So Porter is mostly famous for his 5 forces, but getting to know some techniques to analyze industries and implementing a strategy to win in the industry is graceful.
Competitive Strategy in Fragmented Industries
A fragmented industry is an industry with a large number of small and medium-sized companies with no significant market share or influence on the industry.
There are different reasons that can make an industry fragmented, low entry barriers, exit barriers, newness, etc. industries can become stuck in fragmentation states and if a firm overcomes these barriers will have significant advantages for it.
Common approaches to overcome fragmentation include standardizing the diverse market needs, recognizing trends early, creating economies of scale, or an experience.
But how to formulate a competitive strategy in fragmented industries
- Conduct a full industry analysis to determine the structure of the industry and the position of competitors.
- Identify the causes of fragmentation in the industry.
- Examine the causes of fragmentation one by one to determine if and how they can be overcome.
- If fragmentation can be overcome, determine the best defendable position for the firm to adopt.
- If fragmentation cannot be overcome, determine the best alternative for competing in the fragmented industry.
Competitive Strategy in Emerging Industries
There are different reasons that form emerging industries such as new consumer needs, technological innovations, and changes in cost relationships and these industries have certain structural characteristics like uncertainties in technology and strategy, high initial costs but steep cost reduction, first-time buyers, short time horizon, and subsidy. Also, there are barriers like access to distribution channels and materials, cost advantages, and risk. Firms that can manage risk and have creativity in technology can enter the industry.
Emerging industries have other problems as well including periods of the rapid escalation of raw materials, absence of infrastructure, perceived likelihood of obsolescence, customers’ confusion due to multiple product approaches and claims, high costs, etc.
With risks and uncertainties, the early development of an industry provides potential leverage from strategic choices.
Shaping industry structure by establishing a pricing strategy and marketing approach, externalities in industry development, changing roles of suppliers and channels, and shifting mobility barriers are some of the choices.
Time Entry: Early entry is risky when the skills acquired are quickly changing by shifts in the industry, entry costs are huge and useless giving later entrants and advantage. A firm can have a successful entry and benefit from industry pioneers when it can initiate a learning process hard to imitate and having advantages from commitments by external players like suppliers.
Coping with Competitors: Normally pioneers spend their time on keeping their market shares against new entrants, while they should spend more on building their own strengths and industry’s image with help of other competitors who have strength in areas the pioneers need to widen the market of industry’s products.
Forecasting Techniques: An analyst is required to develop scenarios about industry changes by estimating the future technology, costs, products, and performance in the industry. A selection of scenarios results in a range of outcomes. These scenarios should be determined by how each of them affects different competitors in the industry to result in feedback from the analyst. The firm can use this information to find its position in the industry and develop a strategy for each scenario and the signals that can be in favor of the firm.
Choosing the Right Emerging Industry to Enter: Firms should decide on entering an industry that should be based on structural predictive analysis and not just because of reasons like high profitability or rapid growth of that industry.
The Transition to Industry Maturity
There are times that industry goes through different transitions to maturity, though it may never mature. These transitions cause problems for firms and strategic adjustments and organizational structure changes will be required.
Industry Change During Transition:
- Slowing growth means more competition for market share: As building market share becomes difficult competitor analysis should be repeated.
- Firms in the industry increasingly are selling to experienced repeat buyers: Choosing between different products become the buyer’s focus.
- Competition often shifts towards a greater emphasis on cost and service: The greater the emphasis on lowering the cost, the firms should invest in equipment and facilities.
- There is a topping-out problem in adding industry capacity and personnel and as a result price war will be motivated.
- Manufacturing, marketing, distribution, selling, and research methods are often undergoing change
- New products and applications are harder to come by so the orientation shifts to research and new product development.
- International competition increases with the focus on cost leadership and product standardization.
- Industry profits often fall during the transition period, sometimes temporarily and sometimes permanently. This leads to a reduction of cash flow, stock price, and makes it difficult to secure debt financing.
- Dealers’ margins fall, but their power increases
There are also other problems that entangle firms that should be considered, like invalidity of the company’s self-perception, failure of chosen strategies discussed in Part 1, the dilemma of investing in revenue, or profitability, imbalancement of short-run profits, reaction to price competition, and changes in the industry, the matter of quality vs pricing and also excessive capacity. These problems require strategic management and more focus on budgeting, tighter control, and new motivational systems are required.
While the firm faces problems due to a maturing industry, general managers should recognize and accept changes for which the skills and orientations of the managers should change as well. The leaders must pay attention to managerial changes that are required in a maturing industry.
Competitive Strategy in Declining Industries
An industry is in decline when it cannot follow economic growth like other industries. The factors causing decline are change in consumer preferences, technological innovations, and the emergence of substitutes
The accepted strategy in this industry is to harvest, eliminating investment, and generating maximum cash flow. But there are also other strategies. Taking aggressive actions like reducing exit barriers to achieve leadership in market share, making a strong position in niche markets, or liquidation as early as possible are some of the basic strategies.
Choosing a strategic position based on the above figure is not easy and can be inconsistent. Wrong recognition and exit barriers can prevent firms from acting correctly about the future. Competitive warfare is disastrous. And if you harvest without enough strengths collapse the firm.
Minimizing investments and actions to increase exit barriers, emphasize market segments where demand can be favorable during the decline are some of the actions in the maturity phase that can improve a firm’s position in the decline phase.
Successful companies always look for new ways to increase efficiency and cut costs. In doing so, they normally rather do things in-house than outsourcing. So what they do is vertical integration.
“Vertical integration is a strategy whereby a company owns or controls its suppliers, distributors or retail locations to control its value or supply chain.”
This strategy has many benefits, especially on saving and reducing the cost of scheduling and coordinating operations because of the streamlined procedure within the organization.
But vertical integration demands strategic costs as well. Changes in technology or product design can make a situation where the in-house supplier provides unfitting products or services. And companies cannot easily drop that supplier for a better one.
All in all when you want to enter a market, first you need to learn about the competitors and analyze them and the industry. Use any kind of published and gathered data to stabilize your place in the industry.
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