7 Strategies in a Stable Industry Environment

Some foundations for Zipf's law: Product proliferation and local [An article from: Regional Science and Urban Economics]In a stable industry environment, strategic group of industries follow similar generic strategies. Companies follow the same strategies as their rivals because any change during this phase is likely to stimulate a competitive response from their rivals. In fact, the main issue that firms need to contend in a stable industry environment is to adopt a strategy that simultaneously allows the firms to protect its competitive advantage while preserving industry profitability. In other words, in stable industry environment, competitive strategy hinges on how large companies collectively try to reduce the strength of the five forces of industry competition to preserve both individual and industry profitability. In the next section, the various price and non-price strategies adopted by firms in a stable environment to deter entry of rivals into an industry and to also reduce the level of rivalry within an industry are discussed.

Firms can generally use three strategies to prevent rivals from entering an industry. They are product proliferation, price cutting and excess capacity.

Product proliferation
Most companies produce a range of products instead just one product. This is done to target different segments with different products. Sometimes, companies expand their product range to fill a wide range to market niches, which creates an entry barrier for potential entrants sine they will now find it harder to break into an industry in which all the gaps or niches filled. This strategy of plugging market niches is called product proliferation.

Rationalizing the Product Mix
Although a broad product line and frequent introduction of new varieties and options may often be necessary and desirable, cost competition and fights for market share are too demanding sometimes to follow a product proliferation strategy. As a result, pruning of unprofitable items from the line and focusing attention on items that have some distinctive advantage (technology, cost, image, etc.) is more desirable.

Process Innovation
The importance of process innovations usually increases in stable and mature industry environment, as does the advantage of designing the product and its delivery system to facilitate lower-cost manufacturing. The success of the Japanese industry in industries such as electronics, automobiles, etc. is attributed to this strategy.

Price Cutting
In some situations, price cutting can be used as a strategy to deter entry of other companies, thereby protecting the profit margins of the incumbents in the industry. For instance, a firm can charge a high price for the product initially to seize short term profits and then cut prices aggressively to build market share and deter new entrants at the same time. The current players in the industry can thus send a signal to the potential entrants that if they enter the industry, the incumbent players will use their competitive advantage to drive down prices to a level which will make it unviable for new entrants to compete at that level.

Excess Capacity
A third strategy that firms use to discourage entry of potential rivals involves maintaining excess capacity that is, producing products much more in excess of the demand. The incumbent companies may intentionally develop excess capacity to warn potential new entrants that if they enter the industry, existing firms will strike back by increasing the output and putting a downward pressure on prices until the entry would become unprofitable.

Buying Cheap Assets
Sometimes assets can be acquired very cheaply as a result of the distress sale of assets by companies unable to make successful transition to stable environment. A strategy of acquiring distressed companies or buying liquidated assets can improve margins and create a low-cost position if the rate of technological change is not too great.

Competing Internationally
A firm may break out of the stifling stable environment by competing internationally where the industry is more favourably structured. Sometimes equipment that is obsolete in the home market can be used quite effectively in international markets, significantly lowering the costs of entry there. Or industry structure may be a great deal more favourable internationally, with less sophisticated and powerful buyers, fewer competitors, etc. The shortcomings of this strategy are the usual risks involved in international competition.

Apart from discouraging new entrants, firms also use strategies to manage their competitive interdependence and decrease rivalry. Several options are available to companies to manage rivalry within the industry. Product differentiation is one such option. It allows a firm to compete for market share by offering different products or by using different marketing techniques. The four competitive strategies based on product differentiation are based on different combinations of product and market segments (not markets as in Ansoff’s matrix) are as follows:

Market Penetration
When a company expands market share in its existing product markets, it is said to follow market penetration strategy. This strategy involves heavy advertising to promote and create product differentiation. In a stable and mature industry the major objective of promotion is to influence consumers’ choice for the company’s brands and products. A company can thus increase its market share by attracting customers.

Product Development
This strategy involves creation of new or improved products to replace existing ones. Product development strategy is vital for maintaining product differentiation and building market share.

Market Development
Market development strategy involves finding new market segments for a company’s products. A firm following this strategy will try to capitalize on its brand reputation in one market segment by looking for new market segments in which to compete.

Product Proliferation
This strategy is used to manage rivalry within an industry and to deter entry. Product proliferation strategy essentially involves having a product in each market segment or niche and compete face-to-face with rivals for the customers.