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INDUSTRY LIFE CYCLES

Bocconi – Duke Seminar. INDUSTRY LIFE CYCLES. Gianluca Capone – Kun Fu. Presentation Overview. Proposition 1 ILC Explanations ILC and capabilities. Proposition 1. 1.Proposition 1 2. ILC Explanations 3. ILC and Capabilities. Changes in industry structure. (including entry and exit).

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INDUSTRY LIFE CYCLES

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  1. Bocconi – Duke Seminar INDUSTRY LIFE CYCLES Gianluca Capone – Kun Fu

  2. Presentation Overview • Proposition 1 • ILC Explanations • ILC and capabilities

  3. Proposition 1 1.Proposition 1 2. ILC Explanations 3. ILC and Capabilities Changes in industry structure (including entry and exit) primarily arise from firm-level factors

  4. ILC Explanations - overview 1. Proposition 1 2. ILC Explanations 3. ILC and Capabilities • Dominant Design: • Abernathy & Utterback (1978); Utterback & Suarez (1993) • Learning Model: • Jovanovic (1982); Jovanovic & MacDonald (1994) • Size & Appropriability of Returns from Innovation: • Klepper (1997) • Population Ecology: • Carroll and Hannan (2000); Carrol et al. (1996) • Heterogeneous Demand: • Adner & Levinthal (2001); Christensen (1993) • Cognitive Biases: • Dosi & Lovallo (1997); Horvath, Schivardi & Woyvode (2001)

  5. ILC Explanations (1) • Dominant Design: • a) New firms enter a new industry with different variations of product; • b) A dominant design emerges and determines resolution of uncertainty; • c) Advantage to firms that are able to achieve greater skills in process innovation • “A firm’s inability to change its organization structure and practices along with the evolution of technology in the industry will be its major source of failure” • Learning Model: • a) Firms may learn different types of technologies over time; • b) According to their abilities to learn, we have different outcomes in industry structure • “Firms that were able to implement early were rewarded with growth in output and value; the others joined a mass exodus” 1. Proposition 1 2. ILC Explanations 3. ILC and Capabilities

  6. ILC Explanations (2) 1. Proposition 1 2. ILC Explanations 3. ILC and Capabilities Size & Appropriability of Returns from Innovation: a) Firms reduce their average cost through process R&D; b) Larger firms profit more from process R&D; c) Firms’ success depends on time of entry, growth ability, R&D Population Ecology: a) Age dependence; b) Density dependence c) A role for firms’ skills and experience “Early in an organization’s life, we think that the skills, knowledge and other assets accumulated in prior periods of planning, organizing and operating in related industries give the organization an advantage over those without such periods. Later in the life of an organization, however, these same factors diminish in importance and likely create inertial drag, at least relative to new organizations”

  7. ILC Explanations (3) 1. Proposition 1 2. ILC Explanations 3. ILC and Capabilities Heterogeneous Demand: a) Small market niches can allow new entry that later displace incumbents b) Role is played by demand characteristics, technological trajectories and also firm strategies Cognitive Biases: a) Entrants may be over-optimistic about their capabilities or they may under-estimate competitors’ capabilities; b) Excessive entry, especially among de novo firms; higher probability of exit

  8. ILC and Capabilities – A model 1. Proposition 1 2. ILC Explanations 3. ILC and Capabilities Market Forces Rate of entry & exit & Industry Concentration & Market Leadership & Production cost & Product performance & Firm optimal scale & …… Entry (which market, mode, timing) Survival Prosper Exit Industry structure & Life cycle Firm Resource & Capability Organization life cycle Proposition: Changes in industry structure primarily arise from firm-level factors.

  9. Firms Resources & Capabilities Firms are heterogeneous in terms of technical asset, market resources, organization structure, etc.. • Technology-related • R&D (Klepper,2002); • introduce technological change and innovation (Gort and Klepper, 1982); • implement the innovation from outside industry (Jovanovic and MacDonald, 1994) • Tangible assets, intangible knowledge about market and customer, managerial experience, etc. • Pre-entry experience (Klepper and Simons, 2000; Klepper, 2002), resource and capability (Helfat and Lieberman, 2002 ); • accumulation of post-entry experience (Gort and Klepper, 1982); • effective learning and ability to adapt (Helfat and Lieberman, 2002) 1. Proposition 1 2. ILC Explanations 3. ILC and Capabilities

  10. R&C impact Firms’ Entry and Exit Firm-level resources and capability influence firm’s decision and performance: (Helfat and Lieberman, 2002) • Entry • Which market to enter • Which mode of entry • Timing of entry • Post- entry performance • Survival • Prosper (growth, profitability…) • Exit 1. Proposition 1 2. ILC Explanations 3. ILC and Capabilities

  11. R&C Moderate the Role of Market Forces • Market/industry is not given. Any shift in technology, state of business practice, customer need can lead to new segment of market and demand (Helfat and Lieberman, 2002). • Demand-side factor alone can’t explain some phenomena. e.g. the shakeout in the US automobile tire industry during 1920s. (Jovanovic and MacDonald, 1992,1994)  The industry structure is shaped by the ways in which firms lead/adapt to the technological change, created/address market demand based on firm-level R&C (Christensen, 2004). 1. Proposition 1 2. ILC Explanations 3. ILC and Capabilities

  12. R&C Moderate the Role of OLC 1. Proposition 1 2. ILC Explanations 3. ILC and Capabilities Hazard rate increase/decline with age based on organization inertia/liability of newness argument. Experienced entrants have lower mortality rate in early stage of organization’s life and the rate declines more slowly than those without (Carroll, et.al., 1996). earlier entrants have lower hazard at older age. Earlier entrants are composed by both innovators and imitators that greater probability of exit (Klepper and Simons, 2000). Firm-level R&C condition the age-dependent effect At different stages of industry firm-level capabilities shape not only the number of firms but also the composition (Gort and Klepper, 1982)meaning that which kinds firms are more likely stay in/driven out the market

  13. Structural Characteristics of an Industry We can observe: • Rate of entry and exit • Industry concentration • Market leadership profile • Stage of industry life cycle • Product differentiation/performance • Production cost • Firm optimal size/scale … 1. Proposition 1 2. ILC Explanations 3. ILC and Capabilities

  14. …thank you very much!

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