Evaluating a Firm's External Environment - Illinois State University

More documents

Recommendations

Info

M02_BARN4586_03_SE_C02.qxd 7/1/09 7:34 AM Page 51 Chapter 2: Evaluating a Firm’s External Environment 51 Industries can be fragmented for a wide variety of reasons. For example, the fragmented industry may have few barriers to entry, thereby encouraging numerous small firms to enter. The industry may have few, if any, economies of scale, and even some important diseconomies of scale, thus encouraging firms to remain small. Also, close local control over enterprises in an industry may be necessary— for example, local movie houses and local restaurants—to ensure quality and to minimize losses from theft. The major opportunity facing firms in fragmented industries is the implementation of strategies that begin to consolidate the industry into a smaller number of firms. Firms that are successful in implementing this consolidation strategy can become industry leaders and obtain benefits from this kind of effort, if they exist. Consolidation can occur in several ways. For example, an incumbent firm may discover new economies of scale in an industry. In the highly fragmented funeral home industry, Service Corporation International (SCI) found that the development of a chain of funeral homes gave it advantages in acquiring key supplies (coffins) and in the allocation of scarce resources (morticians and hearses). By acquiring numerous previously independent funeral homes, SCI was able to substantially reduce its costs and gain higher levels of economic performance. 38 Incumbent firms sometimes adopt new ownership structures to help consolidate an industry. Kampgrounds of America (KOA) uses franchise agreements with local operators to provide camping facilities to travelers in the fragmented private campgrounds industry. KOA provides local operators with professional training, technical skills, and access to its brand-name reputation. Local operators, in return, provide KOA with local managers who are intensely interested in the financial and operational success of their campgrounds. Similar franchise agreements have been instrumental in the consolidation of other fragmented industries, including fast food (McDonald’s), muffler repair (Midas), and motels (La Quinta, Holiday Inn, Howard Johnson’s). 39 The benefits of implementing a consolidation strategy in a fragmented industry turn on the advantages larger firms in such industries gain from their larger market share. As will be discussed in Chapter 4, firms with large market share can have important cost advantages. Large market share can also help a firm differentiate its products. Opportunities in Emerging Industries: First-Mover Advantages Emerging industries are newly created or newly re-created industries formed by technological innovations, changes in demand, the emergence of new customer needs, and so forth. Over the past 30 years, the world economy has been flooded by emerging industries, including the microprocessor industry, the personal computer industry, the medical imaging industry, and the biotechnology industry, to name a few. Firms in emerging industries face a unique set of opportunities, the exploitation of which can be a source of superior performance for some time for some firms. The opportunities that face firms in emerging industries fall into the general category of first-mover advantages. First-mover advantages are advantages that come to firms that make important strategic and technological decisions early in the development of an industry. In emerging industries, many of the rules of the game and standard operating procedures for competing and succeeding have yet to be established. First-moving firms can sometimes help establish the rules of the game and create an industry’s structure in ways that are uniquely beneficial to them.
M02_BARN4586_03_SE_C02.qxd 7/1/09 7:34 AM Page 52 52 Part 1: The Tools of Strategic Analysis In general, first-mover advantages can arise from three primary sources: (1) technological leadership, (2) preemption of strategically valuable assets, and (3) the creation of customer-switching costs. 40 First-Mover Advantages and Technological Leadership Firms that make early investments in particular technologies in an industry are implementing a technological leadership strategy. Such strategies can generate two advantages in emerging industries. First, firms that have implemented these strategies may obtain a low-cost position based on their greater cumulative volume of production with a particular technology. These cost advantages have had important competitive implications in such diverse industries as the manufacture of titanium dioxide by DuPont and Procter & Gamble’s competitive advantage in disposable diapers. 41 Second, firms that make early investments in a technology may obtain patent protections that enhance their performance. 42 Xerox’s patents on the xerography process and General Electric’s patent on Edison’s original lightbulb design were important for these firms’ success when these two industries were emerging. 43 However, although there are some exceptions (e.g., the pharmaceutical industry and specialty chemicals), patents, per se, seem to provide relatively small profit opportunities for first-moving firms in most emerging industries. One group of researchers found that imitators can duplicate first movers’ patent-based advantages for about 65 percent of the first mover’s costs. 44 These researchers also found that 60 percent of all patents are imitated within four years of being granted—without legally violating patent rights obtained by first movers. As we will discuss in detail in Chapter 3, patents are rarely a source of sustained competitive advantage for firms, even in emerging industries. First-Mover Advantages and Preemption of Strategically Valuable Assets First movers that invest only in technology usually do not obtain sustained competitive advantages. However, first movers that move to tie up strategically valuable resources in an industry before their full value is widely understood can gain sustained competitive advantages. Strategically valuable assets are resources required to successfully compete in an industry. Firms that are able to acquire these resources have, in effect, erected formidable barriers to imitation in an industry. Some strategically valuable assets that can be acquired in this way include access to raw materials, particularly favorable geographic locations, and particularly valuable product market positions. When an oil company such as Royal Dutch Shell (because of its superior exploration skills) acquires leases with greater development potential than was expected by its competition, the company is gaining access to raw materials in a way that is likely to generate sustained competitive advantages. When Wal-Mart opens stores in medium-sized cities before the arrival of its competition, Wal-Mart is making it difficult for the competition to enter into this market. And, when breakfast cereal companies expand their product lines to include all possible combinations of wheat, oats, bran, corn, and sugar, they, too, are using a first-mover advantage to deter entry. 45 First-Mover Advantages and Creating Customer-Switching Costs Firms can also gain first-mover advantages in an emerging industry by creating customer-switching costs. Customer-switching costs exist when customers make investments in order to use a firm’s particular products or services. These investments tie customers to a particular firm and make it more difficult for
Page 1 and 2: M02_BARN4586_03_SE_C02.qxd 7/1/09 7
Page 23: M02_BARN4586_03_SE_C02.qxd 7/1/09 7

Evaluating a Firm's External Environment - Illinois State University

Create successful ePaper yourself

Delete template?

Save as template?