Exam 7: Section 1: Strategy: How Do Businesses Generate a Successful Strategy

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1. Maintain a leadership stance: A leadership strategy requires a firm to continue investing in
marketing, support, and product development, hoping that competitors will eventually exit
the market. Despite declining sales and profit margins, there may still be opportunities to
generate above-average returns for firms that remain the industry leaders during this phase.
2. Pursue a niche strategy: The objective of a niche strategy is to find a specific segment
of the industry that may not decline as rapidly as the rest and where the firm can
expect to possess some form of competitive advantage to discourage direct competition
in the niche. For example, a tobacco firm facing declining cigarette sales may
decide to focus exclusively on the more robust cigar market and defend that niche
heavily against competitors by investing in marketing and sales support.
A firm can ultimately choose to switch to a harvest, exit, or consolidation strategy
after having pursued a leadership or niche approach; however, the reverse is not true.
3. Harvest profits: The harvesting profits strategy requires squeezing as much remaining
profit as possible from the industry by drastically reducing costs. The firm must eliminate
or severely restrict investments in the industry and take advantage of existing
strengths to generate incremental sales. This strategy is ultimately followed by the
firm's exit from the industry.
4. Exit early: The exit early strategy allows firms to recover some of their prior investments
in the industry by exiting the market early in the decline phase, when assets may
still be valuable to others and there is greater uncertainty concerning the speed of the
decline. Some firms also choose to exit the industry during the mature phase to truly
maximize the value from the sale of its assets. Once decline becomes evident, assets are
worth much less to potential buyers, who are in a stronger bargaining position. The risk
of exiting so early is that an organization's forecast for decline may prove inaccurate.
5. Consolidate: A consolidation strategy involves acquiring at a reasonable price the best of
the remaining firms in the industry. This allows the acquirer to enhance its market power
and generate economies of scale and synergies to further reduce costs and make up for
declining demand.

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The industry can enter the decline stage due to declining sales because of 3 key reasons:
Changes in demographics: Toward the end of the baby boom in the 1960s, demand for baby food dropped and rivalry among the leading firms-Gerber, Heinz, and Beech-Nut-intensified considerably.
Shifting consumer tastes and needs: Social trends and health considerations have resulted in declining demand for cigarettes and tobacco products since the 1980s.
Technological substitution: Word processing software led to the decline of the typewriter industry; online streaming and downloading of movies is replacing DVDs, which replaced VHS cassette tapes as the medium of choice for movies. Sales of DVD players, discs, and movie rentals are therefore declining.

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Introduction
New industries emerge as the result of changes (usually technological or regulatory) that create opportunities for entrepreneurs to leverage novel combinations of resources to develop innovative products, services, or processes.
The early years of an industry are generally a tumultuous period where there is tremendous uncertainty about the future of the market. There is no dominant technology or business model, and it is far from certain that the market will ever grow sufficiently to provide attractive financial returns and growth opportunities. At the same time, this is also a period of unbridled optimism among entrepreneurs jockeying for position as the future of the market unfolds.
Early entrants into an industry tend to be small entrepreneurial firms excited by the prospect and potential growth of a new market. Large, established firms tend to lag behind smaller ones in entering new industries for two reasons. First, a budding market is usually too small and risky to justify the entry of large firms burdened with high overhead costs and the need to generate more certain, even if lower, financial returns.
Second, older incumbent firms usually have bureaucratic organizational structures that inhibit their ability to move quickly and flexibly into new markets. Smaller and more nimble firms rely on simpler structures and lower startup costs to capture a first-mover advantage. Entrepreneurial startups are inherently more tolerant of ambiguity and risk because they have much less to lose than established firms and are therefore more willing to gamble in the hopes of generating a large payoff.
This introductory phase is one of great technical uncertainty where producers experiment with different and novel combinations in the hopes of discovering a superior approach that will dominate over other firms. Firms are intensely focused on research and development (R&D) activities during this period. This results in a high degree of product innovation with many different versions of products incorporating different features and technologies. This also leads to confusion for customers and other stakeholders, which prevents the market from taking off into the growth phase. The types of customers who tend to purchase in the introductory phase of the life cycle are early adopters willing to pay a premium for the privilege of owning a product before most other people, despite its early flaws and glitches. Conservative and price-conscious customers will usually wait until the mature stage before buying. Despite (and partly because of) the uncertainty inherent in a new industry, the introduction phase of the life cycle is a period of extraordinary creativity and innovation. An industry is rarely as vibrant as in its early years, when hope and optimism fuel the dreams
Growth
The growth stage begins when the market converges around a single dominant design or approach. A dominant design is defined by Anderson and Tushman as "a single architecture that establishes dominance in a product class." For example, according to the research firm Gartner, Apple's iPad is expected to dominate the tablet industry until at least 2016. In some cases, technical standards are specified and must be adhered to by all firms wishing to enter the market. When a standard is legally mandated and enforced by a government or standards organization, it is called a de jure standard . For example, the gauge of a railroad track, a light bulb socket, and an electrical outlet are all based on standards that have been explicitly specified by a standards organization-usually to ensure compatibility. A company wanting to produce light bulbs must make them to the correct specifications or they will be useless to consumers.
A de facto standard , on the other hand, arises by virtue of common usage and is not officially sanctioned by any authority. It is a standard "in fact" or "in practice," rather than in law. Microsoft Windows is the de facto standard for personal computer operating systems because over 90% of the market uses Windows. Software developers must therefore write programs that are compatible with Windows if they want to reach the majority of the market. As the standard or dominant model spreads across the industry, the producers that persist with a different approach usually exit the industry. This is one of the main causes of industry shakeouts.
A shakeout in an industry is defined as a large number of exits from the market at the same time as the aggregate output of the industry increases. A large number of failures in a declining market is not a shakeout. A shakeout is a natural and healthy-albeit painful-process for an industry as it simply purges and weeds out the weaker competitors. The firms remaining after the shakeout emerge as strong competitors able to scale up production and serve the needs of a growing market.
Maturity
In the mature stage, the third in the life cycle, growth in aggregate demand begins to slow. Markets start to become saturated as there are fewer new adopters to attract and so competition intensifies even more. This can, nevertheless, be a very profitable period for the surviving firms as the industry enters a period of relative stability. For example, between 1980 and 2000, the US beer brewing industry was in a mature phase and was dominated by three large firms that controlled 80% of the market (Anheuser-Busch: 47%; Miller: 23%; and Coors: 10%). Over the 20-year period, market shares were very stable, and no firm gained or lost more than about a single share point in any one year. Despite the high degree of concentration in mature markets, rivalry is fierce. A single point of market share can mean millions of dollars in revenue, so firms spend large amounts of money on advertising and sometimes enter into damaging price wars to lure customers from the competition. Because technological knowledge has diffused to the far corners of the industry and patents may have expired, firms focus their innovative efforts on incremental improvements to products. This is the era where firms market the "new and improved" versions and 25 different scents and flavours in the hopes of differentiating their products ever so slightly from the competition's. Incremental innovations also provide opportunities to extend the life cycle to delay the inevitable arrival of the decline stage. As consumers accumulate knowledge of the industry and its products over time, they become much more sophisticated and demanding buyers. This influences the industry's trend toward the commoditization of its products and makes consumers even more price conscious, which in turn forces firms to continuously squeeze out more cost savings from their production processes .
When there is very little product differentiation and consumers have become notoriously fickle, power once held by the manufacturers now shifts to the distribution channel firms that control access to the customer. This is why shelf space is so critical in mature packaged goods markets like laundry detergent. When customers see very little difference between Tide and the competition, they will essentially grab whatever they have access to or what happens to be on sale. Similarly, grocery stores are under continued pressure to keep costs low to maintain their consumer base and to sell their many undifferentiated products. Retailers who control and allocate shelf space have more bargaining power than they did in earlier phases, where customers would seek out a particular product because it possessed features not shared by others.
Given the scale required to compete efficiently, there is little if any entry at this stage of the life cycle. The sources of competitive advantage for firms reside in process engineering to derive greater manufacturing and production efficiencies and reduce costs even more. This often means outsourcing and shedding activities that can be subcontracted more efficiently. In some industries, production will shift from advanced to developing countries during this stage to benefit from lower labour costs. In terms of the generic competitive strategies described in Chapter 5 , whereas differentiation was the favoured approach in the earlier stages, organizations that adopt a cost leadership strategy in mature markets tend to outperform their competitors.
The shift from a dynamic and technologically innovative environment with many small firms to a stable and cost-efficient market with few large rivals also requires a change in the type of organizational structure , as described in Chapter 4 . In the high-flying and uncertain early market, entrepreneurial startups need to be innovative, dynamic, and flexible. The organic structure, with its decentralized approach, limited hierarchy, and low formalization, is better suited to the environment of the introduction and early growth phases. In a mature market, where efficiency and cost-cutting matter more than innovation, the mechanistic structure, with its stricter rules, chain of command, and narrow division of labour, is more appropriate.
Decline
An industry enters the decline stage when sales begin to fall. Competition may become especially fierce in the decline stage as firms face tough choices regarding the future. It is difficult to predict when this stage will materialize, and the time it takes for industries to reach the decline stage varies widely. Nevertheless, industry sales typically decline as a result of one of the following:
1. Changes in demographics: Toward the end of the baby boom in the 1960s, demand for baby food dropped and rivalry among the leading firms-Gerber, Heinz, and Beech- Nut-intensified considerably.
2. Shifting consumer tastes and needs: Social trends and health considerations have resulted in declining demand for cigarettes and tobacco products since the 1980s.
3. Technological substitution: Word processing software led to the decline of the typewriter industry; online streaming and downloading of movies is replacing DVDs, which replaced VHS cassette tapes as the medium of choice for movies. Sales of DVD players, discs, and movie rentals are therefore declining.