EMBRYONIC INDUSTRY STATEMENT
Understanding Embryonic Industries
Embryonic Industry. An embryonic industry is an industry that is just beginning to develop. Growth at this point is slow due to customers' unfamiliarity with the industry products, high prices, and poorly developed distribution channels (Hill & Jones, 2012: 64). In order to get ahead at this stage, it is important to try to develop solutions to design problems within the industry to gain more market share.
Opinion on Statement
Statement. “A firm competing in an embryonic industry cannot afford to lose its few customers, and so it should do everything it can to satisfy the needs of innovators.” I personally agree with this statement for a few reasons. The first being, innovators within a company competing in an embryonic industry allow the company to solve problems relating to the design of a product. If innovators are not given the resources needed to fix or enhance the design of the product, then how will the problem ever get fixed? The product will not be able to be brought to market with the problem, meaning the company cannot make money off of it. If the company is competing with a rival on the same design issue, then the first company to fix the issue and bring the product to the market will more likely than not gain an advantage in market share. This company will attract all of the customers within the industry, and gain brand loyalty. Innovators also enable companies to create unique distribution channels that allow companies to create a competitive advantage within their industry. An example of this can be seen with the success of Apple Stores. The decision by Apple to open company stores to sell their products was originally viewed with skepticism due to the failure of their competitor, Gateway, attempting to open stores in the past. However, this model worked extremely well for Apple, and allowed them to gain a competitive advantage over their competitors because they have not been able to replicate the model to the same level as Apple. This is giving Apple the opportunity to reach their customers in a more efficient way than their competitors, thus giving Apple a significant advantage. Finally, innovators make it possible for the creation of a new embryonic industry based on their work. For example, LinkedIn was one of the first business professional social networks. LinkedIn provided its members the ability to not only connect with friends, but connect with people in certain companies they were interested in. It was a place for members to build a professional network that would give them information about jobs, companies, or anything else that sparked their interest. Since LinkedIn was so early to the social networking industry, and one of the first for business professionals, it established a loyal customer base with high switching costs. If a customer of LinkedIn wanted to switch to a different social networking site for business professionals, they would pretty much have to start from scratch and rebuild their whole network. This is not an appealing task when considering how much time was spent in the first place to build the network. Also, the customer may find it impossible to fully rebuild the network because chances are that most of the people they were connected with on LinkedIn do not have any other profiles due to the switching costs issue. When considering all of these reasons, it is clear to see that a company must do everything it can to appease the needs of innovators. If innovators do not have the resources they need to complete their job, then design issues will not get fixed, distribution channels will not be opened, and new embryonic industries will not be created. A company that does not provide everything it can to its innovators will quickly fall behind a company that is doing the opposite. The small amount of customers may leave, and never come back.
CROSSING THE CHASM
Understanding Crossing the Chasm
Summary of book. Crossing the Chasm was a book written by Geoffrey Moore which explained the difficulties companies face when marketing and selling technologically new products as the market develops through the different stages of the industry life cycle. He identifies five groups of customers and how they adopt the product, as well as explains what needs to be done to successfully cross the chasm.
Stages of Adoption
Innovators. When the product first comes to market, there is going to be a lot of unfamiliarity with what product and what it will enable the customers to do. This will result in a slow start regarding sales, with most of the sales coming from a group called innovators. These are normally people who are fascinated by technology, and want the latest technological breakthrough that's on the market.
Early adopters. Once the product has been on the market for a while and more people become familiar with what it can do, the next group of customers to purchase the product will be the early adopters. This is a group of people that see potential in the product and is willing to deal with the incomplete feature set because they see massive opportunities for growth in the future (Nielson, 2014).
Early majority. As the popularity of the product continues to increase, the next group of customers that will find value in the product is called the early majority. This group of customers were not willing to deal with the product's early issues because they want solutions to problems they are currently encountering. It is for that reason why they will only buy the product once it is considered fully finished.
Late majority and laggards. The final two groups of customers are the late majority, and the laggards. The late majority is characterized as being risk averse, and wanting a product that has had all of its holes figured out. The laggards on the other hand are the late-to-the-party buyers that are only interested in the product once everyone else has already proven the idea of the product (Nielson, 2014).
Definition. The chasm is the stage directly after the early adopters purchase the product. If the company does not take the product to the rest of the population at this point, their sales will never reach its full potential as there simply will not be enough people that are interested in the product. The trouble with crossing the chasm is figuring out the most effective business strategy to use once the product is presented to the rest of the population.
Crossing the chasm. In order to successfully cross the chasm, there are four things that a company must do. The company must create the finished product, market it appropriately, price the product based on competitors and use the correct distribution channels. Companies should never try to cross the chasm with an unfinished product. As it was mentioned earlier, the early majority is not interested in products that still have bugs that need to be worked out. If the company tries to cross the chasm with an unfinished product, the early majority will not be interested in the product. Once the company has completed the product, the next step is marketing it appropriately. The early majority is full of pragmatists that will want the product to be the solution to the problems they are currently facing. Emphasizing return on investment by showcasing aspects such as market share, third party support and application proliferation will attract the attention of the early majority (Nielson, 2014). The third step in this process is pricing the product based on competitors. It is not smart to price the product way above the market because the population will most likely not be willing to purchase an unproven product when they could go for a cheaper alternative. Pricing it along the line of competitors will attract the most demand. Finally, finding the correct distribution channel for the product is the last obstacle standing in the way from fully crossing the chasm. Companies needs to decide which channel is the best choice for their product to maximize on the demand. The company also needs to decide whether or not to pick a channel that will create demand, or fulfill demand.
TECHNOLOGICAL PARADIGM SHIFT
Understanding Technological Paradigm Shifts
Definition. A technological paradigm shift occurs when new technology is introduced that revolutionizes the structure of the industry, changes the nature of competition within the industry, and requires companies to adopt new strategies to stay competitive (Hill & Jones, 2012: 249). These shifts are most commonly seen in mature industries where there has not been much recent innovation. Once the new technology is introduced, it greatly effects both existing companies, as well as companies attempting to enter the industry.
Paradigm Shifts Today
Television Industry. An example of an industry that has recently undergone a technological paradigm shift is the television industry. The rise of the television and movie streaming service, Netflix, has put immense pressures on the industry. Netflix allows customers to pay a monthly subscription fee in return for the unlimited streaming of television shows and movies that are licensed to Netflix. Netflix started out as a web service which allowed customers to order DVDs to be sent to them through the mail, but has grown to the most popular streaming service in the world.
Effect on Established Companies. The rise of Netflix is causing problems for many companies in the industry, but the cable companies are getting hit the hardest. Netflix's service is 20% of the cost of most cable packages, which has resulted in a large number of customers cancelling their cable plan (Investopedia, 2015). Cable companies are finding it extremely hard to compete because Netflix makes it possible for their customers to watch shows anytime they want, anywhere they want. Customers are able to watch the same television show or movie on any device the customer owns that is able to download the Netflix app. This is far more of an on demand experience than the cable companies are able to provide by only being able to offer their shows through television screens. Netflix is also far better when it comes to mining user data than the cable companies. Netflix first developed a tool that allowed them to generate suggestions for content that the user may be interested in viewing. Once Netflix started making original content, they then used the data to determine what type of original content the company should create (Investopedia, 2015). The success of Netflix may very well be leading to the demise of cable companies as a whole. If cable companies go away, television networks will be the next that are greatly impacted as they will no longer reap revenue from being included in cable packages.
Effect on New Entrants. Well known cable companies are not the only companies facing severe problems from Netflix. New streaming services are also finding it extremely hard to gain a footing in the industry. Customers already have a brand loyalty when it comes to Netflix, so if a new streaming service comes into play, it is very unlikely that the customer will leave Netflix for the new entrant. The most grueling problem the new streaming services are encountering is Netflix's exclusive streaming rights on various shows or movies. Netflix struck a deal with Disney back in 2012 that gave them exclusive pay television rights to all Disney, Pixar, Marvel Studios, and LucasFilm movies released from 2016 onward (Kaye, 2016). This means that Netflix will be the only streaming service that has the rights to provide these films to their customers. This will make it increasingly difficult for new servicing companies to attract customers because Netflix is able to get the exclusive streaming rights to popular shows and movies. If the new entrants are not able to get a customer base, they obviously will not survive against the streaming giant.
PROFITABILITY JUSTIFICATIONS FOR MULTI-BUSINESS MODELS THROUGH DIVERSIFICATION
Understanding Multi-Business Models
Based on diversification. A company that uses a multi-business model based on diversification has the overall goal of finding ways to use a company's existing strategies and distinctive competencies to make products that are highly valued by customers in the new industry it enters (Hill & Jones, 2012: 342). Once the company enters a new industry, it creates a separate division specifically for that industry.
Profitability Justifications for Pursuing Model
Transfer competencies between business units in different industries. A company has an opportunity for profit when the company is able to transfer a competency to a business unit in another division. This can occur when a company has a very strong marketing and sales department. The company would be able to transfer some of their best marketing experts to the business unit in the new division to help create new products, and ways to market that product. This could then result in revenue for the company, and savings to costs because the company was not required to hire a marketing expert that was familiar with the new industry.
Leverage competencies to create business units in new industries. Leveraging competencies is different than transferring competencies because the company is able to create a new business unit when they leverage competencies from a different business unit. A prime example of a company that leveraged its competencies from one business unit to create another is Netflix. Like it was mentioned earlier, Netflix used the results from mining user data in order to get a better idea of what original content could be appealing to their customers.
Share resources between business units to realize synergies or economies of scale. A company is also given the opportunity to profit when they are able to get multiple business units to share resources to increase sales, and cut costs. When business units share resources, it can be anything that one unit does well that can be shared with another. Sharing resources increases the value of each partner by resulting in increases in speed to market, reductions in operational complexity and increases in cost efficiency (Martyak, 2014).
Use product bundling. Another profitable method that can be used when companies pursue a multi-business model focusing on diversification is product bundling. This is when companies sell their products together as a package rather than separately. McDonalds is a company where this strategy is seen often. McDonalds gives the customer the option to order the food items separately, or they can elect to order a meal, and have a few items packaged together for one price. This option is appealing to the customer due to the cost effectiveness of the meal being cheaper than the items included in the meal individually. This option is also appealing to McDonalds because the bundle makes customers more likely to order the meal rather than just the sandwich because they can get more food for a little extra money.
Utilize general competencies that increase the performance of all business units. Companies can utilize general business competencies such as organizational design to increase the performance across all business units. Having the correct organizational design that fits a company allows them to promote accountability, and improve the execution of their strategy. Making sure decision rights are clear and that information flows rapidly and clearly from the executive committee to business units, functions, and departments makes it easy for people to be accountable for their part of the work without being micromanaged (Neilson, Estupinan, & Sethi, 2015). It is also important to find the structure that fits the company best. Having a tall structure keeps most of the decision making with the higher level managers so they can more easily plan for the future of the company as a whole. Having a flat structure spreads the authority between higher level managers and lower level managers. This decreases the chance of information overload, and lets the executives make decisions about the company as a whole rather than the day to day decisions.
In summary, a company that is competing in an embryonic industry must do everything it can to satisfy the need of innovators to avoid the risk of losing their few customers. Innovators allow the company to fix any design problems with the product, which enables the company to bring the product to the market faster than their competitors. If a competitor can fix the problem first, they will most likely get the first mover effect, so it is essential to make sure innovators have the resources they need to do their job. Innovators also allow the company to use unique distribution channels for their products. When considering a company attempting to cross the chasm, there are several groups that the company will encounter through the progression of the industry. At the beginning, most of the sales will come from a group called the innovators. These are people who love technology, and are constantly looking for the next big thing. The next group is the early adopters. These are customers that see big potential in the product, and are willing to deal with the product's bugs as it get completed. The third group is the early majority. These are people who want a finished product to solve their current issues. The late majority are risk-averse people who want all of the holes figured out. Finally, there are the laggards who will only buy the product once the idea of it has been proven by the early groups. The chasm is faced right after the early adopter stage, and there are several things the company must do to cross it. The first being the company creating the finished product, followed by marketing it appropriately, pricing the product based on competitors and using the correct distribution channels. When looking at industries that are recently going through a technological paradigm shift, one that sticks out is the television industry. Cable companies are feeling immense pressure due to the rise of the streaming service Netflix. Many people have already cancelled their cable plan and that number will continue to rise. New entrants are also finding it hard to compete as Netflix is continuing to lock up exclusive steaming rights to several popular movies and shows. Finally, there are several profitability justifications for pursuing a multi-business model that is based on diversification. Pursuing this model enables the company to transfer competencies between business units in different industries, leverage competencies to build new business units in new industries, share resources between business units to achieve synergy or economies of scale, use product bundling and utilize their general competencies in order to increase the performance across all business units. All of these justifications allow the company to either improve certain areas of their business units, cut costs, or increase their sales.
Hill, C., & Jones, G. 2012. Strategic management theory (10th ed.): 64. Boston, Mass.: Cengage Learning.
Hill, C., & Jones, G. 2012. Strategic management theory (10th ed.): 249. Boston, Mass.: Cengage Learning.
Hill, C., & Jones, G. 2012. Strategic management theory (10th ed.): 342. Boston, Mass.: Cengage Learning.
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