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Chapter 6

Chapter 6 Notes

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Administrative Studies
ADMS 1000
Eytan Lasry

Readings- Chapter 6 The Industry Lifecycle Model All industries evolve the same factors & phases from their early emergence & growth to their eventual maturity & decline Industry lifecycle model: almost all industries exhibit an inverted u-shaped growth pattern, rising up to a peak & then declining as the industry ages Evolution of the lifecycle is related to the evolution of technology within the industry Technological innovations will trigger the start of a new cycle or the creation of a new industry 4 distinct phases Introductory phase: many entrepreneurial firms enter the industry. The firm is adopted by customers, suppliers & other key components. Firms that don’t conform to the emerging standard exit the industry at the shakeout Growth phase: The diffusion of an industry standard or dominant design is a critical step in this stage Mature phase: market stabilizes & sales grow more slowly. Firms must become more efficient producers to lower costs & compensate for slower revenue growth. This is achieved through mergers & acquisitions that result in higher industry concentration Decline stage: sales drop & rivalry further heats up as the industry undergoes greater consolidation through more mergers& the exit of insufficient firms Lifecycle phases determines the degree of competition firms face, the type of organizational structure/kind of strategy/approaches they need to survive & grow Different types of firms hit certain stages at different times This cycle framework represents the 5-force model, as it shows a firm at a specific point in time The Introduction Phase: Industry Emergence & Creation New industries emerge as a result of changes (usually technological or regulatory) Creates new opportunities for entrepreneurs to combine resources to create innovative products, services or processes Some industries are the outcome of government regulation that creates markets for new products/services Ie, environmental protection act www.notesolution.com In this stage there is a tremendous amount of uncertainty about the future or market growth In this stage there is also optimism among entrepreneurs Producers experiment with different combinations Firms are focused on research & development leads to many versions of technology features New markets are unstable; they have no clear boundaries It’s almost impossible to say which firms will succeed or not The Quest for Legitimacy Theorists focus on the institutional & social conditions that affect changing markets & competitive forces 2 forms of legitimacy: socio-political & cognitive Socio-political legitimacy: the support of an industry, activity, or organizational form by key stakeholders & institutions such as the state, government officials, opinion leaders or the general public Cognitive legitimacy: the level of public knowledge of a new industry & its conformity to established norms & methods of what’s taken for granted as a desirable & appropriate activity All organizations require legitimacy in order to acquire from external stakeholders the resources they need to survive & grow Failure to follow legal rules or ethical norms leads to a organization to be perceived as undesirable Being new, small, unknown or unrecognized can cause a firm to lack legitimacy, as it has to prove to its outsiders that it DOES conform to institutional norms Start-up firms have a higher risk of failure Ie, opening a new restaurant is better than a new text message advertising company; more people are familiar with how restaurants normally work The Growth Stage: Dominant Designs & Shakeouts All about sales & market share Begins when the market depends on a dominant design/approach Dominant design: a single architecture that establishes dominance in a product class www.notesolution.com De jure standard: a standard is legally mandated & enforced by a government or standards organization. Ie, a light bulb socket & electrical outlet are based on standards that they’ve been specified by a standards organization De facto standard: arises by a virtue of common usage & is not officially sanctioned by any authority. Its the standard “in fact or in practise” rather than in law. Ie, Microsoft windows is the de facto standard for personal computer operating systems because over 90% of the market uses windows Shakeout: an industry is defined as a large number of exits from the market at the same time as the total output if the industry increases. It’s a natural/healthy process for an industry as it gets rid of the weaker competitors The firms that remain after the shakeout emerge as strong competitors able to produce & serve the needs Firms standardize products & processes, resulting in dramatic cost savings that push prices lower Firms that are unable to match the economies of scale, production process improvements & lower prices of the most efficient producers will be driven out of the market The high growth & reduction in uncertainty attracts many more entrants into the industry Most acquire with a firm that’s already in a market than starting a whole new division from scratch Rivalry is intense & firms try to build brand recognition & position themselves for when the market will cease to grow as rapidly The Maturity Phase: A Critical Transition Growth in demand begins to slow Markets become saturated; few new adopters to attract, so competition intensified This can be a profitable period for firms because of the stability Rivalry is fierce Firms spend large amounts of money on advertising Firms focus on innovation to create improvements on products This is the “new & improved” part, ie. New versions of iphone ^ is a way to extend the lifespan Buyers become more sophisticated & demanding www.notesolution.com Commoditization: when consumers more price cons
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