Management And Accounting Web

Porter, M. E. 1980. Competitive Strategy: Techniques for Analyzing Industries and Competitors. The Free Press.

Chapter 10: Competitive Strategy in Emerging Industries

Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

Porter's Competitive Strategy Main Page

Chapter 10: Competitive Strategy in Emerging Industries p. 215

Emerging industries are formed or reformed for many reasons such as technological innovations, changes in cost relationships, new consumer needs, and other economic or social changes. The purpose of this chapter is to describe the structural and competitive characteristics of emerging industries, the problems that limit their growth, the factors that determine buyers and buyer segments, strategic choices for firms entering the industry, and some analytical tools for forecasting the future of these industries including how to select industries that offer favorable opportunities for entry.

The Structural Environment p. 216

Some common structural factors that frequently characterize emerging industries include:

Common Structural Characteristics p. 216

Technological uncertainty - There are questions about which product configuration and alternative production technology will be the most efficient?

Strategic uncertainty - Other questions include which approach to marketing, service, distribution channels, etc. is best?

High initial costs but steep cost reduction - Typically there is a steep learning curve that reduces initial high unit cost at a high proportional rate.

Embryonic companies and spin-offs - Without substantial entry barriers, emerging industries tend to produce many newly formed companies and spin-off firms created by employees leaving firms in the industry to create their own companies.

First time buyers - Buyers in emerging industries are by definition first time buyers and they must be persuaded that the risk of purchasing is worth the potential benefits. Porter mentions solar heating as an example.

Short time horizon - Bottlenecks and problems must be dealt with quickly without a more careful analysis of future conditions. Early entrants adopt an approach (e.g., pricing) and other firms tend to imitate it for lack of an alternative.

Subsidy - Subsidies in the form of government grants and tax incentives are beneficial to an emerging industry, but add a degree of instability because of the uncertainty associated with political decisions.

Early Mobility Barriers p. 220

Mobility barriers in emerging industries include proprietary technology, access to distribution channels, materials and other inputs, cost advantages due to experience, and risk. Entry into the industry tends to come from firms that can bear risk and be creative technologically.

Problems Constraining Industry Development p. 221

Emerging industries face various problems as follows:

Inability to obtain raw materials and components - The need for new suppliers, or the expansion of existing suppliers tends to create shortages of materials and other inputs.

Period of rapid escalation of raw materials prices - Prices for raw materials rise rapidly at first, but decline as suppliers expand.

Absence of infrastructure - Emerging industries frequently lack distribution channels, service facilities, trained mechanics, and complementary products.

Absence of product or technological standardization - Technological uncertainty causes the inability of firms to agree on technical standards exacerbating the shortage of raw materials and complementary products.

Perceived likelihood of obsolescence - Growth will be more difficult when buyers believe the next generation of products will make the current generation obsolete.

Customers' confusion - Growth in an emerging industry is also more difficult when buyers are confused by multiple product approaches and conflicting claims.

Erratic product quality - Variations in the quality of products and services offered can also have a negative effect on the industry even when low quality producers are only a small part of the industry.

Image and credibility with the financial community - The problems mentioned above can affect the credit of the firms in the industry as well as the industry's customers, i.e., cause difficulty obtaining low-cost financing.

Regulatory approval - Regulation sometimes creates delays and red tape as observed in the mineral water, bicycles, and chain saw industries in the 1970s.

High costs - There is high unit costs when starting up the cost-volume cycle. This frequently requires firms in emerging industries to price products below cost.

Response of threatened entities - Some entity (e.g., industry with substitute products, labor union, distribution channel) will usually be threatened by an emerging industry. Threatened entities can fight back in various ways, but whether a threatened industry will aggressively fight the growth of an emerging industry depends how it will be affected and other factors, particularly exit barriers. One possibility is to invest to lower the threatened industry's unit costs as illustrated below.

Response of a threated industry to substitution 

Early and Late Markets p. 225

An important question for emerging industries is which markets will be receptive to the new product. A number of criteria determine the answer to this question.

Nature and benefit - Benefits to buyers can be related to either performance or cost. The receptivity of buyers to a performance benefit depends on how large, how obvious, and how much of a performance benefit it is going to be, and whether the benefit will improve the buyer's competitive position, and how sensitive the buyer is to price if added performance means higher costs. The receptivity to a cost advantage depends on the size of the advantage, how obvious and lasting the advantage will be, the extent of the pressure on the buyer to change over, and how much the buyer's strategy is based on a cost-orientation.

State of the art required to yield significant benefits - This relates to the benefit provided by early versions of a  product relative to its costs. Some buyers are willing to pay for a small- benefit, high-cost product, e.g., scientists used high-cost minicomputers, but the market was limited.

Cost of product failure - Buyers subject to high cost if the product fails (e.g., where the product becomes part of an integrated system) will be slow to adopt the new product.

Introduction or switching costs - Switching, or change-over costs such as the cost of retraining employees, required new equipment, engineering changes, process modifications, etc. can also affect how receptive buyers will be to a new product.

Support services - Similar to switching costs, additional support costs (e.g., skilled operators and technicians) can affect the adoption of a new product.

Cost of obsolescence - The buyer's need to use the latest version of the product to stay competitive also affects the product's acceptance.

Asymmetric government, regulatory, or labor barriers - Government regulations and labor agreements affect (prevent or slow) change-overs in some industries, e.g. food and pharmaceuticals.

Resources to change - Buyers differ in their ability to changeover because of the existence or absence of required resources.

Perception of technological change - Some buyers may view a change to a new product as a strategic opportunity, while other buyers will view it as a threat to their stability.

Personal risk to the decision maker - Buyers who view the decision to adopt a new product as a personal risk will be the slowest to adopt.

Strategic Choices p. 229

Although there is much uncertainty and considerable risk involved in emerging industries, the early development of an industry provides the greatest potential leverage from strategic choices.

Shaping industry structure - Firms should attempt to shape the industry by establishing product policy, a marketing approach, and pricing strategy.

Externalities in industry development - There is a conflict between promoting the industry and promoting the firm. Cooperation among firms in an emerging industry is needed at first to promote standardization, police substandard quality, and present a consistent front to potential buyers, government, and the financial community. However, the balance between promoting the industry and promoting the firm must shift towards the firm at some point, or the firm is likely to be left behind as the industry matures.

Changing role of suppliers and channels - As an industry grows, suppliers and distribution channels may become more inclined to provide special service to the firms in the industry.

Shifting mobility barriers - As an industry matures, more established firms enter, and customers and suppliers may integrate creating new mobility barriers, e.g., economies of scale and marketing influence.

Timing Entry p. 232

Early entry is appropriate when a pioneer can develop an enhanced reputation, initiate a learning process that will be difficult to imitate, acquire customer loyalty, and cost advantages from commitments by suppliers, and distribution channels. Early entry will be risky when the skills acquired by early entry are quickly replaced by shifts in industry, entry costs are great and cannot be made proprietary, and technological change will quickly make startup investments obsolete giving later entrants an advantage.

Tactical moves - Early commitments with suppliers, and financing that lowers the firm's cost of capital can provide benefits to industry pioneers.

Coping with Competitors p. 233

Pioneers in an industry may spend too much on defending against new entrants when they should be spending more on building their own strengths and developing the industry's image. Other firms in an industry can help in the areas of needed technological development and in widening the market for the industry's products.

Techniques for Forecasting p. 234

Developing scenarios about how an industry will evolve provides a way to forecast how an industry will change. The analyst begins by estimating the future technology, costs, product variety, and performance in the industry, and selects a small number of scenarios that include a range of outcomes. Each scenario includes the markets that will open up, the size of the markets, and other key characteristics of the industry. The next step involves determining how each scenario will affect the various competitors in the industry. As products, technology, markets, and competitors change, the analyst builds this feedback into the scenarios. The firm can use this information to examine its position in the industry, develop a strategy for each scenario, identify events that signal which scenario is emerging, and perhaps attempt to cause the scenario that is most favorable for the firm.

Which Emerging Industries to Enter p. 235

Firms may enter an emerging industry for the wrong reasons. For example, they may be attracted by rapid growth, or high profitability, but the decision to enter an industry should be based on a structural predictive analysis as outlined above.

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Go to the next Chapter. Porter. 1980. Competitive Strategy. Chapter 11: The Transition to Industry Maturity. (Summary), or back to Porter's Competitive Strategy Summaries Main Page.

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