CHAPTER 3: THE COMPETITIVE CONTEXT
The industry lifecycle model:
• All industries evolve along particular trajectories and through specific phases
from their early emergence and growth to their eventual maturity and decline –
known as the Industry life cycle model
• Industries exhibit an inverted Ushaped growth pattern – number of organizations
rising initially up to a peak and then declining as the industry ages
• The pace of an industry evolution along its lifecycle is closely related to the
evolution of technology within the industry – technological innovations often
trigger the start of a new lifecycle or the creation of an entirely new industry.
• The industry lifecycle is divided into 4 distinct phases:
• 1. Introduction
• 2. Growth
• 3. Maturity
• 4. Decline
• the lifecycle phase affects the degree of competition firms face – the type of
organizational structure, the kind of strategy and the appropriate management
approaches needed to survive and grow.
• Early years of an industry – generally tremendous uncertainty about the future of
• Period of unbridled optimism among entrepreneurs
• Early entrants into an industry tend to be small entrepreneurial firms excited
about the prospect and potential growth of the new market
• Large established firms tend to lag smaller ones in entering new industries for two
• 1. A nascent market is usually too small and risky to justify the entry of large
firms burdened with high over head costs and the need to generate more certain
even if lower financial returns
• 2. 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 firstmover 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 very large payoff.
• Producers experiment with very different and novel combinations in the hopes of
discovering a superior approach that will dominate those of other firms.
• Firms are intensely focused on research and development (R&D) activities during
• Results in a high degree of product innovation with many different versions of
products incorporating different features and technologies • Leads to confusion for customers and other stakeholders which prevent the
market from taking off into growth phase
• The types of customers that tend to purchase in the introduction phase of the
lifecycle are early adopters willing to pay a premium for the privilege of owing a
product before most anyone else – despite its early flaws and glitch.
• Introduction phase is a period of extraordinary creativity and innovation
• They may have no clear boundaries and segments are not well defined
• The market shares of the different producers are highly unstable and many
entrants fail shortly after entering.
THE GROWTH PHASE:
• The growth stage begins when the market converges around a single dominant
design or approach.
• Dominant design: a single architecture that establishes dominance in a product
• 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
government or standards organization – De Jure Standard
• Eg: the gauge of a rail road track, a light bulb socket, an electrical outlet are all
based on standards that have been explicitly specified by a standard organization
– to ensure compatibility
• De facto standard: Arises by virtue of common usage and is not officially
sanctioned by any authority.
• it is a standard in “fact” or “in practice” but not by law.
• eg: Microsoft windows is the de facto standard for personal computer operating
system because over 90% of the market uses windows
• as the standard or dominant model spreads across the industry the company that
persists to use a different approach usually exit the industry
• shakeout: large number of exits from the market at the same time as the aggregate
output of the industry increases
• large number of failures in a declining market is NOT a shakeout
• shakeout is a natural and health process for an industry as it simply purges and
weeds out the weaker competitor
• the remaining after the shakeout emerge as strong competitors able to scale up
production and provide the needs of a growing market
• the adoption of a dominant design greatly accelerates the growth rate of new
• growth in demand is significantly related to the falling prices of products during
the second phase of the lifecycle
• as output grows further, economies of scale allow producers to generate more cost
savings that drive prices even lower. – another important cause of shakeouts
• as product prices fall inefficient producers come under significant competitive
pressures and exit. • Firms that are unable to match the economies of scale, produc