The decision to Enter Dynamic Markets
A dynamic and developing industry is attractive to enter if it has the potential to provide above-average returns and if the firm is confident that it can create a defendable position in the long run. Quite often firms enter dynamic and risky industries whom the existing firms are going rapidly and making good profits or the ultimate size of the industry promises to be large. These are valid reasons to enter the market, but a firm has to ultimately carry out a structural analysis of the industry/environment (Porter’s five forces model) before leaping into the fray.
Generally, a dynamic environment is characterized by newly formed or re-formed industries that have been created by technological innovations, the emergence of new consumer needs/ segments, or other socio-economic changes that elevate a new product or a service to the level of potentially viable business opportunity. A dynamic environment is also created when old/traditional industries experience fundamental shifts in competitive rules coupled with growth in scale by orders of magnitude, caused by some of the factors mentioned earlier.
The essential characteristic of a dynamic environment is the absence of any “rules of the game” which may pose a risk or provide an opportunity. In either case, it must be managed from the strategic management point of view. The following section outlines the common characteristics of a dynamic industry environment.
Embryonic and Spin-off Firms
Technological and Strategic Uncertainty
High initial costs coupled with steep cost reduction.
Strategic Choices in a Dynamic Environment
Industries operating in a dynamic environment have to cope with the uncertainty and risk inherent in the industry environment. The industry structure is highly amorphous, unsettled, and rapidly changing and the rules of the game are largely undefined. Despite these factors, the dynamic phase of industry is perhaps the time when there is a tremendous amount of latitude and freedom to experiment with new strategies and when the leverage from good choice is the highest in determining performance.
One of the strategic choices in a dynamic environment available to a firm is shaping and influencing the industry structure. A firm can set the rules of the game in areas such as product policy and new product development, marketing approach, and pricing strategy. The firm can seek to define the rules within the constraints dictated by the economics of the industry and its own resources in a way that yields the strongest position in the long run.
Another strategic choice available to a firm to compete in a dynamic environment is changing the orientation of its suppliers and channel partners. A firm must be willing to shift the orientation of its suppliers and distributors as the industry grows and starts maturing. Suppliers should be encouraged (sometimes coerced) to respond to the firm’s special needs in terms of varieties, service, and delivery. Similarly, the distribution channels should be made more receptive in terms of investing in distribution facilities and infrastructure, advertising, etc, and cooperate with the firm in all its marketing endeavors. Exploiting the supply chain in the early stages of the industry can provide strategic leverage to the firm.
Given the dynamic nature of the industry environment and the fast pace of change, firms can adopt the strategy of exploiting their innovations and building an enduring long-run competitive advantage based on low cost or differentiation. Three variants of innovative strategy are available for a firm:
i) to develop and market the innovation itself,
ii) to develop the market and innovation jointly with other companies through a strategic alliance, and
iii) to license the innovation to others and let them develop the market.
The optimal choice of the strategy depends on three factors, namely, the possession of complementary assets to exploit its innovation and create a competitive advantage, the height of barriers to imitation by the competitors, and the presence of capable competitors that can rapidly imitate the innovation.
Complementary assets are those required to exploit an innovation such as competitive manufacturing facilities capable of maintaining high product quality while ramping up the volume to meet the rapidly growing customers’ demand and state-of-the-art manufacturing facilities that enable the firm to move quickly down the experience curve without encountering any hitches and bottle-necks in the production process.
Complementary assets also include marketing know-how, adequate and competent sales force, access to good distribution channels, and after-sales service and support network. These assets, in particular, can develop brand loyalty and help the firm penetrate the market rapidly.
Barriers to innovation are factors that prevent the competitors from imitating a firm’s distinctive and unique competencies. These barriers particularly are effective in preventing second and late entrants from imitating the innovation. Ultimately, all innovations are susceptible to imitation, but the higher the barrier the more difficult it is for the rivals to imitate.
Capable competitors are firms that can rapidly imitate the pioneering company. A rival’s ability to imitate an innovation essentially depends on its R&D skills and access to complementary assets. In general, the greater the number of rivals with such capabilities, the more rapid is the imitation likely to be.
The strategy of going along with the innovation makes sense when
i) the innovator has the necessary complementary assets to develop the innovation,
ii) the barriers to imitation are high, and
iii) the number of capable competitors is limited.
The second variant of the innovation strategy, namely, developing and marketing the innovation jointly through a strategic alliance makes sense when
i) the innovator does not possess complementary assets,
ii) barriers to imitation are high and
iii) there are quite a few capable competitors.
Such an alliance is expected to prove mutually beneficial and each partner can share in high profits which neither of them is capable of earning on their own. The final variant of the strategy which involves licensing makes the most sense when the
i) innovating company lacks the complementary assets,
ii) barriers to imitation are low, and
ii) there are several capable competitors.
A vital strategic decision for competing in a dynamic industry is the appropriate timing of entry. While entry barriers are low in an emerging or embryonic industry, the risk can be quite substantial. Entering early is generally recommended when:
- Image and reputation are important to buyers and the firm is confident of developing a good reputation by being a pioneer.
- Customer loyalty is valuable and being first to the market helps build customer loyalty
- Being early puts the firm ahead of others on the learning curve, experience is difficult to imitate and it will be neutralized by future technological generations.
- Absolute advantage can be gained by an early commitment to suppliers, channel partners, etc.
However, early entry is risky when:
- The cost of opening up the market such as customer education/awareness, regulatory approvals, etc. is great.
- Technological change will make early investments obsolete and the second and latecomers can gain an advantage by having access to more advanced and newer technologies.
- Early competition with small firms will be replaced by bigger and more formidable competition at a later stage.