1. Chapter 5 A Dynamic Model of Industry 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

2. Copyright © 1999 by Harcourt Brace & Company All rights reserved Chapter Objectives t Introduce a dynamic model of industry competition and evolution. t 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. t Illustrate how the dynamic model can be used to analyze industries.

3. Copyright © 1999 by Harcourt Brace & Company All rights reserved Chapter Objectives (cont.) t Emphasize the managerial implications of this dynamic model of industry structuring.

4. Copyright © 1999 by Harcourt Brace & Company All rights reserved IntroductionIntroduction t 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. t Similarly, Apple’s commercialization of the PC allowed small, entrepreneurial firms to compete with established rivals.

5. Copyright © 1999 by Harcourt Brace & Company All rights reserved Introduction (cont.) t 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.

6. Copyright © 1999 by Harcourt Brace & Company All rights reserved Introduction (cont.) t In today’s world, new entrants tend to reshape industries in fundamental ways. © Incumbent firms have difficulties responding to industry change. t Managers need to anticipate or even create changes in their industries.

7. Copyright © 1999 by Harcourt Brace & Company All rights reserved Building Blocks of a Dynamic Theory of Industry Structuring t 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.

8. Copyright © 1999 by Harcourt Brace & Company All rights reserved Building Blocks of a Dynamic Theory of Industry Structuring t 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. t Entrepreneurial activity also affects other industries. © Fore example, competition in banking and insurance industry helped to create the financial services industry.

9. Copyright © 1999 by Harcourt Brace & Company All rights reserved Changing Dimensions of Industries t 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).

10. Copyright © 1999 by Harcourt Brace & Company All rights reserved Technologies Business Strategy Capabilities How to Compete Business Definition The Industry Size and Diversification Corporate Strategy How to Organize Customers Products & Services The Firm The Industry or Competitive Environment Managers’ Mental Models Exhibit 5.1 Organizational Structure

11. Copyright © 1999 by Harcourt Brace & Company All rights reserved Exhibit 5.2: Industry Environment Portrayed as “Competitive Space” How? (Technology) Who? (Customers) What? (Products/Services)

12. Copyright © 1999 by Harcourt Brace & Company All rights reserved Changing Dimensions of Industries (cont.) t Consumer preferences and new product and process technologies are constantly changing over time. © As a result, competitive space is very fluid. t Development of new technologies has profound effect on industry environments. © New products or services.

13. Copyright © 1999 by Harcourt Brace & Company All rights reserved Changing Dimensions of Industries (cont.) t 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. t As any dimension in industry changes, “holes” or areas of opportunity are created. © See example of Nucor with their minimill technology.

14. Copyright © 1999 by Harcourt Brace & Company All rights reserved Changing Dimensions of Industries (cont.) t These holes create problems for industry incumbents: © They may not perceive emergence of opportunities; and © New entrants may not be recognized as serious threats.

15. Copyright © 1999 by Harcourt Brace & Company All rights reserved Industry Norms t 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.

16. Copyright © 1999 by Harcourt Brace & Company All rights reserved Cognitive Limitations t 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.

17. Copyright © 1999 by Harcourt Brace & Company All rights reserved Successful Entry Enhanced by New Entrants’ First- Mover Advantages t 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).

18. Copyright © 1999 by Harcourt Brace & Company All rights reserved Successful Entry Enhanced by New Entrants’ First-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. t 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.

19. Copyright © 1999 by Harcourt Brace & Company All rights reserved Successful Entry Enhanced by New Entrants’ First-Mover Advantages (cont.) t 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.

20. Copyright © 1999 by Harcourt Brace & Company All rights reserved Successful Entry Enhanced by New Entrants’ First- Mover Advantages (cont.) t 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.

21. Copyright © 1999 by Harcourt Brace & Company All rights reserved Successful Entry Enhanced by New Entrants’ First- Mover Advantages (cont.) t 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.

22. Copyright © 1999 by Harcourt Brace & Company All rights reserved “Attack” of New Entrants is 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.

23. Copyright © 1999 by Harcourt Brace & Company All rights reserved “Attack” of New Entrants is Interesting for 3 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.

24. Copyright © 1999 by Harcourt Brace & Company All rights reserved “Attack” of New Entrants is Interesting for 3 Reasons: 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.

25. Copyright © 1999 by Harcourt Brace & Company All rights reserved Incumbent Firms’ Responses to New Entrants t Mangers of incumbent firms are rarely able to match new entrants’ products, services, or technological capabilities.

26. Copyright © 1999 by Harcourt Brace & Company All rights reserved Incumbent Firms’ Responses to New Entrants (cont.) t 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.

27. Copyright © 1999 by Harcourt Brace & Company All rights reserved Incumbent Firms’ Responses to New Entrants (cont.) t 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.

28. Copyright © 1999 by Harcourt Brace & Company All rights reserved Using the Dynamic Model for Industry Analysis t 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

29. Copyright © 1999 by Harcourt Brace & Company All rights reserved Using the Dynamic Model for Industry Analysis (cont.) © Products and Services (the “what” dimension) Size Availability Accessories Cost

30. Copyright © 1999 by Harcourt Brace & Company All rights reserved Using the Dynamic Model for Industry Analysis (cont.) © Technologies (the “how” dimension) State-of-the-Art? Effectiveness

31. Copyright © 1999 by Harcourt Brace & Company All rights reserved Recommendations for Managers t Managers must actively anticipate the future. t Innovation is more important than imitation. t The advantages of thinking like an outsider. t Beware of success -- might lead to complacency.

32. Copyright © 1999 by Harcourt Brace & Company All rights reserved Concluding Observations t 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.

33. Copyright © 1999 by Harcourt Brace & Company All rights reserved Key Points Introduced in Chapter 5 t The key assumption of this chapter is that industries are continuously structured and restructured over time. t 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.

34. Copyright © 1999 by Harcourt Brace & Company All rights reserved Key Points Introduced in Chapter 5 (cont.) t 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.

35. Copyright © 1999 by Harcourt Brace & Company All rights reserved Key Points Introduced in Chapter 5 (cont.) t 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.

36. Copyright © 1999 by Harcourt Brace & Company All rights reserved Key Points Introduced in Chapter 5 (cont.) 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.

37. Copyright © 1999 by Harcourt Brace & Company All rights reserved Key Points Introduced in Chapter 5 (cont.) 6. Incumbent firms rarely enjoy any sort of long- term benefit from strategic withdrawals from market segments invaded by new entrants. t 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.