Industry Evolution: Strategies for Success in Different Market Stages

Posted on Mar 6, 2025 in Business Administration and Management (BAM)

Fragmented Industry

A fragmented industry is composed of a large number of small and medium-sized companies.

Reasons for Fragmentation:

• Low barriers to entry due to lack of economies of scale.
• Low entry barriers allow constant entry of new companies.
• Diseconomies of scale may be present.

Strategies:

• Chaining: Achieve cost leadership. (e.g., Tagliatelle).
• Franchising: Facilitates rapid growth with an established business model.
• Horizontal Merger: Acquire competitors to consolidate market share.
• Information Technology & Internet: Develop innovative business models (e.g., Glovo).

Embryonic Industry

An embryonic industry is one that is just beginning to develop, often driven by technological innovation that creates new market or product opportunities. It’s primarily about innovation.

Strategies:

• Strategies are determined by market demand.
• Innovators and early adopters have different needs than the early and late majority.
• Companies must be prepared to cross the chasm between early adopters and the late majority.

Reasons for Slow Growth in Demand:

• Limited performance and poor quality of first-generation products.
• Customers are unfamiliar with the product.
• Lack of complementary products.
• High production costs.

Growth Industry

A growth industry is one in which first-time demand is expanding rapidly as many new customers enter the market. It’s characterized by new, trendy products with high demand.

Factors Affecting Market Growth Rates:

• Relative advantages of the product.
• Complexity of the product.
• Compatibility with existing customer needs.
• Observability of the product’s benefits.
• Availability of complementary products.
• Triability of the product.

Business-level strategy is a major determinant of industry profitability. The choice of business model and strategies can accelerate or retard market growth.

Mass Market Development:

A mass market starts to develop when:

• Technological progress makes the product easier to use and increases its value to the average customer.
• Key complementary products are developed.
• Companies find ways to reduce production costs, leading to lower prices due to economies of scale.

Mature Industry

A mature industry is dominated by a small number of large companies whose actions are highly interdependent.

Evolution of a Mature Industry:

• The industry becomes consolidated due to fierce competition during the shakeout stage.
• Business-level strategy is based on how established companies collectively try to reduce the strength of competition.

Interdependent companies try to protect industry profitability.

Strategies:

Prevent entry to the industry:

• Product proliferation.
• Maintaining excess capacity.
• Price cutting.

Manage industry rivalry:

• Price signaling.
• Capacity control.
• Price leadership.
• Non-price competition.

Declining Industry

A declining industry is one in which market demand is falling, and the size of the total market starts to shrink.

Competition tends to intensify, and industry profits tend to fall.

Reasons: Technological change, social trends, and demographic shifts.

Intensity of Competition is Greater When:

• Decline is rapid instead of slow and gradual.
• The industry has high fixed costs.
• Exit barriers are high.
• The product is perceived as a commodity.

Strategies:

• Leadership: Become the dominant player.
• Niche: Focus on pockets of demand that are declining more slowly.
• Harvest: Optimize cash flow from existing operations.
• Divestment: Sell the business to others.

MNC’s Positive Influence on Host Countries:

• Tax revenue.
• Job creation.
• Increased GDP.
• Transfer of know-how, skills, and technology.

MNC’s Negative Influence on Host Countries:

• Risk of increasing unemployment (in case of bankruptcy of local firms).
• Risk of profit repatriation.
• Exploitation of domestic natural resources.
• Increasing bargaining power.

International Strategy Framework

International strategy: A range of options for operating outside an organization’s country of origin.

Global strategy: Involves high coordination of extensive activities dispersed geographically in many countries around the world.

Internationalization Drivers – Main Groups

Location Advantages: Porter’s Diamond

Porter’s Diamond explains why some locations tend to produce firms with sustained competitive advantage in some industries more than others.

Factors Providing Competitive Advantage:

• Demand conditions.
• Factor conditions.
• Firm strategy, structure, and rivalry.
• Related and supporting industries.

Firm Strategy, Structure, and Rivalry: Competition leads to increased production and technological innovation. The concentration of market power, degree of competition, and ability of rival firms to enter a nation’s market are influential.

Related and Supporting Industries: For example, a company that makes tables would benefit from entering a country that provides a lot of wood.

Demand Conditions: The size and nature of the customer base for products, which drives innovation and product improvement. Larger consumer markets stimulate a need to differentiate and innovate, increasing market scale for businesses.

Factor Conditions: Elements that a country’s economy can create for itself, such as a large pool of skilled labor, technological innovation, infrastructure, and capital.

Exporting

Advantages:

• No need for operational facilities in the host country.
• Economies of scale in the home country.
• The Internet facilitates exporting marketing opportunities.

Disadvantages:

• Dependence on export intermediaries.
• Exposure to trade barriers.
• Transportation costs.

Joint Ventures & Alliances

Advantages:

• Shared investment risk.
• Complementary resources.
• May be required for market entry (e.g., China).

Disadvantages:

• Difficult to find a good partner.
• Relationship management challenges (trust, language).
• Loss of competitive advantage.
• Difficult to integrate and coordinate (e.g., Renault & Nissan).

Licensing

Advantages:

• Contractual source of income.
• Limited economic and financial exposure.

Disadvantages:

• Difficult to identify a good partner.
• Loss of competitive advantage.
• Limited benefits from the host nation.

Foreign Direct Investment (FDI)

Advantages:

• Full control.
• Integration and coordination are possible (can send trusted staff).
• Rapid market entry through acquisition.
• Greenfield investments are possible and may be subsidized.

Disadvantages:

• Substantial investment and commitment.
• Acquisitions may create integration/coordination issues.
• Greenfield investments are time-consuming and unpredictable.

Determine your company’s optimal strategy:

Nature of Differentiation

Differentiation: Providing something unique that is valuable to the buyer beyond simply offering a low price. The key is to create value for the customer.

Tangible Differentiation:

Observable product characteristics:

• Size, color, materials.
• Performance.
• Packaging.
• Complementary services.

Intangible Differentiation:

Unobservable and subjective characteristics relating to image, status, exclusivity, and identity.

Total Customer Responsiveness:

Differentiation is not just about the product; it embraces the whole relationship between the supplier and the customer.

CAGE Framework: Spain vs. Germany

Cultural Distance

1. Excellence Orientation:
   • Spain: 4
   • Germany: 7

   Germans emphasize precision, efficiency, and quality more than Spanish culture.

2. Risk-Taking:
   • Spain: 4
   • Germany: 1

   Spanish culture is more inclined towards risk-taking behavior. Germans prefer safer and more controlled choices.

Economic Distance

1. Labor Market – Unemployment:
   • Spain: 12.1%
   • Germany: 5.7%

   Germany has a tighter labor market with potentially fewer available workers, leading to higher competition for skilled workers. There’s a higher probability of finding qualified and experienced workers in Germany.

2. Income Distribution (Gini Coefficient):
   • Spain: 35%
   • Germany: 29%

   The Gini coefficient indicates slightly higher income inequality in Spain.

Administrative Distance

1. Corruption Perception Index (CPI):
   • Spain: 60% (Moderate)
   • Germany: 85% (Low)

   Germany provides access to a market with more transparency and a more favorable administrative environment for business operation and growth.

2. Government Effectiveness:
   • Spain: 70% (Moderate)
   • Germany: 85% (High)

   Germany has a higher ease of doing business index (ranked 20 out of 190 countries). Germans have a more business-friendly environment in terms of regulatory and government efficiency. This is positive for Spain.

Geographic Distance

1. Extreme Weather:
   • Spain: Variable climates. Extreme heat in some regions, but generally less extreme conditions than Germany. Tends to be hotter.
   • Germany: Extreme weather with colder winters (including snow) and milder summers.

   There could be problems with the Spanish workforce adapting to extreme cold (-20°C) in Germany.

2. Physical Distance:
   • 1,800 – 2,000 km. This can influence logistics if materials need to be transported between the two countries. Long distances mean higher shipping/logistics expenses.