Strategic management theory and cases an integrated approach 11th edition hill solutions manual 1

STRATEGIC MANAGEMENT THEORY AND CASES AN INTEGRATED APPROACH 11TH EDITION HILL SOLUTIONS MANUAL Full download link at: Solution manual+ test bank: https://testbankpack.com/

CHAPTER 6 Business-Level Strategy and The Industry Environment Synopsis of Chapter This chapter extends the analysis of business-level strategy by considering the different competitive strategies that firms can and should adopt as they enter different industry environments. The formulation of business-level strategy does not take place in a vacuum; companies have to consider the reaction of other firms to their competitive moves. The chapter is therefore a necessary addition to Chapter 5 and provides a building block to the chapters on corporate-level strategy.

The chapter mainly examines the challenges of managing a generic business-level competitive strategy in different kinds of industry environments: fragmented industries, embryonic and growth industries, mature industries, and finally declining industries. In each type of industry, there is a discussion of the competitive problems associated with that particular environment and the appropriate strategies that firms can use to tackle those problems.

Learning Objectives 1.

2.

3.

4.

Identify the strategies managers can develop to increase profitability in fragmented industries.

Discuss the special problems that exist in embryonic and growth industries and how companies can develop strategies to effectively compete.

Understand competitive dynamics in mature industries and discuss the strategies managers can develop to increase profitability even when competition is intense.

Outline the different strategies that companies in declining industries can use to support their business models and profitability.

Opening Case

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How to Make Money in Newspaper Advertising The U.S. newspaper business is a declining industry, with the drop accelerating in recent years. The fall in advertising revenue has been very steep. The reasons for the declines in circulation and advertising revenue are not hard to find; digitalization has disrupted the industry, news consumption has moved to the Web, and advertising has followed suite. The industry has responded by downsizing newsrooms, shutting down unprofitable newspaper properties, including numerous local newspapers, and expanding Web-based news properties as rapidly as possible. Whereas consumers were once happy to subscribe to their daily print newspaper, they seem to loathe paying for anything on the Web, particularly given the large amount of “free” content that they can access. Against this background, one local newspaper company is swimming against the tide, and making money at it. The company, Community Impact Newspaper, produces 13 hyperlocal editions that are delivered free each month to 855,000 homes in the Austin, Houston, and Dallas areas.

The paper was the brainchild of John Garrett who noticed that local newspapers in Texas did not cover news that was relevant to smaller neighborhoods. Today the paper has a staff of 30 journalists, about 35% of the total workforce. The reporting is pretty straight stuff, although Impact will do in-depth stories on controversial local issues, but it is careful not to take sides as it will cause them to lose business. About half of each edition is devoted to local advertisements, and this is where Impact makes its money. For their part, the advertisers seem happy with the paper. It seems that Impact is making very good money for its owners in an industry where most players are struggling just to survive.

Teaching Note: This case illustrates the need for business level strategies in a declining industry. Students should continue to understand the advantages and disadvantages of using a product development strategy and how and why strategies may need to change according to industry and competitive moves. You might ask students about the advantages of the niche market.

Lecture Outline I. Overview This chapter looks at the different strategies that companies can pursue to strengthen their competitive position in each of these different stages of the industry life cycle. Each stage in the evolution of its industry raises some interesting challenges for a business. Managers must adopt the appropriate strategies to deal with these challenges.

II. Strategy in a Fragmented Industry A fragmented industry is composed of a large number of small- and medium-sized companies, such as the dry-cleaning and restaurant industries. An industry may be fragmented for several reasons.

A. Reasons for Fragmentation

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Reasons for fragmentation are as follows:  A lack of scale economies may mean that there are few, if any, cost advantages to large size. In Some industries there may even be diseconomies of scale, such as when customers prefer the unique food and style of a popular local restaurant rather than the standardized offerings of some chain restaurants.  Brand loyalty in the industry may primarily be local. It may be difficult to build a brand through differentiation that transcends a particular location or region.  The lack of scale economies and national brand loyalty implies low entry barriers. When this is the case, a steady stream of new entrants may keep the industry fragmented.

Companies may specialize by customer group, customer need, or geographic region. Many small specialty companies may operate in local or regional markets. All kinds of specialized or custom-made products—furniture, clothing, hats, boots, houses, and so forth—fall into this category, as do all small service operations that cater to personalized customer needs, including dry-cleaning services, landscaping services, hair salons, and massage services.

B.

Consolidating a Fragmented Industry Through Value Innovation Business history is full of examples of entrepreneurial organizations that have pursued strategies to create meaningful scale economies and national brands where none previously existed. In the process they have consolidated industries that were once fragmented, reaping enormous gains for themselves and their shareholders in the process.

For example, until the 1980s the office supplies business was a highly fragmented industry composed of many small “mom-and-pop” enterprises that served local markets. The typical office supplies enterprise in those days had a limited selection of products, low inventory turnover, limited operating hours, and a focus on providing personal service to local businesses. Then along came Staples, started by executives who had cut their teeth in the grocery business; they opened a big-box store with a wide product selection, long operating hours, and a self-service business model. They implemented computer information systems to track product sales and make sure that inventory was replenished just before it was out of stock, which drove up inventory turnover.

Fragmented industries are wide open market spaces just waiting for entrepreneurs to transform them through the pursuit of value innovation. A key to understanding this process is to recognize that in each case, the value innovator defines value differently than established companies, and finds a way to offer that value that lowers costs through the creation of scale economies.

C. Chaining and Franchising There are two strategies that enterprises use to replicate their offering once they get it right. One is chaining and the other is franchising. Chaining involves opening additional locations that adhere to the same basic formulae, and that the company owns. By expanding through chaining, a value innovator can quickly build a national brand. At the same time, by rapidly opening locations, and by knitting those locations together through good information systems, the value innovator can start to

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realize many of the cost advantages that come from large size.

Franchising is similar in many respects to chaining, except that in the case of franchising the founding company—the franchisor—licenses the right to open and operate a new location to another enterprise—franchisee—in return for a fee. There are some advantages to using a franchising strategy:  Normally the franchisee puts up some or all of the capital to establish his or her operation. This helps to finance the growth of the system, and can result in more rapid expansion.  As franchisees are the owners of their operations, and because they often put up capital, they have a strong incentive to make sure that their operations are run as efficiently and effectively.  Franchisees have an incentive to improve the efficiency and effectiveness of their operations by developing new offerings and/or processes.

The drawbacks of a franchising strategy are threefold:  There may not be the same tight control that can be achieved through a chaining strategy.  In a franchising system the franchisee captures some of the economic profit from a successful operation.  As franchisees are small relative to the founding enterprise, they may face a higher cost of capital, which raises system costs and lowers profitability.

Given these various pros and cons, the choice between chaining and franchising depends on managers evaluating which is the best strategy given the circumstances facing the founding enterprise.

D. Horizontal Mergers Another way of consolidating a fragmented industry is to merge with or acquire competitors, combining them together into a single larger enterprise that is able to realize scale economies and build a more compelling national brand.

Focus On: Wal-Mart Value Innovation at Wal-Mart: Consolidating a Fragmented Market When Sam Walton opened the first Wal-Mart store in 1967 there were no large-scale general merchandise retailers. The industry was very fragmented. Walton’s vision was simple: Provide a wide selection of merchandise, stay open seven days a week, and have long operating hours. Buy in bulk to drive down the costs of goods sold, and then pass those cost savings on to customers in the form of lower prices. Reduce costs further by switching from a full-service format to a self-service format. Use good information systems to track what is sold in a store, and make sure that desired products are never out of stock. Gain further efficiencies by chaining, opening additional stores in a cluster around a common distribution center. It was a brilliant vision. Execution required the development of processes that did not exist at the time, including state-of-the-art information systems to track store sales and inventory turnover, and a logistics system to optimize the flow of inventory from distribution centers to stores. Over the years, as Wal-Mart did grew and built these systems, it was able to offer its customer set more value on the attributes that mattered to them.

Due to its increasingly low cost structure, it was able to offer all this at prices significantly below those of its smaller rivals, effectively driving them out of business. Through such value innovation, Wal-Mart was able

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to consolidate what was once a fragmented market, building a powerful national brand wrapped around the concept of everyday low prices and wide product selection.

Teaching Note: Wal-Mart did a fantastic job consolidating a once fragmented market, through the process of value innovation. Although faced with initial difficulties, Wal-Mart was able to achieve all its goals. Ask students to think of other examples of companies that successfully expanded by chaining the way. To initiate a class discussion, students may be asked to share about the difficulties these companies may have faced.

III. Strategies in Embryonic and Growth Industries An embryonic industry is one that is just beginning to develop, and a growth industry is one in which firsttime demand is rapidly expanding as many new customers enter the market. Choosing the strategies needed to succeed in such industries poses special challenges for because new groups of customers with different kinds of needs start to enter the market. Managers must be aware of the way competitive forces in embryonic and growth industries change over time because they frequently need to build and develop new kinds of competencies, refine their business strategy, in order to effectively compete in the future. Most embryonic industries emerge when a technological innovation creates a new product opportunity. Customer demand for the products in embryonic industries is initially limited for a variety of reasons. Reasons for slow growth in market demand include:  The limited performance and poor quality of the first products  Customer unfamiliarity with what the new product can do for them  Poorly developed distribution channels to get the product to customers  A lack of complementary products that might increase the value of the product for customers  High production costs because of small volumes of production An industry moves from the embryonic stage to the growth stage when a mass market starts to develop for its product. A mass market is one in which large numbers of customers enter the market. Mass markets start to emerge when three things happen: Ongoing technological progress makes a product easier to use, and increases its value for the average customer Complementary products are developed that also increases its value Companies in the industry work to find ways to reduce the costs of producing the new products so they can lower their prices and stimulate high demand.

A. The Changing Nature of Market Demand Managers who understand how the demand for a product is affected by the changing needs of customers can focus on developing new strategies that will protect and strengthen their competitive position, such as building competencies to lower production costs or speed product development.

Figure 6.1: Market Development and Customer Groups Different groups of customers with different needs enter the market over time. Growth follows an S-

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