1. Modern Competitive Strategy 3 rd Edition Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reservedMcGraw-Hill/Irwin

2. Chapter 5 Competing Over Time 5-2

3. Three Stages of Industry Growth Growth Entry rate exceeds the exit rate Shakeout Exit rate exceeds the entry rate Maturity Entry and exit rates are about the same Industry disruption Technological substitutes or disruptive technologies offer a stronger buyer surplus to the industry’s customers, drawing them away (e.g., DVDs vs. videotapes) 5-3

4. Industry Evolution All industries evolve over time as new firms enter and failing firms exit 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 Product life cycle Not the same as industry evolution but often linked closely to it 5-4

5. 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) Number of Years in Each Developmental Stage for Selected Industries from the Inception of the Industry until 1981 5-5

6. 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. Number of Firms Remaining at the End of Stages 1 and 2 for Selected Industries 5-6

7. The Industry Life Cycles of Four Representative Industries 5-7

8. Entries, Exits and Total Firms in the U.S. Automobile Industry 1880-1974 5-8

9. Total Production of U.S. Automobile Firms (in millions) 5-9

10. Total Automobile and Model T Production, 1909-1927 5-10

11. Figure 4.1 Dynamic Growth Cycle Firm Size Innovation in Processes or Products Improved Market Position Through Higher Value, Lower Cost or Both Capacity Expansion Increased Profitability 5-11

12. Dynamic growth cycle The cycle of firm growth linking size, innovation, productivity, profitability, and capacity expansion Dynamic capability The ability of a firm, as it grows, to build its innovative potential and exploit it effectively 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 Key Concepts in Developing and Maintaining Dynamic Capability 5-12

13. 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 The inability of a firm to adapt to changing market or technological conditions because of its attachment to its core practices and customers Key Concepts in Developing and Maintaining Dynamic Capability (cont’d) 5-13

14. Samsung’s Virtuous Cycle in 2003 Investment Ahead of the Competition Investment Ahead of the Competition Market Leadership High Profits Cash Flows and Balance Sheet Flexibility Cash Flows and Balance Sheet Flexibility 5-14

15. Customer Segmentation over the Product Life Cycle 5-15

16. Expansion During the Growth Stage Developing scale-based value drivers Which drivers are adopted depends on the purchasing criteria of the majority of buyers For example: brand, service, network externalities, quality Moving from early adopters to the early majority is crossing the chasm Developing scale-based cost drivers in specific value chain activities Economies of scale Economics of scope Learning curve 5-16

17. Early Mover Advantage Defined by a combination of competitive advantage (short term) and dynamic capability (long term) Opportunity to establish and defend a strong market position Opportunity to grow over a longer period of time Higher chances of being exposed to opportunities for growth and innovation 5-17

18. Strategic Pricing Strategic pricing Pricing below marginal cost in order to attract additional buyers Strategic pricing makes sense under two conditions When increases in volume are sustainable through customer loyalty due to higher switching costs When increased demand leads to lower costs for the firm through scale-driven cost drivers such as the learning curve and scale economies 5-18

19. Risks of Strategic Pricing Cost reduction due to learning or scale does not make up for the profits lost by setting a lower price Poor understanding of technologies or other activities Inability to protect cost advantages Higher demand does not materialize Customers cannot be retained 5-19

20. What Determines a Shakeout? Shakeout Due to the emergence of a dominant, sustainable business model (value minus cost) The strongest competitors use their higher productivity to drive out weaker firms Shakeouts can occur in the same time frame As the product life cycle shifts toward maturity The product life cycle does not explain which firms will survive the shakeout As a dominant design emerges A dominant design is the culmination of a series of innovations in a product’s components and architecture and in related value drivers, such as service, network externalities, complements, or breadth of line For example, the IBM PC, the general purpose tractor, the piano 5-20

21. Figure 4.3 Source: Adapted from James Utterback, Mastering the Dynamics of Innovation, (Cambridge, MA: Harvard Business School Press, 1994), p. 82. Rates of Product and Process Innovation over the History of the Industry 5-21

22. What Determines a Shakeout’s Severity? Expectations about future market demand and the degree of sunk costs Ease of imitation of the dominant firms’ market position The existence of defendable niche markets  About six percent of the firms in an industry exit during the shakeout every year 5-22

23. Indicators of Industry Maturity The long-term leveling-off or decline in the market growth rate Rising buyer experience with industry products The high concentration of market share among large, relatively similar firms The persistence of niche markets 5-23

24. An Increase in Buyer Experience Firms attempt to counter the growing power of experienced buyers by: Introducing innovations that increase search and transition costs for buyers: Improved service Higher quality Breadth of line and product customization Lowering prices 5-24

25. Industry Concentration Industry concentration depends on The ratio of market size to 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 5-25

26. Hypercompetition Hypercompetition is the combination of: Multipoint competition Industries in which large firms compete across many products in a product line and across geographical regions Mutual footholds in the core market of rival firms ensure competitive stability An arms race The requirement to develop product and process innovations to keep up with competitors Returns on innovations become lower innovations are copied by competitors 5-26

27. Niche Markets Competition in niche markets is affected by: Size of the niche Growth rate of the niche Barriers to entry Changes in niche buyers’ preferences toward core market products Minimum level of scale required to compete Ability to improve non-scale based cost and value drivers Increase in the buyer switching costs 5-27

28. Types of Industry Disruption 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 Introduction of a new product with lower value but much lower cost than the incumbent product Typically based on standard components Exploits emergent customer price sensitivity Radical institutional change A radical shift in the regulation of competition that opens the market to firms with innovative capabilities 5-28

29. Adapting to Industry Disruption When can incumbents adapt to disruption? When they control assets (e.g., distribution) that are critical for competing in the industry When isolating mechanisms protecting the innovation are weak When incumbents do not suffer large short-term opportunity costs in switching to the innovation 5-29

30. Figure 4.5 Industry Disruption from Technological Substitution 5-30

31. Figure 4.6 Trends in VCR and DVD sales in the United States by quarter, 1998-2003 5-31

32. Incumbents Adaptation to Technological Substitutes Incumbents delay adopting technological substitutes for the following reasons Emphasis on total (rather than marginal) return on investment in R & D Potential cannibalization by the new technology of profits from the traditional technology Poor absorptive capacity to adopt new technology 5-32

33. Disruptive Technology Characteristics include: Technology initially introduced by start-ups into niche market too small to attract incumbents’ attention Product based on technology has relatively lower initial functionality and also a lower cost Price-value profile of new product does not initially attract customers in industry’s core market 5-33

34. Disruptive Technology (cont’d) Over time, preferences of incumbents’ customers shift toward value-price profile of new product Complementary assets (distribution) necessary for market penetration of disruptive technology not controlled by incumbents Start-ups selling new product develop a dynamic growth cycle which allows them to penetrate core market rapidly through scale-based cost drivers 5-34

35. Table 4.4 Deregulation typically leads to: Entry Industry consolidation Decline in incumbents Disruption by Regulatory Change 5-35