Emerging industries: Problems Constraining Industry Development

Emerging industries usually face limits or problems, of varying severity, in getting the industry off the ground. These stem from the newness of the industry, its dependence for growth on other outside economic entities, and externalities in its development that result from its need to induce substitution by buyers to its product.

Inability to Obtain Raw Materials and Components. The de-velopment of an emerging industry requires that new suppliers be es-tablished or existing suppliers expand output and/or modify raw materials and components to meet the industry’s needs. In the proc-ess, severe shortages of raw materials and components are very com-mon in emerging industries. For example, acute shortages of color picture tubes in the mid-1960s was a major strategic factor affecting industry participants. Video game chips, particularly those for sin-gle-chip games pioneered by General Instrument, were very scarce and all but unavailable to new entrants for over a year after their in-troduction.

Period of Rapid Escalation of Raw Materials Prices. Con-fronted with burgeoning demand and inadequate supply, prices for key raw materials often skyrocket in the early phases of an emerging industry. This situation is partly simple economics of supply and de-mand and partly the result of suppliers realizing the value of their products to the desperate industry. As suppliers expand (or industry participants integrate to ease bottlenecks), however, prices for raw materials can fall off just as sharply. This fall-off will not happen when supplies of raw materials cannot expand easily, such as in min-eral bearing lands and skilled labor.

Absence of Infrastructure. Emerging industries are often faced with difficulties like those of material supply caused by the lack of appropriate infrastructure: distribution channels, service fa-cilities, trained mechanics, complementary products (e.g., appropri-ate campsites for recreational vehicles; coal supplies for coal gasifi-cation technology), and the like.

Absence of Product or Technological Standardization. Inability to agree on product or technical standards accentuates problems in the supply of raw materials or complementary products, and can impede cost improvements. The lack of agreement is usually caused by the high level of product and technological uncertainty that still remains in an emerging industry.

Perceived Likelihood of Obsolescence. An emerging indus-try’s growth will be impeded if buyers perceive that second- or third- generation technologies will significantly make obsolete currently available products. Buyers will wait instead for the pace of techno-logical progress and cost reduction to slow down. This phenomenon has been present in such industries as digital watches and electronic calculators.

Customers’ Confusion. Emerging industries are often beset by customers’ confusion, which results from the presence of a multiplicity of product approaches, technological variations, and con-flicting claims and counterclaims by competitors. All these are symptomatic of technological uncertainty and the resulting lack of standardization and general technical agreement by industry partici-pants. Such confusion can limit industry sales by raising the new buyers’ perceived risk of purchase. For example, the conflicting claims being made by ionization versus photoelectric smoke alarm manufacturers are believed by some observers to be causing buyers to postpone purchases. An article summarizes a similar problem for the solar heating industry in 1979:

But also important for the industry’s future health will be its de-gree of success in matching equipment performance to customer expectation. “Overenthusiasm, ignorance and selfish interests are endangering the success of applying a great energy source to America’s needs,” said Loff at the Denver solar conference. While Loff emphasized that inaction on the tax incentives was a root cause of industry malaise, he also blamed uninformed “solar messiahs, problems and failures with solar heating systems in buildings, and . . . irresponsible claims of suppliers.”

Erratic Product Quality. With many newly established firms, lack of standards, and technological uncertainty, product quality is often erratic in emerging industries. This erratic quality, even if caused by only a few firms, can negatively affect the image and cred-ibility of the entire industry. Video game defects, such as the burning of television picture tubes, have set back early growth in much the same way as the erratic performance of digital watches (and of newly established franchised automobile tune-up centers) has led to cus-tomers’ suspicion.

Image and Credibility with the Financial Community. As a re-sult of newness, the high level of uncertainty, customer confusion, and erratic quality, the emerging industry’s image and credibility with the financial community may be poor. This result can affect not only the ability of firms to secure low-cost financing but also the ability of buyers to obtain credit. Although difficulty in financing is probably the most common situation, some industries (usually high- technology businesses or “concept” companies) seem to be an ex-ception. In industries like minicomputers and data transmission, even newly started firms have enjoyed a status as darlings of Wall Street, with very high multiples and effectively cheap money.3

Regulatory Approval. Emerging industries often face delays and red tape in gaining recognition and approval by regulatory agen-cies if they offer new approaches to needs currently served by other means and subject to regulation. For example, modular housing was severely crippled by inflexibility in building codes, and new medical products now face long periods of mandatory precertification test-ing. On the other hand, government policy can put an emerging in-dustry on the map almost overnight, as it has by mandating smoke alarms.

If the emerging industry is outside a traditionally regulated sphere, regulation sometimes comes abruptly and can slow the industry’s progress. For example, mineral water was traditionally ig-nored by regulators until the industry greatly expanded in the mid- 1970s. Having reached significant size, however, mineral water pro-ducers are being drowned in regulations about labeling and health.” The same phenomenon occurred in bicycles and chain saws; once a growth boom increased the size of the industry, regulators took notice.

High Costs. Because of many of the structural conditions de-scribed earlier, the emerging industry is often faced with unit costs much higher than firms know they will eventually be. This situation sometimes requires firms initially to price below cost or severely limit industry development. The problem is starting up the cost-volume cycle.

Response of Threatened Entities. Some entity is almost always threatened by the advent of an emerging industry. It may be the in-dustry producing a substitute product, labor unions, distribution channels with ties to the old product and preferring the certainty of dealing with it, and so on. For example, most electric utilities are lobbying against solar energy subsidies because they believe solar power will not relieve needs for peak load electrical capacity. Con-struction unions fought bitterly against modular housing.

The threatened entity can fight the emerging industry in a num-ber of ways. One is in the regulatory or political arena; another is at the collective bargaining table. In the case of an industry threatened by substitution, its response can take the form of foregoing profits by lowering prices (or raising costs such as marketing) or making R&D investments aimed at making the threatened product or service more competitive. Figure 10-1 illustrates the latter choice.5 If the threatened industry chooses to invest to try to bring its quality- adjusted costs down, it is clear that the target at which learning and scale-related cost reductions in the emerging industry must shoot is a moving one.

FIGURE 10-1. Response of Threatened Industry to Substitution

The propensity of the threatened industry to forego profits in pricing or aggressively investing in cost reduction to hold volume will be a direct function of the exit barriers (see Chapters 1 and 12) in the threatened industry. If they are high because of specialized as-sets, high perceived strategic importance, emotional ties, or other causes, then the emerging industry may well face determined and even desperate efforts by the threatened industry to stem its growth.

Source: Porter Michael E. (1998), Competitive Strategy_ Techniques for Analyzing Industries and Competitors, Free Press; Illustrated edition.

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