One in which large numbers of customers enter the market, occurs when product value increases and production cost decreases
• Customer segments


  • Innovators
  • Early adopters
  • Early majority
  • Late majority
  • Laggards
• Competitive chasm is the transition between the embryonic market and mass market, failure to cross it results in the company going out of business
• Strategies required for different customer segments

  • Innovators and early adopters: Technologically sophisticated, tolerate product limitations, reached through specialized distribution, small quantities priced high
  • Early majority: Value ease of use and reliability, require mass-market distribution and mass-media advertising, require large-scale mass production for high-quality low-cost product
• Factors that accelerate customer demand

  • Relative advantage
  • Complexity
  • Compatibility
  • Trialability
  • Observability
  • Viral model of infection
• Product proliferation strategy


  Catering to the needs of all market segments to deter entry by competitors
• Limit price strategy


  Charging a price that is lower than that required to maximize profits in the short run, but is above the cost structure of potential entrants
• Strategic commitments


  Investments that signal an incumbent's long-term commitment to a market or a segment of the market
• In mature industries, successful enterprises have normally gained substantial economies of scale and established strong brand loyalty
• Price signaling


  Companies increase or decrease product prices to convey their intentions to other companies and influence the price of an industry's products
• Price leadership


  When one company assumes the responsibility for determining the pricing strategy that maximizes industry profitability
• Non-price competition


  Use of product differentiation strategies to deter potential entrants and manage rivalry within an industry
• Market penetration


  Occurs when a company concentrates on expanding market share in its existing product markets
• Product development

  Creation of new or improved products to replace existing products
• Market development


  When a company searches for new market segments to increase the sale of its existing products
• Product proliferation


  Large companies in an industry have a product in each market segment
• Factors causing excess capacity

  • New technologies that produce more than the old ones
  • New entrants in an industry
  • Economic recession that causes global overcapacity
  • High growth of and demand in an industry that triggers rapid expansion
• Leadership strategy


  When a company develops strategies to become the dominant player in a declining industry
• Niche strategy


  When a company focuses on pockets of demand that are declining more slowly than the industry as a whole to maintain profitability
• Harvest strategy


  When a company reduces to a minimum the assets it employs in a business to reduce its cost structure and extract maximum profits from its investment
• Divestment strategy


  When a company decides to exit an industry by selling off its business assets to another company