1. PowerPoint Presentation by Charlie Cook Gordon Walker McGraw-Hill/Irwin Copyright © 2004 McGraw Hill Companies, Inc. All rights reserved. Chapter 4 Competing over Time: Industry and Firm Evolution

2. 4–2 Three Stages of Industry Growth Growth Growth –The entry rate exceeds the exit rate. Shakeout Shakeout –The exit rate exceeds the entry rate. Maturity Maturity –Entry and exit rates are about the same. Disruption (possible at any stage) Disruption (possible at any stage) –Customers switch to new products based on different technology.

3. 4–3 Industry Evolution All industries evolve over time as new firms enter and failing firms exit. All industries evolve over time as new firms enter and failing firms exit. Industry evolution threatens all sources of competitive advantage. Industry evolution threatens all sources of competitive advantage. The more a firm resists the forces of industry evolution, the less likely it is to survive. The more a firm resists the forces of industry evolution, the less likely it is to survive.

4. 4–4 Entries, Exits and Total Firms in the U.S. Automobile Industry 1880–1974

5. 4–5 Total Production of U.S. Automobile Firms (in millions)

6. 4–6 Total Automobile and Model T Production, 1909–1927

7. 4–7 Number of Years in Each Developmental Stage for Selected Industries from the Inception of the Industry until 1981 Table 4.1 Source: Excerpted from Steven Klepper and Elizabeth Graddy, “The Evolution of New Industries and the Determinants of Market Structure,” RAND Journal of Economics 21, no. 1 (1990), p. 30.

8. 4–8 Number of Firms Remaining at the End of Stages 1 and 2 for selected Industries Table 4.2 Source: Excerpted from Steven Klepper and Elizabeth Graddy, “The Evolution of New Industries and the Determinants of Market Structure,” RAND Journal of Economics 21, no. 1 (1990), p. 32.

9. 4–9 Dynamic Growth Cycle Figure 4.1

10. 4–10 Key Concepts in Developing and Maintaining Dynamic Capability Dynamic growth cycle Dynamic growth cycle –The cycle of firm growth linking size, innovation, productivity, profitability, and capacity expansion. Dynamic capability Dynamic capability –The ability of a firm, as it grows, to build its innovative potential and exploit it effectively. Path dependence Path dependence –The tendency of a firm over time to invest in innovations that are upwardly compatible with each other, thereby creating a relatively unique path of product and process development. Table 4.3a

11. 4–11 Key Concepts in Developing and Maintaining Dynamic Capability Absorptive capacity Absorptive capacity –The ability of the firm to adopt innovations developed by other organizations based on its prior experience with similar or related practices or technologies. Core rigidity Core rigidity –The inability of a firm to adapt to changing market or technological conditions because of its attachment to its core practices and customers. Table 4.3b

12. 4–12 Customer Segmentation over the Product Life Cycle Figure 4.2

13. 4–13 Expansion During the Growth Stage Developing scale-based value drivers Developing scale-based value drivers –Which drives are adopted depends on the purchasing criteria of the majority of buyers. »More advanced product technology »Wider market acceptance »Lower prices Developing scale-based cost drivers Developing scale-based cost drivers –Newer more efficient (scalable) practices leading to higher productivity –Lower cost inputs versus lower value

14. 4–14 First Mover Advantage First mover benefits: First mover benefits: –Older firms that arrived first have the opportunity to grow over a longer period of time. –First (or early) mover advantage is ultimately of the most benefit to firms that can continue grow and protect their innovations. Size, not age, leads to survival over the industry life cycle. Size, not age, leads to survival over the industry life cycle.

15. 4–15 Strategic Pricing Strategic pricing Strategic pricing –Pricing below marginal cost in order to attract additional buyers. Strategic pricing makes sense under two conditions: Strategic pricing makes sense under two conditions: –When the increased demand it causes leads to lower costs for the firm through scale-driven cost drivers such as the learning curve and scale economies. –When increases in volume are sustainable through customer loyalty.

16. 4–16 What Determines a Shakeout? Shakeout Shakeout –Due primarily the emergence of a dominant business model with a sustainable, defensible market position (value minus cost). –The strongest competitors use their higher productivity to drive out weaker competitors and block market entry. Shakeouts occur: Shakeouts occur: –As the product life cycle shifts toward maturity. –When a dominant product design emerges.

17. 4–17 What Lessens a Shakeout’s Severity? Higher expectations about future demand Higher expectations about future demand Higher sunk costs required to compete Higher sunk costs required to compete Easy imitation of the dominant firms’ market position Easy imitation of the dominant firms’ market position The existence of many defendable niche markets The existence of many defendable niche markets

18. 4–18 Indicators of Industry Maturity A long-term leveling-off in the market growth rate A long-term leveling-off in the market growth rate Rising buyer experience with industry products Rising buyer experience with industry products A high concentration of market share among large, relatively similar firms A high concentration of market share among large, relatively similar firms A persistence of niche markets A persistence of niche markets

19. 4–19 Decline in the Market Growth Rate Firms adjust to maturing markets by: Firms adjust to maturing markets by: –Shifting from growth (scale) projects to seeking process innovations that increase value. –Attempting to lower costs by engaging in economies of scope activities that reduce increase efficiencies and reduce costs.

20. 4–20 An Increase in Buyer Experience Firms attempt counter the growing power of experience buyers by: Firms attempt counter the growing power of experience buyers by: –Introducing innovations that increase search and transition costs for buyers: »Improved service »Higher quality »Product customization

21. 4–21 Industry Concentration Industry concentration depends on: Industry concentration depends on: –Market size »Larger markets are harder to consolidate. –The minimum scale required to compete »The lower the scale, the more firms are viable. –Sunk cost investments in value drivers that have increasing returns to scale »Higher sunk costs force out smaller rivals and deter entry.

22. 4–22 HypercompetitionHypercompetition Multipoint competition Multipoint competition –Markets in which large firms compete across many products in a product line and across geographical regions. “Arms race” “Arms race” –The requirement to develop the product and process innovations necessary to keep up with competition –Returns on innovations become lower as product and process innovations are copied by other competitors.

23. 4–23 Niche Markets Competition in niche markets is affected by: Competition in niche markets is affected by: –Size of the niche –Growth rate of the niche –Barriers to entry by outside competitors –Changes in niche buyers’ preferences toward core market products –Minimum level of scale investment required to compete –Durability of niche-specific value drivers

24. 4–24 Rates of Product and Process Innovation over the History of the Industry Figure 4.3 Source: Adapted from James Utterback, Mastering the Dynamics of Innovation, (Cambridge, MA: Harvard Business School Press, 1994), p. 82.

25. 4–25 Industry Disruption Technological substitution Technological substitution –Introduction of a radically new technology that has a higher rate of return on investment in R&D than the current technology in the industry. Disruptive innovation Disruptive innovation –Introduction of a new product based on standard technologies that has a stronger long-term market position than older products in the industry. Radical institutional change Radical institutional change –A radical shift in the industry that opens the market to firms with innovative capabilities.

26. 4–26 Adapting to Industry Disruption When can incumbents adapt to disruption? When can incumbents adapt to disruption? –When they control assets (e.g., distribution) that are needed to commercialize the innovation. –When isolating mechanisms protecting the innovation are weak. –When incumbents do not suffer large short-term opportunity costs in switching to the innovation.

27. 4–27 Industry Disruption from Technological Innovation Figure 4.4 Source: Richard Foster, Innovation: The Attacker’s Advantage (New York: Summit Books, 1985), p. 00.

28. 4–28 Number of Incumbents and Entrants in the Trucking Industry after Deregulation in 1980 Figure 4.5

29. 4–29 Incumbent Survival in Four U.S. Industries After Price and Entry Deregulation Table 4.4