Although emerging industries can differ a great deal in their structures, there are some common structural factors that seem to characterize many industries in this stage of their development. Most of them relate either to the absence of established bases for competi-tion or other rules of the game or to the initial small size and newness of the industry.
1. COMMON STRUCTURAL CHARACTERISTICS
Technological Uncertainty. There is usually a great deal of un-certainty about the technology in an emerging industry: What prod-net configuration will ultimately prove to be the best? Which pro-duction technology will prove to be the most efficient? For example, in smoke alarms there is continued uncertainty over whether photo-electric or ionization detectors will win out as the favored alterna-tive; both are currently being produced by different companies.1 The philips and RCA approaches to video disc technology are contend-ing for adoption as the industry standard, as did alternative ap-proaches to television set technology in the 1940s. Alternative pro-duction technologies may also be present, all of which have been untried on a large-scale basis. In the manufacture of optical fibers, for example, there are at least five different processes backed by dif-ferent industry participants.
Strategic Uncertainty. Related to the technological uncertain-ty, but broader in cause, are a wide variety of strategic approaches often being tried by industry participants. No “right” strategy has been clearly identified, and different firms are groping with differ-ent approaches to product/market positioning, marketing, servic-ing, and so on, as well as betting on different product configurations or production technologies. For example, solar heating firms are taking a wide variety of stances with respect to supplying compo-nents versus systems, market segmentation, and distribution chan-nels. Closely related to this problem, firms often have poor informa-tion about competitors, characteristics of customers, and industry conditions in the emerging phase. No one knows who all the compet-itors are, and reliable industry sales and market share data are often simply unavailable, for example.
High Initial Costs but Steep Cost Reduction. Small produc-tion volume and newness usually combine to produce high costs in the emerging industry relative to those the industry can potentially achieve. Even for technologies for which the learning curve will soon level off, there is usually a very steep learning curve operating. Ideas come rapidly in terms of improved procedures, plant layout, and so on, and employees achieve major gains in productivity as job famil-iarity increases. Increasing sales make major additions to the scale and total accumulated volume of output produced by firms. These factors are accentuated if, as is common, the technology in the emerging phase of the industry is more labor intensive than it may ultimately become.
The result of a steep learning curve is that the initially high costs are declining at a very high proportional rate. If the gains due to learning are combined with increasing opportunities to reap econo-mies of scale as the industry grows, the cost declines will be even more rapid.
Embryonic Companies and Spin-Offs. The emerging phase of the industry is usually accompanied by the presence of the greatest proportion of newly formed companies (to be contrasted with newly formed units of established firms) that the industry will ever experi–ence. Witness the many new firms populating such contemporary emerging industries as personal computers and solar heating and which characterized the early automobile industry (Packard, Hud-son, Nash, and dozens of others) and early minicomputer industry (e.g., Digital Equipment, Data General, Computer Automation). Without established rules of the game or scale economies as deter-rents, newly formed companies are in a position to get into emerging industries (this situation will be discussed further).
Related to the presence of newly formed companies is that of many spin-off firms, or firms created by personnel leaving firms in the industry to create their own new firms. Digital Equipment spawned a number of spin-offs in minicomputers (e.g., Data Gener-al) as did Varian Associates (e.g., General Automation), and Honey-well, and we could cite many other industries in which spin-offs were numerous. The phenomenon of spin-offs is related to a number of factors. First, in an environment of rapid growth and perceived op–portunity, the rewards of equity participation may seem attractive when compared to a salary at an established company. Second, be-cause of the fluidity of technology and strategy in the emerging phase, employees of established firms are often in a good position to think up new and better ideas, taking advantage of their proximity to the industry. Sometimes they leave in order to increase their poten-tial rewards, but not infrequently spin-offs occur because the em-ployee with a new idea confronts an unwillingness of his superior to try it, perhaps because it undermines much of the investment the firm has made in the past. Data General was formed, so industry ob-servers tell it, when Edson de Castro and a handful of other Digital Equipment employees could not sell Digital on a new product idea they believed had high potential. Provided industry structure does not provide substantial entry barriers to newly created firms, spin-offs can be a common phenomenon in emerging industries.
First-Time Buyers. Buyers of the emerging industry’s product or service are inherently first-time buyers. The marketing task is thus one of inducing substitution, or getting the buyer to purchase the new product or service instead of something else. The buyer must be informed about the basic nature and functions of the new product or service, be convinced that it can actually perform these functions, and be persuaded that the risks of purchasing it are rationally borne given the potential benefits. Right now, for example, solar heating companies are struggling to persuade homeowners and homebuyers that the cost savings of solar heating are real, that systems will per-form reliably, and that they need not wait for further government tax incentives to commit to the new technology. I will have much more to say later about the factors prompting buyers to commit themselves early to a new product or service.
Short Time Horizon. In many emerging industries the pres-sure to develop customers or produce products to meet demand is so great that bottlenecks and problems are dealt with expediently rather than as a result of an analysis of future conditions. At the same time, industry conventions are often born out of pure chance: Confronted with the need to set a pricing schedule, for example, one firm adopts a two-tiered price that the marketing manager used in his previous firm, and the other firms in the industry imitate for lack of a ready alternative. In both these ways “conventional wisdom,” which was discussed in Chapter 3, is created.
Subsidy. In many emerging industries, especially those with radical new technology or that address areas of societal concern, there may be subsidization of early entrants. Subsidy may come from a variety of government and nongovernment sources; heavy subsidies in solar energy and conversion of fossil fuels into gas are particularly prominent examples of the early 1980s. Subsidies can be awarded directly to firms in the form of grants, or can operate indi-rectly through tax incentives, subsidizing buyers, and so on. Subsi-dies often add a great degree of instability to an industry, which is made dependent on political decisions that can be quickly reversed or modified. While subsidies are obviously beneficial to industry de-velopment in some respects, they often deeply involve government bodies in an industry, which can be a mixed blessing. Yet the need to overcome startup difficulties leads many emerging industries to seek subsidies; aquaculturists are actively lobbying for them in 1980.
2. EARLY MOBILITY BARRIERS
In an emerging industry, the configuration of mobility barriers is often predictably different from that which will characterize the industry later in its development. Common early barriers are the fol-lowing:
- proprietary technology;
- access to distribution channels;
- access to raw materials and other inputs (skilled labor) of ap-propriate cost and quality;
- cost advantages due to experience, made more significant by the technological and competitive uncertainties;
- risk, which raises the effective opportunity cost of capital and thereby effective capital barriers.
As discussed in Chapter 8, some of these barriers—such as pro-prietary technology, access to distribution, learning effects, and risk—have a strong tendency to decline or disappear in importance as the industry develops. Although there are exceptions, early mobil–ity barriers are usually not brand identification (it is just being cre-ated), economies of scale (the industry is too small to allow them), or capital (today’s large firms can generate prodigious capital for a low-risk investment).
The nature of the early barriers is a key reason why we observe newly created companies in emerging industries. The typical early barriers stem less from the need to command massive resources than from the ability to bear risk, be creative technologically, and make forward-looking decisions to garner input supplies and distribution channels. These same sorts of barriers also help explain why estab-lished companies are often not the first firms into new industries, even if they have obvious strengths, but climb on the bandwagon later. Established companies may place a higher opportunity cost on capital and are often ill-prepared to take the technological and prod-uct risks necessary in the early phases of industry development. For example, the toy companies were relatively late entrants into video games despite some obvious strengths like knowledge of customers, brand names, and distribution. The dizzying technological change appears to have been too intimidating. Similarly, the traditional vac-uum tube firms were late entrants into semiconductor manufacture, and the electric coffee percolator manufacturers were beaten in auto-matic drip coffee makers by new firms such as Mr. Coffee. There may be some advantages to late entry, however, that will be dis-cussed later.
Source: Porter Michael E. (1998), Competitive Strategy_ Techniques for Analyzing Industries and Competitors, Free Press; Illustrated edition.