Business Unit Strategy: Contexts and Special Dimensions

on expanding

between competitive

knowledgeable

increased segmentation often accompanies

offerings. As a result,

to market maturity. Cost contrai becomes an

the transition

shrink and new

important

to find. ln industries with

products and applications

global potential,

international markets become more important.

The globalization of competition also introduces new uncertain-

ties as a second wave of global competitors enters the race.

element of strategy as unit margins

are harder

tend to add more

During the early growth phase, companies

products, models, sizes, and flavors to appeal

to an increasingly

segmented market. Toward the end of the growth phase eost

considerations become a priority.

ln addition, process innovation

becomes an important dimension of cost controI, as do the redefin-

itions of supplier and distributor

inte-

gration becomes attractive as a way of consolidating a company's

market position or increasing a firm' s international presence.

relations. Finally, horizontal

Competing companies that enter the market at this time, often

than early market

labeled followers, have different advantages

to evaluate alterna-

leaders. Later entrants have the opportunity

in risky projects or plant

tive technologies,

and technol-

capacity, and imita te or leapfrog superior product

ogy offerings. Followers also tap into proven market

segments

rather than take the risks associated with trying to develop latent

market demand into ongoing revenue streams.

delay investment

Firms that consider entry into a growing industry must also

to enter through internaI

face the strategie decision of whether

development

or acquisition. Entry into a new segment or indus-

try through internaI development involves creating a new business,

often in a somewhat unfamiliar competitive environment.

It also

new products,

is likely to be slow and expensive. Developing

takes time and requires

processes, partnerships,

substantiallearning.

increasingly

are turning to joint ventures, alliances, and acquisitions of existing

segments.

players as strategies for invading new product-market

For these reasons, companies

and systems

142

Strategy: A View from the Top

Two major

issues must be analyzed

as part of the decision

process to enter a new market: (1) What are the structural barriers

to the intrusion?

to entry? (2) How will

Saille of the most important

are the level

required, access to production or distribution facil-

of investment

ities, and the threat of overcapacity.

impediments

firms react

incumbent

structural

Potential

retaliation is more diffieult

to analyze.

Incumbents

will oppose a new player if resistance is likely to par off. This is

more likely to occur in mature markets if growth is low, products

or services are not highly differentiated,

fixed costs are high,

is of great strategie importance

capacity is ample, and the market

to incumbents. However,

resistance

at any stage of the life cycle suggests

the search for new

that are experiencing Saille

markets

are likely to be slow to react, in

disequilibria, where incumbents

whieh the firm caTIinfluence the industry structure,

and where

the benefits of entry exceed the costs, including the costs of deal-

ing with possible retaliation by incumbents.

the likelihood of competitor

should focus on industries

that

Strategy in Mature and Declining Industries

and low-

Carefully choosing a balance between differentiation

to compete in multiple- or

cost postures and deciding whether

single-industry

issues as ma tu-

segments are critieally important

rity sets in and decline threatens. Growth tends to mask strategie

errors and let companies

survive; a low- or no-growth environ-

ment is far less benevolent.

Firms earn attractive profits during the long maturity stage of

(1) concentrate

an industry's growth when they do the following:

on segments

or higher

that offer chances

return; (2) manage product and process innovation aimed at fur-

segment

reduction,

ther differentiation,

growth; (3) streamline production and delivery to eut costs; and

(4) gradually "harvest"

the business in preparation for a strategie

shift to more promising products or industries.

for higher growth

or rejuvenating

cost

Counterbalancing

these opportunities, mature and declining

industries contain a number of strategie pitfalls that companies

should avoid: (1) an overly optimistie view of the industry or the

Chapter 7 Business Unit Strategy: Contexts and Special Dimensions

143

company's position within it, (2) a lack of strategie clarity shawn

by a failliTe to choose between a broad-based

and a focused

competitive approach, (3) investing tao much for tao little return-

the so-called "cash trap," (4) trading market share for profitability

(5) unwilling-

in response to short-term performance

ness to compete on priee,

structural

changes or new practiees, (7) placing tao much emphasis on new

existing one s,

product development

and (8) retaining excess capacity.l

compared with improving

(6) resistance

to industry

pressures,

Exit decisions often are extremely diffieult, in part because exit-

ing might be actively opposed in the marketplace. Possible exit bar-

riers include government restrictions, labor and pension obligations,

and contractual obligations to other parties. Even if a business can

be sold, in part or as a whole, a hast of issues must be addressed. The

negative effects of an exit on customer, supplier, and distributor

the entire corporate

relations, for example, can ripple throughout

structure if the firm is an SBU of a larger corporation.

ln this case,

shared cost arrangements can produce cost increases in other parts

of the business, and labor relations can become strained,

thereby

diminishing the strategie outlook for the corporation as a whole.

Industry Evolution and Functional Priorities

for success in industry segments change over

The requirements

time. Strategists need to use these changing requirements

as a

basis for identifying and evaluating a firm's strengths and weak-

nesses. Figure 7-1 depicts four stages of industry evolution and

that often are associated

capabilities

the changes

with business

it suggests

dimensions

that are partieularly deserving of in-depth considera-

tion when a strategie assessment

success at each stage.2 At a minimum,

is undertaken.

in functional

of a product market

The early development

typieally enta ils

slow growth in sales, major R&D emphasis,

rapid technological

change in the product, operating lasses, and a need for sufficient

resources or slack to support

opera-

tion. Success at this emerging stage often is associated with tech-

and with having a

nical skill, with being first

in new markets,

awareness.

marketing advantage that creates widespread

a temporarily

unprofitable

144

Strategy: A View from the Top

---

-- --- -

Figure

7-1

Stages of Industry Evolution and Functional Priorities of Business Strategy

Introduction

Growth

Maturity

Decline

Stage of ln dus try Evolution

Functional

area

Marketing

Production,

operations

Finance

~

~

U1

/ skills to create

Resources

widespread awareness

and find acceptance froID

customers; advantageous

access to distribution

Ability to expand capacity

effectively,limit number

of designs, develop

standards

Resources to support

high net cash overflow

and initiallosses;

to use leverage effectively

ability

Ability to establish

brand recognition,

find niche, reduce

price, solidify strong

distribution relations,

and develop new

chaRnels

Ability to add product

variants, centralize

production, or

otherwise lower costs;

ability to improve

product quality; sea-

sonalsubcontracting

capacity

Ability to finance

rapid expansion,

have net cash

outflows but increas-

ing profits; resources

to support product

improvements

to

Skills in aggressively

promoting products

to new markets and

holding existing

markets; pricing

flexibility; skills in dif-

ferentiating products

and holding customer

loyalty

Ability to improve

product and reduce

costs; ability to share

or reduce capacity;

advantageous

supplier relationships;

subcontracting

Ability to generate

and redistribute

increasing net cash

inflows; effective cost

contrai systems

east-effective means

of efficient access to

selected chaRnels and

markets; strong

customer

dependence;

company image

loyalty or

strong

Ability to prune prod-

uct Ille; cost advantage

in production,

location,

or distribution;

simplified inventory

contrai; subcontracting

or long production

runs

Ability to relise or

liquidate unneeded

equipment; advantage

in cost of facilities;

contrai system

accuracy; streamlined

contrai

management

(Continued)

i-oI>

~

0'1

Figure 7-1 Continued

Introduction

Growffi

Marnri~

Decline

Stage of ln dus try Evolution

Personnel

Engineering and

research and

development

Flexibility in staffing and

training new management;

existence of employees

with key skills in new

products or markets

Ability to make

engineering changes, have

technical bugs in product

and process resolved

Key functional area

and strategy focus

recovery

Engineering: market

penetration

Existence of an

ability to add skilled

personnel; motivated

and loyal-workforce

Ability to cost

effectively reduce

workforce, increase

efficiency

Capacity to reduce

and reallocate

personnel; cost

advantage

ability

Skills in quality and

new feature

development;

to start developing

successor product

Sales: consumer

loyalty; market share

Ability to reduce

costs, develop vari-

ants, differentiate

products

Ability to support

other grown areas or

to apply product

unique customer

needs

to

Production efficiency;

successor products

Finance; maximum

investment

Source: From J.A.Pearce II and R. B. Robinson, Jr., Strategie Management: Strategy Formulation, Implementation, and ContraI, llth ed.,

R. D. Irwin, me., Chicago,

IL, 2009, char. 5.

brings

Rapid growth

the

strengths necessary for success. Brand recognition, product dif-

ferentiation, and financial resources to support bath heavy mar-

keting expenses and priee competition become key strengths.

new competitors

and reorders

segments

increases, but

As the industry moves through a shakeout phase and into the

maturity stage, sales growth continues, but at a decreasing rate.

The number of industry

technologieal

change inEroduct design slows considerably. As a result, compe-

tition usti lly becomes more intense, and promotional or pricing

advantages

strengths.

The rate of technologieal change in process design accelerates as

the many competitors

in the most

efficient tnanner. Although R&D is critieal in the emerging stage,

efficient production is now crucial.

When the industry moves

become key internaI

and differentiation

seek to provide

the product

center on cost advantages,

tionships, and financial contraI. Competitive

at this stage if a firm serves gradually

competitors choose to leave.

superior

into the decline stage, strengths

rela-

supplier and customer

can exist

that

advantage

shrinking markets