Business Strategy Notes

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Week 4. Business Strategy
Chapter 5: A Dynamic Model of Industry Structuring.

Objectives:
Introduce a dynamic model of industry competition and evolution. •Offer several propositions about the way industries will evolve based on this dynamic model, focusing specifically on the likely actions of new entrants to an industry and the responses of incumbent firms. •Illustrate how this dynamic model can be used to analyze industries. •Emphasize the managerial implications of this dynamic model of industry structuring.

Industries change: New entrants→ Existing industry → Market created (Exhibit 5.1. p101).

The Nature of Industry Change
Abell: An industry is a group of firms that serves the same customers, meets similar customer needs, and employs common technologies. oHis three dimensional “competitive space”, delineated by customers (who), products and/or services (what) and technologies (how). oExhibit 5.2. p102. Industry as a Three-Dimensional Competitive Space Consisting of Customers, Products and Technologies.

Industries do not remain in equilibrium, customer demographics change, new technologies emerge, and new products and services are constantly being developed--> Industry dimensions are constantly changing. •Many forces are sources to change.

Expand the competitive space, any way – either customers, technology or the offering. •Transformation throughout the three industry dimension, e.g. Apple Computer – the personal computer. •“Outsider” firms generally have an advantage. --> the most entrepreneurial firm can create new competitive spaces, first by proactively exploiting technology and developing products/services and later by creating desire for these products/services. (Shaping rather than getting shaped).

The Role of Managerial Thinking in Industry Evolution
Limitations and Inertia in Managerial Thinking
Why do incumbent firms fail to anticipate changes in their industry or to notice the entrance of new rivals? Factors that help explain why:

Noticing:
oMay simply fail to notice changes in the industry. Managers only focus on what they see as key or important events. oNo optimal choice/strategy to follow as the information is soft and overloaded. oGreater attention will be brought to events that support managers views – views formed by past experiences (mental models). •The Difficulty of Making Accurate Interpretations:

oDefining the nature of a competitive threat is a problem for managers of incumbent firms. Might not be perceived important if the incumbent firm keeps enjoying satisfactory levels of performance. oMight sometime need an extreme crisis, e.g. bankruptcy to relies what is going on. •Noticing and Interpretation Are Difficult Because Most Changes Occur and Most New Rivals Enter on the Periphery of the Competitive Space oRed Bull vs Cola and Pepsi.

oThe relevant issue is whether incumbent firms identify the “credible threats” posed by new entrants. oManagers seek information when confronted with a threat, but the overload of information can cause confusion. They develop “threat rigidity” and actively ignore new rivals. o“First-mover” advantages: Market share, pricing etc. Many years.. •Industry Norms

oCommon language and similar understanding of how to compete in an industry. “Common body of knowledge” oPositive: Industry standards, encouraging consumer acceptance of products/services. oNegative: Can easily fail to keep up with dynamic environments. •The Likely Outcome- Retreat and Decline of Incumbent Firms o“Rationalization” or “Downsizing”

oNew companies act different from incumbent ones, this is not taken into account in SWOT or PFF. The new firms change the rules of the game. oE.g. Canon

Patterns in the Evolution of Industries
The Attack of New Entrants
oThree characteristic patterns:
o1). Entry occurs on the Periphery or at the “Holes” in the competitive space. (E.g. Nissan, Japanese cars-->...
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