Formulation of strategy in emerging industries must cope with the uncertainty and risk of this period of an industry’s development. The rules of the competitive game are largely undefined, the struc-ture of the industry unsettled and probably changing, and competi–tors hard to diagnose. Yet all these factors have another side—the emerging phase of an industry’s development is probably the period when the strategic degrees of freedom are the greatest and when the leverage from good strategic choices is the highest in determining performance.
Shaping Industry Structure. The overriding strategic issue in emerging industries is the ability of the firm to shape industry struc-ture. Through its choices, the firm can try to set the rules of the game in areas like product policy, marketing approach, and pricing strat-egy. Within the constraints set by the underlying economics of the industry and its resources, the firm should seek to define the rules in the industry in a manner that will yield it the strongest position in the long run.
Externalities in Industry Development. In an emerging indus-try, a key strategic issue is the balance the firm strikes between indus-try advocacy and pursuing its own narrow self-interest. Because of potential problems with industry image, credibility, and confusion of buyers (outlined in Section II in this chapter), in the emerging phase the firm is in part dependent on others in the industry for its own success. The overriding problem for the industry is inducing substitution and attracting first–time buyers, and it is usually in the firm‘s interest during this phase to help promote standardization, police substandard quality and fly-by-night producers, and present a consistent front to suppliers, customers, government, and the finan-cial community. Industry conferences and associations can be a use-ful device, as can the avoidance of strategies that degrade competi-tors. For example, in the hospital management industry that has grown up since 1970, all the participants are critically dependent on the industry’s image of professionalism and its credibility with lend-ers. Firms in this industry have had a practice of actually praising the industry and their competitors by name.
This need for industry cooperation during the emerging period often seems to raise an internal dilemma for firms, who are driven toward pursuing their own market position, often to the detriment of industry development. A firm may resist standardization on prod-ucts, needed to aid ease of repair and promote customers’ confidence, because it wants to maintain uniqueness or garner the advantage of having its particular product variety adopted as standard. There is a fine line of judgment that determines whether or not such an ap-proach is optimal in the long run. Some firms in the smoke alarm in-dustry, for example, are advocating industry standards that will hurt other firms. At the same time, buyers’ confusion is continuing about just what kind of alarm is best. The question is whether the industry is developed enough for such confusion to be a significant problem for future industry growth.
It is probably a valid generalization that the balance between in-dustry outlook and firm outlook must shift in the direction of the firm as the industry begins to achieve significant penetration. Some-times firms who have taken very high profiles as industry spokesper-sons, much to their and the industry’s benefit, fail to recognize that they must shift their orientation. As a result, they can be left behind as the industry matures.
Another implication of externalities in industry development is the possibility that a firm may have to compete initially with a strat-egy it ultimately does not want to follow or participate in market segments it plans to drop out of in the long run. These “temporary” actions may be necessary to develop the industry, but once it is devel-oped the firm is free to seek its optimal position. For example, Corn-ing Glass Works has been forced to invest in research on connectors, splicing techniques, and light sources for fiber optic applications— even though in the long run Corning seems to want to be a fiber and cable supplier only—because the quality of available equipment and techniques has been an impediment to the development of fiber op-tics generally. Such investments outside the firm‘s ideal long-run po-sition are part of the cost of pioneering.
Changing Role of Suppliers and Channels. Strategically, the firm in an emerging industry must be prepared for a possible shift in the orientation of its suppliers and distribution channels as the in-dustry grows in size and proves itself. Suppliers may become increas-ingly willing (or can be forced) to respond to the industry’s special needs in terms of varieties, service, and delivery. Similarly, distribu-tion channels may become more receptive to investing in facilities, advertising, and so forth in partnership with the firms. Early exploi-tation of these changes in orientation can give the firm strategic lev-erage.
Shifting Mobility Barriers. As outlined above in this chapter, the early mobility barriers may erode quickly in an emerging indus-try, often to be replaced by very different ones as the industry grows in size and as the technology matures. This factor has a number of implications. The most obvious is that the firm must be prepared to find new ways to defend its position and must not rely solely on things like proprietary technology and a unique product variety on which it has succeeded in the past. Responding to shifting mobility barriers may involve commitments of capital that far exceed those that have been necessary in the early phases.
Another implication is that the nature of entrants into the in-dustry may shift to more established firms attracted to the larger and increasingly proven (less risky) industry, often competing on the basis of the newer forms of mobility barriers, like scale and market-ing clout. The firm in an emerging industry must forecast the nature of probable potential entrants based on its assessment of present and future barriers, coupled with the attraction the industry will hold to various types of firms and their ability to hurdle the barriers cheaply.
Another implication related to increasing industry size and tech-nological maturity is that customers or suppliers may integrate into the industry—which has occurred in such industries as aerosol pack-aging, recreational vehicles, and electronic calculators. The firm must be prepared to secure supplies and markets if integration oc-curs or stop integration moves by the way in which it competes.
1. TIMING ENTRY
A crucial strategic choice for competing in emerging industries is the appropriate timing of entry. Early entry (or pioneering) in-volves high risk but may involve otherwise low entry barriers and can offer a large return. Early entry is appropriate when the follow-ing general circumstances hold:
- Image and reputation of the firm are important to the buyer, and the firm can develop an enhanced reputation by being a pioneer.
- Early entry can initiate the learning process in a business in which the learning curve is important, experience is difficult to imitate, and it will not be nullified by successive technolog-ical generations.
- Customer loyalty will be great, so that benefits will accrue to the firm that sells to the customer first.
- Absolute cost advantages can be gained by early commitment to supplies of raw materials, distribution channels, and so on.
Early entry is especially risky in the following circumstances:
- Early competition and market segmentation are on a basis different to that which will be important later in industry de-velopm The firm, therefore, builds the wrong skills and may face high costs of changeover.
- Costs of opening up the market are great, including such things as customer education, regulatory approvals, and tech-nological pioneering, and the benefits of opening up the mar-ket cannot be made proprietary to the firm.
- Early competition with small, newly started firms will be costly, but these firms will be replaced by more formidable competition later.
- Technological change will make early investments obsolete and allow firms entering later to have an advantage by having the newest products and processes.
Tactical Moves. The problems limiting development of an emerging industry suggest some tactical moves that may improve the firm’s strategic position:
- Early commitments to suppliers of raw materials will yield fa-vorable priorities in times of shortages.
- Financing can be timed to take advantage of a Wall Street love affair with the industry if it happens, even if financing is ahead of actual nee This step lowers the firm’s cost of cap-ital.
2. COPING WITH COMPETITORS
Coping with competitors in an emerging industry may be a dif-ficult problem, particularly for firms that have been pioneers and have enjoyed major market shares. The proliferation of newly formed entrants and spin-offs may cause resentments, and the firm must confront the external factors described previously which make it in part dependent on competitors for the development of the in-dustry.
One common problem in emerging industries is that pioneers expend excessive resources defending high market shares and re-sponding to competitors who may have little chance of becoming market forces in the long run. This can be partly an emotional reac-tion. Although it may sometimes be appropriate to respond to com-petitors vigorously in the emerging phase, it is more likely that the firm‘s efforts are best spent in building its own strengths and in de-veloping the industry. It may even be appropriate to encourage the entry of certain competitors, perhaps through licensing or other means. Given the characteristics of the emerging phase, the firm of-ten benefits from having other firms aggressively selling the indus-try’s product and aiding in technological development. The firm may also want competitors who are known quantities, rather than preserving a large share for itself but inviting entry by major estab-lished firms as the industry matures. It is difficult to generalize about the appropriate strategy, but only in rare cases will it be feasi-ble and profitable to defend a near monopoly market share as the in-dustry grows rapidly, even though the firm has one initially.
Source: Porter Michael E. (1998), Competitive Strategy_ Techniques for Analyzing Industries and Competitors, Free Press; Illustrated edition.