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Chapter 7-12

ADMS 1000 Chapter Notes - Chapter 7-12: Comparative Advantage, Financial Statement, Role Theory

Administrative Studies
Course Code
ADMS 1000
Shahab Modirmassihai

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The Industry Life-Cycle Model
-Many industries follow a similar & predictable evolution of competitive pressures
oIndustry Life-Cycle Model – An inverted U-shaped growth pattern that is seen in almost
all industries given a long enough period of observation
Initially rise to a peak and declines as industry ages
Pace of industry’s evolution along its life cycle related to the evolution of
technology within the industry
Tech innovations often trigger start of new life cycle or creation of an
entirely new industry
-Industry life-cycle model describes the evolution of the entire product category and its
associated industry, not a single product or firm
-Model divides industry evolution into 4 distinct phases: Introduction, growth, maturity, and
-Understanding which phase of the life cycle an industry is in is critical for effective management
at all levels of the organization
-Different types of firms tend to be market leaders at different stages given the difficulties
organizations experience when they must adapt to a different environment and make the
transition from one type of organizational structure or strategy to another
-The Introduction Phase: Industry Emergence and Creation
oNew industries emerge as the result of changes (usually technological or regulatory)
creating opportunities for entrepreneurs to leverage novel combinations of resources to
develop innovative products, services, or processes
Opportunities not always exploited immediately, some remain untapped and
unrecognized for many years until someone decides to start a new firm that
will take advantage of the resources and create a new market
oSome industries are the outcome of government regulation (or deregulation) that
creates markets for new products or services
oEarly years of an industry tends to be full of uncertainty
There is no dominant technology or business model, it is far from certain that
the market will grow sufficiently to provide attractive financial returns and
growth opportunities
oLarge, established firms tend to lag behind smaller ones in entering new industries for
two reasons.
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New markets usually too small and too risky to justify large industries with high
overhead costs and the need to generate revenue
Many incumbents utilize an bureaucratic organizational structure inhibiting
their ability to move quickly with market trends
Smaller firms rely on simpler structures and lower startup costs to
capture a first-mover advantage
Entrepreneurial startups are more tolerant of ambiguity and risk as
they have much less to lose than established firms and are more
willing to gamble in the hopes of generating a large payoff
oIntroductory phase is one of great technical uncertainty where producers experiment
with different and novel combinations in the hopes of discovering a superior approach
Firms intensely focused on research and development (R&D) activities during
this period.
Results in high degree of product innovation with many different
versions of products incorporating different features and technologies
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 are
early adopters willing to pay a premium for the privilege of owning a product
before others, despite early flaws and glitches
Conservative and price-conscious customers will usually wait until the
mature stage before buying
oNew markets are extremely volatile
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
It is nearly impossible to predict which firms will survive and grow
oThe Quest For Legitimacy
2 forms of legitimacy
Sociopolitical – endorsement of an industry, activity, or organizational
form by key stake-holders and institutions such as the state and
government officials, opinion leaders, or the general public
Cognitive – level of public knowledge about a new industry and its
conformity to established norms and methods reflected in the extent
to which it is taken for granted as a desirable and appropriate activity
All organizations require legitimacy to acquire resources and grow from
external stakeholders
Being new and unknown can cause a firm to lack legitimacy because it must
prove to outsiders that it does conform to institutional norms
-The objective of this phase essentially is to be accepted and institutionalized
-The Growth Phase: Dominant Designs and Shakeouts
oDominant design – “a single architecture that establishes dominance in a product class”
Technical standard may be specified and all firms wishing to join the market
must adhere to it (de jure standard when it is legally mandated & enforceable)
A de facto standard is not mandated but is standard in practice
oAs standard/dominant model spreads, producers that persist with a different approach
usually exit the industry
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One of the main causes of Shakeouts – large number of exits from the market
at the same time as the aggregate output of the industry increases
Some do survive despite following different paths, but on a small scale
oThe adoption of a dominant design greatly accelerates the market growth as it allows
for standardization leading to lower costs
Standardization creates incentive for others to offer complementary
oAs 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, production
process improvements, and lower prices of the most efficient
producers will be driven out of the market.
High-volume producers can afford to operate with lower profit
margins while smaller firms are forced to exit
oEstablished firms from other industries that may have lagged behind the startups in
entering now see the new industry as either potentially lucrative or threatening to their
own assets and markets.
Often enter by acquiring a firm already in the market rather than starting a new
Large firms bring tremendous resources to invest in distribution, marketing,
and advertising to capture a greater share of the market, as well as expertise in
efficient production and the capacity to withstand fierce price competition
oIn the introduction phase, product innovation and R&D were critical skills for
organizations. After standardization, process innovation and sales and marketing
become more important as larger firms with greater resources can easily replace start-
ups, many of them will collaborate to stay competitive
-The Maturity Phase A Critical Transition
oGrowth in demand begins to slow at this stage as markets become saturated and there
are fewer new adopters and competition intensifies
oA 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 (differentiation)
Can also prolong life cycle to delay inevitable decline
oAs consumers accumulate knowledge and become much more sophisticated and
demanding. 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
When there is very little product differentiation and consumers have become
fickle, power once held by the manufacturers now shifts to the distribution
channel firms that control access to the customer
oThere is little if any entry at this stage of the life cycle.
The sources of competitive advantage for firms reside in process engineering to
derive greater manufacturing and production efficiencies and reduce costs
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