Industry Life Cycles
13 important questions on Industry Life Cycles
What are the 5 stages of the industry life cycle?
- Encompasses the interval in which market remains relatively small (usually between 1 and 3)
- Is the interval form the 'take-off' point of net entry to the time that net entry decelerates drastically
- Is the ensuing period of low or 0 net entry
- Is the subsequent period of negative net entry
- Represents the new equilibrium in the number of producers that coincides with the maturity of the product market and continues until some new fundamental disturbance generates a change in market structure
What did Williamson (1975, 215-126) say about the 1st stage of the industry life cycles? (3)
- The first stage involves the supply of a new product of relatively primitive design, manufactured on comparatively unspecialised machinery, and marketed through a variety of exploratory techniques
- Volume is typically low
- A high degree of uncertainty characterises business experience at this stage
What did Williamson (1975, 215-126) say about the 2nd stage of the industry life cycles? (3)
- In the second stage manufacturing techniques are more refined and market definition is sharpened
- Output grows rapidly in response to newly recognised applications and unsatisfied market demands
- A high but somewhat lesser degree of uncertainty characterises market outcomes at this stage
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What did Williamson (1975, 215-126) say about the 3rd stage of the industry life cycles? (2)
- The third stage is that of a mature industry
- Management, manufacturing an d marketing techniques all reach a relatively advanced degree of refinement
What did Abernathy & Utterback say about the industry life cycles?
What 4 things are typical for the 'fluid' period in the A-U model?
- Performance criteria for new products are not well-defined
- Market needs or process difficulties are approached through a variety of different product or equipment designs
- Innovation is relatively rapid, and fundamental
- Production process is highly flexible and labor intensive
What are 3 steps in the industry life cycles according to Mueller and Tilton (1969)?
- The initial stages in the industry
- The frontiers of the technology expand
- Knowledge gets codified eventually
What is typical for 'the initial stages in the industry' according to Mueller and Tilton (1969)? (4)
- Uncertainty about the new technology is high
- R&D tends to be on a trial-and-error basis
- Large firms have no particular advantages in R&D
- Absence of size advantages coupled with large prospective returns to successful innovation attracts many entrants
What is typical for 'the frontiers of the technology expand' according to Mueller and Tilton (1969)? (3)
- Scale economies in R&D through specialisation
- Know-how of producers also rises over time raising entry barriers
- Coupled with the decline in profit margins associated with the increase in competition from prior entry
- this causes entry to decline and forces less efficient firms to exit the industry
What is typical for 'knowledge gets codified eventually' according to Mueller and Tilton (1969)? (2)
- Decreasing R&D entry barriers, but profit margins are sufficiently compressed to make entry unattractive
- At this point competition shifts from technology to price
What is the theory of shakeout from Abernathy & Utterback? (4)
- Shakeout: a decline in the number of firms despite industry growth
- Initially, many offering different varieties of the product enter the market and compete based on product innovation
- Experimentation by buyers and innovation by sellers leads to a de facto product standard dubbed a dominant design emerges
- Then, product innovation slows, process innovation rises
What is the theory of shakeout from Klepper (1996)? (4)
- Firms face continuous opportunities for product and process innovation
- There are increasing returns operating through process R&D
- Firms reduce their average cost through process R&D, and the value of reducing average cost is proportional to the level of output a firm produces
- Larger firms profit more from process R&D, which confers a competitive advantage, pushing smaller ones out
What is the specialisation over the industry life cycle from Stigler (1951)? (5)
- Stigler offers a theory in which firms become more specialized as a new industries evolve
- He considers the case where some activities in a vertical chain are subject to decreasing average costs (increasing returns)
- Savings on these activities can be realised if they are contracted out and performed by specialist firms
- Evolution brings growth, so that over time the savings from contracting outgrow
- Over time, firms find it profitable to contract out more activities to specialists
- This suggests that as industries evolve (and grow), firms will become increasingly specialised
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