After selecting business-level strategies, firms are faced with selecting appropriate competitive tactics to position their company to sustain its strategic competitiveness over time in different kinds of industrial environments.
Certain competitive tactics are more suitable to certain industries and maturity stages that they are currently in.
Strategies in Fragmented and Growing Industries
Many industries are fragmented, which means they are composed of a large number of small and medium-sized companies.
In a fragmented industry, many small and medium-sized local firms try to compete for relatively small shares of the total market, focus strategies are likely to prevail. Fragmented industries are typically for products that are at the early stage of their maturity and life cycle. Large firms will not emerge to the industry and the barrier of entry will be low, allowing for many new small entrants to enter the industry.
As all industries start out as fragmented, battles for market share and creative attempts to overcome niche market boundaries often increase the market share of a few companies. After product standards are established for minimum quality and features, competition will shift toward a greater emphasis on cost and services. Overall product quality improves, and costs are reduced significantly.
There are several reasons why industry may consist of many small companies rather than a few large ones.
In some industries there are few economies of scale, so large companies do not have an advantage over smaller ones. Indeed, in some industries, there are advantages to staying small, which enables companies to get closer to their customers.
In addition, many industries are fragmented because there are few barriers to entry.
Finally, an industry may be fragmented because customers’ needs are so specialized that only small lots of products are required, and thus there is no room for a large, mass-production operation to satisfy the market.
For some fragmented industries, these factors dictate the competitive strategy to pursue, and the focus strategy stands out as a principal choice.
Companies may specialize by customer group, customer need, or geographic region so that many small specialty companies operate in local or regional market segments. All kinds of custom-made products (furniture, clothing, hats, boots, and so on) fall into this category, as do all small service operations that cater to particular customers’ needs, such as laundries, restaurants, health clubs, and furniture rental stores.
Firms, however, are eager to gain the cost advantages of pursuing a low-cost strategy or the sales-revenue-enhancing advantages of differentiation by circumventing the problems of a fragmented industry.
As the industry progresses toward maturity, it tends to become a consolidated industry, dominated by a few large companies.
Returns from consolidating a fragmented industry are often huge, especially when industry sales and revenues are growing.
Once consolidated, the industry has become one in which cost leadership and differentiation tend to be combined to various degrees, even though one competitive strategy may be primarily emphasized. A firm can no longer gain or keep a high market share simply through low prices.
The same thing is true for firms emphasizing high quality. The buyers are more sophisticated and demand a certain minimum level of quality for the price paid. Either quality must be high enough to be valued by customers, or prices must be dropped to compete effectively with the lower-priced products.
Strategic rollup is an effective way to quickly consolidate a fragmented industry. In strategic rollup, many owner-operated small businesses are bought resulting in a large firm that creates economies of scale, applies best practices across all aspects of marketing and operations, and hires more conventional management comparing to what small businesses can afford. In this way, the industry will be quickly brought through its maturity stages.
To grow and consolidate their industries, and to become the dominant companies in them, firms utilize three main competitive strategies: (1) chaining, (2) franchising, and (3) horizontal merger.
The challenge in fragmented and growing industries is to choose the most appropriate means (franchising, chaining, or horizontal merger) to consolidate the market and grow sales so that the competitive advantages gained from pursuing the generic business-level strategies can be realized.
It is difficult to think of any major service activities—from consulting and accounting firms to businesses satisfying the smallest consumer need, such as beauty parlors and car repair shops— that have not been merged or consolidated by chaining or franchising.
Strategy 1: Chaining
Firms pursue a chaining strategy to obtain the advantages of cost leadership.
They establish networks of linked merchandising outlets that are so interconnected that they function as one large business entity.
The amazing buying power that these companies possess through their nationwide store chains enables them to negotiate large price reductions with their suppliers, which in turn promotes their competitive advantage.
They overcome the barrier of high transportation costs by establishing sophisticated regional distribution centers, which can economize inventory costs and maximize responsiveness to the needs of stores and customers.
Last but not least, they realize economies of scale from sharing managerial skills across the chain and from placing nationwide, rather than local, advertising.
Strategy 2: Franchising
For differentiated companies in fragmented industries, the competitive advantage comes from a business strategy that employs franchise agreements.
In franchising, the franchisor grants the franchisee the right to use the parent’s name, reputation, and business skills in a particular location or area. If the franchisee also acts as the manager, he or she is strongly motivated to control the business closely and make sure that quality and standards are consistently high so that customer needs are always satisfied.
Such motivation is particularly critical in a strategy of differentiation, where it is vital that a company maintain its uniqueness.
One reason why industries are fragmented is the difficulty of maintaining control over the many small outlets that they must operate, while at the same time retaining their uniqueness. Franchising solves this problem.
In addition, franchising lessens the financial burden of swift expansion and so permits rapid growth of the company.
Finally, a differentiated large company can reap the advantages of large-scale advertising, as well as economies in purchasing, management, and distribution.
Strategy 3: Horizontal Merger
Companies chose a strategy of horizontal mergers to consolidate their respective industries.
By pursuing a horizontal merger, companies are able to obtain economies of scale or secure a national market for their products. As a result, they are able to pursue a cost-leadership strategy, or a differentiation strategy, or both.
Strategies in Mature Industries
As a result of fierce competition in the growth and shakeout stages, an industry becomes consolidated, so a mature industry is often dominated by a small number of large companies.
Although a mature industry may also contain many medium-sized companies and a host of small, specialized ones, the large companies determine the nature of the industry’s competition because they can influence the five competitive forces.
By the end of the shakeout stage, companies in an industry have learned how important it is to analyze each other’s business-level strategies continually. This competitive analysis helps them determine how to modify their business-level strategy to maintain and build their competitive positioning.
At the same time, however, they also know that if they move aggressively to change their strategies to attack competitors, this will stimulate a competitive response from rivals threatened by the change in strategy. Hence, by the mature stage of the industry life cycle, companies have learned just how interdependent their strategies are.
In fact, the main challenge facing companies in a mature industry is to adopt a competitive strategy that simultaneously allows each individual company to protect its competitive advantage and preserves industry profitability.
No generic strategy will generate above-average profits if competitive forces in an industry are so strong that companies are at the mercy of each other, of potential entrants, of powerful suppliers, of powerful customers, and so on.
As a result, in mature industries, a competitive strategy revolves around understanding how large companies try collectively to reduce the strength of the five forces of industry competition to preserve both company and industry profitability.
Interdependent companies can help protect their competitive advantage and profitability by adopting competitive moves and tactics to reduce the threat of each competitive force.
Companies can utilize 3 main tactics to deter entry by potential rivals and hence maintain and increase industry profitability.
These tactics are (1) product proliferation, (2) price-cutting, and (3) maintaining excess capacity.
Deter Entry Tactic 1: Product Proliferation
Companies seldom produce just one product. Most commonly, they produce a range of products aimed at different market segments so that they have broad product lines. Sometimes, to reduce the threat of entry, companies expand the range of products they make to fill a wide variety of niches. This creates a barrier to entry because potential competitors now find it harder to break into an industry in which all the niches are filled.
Filling all the product spaces in a particular market creates a barrier to entry and makes it much more difficult for a new company to gain a foothold and differentiate itself.
Deter Entry Tactic 2: Price Cutting
In some situations, pricing strategies that involve price cutting can be used to deter entry by other companies, thus protecting the profit margins of companies already in the industry.
The incumbent companies signal to potential entrants that if they enter the industry, the incumbents will use their competitive advantage to drive down prices to a level at which new companies will be unable to cover their costs.
This pricing strategy also allows a company to ride down the experience curve and obtain substantial economies of scale. Because costs fall with increasing sales, profit margins can still be maintained.
However, it may be in the interests of incumbent companies to accept new entry gracefully, giving up market share gradually to the new entrants to prevent price wars from developing, and thus maintain their profit margins, if this is feasible.
In general, companies first skim the market and charge high prices during the growth stage, maximizing short-run profits. Then they move to increase their market share and charge a lower price to expand the market rapidly; develop a reputation; and obtain economies of scale, driving down costs and barring entry. As competitors do enter, incumbent companies reduce prices to retard entry and give up market share to create a stable industry context—one in which they can use non-price competitive tactics, such as product differentiation, to maximize long-run profits. At that point, non-price competition becomes the main basis of industry competition, and prices are quite likely to rise as competition stabilizes.
Thus, competitive tactics such as pricing and product differentiation are linked in mature industries; competitive decisions are taken to maximize the returns from a company’s generic strategy.
Deter Entry Tactic 3: Maintaining Excess Capacity
A third competitive technique that allows companies to deter entry involves maintaining excess capacity—that is, producing more of a product than customers currently demand.
Existing industry companies may deliberately develop some limited amount of excess capacity because it serves to warn potential entrants that if they do enter the industry, existing firms will retaliate by increasing output and forcing down prices, so the entry would be unprofitable. However, the threat to increase output has to be credible; that is, companies in an industry must collectively be able to raise the level of production quickly if entry appears likely.
Incumbent companies need to develop a competitive strategy to manage their competitive interdependence and decrease rivalry. Unrestricted industry price competition reduces both company and industry profitability. Several competitive tactics are available to companies to prevent price wars and manage industry relations.
The most important are (1) price signaling, (2) price leadership, (3) non-price competition, and (4) capacity control.
Managing Rivalry Tactic 1: Price Signaling
Most industries start out fragmented, with small companies battling for market share. Then, over time, the leading players emerge, and companies start to interpret each other’s competitive moves.
Price signaling is the first means by which companies attempt to structure competition within an industry in order to control rivalry. Price signaling is the process by which companies increase or decrease product prices to convey their competitive intentions to other companies and so influence the way competitors price their products.
There are two ways in which companies can use price signaling to help defend their generic competitive strategies.
First, companies use price signaling to make a clear announcement that they will respond vigorously to hostile competitive moves that threaten them. The outcome of this tit-for-tat strategy is that nobody gains and everybody loses. Similarly, companies may signal to potential entrants that if the latter does enter the market, they will fight back by reducing prices, so that new entrants may incur significant losses.
The second use of price signaling is to allow companies indirectly to coordinate their actions and avoid costly competitive moves that lead to a breakdown in pricing policy within an industry. One company may signal that it intends to lower prices because it wishes to attract customers who are switching to the products of another industry, not because it wishes to stimulate a price war. On the other hand, signaling can be used to improve profitability within an industry. In sum, price signaling allows companies to give one another information that enables them to understand each other’s competitive product/market strategy and make coordinated, competitive moves to protect industry profitability.
Managing Rivalry Tactic 2: Price Leadership
Price leadership is the process by which one company informally takes the responsibility for setting industry prices. Formal price leadership, or price setting by companies jointly, is illegal under antitrust laws, so the process of price leadership is often very subtle.
Price leadership allows differentiators to charge a premium price and also helps low-cost companies by increasing their margins.
Although price leadership can stabilize industry relationships by preventing head-to-head competition and thus raise the level of profitability within an industry, it has its dangers. Price leadership helps companies with higher costs by allowing them to survive without becoming more productive or more efficient.
In the long term, such behavior makes them vulnerable to companies that continually develop new production techniques to lower costs.
Managing Rivalry Tactic 3: Non-price Competition
A third very important aspect of product/market strategy in mature industries is the use of non-price competition to manage rivalry within an industry.
Using various tactics and maneuvers to try to prevent costly price cutting and price wars does not preclude competition by product differentiation. Indeed, in many industries, product differentiation is the principal competitive tactic used to prevent rivals from stealing a company’s customers and reducing its market share.
In other words, companies rely on product differentiation to deter potential entrants and manage rivalry within their industry.
Product differentiation allows industry rivals to compete for market share by offering products with different or superior features or by utilizing different marketing techniques. Product and market segment dimensions are used to identify four non-price competitive strategies based on product differentiation.
When a company concentrates on expanding market share in its existing product markets, it is engaging in a strategy of market penetration. Market penetration involves heavy advertising to promote and build product differentiation.
In a mature industry, the thrust of advertising is to influence consumers’ brand choice and create a brand-name reputation for the company and its products. In this way, a company can increase its market share by attracting customers off its rivals. Because brand-name products often command premium prices, building market share in this situation is very profitable.
In some mature industries, a market-penetration strategy becomes a way of life. In these industries, all companies engage in intensive advertising and battle for market share. Each company fears that by not advertising, it will lose market share to rivals. These huge advertising outlays constitute a barrier to entry for prospective entrants.
Product development is the creation of new or improved products to replace existing ones. Product development is important for maintaining product differentiation and building market share. Refining and improving products is an important competitive tactic in defending a company’s generic competitive strategy in a mature industry. However, this kind of competition can be as vicious as a price war because it is expensive and raises costs dramatically.
Market development involves searching for new market segments and therefore uses, for a company’s products. A company pursuing this strategy wants to capitalize on the brand name it has developed in one market segment by locating new market segments in which to compete. In this way, it can exploit the product differentiation advantages of its brand name.
Product proliferation can be used to manage rivalry within an industry and to deter entry. The strategy of product proliferation generally means that the leading companies in an industry all have a product in each market segment, or niche, and compete head-to-head for customers. Product proliferation thus allows the development of stable industry competition based on product differentiation, not price—that is non-price competition based on the development of new products. The battle is over a product’s perceived quality and uniqueness, not over its price.
Strategies in Declining Industries
Sooner or later many industries enter into a decline stage, in which the size of the total market starts to shrink.
Industries start declining for a number of reasons, including technological change, social trends, and demographic shifts.
When the size of the total market is shrinking, competition tends to intensify in a declining industry, and profit rates tend to fall.
The intensity of competition in a declining industry depends on 4 critical factors.
First, the intensity of competition is greater in industries where decline is rapid than in industries where decline is gradual.
Second, the intensity of competition is greater in declining industries in which exit barriers are high. High exit barriers keep companies locked into an industry even when demand is falling. The result is the emergence of excess productive capacity—and hence an increased probability of fierce price competition.
Third, the intensity of competition is greater in declining industries in which fixed costs are high. The need to cover fixed costs, such as the costs of maintaining productive capacity, can make companies try to utilize any excess capacity they have by slashing prices—an action that can trigger a price war.
Finally, the intensity of competition is greater in declining industries where the product is perceived as a commodity than in industries where differentiation gives rise to significant brand loyalty.
Not all segments of an industry typically decline at the same rate.
In some segments, demand may remain reasonably strong, despite decline elsewhere. Generally, there may be pockets of demand in which demand is declining more slowly than in the industry as a whole or, indeed, is not declining at all. Price competition may be far less intense among the companies serving such pockets of demand than within the industry as a whole.
The choice of strategy depends in part on the intensity of the competition.
Choice of strategy can be guided on the basis of two factors: (1) the intensity of competition in the declining industry, measured on the vertical axis, and (2) a company’s strengths relative to remaining pockets of demand, measured on the horizontal axis.
There are 4 main strategies that companies can adopt to deal with decline.
They are as follows: (1) a leadership strategy, by which a company seeks to become the dominant player in a declining industry; (2) a niche strategy, which focuses on pockets of demand that are declining more slowly than demand in the industry as a whole; (3) a harvest strategy, which optimizes cash flow; and (4) a divestment strategy, by which a company sells off the business to others.
Strategy 1: Leadership
A leadership strategy aims at growing in a declining industry by picking up the market share of companies that are leaving the industry.
A leadership strategy makes the most sense (1) when the company has distinctive strengths that enable it to capture market share in a declining industry and (2) when the speed of the decline and the intensity of competition in the declining industry are moderate.
The tactical steps companies might use to achieve a leadership position include aggressive pricing and marketing to build market share; acquiring established competitors to consolidate the industry; and raising the stakes for other competitors.
Such competitive tactics signal to other competitors that the company is willing and able to stay and compete in the declining industry.
These signals may persuade other companies to exit the industry, which would further enhance the competitive position of the industry leader.
Strategy 2: Niche
A niche strategy focuses on those pockets of demand in the industry in which demand is stable or is declining less rapidly than demand in the industry as a whole.
The strategy makes sense when the company has some unique strengths relative to those niches where demand remains relatively strong.
Strategy 3: Harvest
A harvest strategy is the best choice when a company wishes to get out of a declining industry and perhaps optimize cash flow in the process.
This strategy makes the most sense when the company foresees a steep decline and intense future competition or when it lacks strengths relative to the remaining pockets of demand in the industry.
A harvest strategy requires the company to cut all new investments in capital equipment, advertising, R&D, and the like. The inevitable result is that the company will lose market share, but because it is no longer investing in this business, initially its positive cash flow will increase. Ultimately, however, cash flows will start to decline, and at this stage, it makes sense for the company to liquidate the business.
Strategy 4: Divestment
A divestment strategy is based on the idea that a company can maximize its net investment recovery from a business by selling it early before the industry has entered into a steep decline.
This strategy is appropriate when the company has few strengths relative to whatever pockets of demand are likely to remain in the industry and when the competition in the declining industry is likely to be intense.
The best option may be to sell out to a company that is pursuing a leadership strategy in the industry. The drawback of the divestment strategy is that its success depends on the ability of the company to notice its industry’s decline before it becomes serious and thus to sell out while the company’s assets are still valued by others.
Resources
Further Reading
- Stage of Industry Maturity and Relevant Competitive Position (yourarticlelibrary.com)
- What Is the Industry Life Cycle? (investopedia.com)
- Industry Life Cycle (inc.com)
- Industry Life Cycle: Stages And Characteristics (penpoin.com)
Related Concepts
References
- Hitt, M. A., Ireland, D. R., & Hoskisson, R. E. (2016). Strategic Management: Concepts: Competitiveness and Globalization (12th ed.). Cengage Learning.
- Hitt, M. A., Ireland, D. R., & Hoskisson, R. E. (2019). Strategic Management: Concepts and Cases: Competitiveness and Globalization (MindTap Course List) (13th ed.). Cengage Learning.
- Hill, C. W. L., & Jones, G. R. (2011). Essentials of Strategic Management (Available Titles CourseMate) (3rd ed.). Cengage Learning.