Business Models, Competitive Strategies, and Market Dynamics
Business Model & Competitive Strategies
Business Model: How a company creates, delivers, and captures value. Ex: Netflix charges monthly fees to deliver entertainment through a streaming platform.
Strategy Model: How a company competes in the market to achieve its goals and gain a competitive advantage. Ex: Invest heavily in original content to differentiate itself from competitors like Amazon Prime & Disney+.
Fragmented Industries
A fragmented industry is one where there are many small or medium-sized companies rather than a few large, dominant firms. There are many competitors in the market, with many small businesses competing without a dominant market leader.
Reasons for Fragmentation:
- Low Barriers to Entry: It’s easy for new companies to start operating in these industries because:
- You don’t need massive capital investment (opening a small restaurant or barber shop is affordable).
- There are no advanced technologies or specialized knowledge needed to enter the market.
- Specialized Customer Needs: Customers often have specific preferences that suit small-scale businesses.
- Diseconomies of Scale: As businesses grow, it’s harder to maintain quality & control, which limits their size.
Strategies to Grow or Gain a Competitive Edge:
- Chaining: Create a network of outlets to achieve cost leadership. Ex: A barber shop could open multiple branches in different areas.
- Franchising: Develop a proven business model & sell franchises to expand quickly. Ex: A restaurant like McDonald’s or a salon chain like Great Clips.
- Horizontal Merger: Combine two or more similar businesses to gain economies of scale and reduce competition. Ex: Two local barbers joining to form a larger salon.
- IT & Internet: Use online booking systems or apps to streamline operations and reach more customers. Ex: A barber shop offering an app for scheduling appointments.
Example: Barber Shops
- Fragmented Nature: Barber shops are small businesses that serve a localized market.
- Low Barriers to Entry: It’s easy to open a barber shop because the initial investment is small, and no advanced technology is required. This allows new barber shops to constantly enter the market.
- Specialized Services: Haircut services are personalized and often rely on individual relationships between the barber & the customer, which favors small businesses.
- Diseconomies of Scale: Cannot scale easily because the service (cutting hair) requires time & personal effort, making it hard to mass-produce or automate.
Embryonic & Growth Industries
Embryonic: Is the earliest stage of development, created by technological innovations, that open new market opportunities. Companies focus on testing the market.
Growth: Rapid expansion of customer base, as many new customers enter the market.
Strategies:
- Determined by market demand: Companies need to know what customers want & adjust their products or services according to their needs.
- Innovators & early adopters (are risk-takers, value newness) have different needs from the early & late majority (prefer reliable & value products).
Cross the Chasm: Companies need to be prepared to cross the chasm between the early adopters & the later majority. (Transition of early adopters (like trying new things) & early majority (need proof the product works well & it’s affordable)).
Stages of Development:
- Embryonic Stage (Innovators & some early adopters): New market. Adoption is low as the product is not known, the product is still refining. Companies focus on building awareness & improving product quality.
- Growth Stage: Adoption accelerates as the (early majority) joins, driving rapid market penetration.
- Mature Stage: Growth slows as the market approaches saturation. Companies compete for remaining market share & focus on existing customers.
Customer Groups:
- Innovators: First customers to try a product / are risk-takers, willing to test new & unproven technologies. Ex: Early Tesla buyers who trusted the brand and concept before electric vehicles were mainstream.
- Early Adopters: More cautious but still eager to try new technologies once innovators have proven their potential. Ex: People who started using smartwatches (like the Apple Watch) shortly after the initial buzz from innovators.
- Early Majority: Customers that wait until a product is tested & widely accepted / they prefer proven solutions & represent the start of mass-market adoption. Ex: Customers purchasing streaming services (e.g., Netflix) after hearing success stories.
- Late Majority: They are price-sensitive. They adopt only after the product has become standard. Look for: reliability, affordability. Ex: People who only started using smartphones when basic models became very cheap and widely available.
- Laggards: Are the last to adopt the product, due to financial constraints or resistance to change. Just when it is mandatory. Ex: Consumers who still buy DVDs and only move to streaming services when DVD players are no longer supported.
Mature Industries
A mature industry is dominated by a small number of large companies whose actions are highly interdependent (companies are aware of each other’s moves; when one company does something, other companies do the same thing).
Key Features / Evolution if Demand Increases:
- Consolidation: Competition in the first stages reduces the number of competitors. Companies that stay are big & well-established. Ex: Airline industry; only a few large players dominate most markets.
- Interdependence: Companies are aware of each other’s moves (prices, product launches) to maintain their market position. Ex: If one fast-food chain introduces a discount, competitors will follow to avoid losing customers.
- Focus on Profitability: Growth opportunities are limited because the market is saturated. Companies focus on profitability rather than market expansion.
Strategies:
- Product Proliferation: Offer a wide range of products to “flood” the market & occupy all the niches. Ex: Coca-Cola produces many variations to cover different customer preferences & limit opportunities for new consumers.
- Maintain Excess Capacity: Keep production capacity to meet any increase in demand, preventing new entrants. Ex: Large automakers keep extra capacity to quickly produce if it is needed.
- Price Cutting: Reduce prices to make it difficult for new entrants to compete. Ex: Established airlines reduce prices to drive out low-cost competitors.
- Price Signaling: Companies send indirect hints about price changes to competitors to prevent price wars. Ex: One company announces a future price, & others follow to avoid reducing their prices.
- Capacity Control: Companies agree to reduce or limit production, avoiding oversupply & price drops. Ex: Luxury car manufacturers limit the number of cars they produce each year. By keeping production low, they maintain the exclusivity of their brand, prevent market oversaturation, and ensure higher prices for their vehicles.
- Price Leadership: Dominant company sets the market price, & others follow. Ex: Repsol.
- Nonprice Competition: Competing on factors other than price, such as quality, branding, or customer service. Ex: Apple focuses on innovation & brand loyalty, rather than price competition with Android.
Declining Industries
A declining industry is one in which market demand has already reached its highest point & now is going down. This makes the market smaller, causing companies to compete for fewer customers, which leads to lower profits.
Reasons for Declining:
- Technological Change: Innovations can make old products antiquated. Ex: Streaming services like Netflix reduced demand for DVDs.
- Social Trends: Changes in habits & preferences impact demand. Ex: Environmental concerns reduced single-use plastic use.
- Demographic Shifts: Population changes affect demand. Ex: As populations age, fewer people will be interested in fast fashion.
Factors That Increase Competition:
- Rapid Decline: When the market decreases quickly, companies must compete to retain customers. Ex: The DVD rental industry saw a rapid decline due to the rise of streaming services “Netflix”; they needed to offer discounts & promotions to retain customers.
- High Fixed Costs (FC): Companies with high FC need to maintain high sales to cover these costs. Ex: Airlines have high FC, including (planes, airport fees…). They need to offer heavily discounted tickets to stay operational when they have low demand (COVID-19).
- High Exit Barriers: Companies find it difficult to leave the market because of expensive investments in assets. These barriers force them to keep operating, despite losses. Ex: Steel production: Invest in machinery, even when the market is oversupplied & prices fall, they stay in the market because closing would mean financial losses.
- Commodity Products: Industries where products are seen as commodities. Ex: Gasoline. Gas stations compete by lowering the price to attract customers in areas where a lot of stations are located close together.
Strategies:
- Leadership: Seeks to dominate the market, wanting to get rid of competitors. Ex: Amazon.
- Niche: Concentrating on smaller market segments that are declining more slowly or have loyal customers. Ex: Local newspapers focusing on specific communities while larger outlets shift online.
- Harvest: Maximizing cash flow by reducing costs & investments, focusing on profitability rather than growth.
- Divestment: Selling the business to others & exiting. Ex: Coal companies selling off mines to invest in renewable energy.
Globalization
Globalization refers to the increasing integration & interdependence of economies, cultures, & societies across the world. Countries & businesses are more connected than ever, with goods, services, and ideas.
Characteristics:
- Similar Consumer Habits & Tastes: Ex: McDonald’s is popular in many countries because people have developed similar tastes & habits.
- Interrelation of Economic & Political Decisions: Economic & political actions can impact others. Ex: The crisis in the U.S. in 2008 affected markets globally.
- Liberalization of International Flows: Allows goods, services, capital, & labor to move more freely between countries. Ex: Goods: Products made in China are sold worldwide. Finance: International investments flow between countries. Human labor: Workers move across borders for better opportunities.
Impact:
- Increased Competition: Connects markets across countries, allowing companies to compete in the same industry.
- Unify Customer Expectations: As people around the world are exposed to similar products & services, their preferences & expectations become more alike.
- Increased Customer Base: Gives businesses access to more customers across the world.
- Economies of Scale: Companies can reduce costs by producing goods in larger quantities for global markets.
- Greater Choice of Locations: Allows companies to choose where to locate their operations based on costs, resources, or market opportunities.
Multinational Corporations (MNCs)
MNCs are businesses that operate in two or more countries. These companies have their main office in one country, known as the home country, but they run operations in other countries, referred to as host countries. Ex: Coca-Cola: Sells beverages globally, adapting to local tastes. Microsoft: Provides software worldwide and has offices in many countries.
Positive Impacts of MNCs:
- Job Creation: Set up operations “factories or offices” in the host country, creating employment opportunities for the local population. Ex: H&M establishing factories in Bangladesh created many jobs for local workers.
- Increase GDP: Contributes to the host country’s economic growth by generating income through production, exports, & taxes.
- Transfer of Knowledge & Technology: Introduce advanced technologies, management practices, & skills, benefiting local workers & industries.
- Increase Competition: Creates competition for local businesses, which can lead to improved efficiency & innovation in the domestic market.
Negative Impacts of MNCs:
- Risk of Unemployment: Local firms can close due to MNC competition, causing job losses. Ex: Amazon has forced small businesses to shut down.
- Risk of Repatriation: Send profits back to their home countries, limiting benefits for the host country.
- Increased Bargaining Power: Have significant influence over local governments due to their size and economic importance.
International Strategy Framework
Four key factors a company must consider when expanding its business internationally:
- International Drivers: Reasons a company decides to go global, including: market demand, cost efficiency, competitive pressure, access to resources.
- Geographic Advantages: Benefits a specific location offers for the business, such as: natural resources, logistics, economic conditions.
- Market Selection: Companies must choose which countries or regions to enter based on factors like market size, growth potential, cultural fit, and risks.
- Mode of Entry: Describes how the company enters the new market: exporting, licensing/franchising, joint ventures, or direct investment.
Differences:
- International: Companies operating in multiple countries but with limited coordination between these operations. Each country is treated as a separate market, & the company adapts its strategies to fit local needs. The goal is to expand into new markets while customizing offerings to maximize local market share.
- Global: Involves managing & coordinating activities across many countries as a single, unified strategy. Emphasizes efficiency & standardization across all regions. The goal is to achieve efficiency, consistency, and cost savings by standardizing products and operations globally.
Sources of Superior Performance
This diagram outlines two primary strategies that companies can use to achieve above-normal profits. These strategies are Avoiding Competitors & Being Better Than Competition.
1. Avoiding Competitors:
This approach emphasizes finding and targeting areas in the market with minimal competition, allowing a company to succeed without directly challenging other firms.
Sub-strategies under Avoiding Competition:
- Attractive Industry: Entering industries with high barriers to entry, such as significant startup costs or strict regulations, which limit the ability of new competitors to enter.
- Attractive Strategic Group: Joining a group within the industry that has mobility barriers (brand loyalty or proprietary technology) that make it hard for competitors to switch into this space.
- Attractive Niche: Targeting a niche market with isolating mechanisms like patents or exclusive technologies, which protect the company from competition within that niche.
2. Being Better Than Competition:
Involves competing directly with other firms but achieving superior performance by offering something better or at a lower cost.
Sub-strategies under Being Better Than Competition:
- Cost Advantage: Producing goods or services more efficiently than competitors, enabling the company to offer lower prices while staying profitable.
- Differentiation Advantage: Providing unique, high-value products or services that stand out to customers, allowing the company to charge premium prices.
Competitive Advantage
Highlights the two primary methods a company can use to gain a competitive advantage:
- Cost Advantage: Delivering a similar product at a lower cost than competitors, appealing to customers through more affordable pricing.
- Differentiation: Offering a unique product that customers perceive as valuable, enabling the company to charge a premium price.
The Nature of Differentiation
Illustrates the concept of differentiation as a way to achieve a competitive advantage.
- Differentiation involves offering something unique and valuable to customers, beyond just competing on price. The key objective is to deliver value that stands out.
Types of Differentiation:
- Tangible Differentiation: Features of the product that are visible and measurable, such as size, color, materials, performance, packaging, or additional services.
- Intangible Differentiation: Non-physical attributes that influence customers’ emotions and perceptions, like how the product affects their image, status, identity, or sense of exclusivity.
Total Customer Responsiveness: Differentiation goes beyond the product itself. It encompasses the overall relationship between the company and its customers, focusing on responsiveness and fully addressing customer needs.
Drivers of Cost Advantage
- Economies of Scale: Producing more lowers the cost per unit because fixed costs are spread out. Specializing tasks and dividing labor makes processes more efficient.
- Economies of Learning: Employees get better with practice, improving speed and quality. Organizations develop better routines to reduce waste and errors.
- Production Techniques: Innovating how products are made to cut costs. Simplifying or reengineering processes to save time and resources.
- Product Design: Using standard parts or simple designs to lower manufacturing costs. Designing products to make them easier and cheaper to produce.
- Input Costs: Sourcing materials from low-cost locations. Using cheaper labor or negotiating better deals with suppliers.
- Capacity Utilization: Making full use of resources to avoid waste. Adjusting quickly to changes in demand to maintain efficiency.
- Residual Efficiency: Reducing inefficiencies caused by poor management or motivation. Improving organizational culture and leadership for better productivity.
In simple terms, these are strategies to make operations more efficient and reduce costs across various areas of a business.
Identifying Differentiation Potential
- The Product:
- Determine the needs it satisfies.
- Identify its key attributes.
- Link these attributes to customer preferences and determine any price premium customers are willing to pay.
- The Customer:
- Understand selection criteria (how they choose products).
- Know their motivations.
- Examine demographic, sociological, and psychological traits affecting behavior.
- Formulate Differentiation Strategy:
- Choose product positioning and target customer group.
- Ensure the product meets customer needs.
- Weigh the costs and benefits of differentiation.
In short, this process helps tailor the product to customer desires, maximizing differentiation potential.