1) Explain the characteristics of the four stages of the industry lifecycle model.
Answer:
Introduction
New industries emerge as the result of changes (usually technological or regulatory) that
create opportunities for entrepreneurs to leverage novel combinations of resources to
develop innovative products, services, or processes.
The early years of an industry are generally a tumultuous period where there is
tremendous uncertainty about the future of the market. There is no dominant technology
or business model, and it is far from certain that the market will ever grow sufficiently to
provide attractive financial returns and growth opportunities. At the same time, this is
also a period of unbridled optimism among entrepreneurs jockeying for position as the
future of the market unfolds.
Early entrants into an industry tend to be small entrepreneurial firms excited by the
prospect and potential growth of a new market. Large, established firms tend to lag
behind smaller ones in entering new industries for two reasons. First, a budding market is
usually too small and risky to justify the entry of large firms burdened with high
overhead costs and the need to generate more certain, even if lower, financial returns.
Second, older incumbent firms usually have bureaucratic organizational structures that
inhibit their ability to move quickly and flexibly into new markets. Smaller and more
nimble firms rely on simpler structures and lower startup costs to capture a first-mover
advantage. Entrepreneurial startups are inherently more tolerant of ambiguity and risk
because they have much less to lose than established firms and are therefore more willing
to gamble in the hopes of generating a large payoff.
This introductory phase is one of great technical uncertainty where producers experiment
with different and novel combinations in the hopes of discovering a superior approach
that will dominate over other firms. Firms are intensely focused on research and
development (R&D) activities during this period. This results in a high degree of product
innovation with many different versions of products incorporating different features and
technologies. This also leads to confusion for customers and other stakeholders, which
prevents the market from taking off into the growth phase. The types of customers who
tend to purchase in the introductory phase of the life cycle are early adopters willing to
pay a premium for the privilege of owning a product before most other people, despite its
early flaws and glitches. Conservative and price-conscious customers will usually wait
until the mature stage before buying. Despite (and partly because of) the uncertainty
inherent in a new industry, the introduction phase of the life cycle is a period of
extraordinary creativity and innovation. An industry is rarely as vibrant as in its early
years, when hope and optimism fuel the dreams
Growth
The growth stage begins when the market converges around a single dominant design or
approach. A dominant design is defined by Anderson and Tushman as “a single
architecture that establishes dominance in a product class.” For example, according to the
research firm Gartner, Apple’s iPad is expected to dominate the tablet industry until at
Test Bank for Karakowsky and Guriel, The Context of Business, 1e
Copyright © 2015 Pearson Canada Inc. 1
, least 2016. In some cases, technical standards are specified and must be adhered to by all
firms wishing to enter the market. When a standard is legally mandated and enforced by a
government or standards organization, it is called a de jure standard . For example, the
gauge of a railroad track, a light bulb socket, and an electrical outlet are all based on
standards that have been explicitly specified by a standards organization—usually to
ensure compatibility. A company wanting to produce light bulbs must make them to the
correct specifications or they will be useless to consumers.
A de facto standard , on the other hand, arises by virtue of common usage and is not
officially sanctioned by any authority. It is a standard “in fact” or “in practice,” rather
than in law. Microsoft Windows is the de facto standard for personal computer operating
systems because over 90% of the market uses Windows. Software developers must
therefore write programs that are compatible with Windows if they want to reach the
majority of the market. As the standard or dominant model spreads across the industry,
the producers that persist with a different approach usually exit the industry. This is one
of the main causes of industry shakeouts.
A shakeout in an industry is defined as a large number of exits from the market at the
same time as the aggregate output of the industry increases. A large number of failures in
a declining market is not a shakeout. A shakeout is a natural and healthy—albeit
painful—process for an industry as it simply purges and weeds out the weaker
competitors. The firms remaining after the shakeout emerge as strong competitors able to
scale up production and serve the needs of a growing market.
Maturity
In the mature stage, the third in the life cycle, growth in aggregate demand begins to
slow. Markets start to become saturated as there are fewer new adopters to attract and so
competition intensifies even more. This can, nevertheless, be a very profitable period for
the surviving firms as the industry enters a period of relative stability. For example,
between 1980 and 2000, the US beer brewing industry was in a mature phase and was
dominated by three large firms that controlled 80% of the market (Anheuser-Busch: 47%;
Miller: 23%; and Coors: 10%). Over the 20-year period, market shares were very stable,
and no firm gained or lost more than about a single share point in any one year. Despite
the high degree of concentration in mature markets, rivalry is fierce. A single point of
market share can mean millions of dollars in revenue, so firms spend large amounts of
money on advertising and sometimes enter into damaging price wars to lure customers
from the competition. Because technological knowledge has diffused to the far corners of
the industry and patents may have expired, firms focus their innovative efforts on
incremental improvements to products. This is the era where firms market the “new and
improved” versions and 25 different scents and flavours in the hopes of differentiating
their products ever so slightly from the competition’s. Incremental innovations also
provide opportunities to extend the life cycle to delay the inevitable arrival of the decline
stage. As consumers accumulate knowledge of the industry and its products over time,
they become much more sophisticated and demanding buyers. This influences the
industry’s trend toward the commoditization of its products and makes consumers even
more price conscious, which in turn forces firms to continuously squeeze out more cost
savings from their production processes .
Test Bank for Karakowsky and Guriel, The Context of Business, 1e
Copyright © 2015 Pearson Canada Inc. 2
Answer:
Introduction
New industries emerge as the result of changes (usually technological or regulatory) that
create opportunities for entrepreneurs to leverage novel combinations of resources to
develop innovative products, services, or processes.
The early years of an industry are generally a tumultuous period where there is
tremendous uncertainty about the future of the market. There is no dominant technology
or business model, and it is far from certain that the market will ever grow sufficiently to
provide attractive financial returns and growth opportunities. At the same time, this is
also a period of unbridled optimism among entrepreneurs jockeying for position as the
future of the market unfolds.
Early entrants into an industry tend to be small entrepreneurial firms excited by the
prospect and potential growth of a new market. Large, established firms tend to lag
behind smaller ones in entering new industries for two reasons. First, a budding market is
usually too small and risky to justify the entry of large firms burdened with high
overhead costs and the need to generate more certain, even if lower, financial returns.
Second, older incumbent firms usually have bureaucratic organizational structures that
inhibit their ability to move quickly and flexibly into new markets. Smaller and more
nimble firms rely on simpler structures and lower startup costs to capture a first-mover
advantage. Entrepreneurial startups are inherently more tolerant of ambiguity and risk
because they have much less to lose than established firms and are therefore more willing
to gamble in the hopes of generating a large payoff.
This introductory phase is one of great technical uncertainty where producers experiment
with different and novel combinations in the hopes of discovering a superior approach
that will dominate over other firms. Firms are intensely focused on research and
development (R&D) activities during this period. This results in a high degree of product
innovation with many different versions of products incorporating different features and
technologies. This also leads to confusion for customers and other stakeholders, which
prevents the market from taking off into the growth phase. The types of customers who
tend to purchase in the introductory phase of the life cycle are early adopters willing to
pay a premium for the privilege of owning a product before most other people, despite its
early flaws and glitches. Conservative and price-conscious customers will usually wait
until the mature stage before buying. Despite (and partly because of) the uncertainty
inherent in a new industry, the introduction phase of the life cycle is a period of
extraordinary creativity and innovation. An industry is rarely as vibrant as in its early
years, when hope and optimism fuel the dreams
Growth
The growth stage begins when the market converges around a single dominant design or
approach. A dominant design is defined by Anderson and Tushman as “a single
architecture that establishes dominance in a product class.” For example, according to the
research firm Gartner, Apple’s iPad is expected to dominate the tablet industry until at
Test Bank for Karakowsky and Guriel, The Context of Business, 1e
Copyright © 2015 Pearson Canada Inc. 1
, least 2016. In some cases, technical standards are specified and must be adhered to by all
firms wishing to enter the market. When a standard is legally mandated and enforced by a
government or standards organization, it is called a de jure standard . For example, the
gauge of a railroad track, a light bulb socket, and an electrical outlet are all based on
standards that have been explicitly specified by a standards organization—usually to
ensure compatibility. A company wanting to produce light bulbs must make them to the
correct specifications or they will be useless to consumers.
A de facto standard , on the other hand, arises by virtue of common usage and is not
officially sanctioned by any authority. It is a standard “in fact” or “in practice,” rather
than in law. Microsoft Windows is the de facto standard for personal computer operating
systems because over 90% of the market uses Windows. Software developers must
therefore write programs that are compatible with Windows if they want to reach the
majority of the market. As the standard or dominant model spreads across the industry,
the producers that persist with a different approach usually exit the industry. This is one
of the main causes of industry shakeouts.
A shakeout in an industry is defined as a large number of exits from the market at the
same time as the aggregate output of the industry increases. A large number of failures in
a declining market is not a shakeout. A shakeout is a natural and healthy—albeit
painful—process for an industry as it simply purges and weeds out the weaker
competitors. The firms remaining after the shakeout emerge as strong competitors able to
scale up production and serve the needs of a growing market.
Maturity
In the mature stage, the third in the life cycle, growth in aggregate demand begins to
slow. Markets start to become saturated as there are fewer new adopters to attract and so
competition intensifies even more. This can, nevertheless, be a very profitable period for
the surviving firms as the industry enters a period of relative stability. For example,
between 1980 and 2000, the US beer brewing industry was in a mature phase and was
dominated by three large firms that controlled 80% of the market (Anheuser-Busch: 47%;
Miller: 23%; and Coors: 10%). Over the 20-year period, market shares were very stable,
and no firm gained or lost more than about a single share point in any one year. Despite
the high degree of concentration in mature markets, rivalry is fierce. A single point of
market share can mean millions of dollars in revenue, so firms spend large amounts of
money on advertising and sometimes enter into damaging price wars to lure customers
from the competition. Because technological knowledge has diffused to the far corners of
the industry and patents may have expired, firms focus their innovative efforts on
incremental improvements to products. This is the era where firms market the “new and
improved” versions and 25 different scents and flavours in the hopes of differentiating
their products ever so slightly from the competition’s. Incremental innovations also
provide opportunities to extend the life cycle to delay the inevitable arrival of the decline
stage. As consumers accumulate knowledge of the industry and its products over time,
they become much more sophisticated and demanding buyers. This influences the
industry’s trend toward the commoditization of its products and makes consumers even
more price conscious, which in turn forces firms to continuously squeeze out more cost
savings from their production processes .
Test Bank for Karakowsky and Guriel, The Context of Business, 1e
Copyright © 2015 Pearson Canada Inc. 2
