Chapter 4
Competing over Time:
Industry and Firm
Evolution
Gordon Walker
McGraw-Hill/Irwin
Copyright © 2004 McGraw Hill Companies, Inc. All rights reserved.
PowerPoint Presentation by Charlie Cook
Three Stages of Industry Growth
• Growth
– The entry rate exceeds the exit rate.
• Shakeout
– The exit rate exceeds the entry rate.
• Maturity
– Entry and exit rates are about the same.
• Disruption (possible at any stage)
– Customers switch to new products based on
different technology.
4–2
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.
4–3
Entries, Exits and Total Firms in the U.S.
Automobile Industry 1880–1974
4–4
Total Production of U.S. Automobile Firms
(in millions)
4–5
Total Automobile and Model T Production,
1909–1927
4–6
Number of Years in Each Developmental Stage for Selected
Industries from the Inception of the Industry until 1981
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.
Table 4.1
4–7
Number of Firms Remaining at the End of
Stages 1 and 2 for selected Industries
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.
Table 4.2
4–8
Dynamic Growth Cycle
Figure 4.1
4–9
Key Concepts in Developing and
Maintaining Dynamic Capability
• 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.
Table 4.3a
4–10
Key Concepts in Developing and
Maintaining Dynamic Capability
• 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.
Table 4.3b
4–11
Customer Segmentation over
the Product Life Cycle
Figure 4.2
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Expansion During the Growth Stage
• 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
– Newer more efficient (scalable) practices leading
to higher productivity
– Lower cost inputs versus lower value
4–13
First Mover Advantage
• 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.
4–14
Strategic Pricing
• Strategic pricing
– Pricing below marginal cost in order to attract
additional buyers.
• 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.
4–15
What Determines a 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:
– As the product life cycle shifts toward maturity.
– When a dominant product design emerges.
4–16
What Lessens a Shakeout’s Severity?
• Higher expectations about future demand
• Higher sunk costs required to compete
• Easy imitation of the dominant firms’ market
position
• The existence of many defendable niche
markets
4–17
Indicators of Industry Maturity
• A long-term leveling-off in the market growth
rate
• Rising buyer experience with industry
products
• A high concentration of market share among
large, relatively similar firms
• A persistence of niche markets
4–18
Decline in the Market Growth Rate
• 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.
4–19
An Increase in Buyer Experience
• 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
4–20
Industry Concentration
• 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.
4–21
Hypercompetition
• Multipoint competition
– Markets in which large firms compete across many
products in a product line and across geographical
regions.
• “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.
4–22
Niche Markets
• 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
4–23
Rates of Product and Process Innovation
over the History of the Industry
Source: Adapted from James Utterback, Mastering the Dynamics of Innovation,
(Cambridge, MA: Harvard Business School Press, 1994), p. 82.
Figure 4.3
4–24
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 based on standard
technologies that has a stronger long-term market
position than older products in the industry.
• Radical institutional change
– A radical shift in the industry that opens the
market to firms with innovative capabilities.
4–25
Adapting to Industry 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.
4–26
Industry Disruption from Technological
Innovation
Source: Richard Foster, Innovation: The Attacker’s
Advantage (New York: Summit Books, 1985), p. 00.
Figure 4.4
4–27
Number of Incumbents and Entrants in the
Trucking Industry after Deregulation in 1980
Figure 4.5
4–28
Incumbent Survival in Four U.S. Industries
After Price and Entry Deregulation
Table 4.4
4–29