Chapter 5 A Dynamic Model of Industry Structuring Copyright © 1999 by Harcourt Brace & Company All...

Chapter 5Chapter 5

A Dynamic Model of A Dynamic Model of Industry StructuringIndustry Structuring

Chapter 5Chapter 5

A Dynamic Model of A Dynamic Model of Industry StructuringIndustry Structuring

Copyright © 1999 by Harcourt Brace & Company

All rights reserved. Requests for permission to make copies of any part of the work should be mailed to the following address: Permissions Department, Harcourt Brace & Company, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777.

Bourgeois, Duhaime,

& Stimpert

Copyright © 1999 by Harcourt Brace & CompanyAll rights reserved

Chapter ObjectivesChapter ObjectivesChapter ObjectivesChapter Objectives Introduce a dynamic model of industry competition

and evolution. Offer several specific observations about the

evolution of industries based on this dynamic model, focusing specifically on the likely actions of new entrants to an industry and the response of incumbent firms.

Illustrate how the dynamic model can be used to analyze industries.


Chapter ObjectivesChapter Objectives (cont.)(cont.)Chapter ObjectivesChapter Objectives (cont.)(cont.)

Emphasize the managerial implications of this dynamic model of industry structuring.


IntroductionIntroductionIntroductionIntroduction

Dynamic nature of industry environments exemplified by demand for, and subsequent development of, the minicomputer. Market demand was enormous, but IBM ignored it

and left the field open to competitors. Similarly, Apple’s commercialization of the PC allowed

small, entrepreneurial firms to compete with established rivals.


Introduction (cont.)Introduction (cont.)Introduction (cont.)Introduction (cont.)

Evolution of computer industry was inconsistent with Porter’s Five Force Model. Incumbent firms not only did not erect sufficient

barriers to new entrants, but the entrenched incumbents experienced declines in profitability.

• Therefore, new frameworks and models needed to explain the evolution of industries and provide managers with better understanding of industry environments.


Introduction (cont.)Introduction (cont.)Introduction (cont.)Introduction (cont.)

In today’s world, new entrants tend to reshape industries in fundamental ways. Incumbent firms have difficulties responding to

industry change. Managers need to anticipate or even create changes

in their industries.


Building Blocks of a Dynamic Building Blocks of a Dynamic Theory of Industry Theory of Industry StructuringStructuring


Industries are being re-structured continuously. Four factors help to explain patterns in the

evolution of industries:1. Changing industry dimensions;

2. Shared norms held by managers of firms in an industry;

3. Managers’ cognitive limitation; and

4. First-mover advantages.




Entrepreneurial activity plays key role in on-going industry restructuring because entrepreneurs see opportunities to: Satisfy consumers’ new wants and needs; Exploit new technological developments; and Offer new products and services.

Entrepreneurial activity also affects other industries. Fore example, competition in banking and insurance

industry helped to create the financial services industry.


Changing Dimensions Changing Dimensions of Industriesof IndustriesChanging Dimensions Changing Dimensions of Industriesof Industries

The Model of Strategic Development (see Exhibit 5.1 on following slide) places firms in competitive industry environments consisting of customers, products and services, and technologies. Scholars suggests that industry can be thought of

as competitive “space” in which rivals compete along various dimensions (see Exhibit 5.2).


Tech

nolo

gi

es

Business

Strategy

Capabilities

How toCom

pete

Busi

nes

sD

efinitio

n

The

Indust

ry

Siz

e an

d

Div

ersi

fica

tio

nCor

pora

te

Stra

tegy

How toOrganize

Cu

stom

er

s

Products & Services

The Firm

The Industry orCompetitive Environment

Managers’Mental Models

Exhibit 5.1

Organizational

Structure


Exhibit 5.2:Exhibit 5.2: Industry Environment Industry Environment Portrayed as “Competitive Space”Portrayed as “Competitive Space”Exhibit 5.2:Exhibit 5.2: Industry Environment Industry Environment Portrayed as “Competitive Space”Portrayed as “Competitive Space”

How?(Technology)

Who?

(Customers)What?

(Products/Services)


Changing Dimensions Changing Dimensions of Industries (cont.)of Industries (cont.)Changing Dimensions Changing Dimensions of Industries (cont.)of Industries (cont.)

Consumer preferences and new product and process technologies are constantly changing over time. As a result, competitive space is very fluid.

Development of new technologies has profound effect on industry environments. New products or services.

See Exhibit 5.3

for examples of

Peapod and Amazon



Demographic trends and shifts also impact industry environments. For example, Boston Market provides more

convenience and speed than home cooking. Aging baby-boomers demand new healthcare

services. As any dimension in industry changes, “holes” or areas

of opportunity are created. See example of Nucor with their minimill technology.



These holes create problems for industry incumbents: They may not perceive emergence of opportunities;

and New entrants may not be recognized as serious

threats.

See

Exhibit 5.4


Industry NormsIndustry NormsIndustry NormsIndustry Norms

Firms in same industry develop a common body of knowledge and similar understandings. These shared norms help in providing industry

standards, encourage consumer acceptance of products, and facilitate incremental technological developments.

• However, these shared understandings remain relatively stable over time and cause managers to become complacent regarding industry changes.


Cognitive LimitationsCognitive LimitationsCognitive LimitationsCognitive Limitations

Even with sophisticated market research and planning departments, managers fail to perceive impact of changing industry dimensions. Managers may fail to notice changes in their firms’

environments. Managers may develop strategies that are based on

untested assumptions or understandings of the environment that may no longer be valid.


Successful Entry Successful Entry Enhanced by New Enhanced by New Entrants’ First-Mover Entrants’ First-Mover AdvantagesAdvantages

Successful Entry Successful Entry Enhanced by New Enhanced by New Entrants’ First-Mover Entrants’ First-Mover AdvantagesAdvantages

Traditional models suggest that entry of new rival will be countered quickly by incumbents. Several factors prevent effective retaliation:

• Managers of incumbent firms may fail to “see” the entrant.

• Even after new entrant is detected, many managers may assume that niches occupied by new entrants are not important enough to be of concern (see examples of Western Union and emergence of natural cereals).


Successful Entry Enhanced Successful Entry Enhanced by New Entrants’ First-by New Entrants’ First-Mover Advantages (cont.)Mover Advantages (cont.)


• Managers of incumbent firms gather more information about new entrants. Instead of leading to a better understanding, many mangers develop “threat rigidity” and ignore new rivals.

Even if incumbent firms recognize seriousness of threat from new entrants, their responses may come too late. First-mover advantages (market share, pricing,

etc.) of new entrants may continue for many years.




Most likely outcome: strategic retreat and decline of incumbent firms. Strategic retreat usually causes more intense

competition along two fronts:• Competition increases because incumbents retreat

to smaller segments of industry; and

• New rivals seek to expand their initial “beachhead” into larger pieces of the competitive space.


Successful Entry Successful Entry Enhanced by New Enhanced by New Entrants’ First-Mover Entrants’ First-Mover Advantages (cont.)Advantages (cont.)


Steel industry provides example of dangers strategic retreat. Action invites advances by new entrants. Major integrated steel manufacturers retreated to

a more profitable, but smaller industry niche -- sheet and rod steel products.

• Resulted in excess capacity and very few benefits for the large players.

– Minimills, like Nucor, remained and competed effectively.




New entrants usually think and act in new and totally different ways than assumed by incumbents. Research shows that managers of incumbents,

when faced with new technologies, do not adopt those new technologies.

• Instead, they try to improve their own technologies, even though they might becoming obsolete.


““Attack” of New Entrants is Attack” of New Entrants is Interesting for 3 Reasons:Interesting for 3 Reasons:““Attack” of New Entrants is Attack” of New Entrants is Interesting for 3 Reasons:Interesting for 3 Reasons:

1. Managers of successful new rivals generally do not attack incumbent firms directly.

Instead, they are more likely to enter an industry at the “holes” that are created by changes in industry dimensions such as consumer preferences and the adoption of new product and process technologies.

2. Dynamic model also suggests that managers of successful new entrants generally offer new products or services that capitalize on changes in more than one industry dimension.


““Attack” of New Entrants Attack” of New Entrants is Interesting for 3 is Interesting for 3 Reasons:Reasons:


For example, a successful new entrant is like to introduce a new product that not only responds to a change in consumer preferences, but also incorporate a new technological development or new production process.

• Japanese automobile manufacturers and their fuel-efficient cars and new manufacturing technologies.




3. Model also suggests that managers of successful new entrants seek to establish strong niches from which they then expand into ever larger areas in competitive space.

See

Exhibit 5.5


Incumbent Firms’ Incumbent Firms’ Responses to New Responses to New EntrantsEntrants

Incumbent Firms’ Incumbent Firms’ Responses to New Responses to New EntrantsEntrants

Mangers of incumbent firms are rarely able to match new entrants’ products, services, or technological capabilities.

See

Exhibit 5.6


Incumbent Firms’ Incumbent Firms’ Responses to New Responses to New Entrants (cont.)Entrants (cont.)


When confronted by new rivals, the managers of new entrants are likely to respond in the following ways: Withdraw to supposedly “safer” area in

competitive space. Diversify. Improve current offerings of products and

services.




Managers of incumbent firms rarely enjoy any sort of long-term benefit from a strategic withdrawal from market segments invaded by new entrants. Likely to find that competition has actually

escalated (and will continue to intensify). New entrants often totally restructure the

industries they enter.


Using the Dynamic Using the Dynamic Model for Industry Model for Industry AnalysisAnalysis

Using the Dynamic Using the Dynamic Model for Industry Model for Industry AnalysisAnalysis

Any industry may be analyzed along three dimensions, but analyst must identify relevant labels. Customers (the “who” dimension)

• Age

• Disposal income

• Driving habits

• First-time or repeat buyers


Using the Dynamic Model Using the Dynamic Model for Industry Analysis for Industry Analysis (cont.)(cont.)


Products and Services (the “what” dimension)• Size

• Availability

• Accessories

• Cost

See

Exhibit 5.7




Technologies (the “how” dimension)• State-of-the-Art?

• Effectiveness

See Exhibits

5.8 and 5.9


Recommendations for Recommendations for ManagersManagersRecommendations for Recommendations for ManagersManagers

Managers must actively anticipate the future. Innovation is more important than imitation. The advantages of thinking like an outsider. Beware of success -- might lead to complacency.


Concluding Concluding ObservationsObservationsConcluding Concluding ObservationsObservations

Industry environments are evolving over time as customer demographics change, as products and services are introduced, and as new technologies emerge. Managers must continuously reposition their firms

over time. This dynamic nature is one of the factors which make

business management so interesting. Many companies have difficulty adapting to changes

in their industries.


Key Points Introduced Key Points Introduced in in Chapter 5Chapter 5Key Points Introduced Key Points Introduced in in Chapter 5Chapter 5

The key assumption of this chapter is that industries are continuously structured and restructured over time.

The model suggests that an industry can be thought of as a competitive arena or as a “space” defined by firms sharing similarities along three dimensions: Customers -- the “who” dimension; Products and services -- the “what” dimension; and Technologies -- the “how” dimension.


Key Points Introduced Key Points Introduced in in Chapter 5Chapter 5 (cont.)(cont.)


This model suggests that the 3 dimensions are continuously changing as customers develop new needs and wants, as new products and services are developed, and as new technologies emerge. These changes in industry dimensions create “holes” or

opportunities in industry environments, and these holes invite invasion by entrepreneurial firms.

At the same time, industry norms and cognitive limitations prevent the managers of incumbent firms from recognizing these same opportunities. They also prevent the managers of incumbent firms from recognizing the threat posed by entrepreneurial firms.




The chapter offered 6 observations about the entry of new rivals into an industry and response of incumbent firms to those new entrants:1. Successful new rivals generally do not attack

incumbent firms directly, but instead are more likely to enter an industry at the “holes” that are created by changes in the industry dimensions.

2. Successful new rivals generally offer new products or services that capitalize on changes in more than one industry dimension.




3. Model also suggests that successful new entrants seek to establish strong niches from which they then expand into ever larger areas in the competitive space.

4. Incumbent firms are rarely able to match new entrants’ products, services, or technological capabilities.

5. Incumbent firms confronted by new rivals are more likely to respond by withdrawing to supposedly “safer” areas in the competitive space, by diversifying, or by improving products/services.




6. Incumbent firms rarely enjoy any sort of long-term benefit from strategic withdrawals from market segments invaded by new entrants.

Implications for managers: Must actively anticipate the future. Innovation more important than imitation. Important to think like industry outsider. Beware of success.

• Can slow or prevent organizational learning and renewal.

Chapter 5 A Dynamic Model of Industry Structuring Copyright © 1999 by Harcourt Brace & Company All...

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