Strategic Management 3 Growth Strategies

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Strategic Management 3Growth Strategies

• Anthony Boardman

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Profiting from Growth

• Firms that grow usually have a comparative
  advantage, firm-specific asset, core competency,
  or strategic asset that they are trying to
  leverage
• Growth may involve changes in corporate scope or
  positioning strategies (such as entry into new
  products or geographic markets)
• Profiting from these strategic changes depends on
  the choice of appropriate strategies in terms of
  timing and means of expansion

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Entry and Growth Strategies Outline

• Timing and first mover advantages (FMA)
• Does timing matter?
• What are FMAs?
• When do they exist?
• Means of growth what is the appropriate means to
  expand?
• Internal growth (internal development,
  greenfield)
• Licensing
• Collaboration Joint ventures, alliances
• Mergers and Acquisitions

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First-Mover Advantages

• What is a first-mover advantage?
• Do first movers always win? Complete the matrix
  on the following page (innovators first
  commercialised a product)
• In what industries and in what circumstances do
  first movers win?

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Do First Movers Win?
Innovator Follower



Win




Lose

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First-Mover Advantages

• A first mover advantage arises when the first
  firm into a market earns higher returns than
  subsequent entrants
• Evidence suggests that being first to market is
  neither a necessary nor a sufficient condition
  for success
• Many first movers see their advantages eroded
  through imitation by competitors and
  appropriation by suppliers (including employees)
• Often being second is advantageous

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Sources of First-Mover Advantages
Demand-Related 1. Network externalities 2.
Switching costs high (lock-in) 3. Buyer inertia
due to uncertainty over quality 4. Buyer inertia
due to habit formation
Supply-Related 1. Winner take all markets (patent
races) 2. Scale and scope economies (no room
for second movers) 3. Learning effects and
dynamic capabilities 4. Control of suppliers or
complementors
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Will the First Mover Make ? Who Appropriates
the Rents?

• If a firm is first to market with a new
  technology or a new product, who tends to benefit
  the most
• The innovator?
• Competitors?
• Customers?
• Second mover?
• Besides competition in the market place, the
  answer depends on two factors
• Control of technology (appropriability and
  imitation)
• Nature and ownership of complementary assets

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Spillover Channels

• Competitors may obtain information by
• Reverse engineering
• Hiring the technological leaders people
• Formal and informal communication among employees
  e.g. at professional meetings
• Asking suppliers and customers
• Tools for controlling spillovers
• Intellectual property rights
• Employment agreements
• Non-disclosure agreements with vendors/customers
• Human resource management
• Product design decisions
• Secrecy

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Complementary Assets

• Complementary assets refer to the additional
  capabilities, knowledge, or resources required to
  successfully commercialize a new technology
• Complementary assets include access to
  distribution channels, sales and marketing,
  service capability, customer relations and linked
  technologies
• If a firm needs some complementary asset(s), it
  could
• build them itself (internally), but takes time,
  may not have the skills, no competitive
  advantage, or
• buy them

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Is Buying a Good Idea?

• It depends on the nature of the complementary
  assets
• Generic assets are readily-available,
  general-purpose assets (computer components, some
  assembly facilities). They are easy to buy at a
  competitive price. Get them from the Yellow
  Pages!
• Specialized assets depend on the specific
  purpose. They may be scarce, expensive,
  difficult or impossible to obtain. If you buy
  them, you may
• Pay too much
• Not get what you want (availability and
  indivisibilities)
• Have contracting problems
• Monitoring/enforcing difficulties
• Opportunism and hold-up

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Who Benefits Most?
NATURE OF THE COMPLEMENTARY ASSETS

GENERIC SPECIALIZED
CONTROL OF TECHNLGY
OWNER OF THE COMPLEMENTARY ASSET
CUSTOMERS
WEAK
TIGHT
INNOVATOR
SHARED AMONG THE OWNERS OF THE KEY ASSETS
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Strategic Implications for First-Movers

• When control of the technology is weak and the
  complementary assets are highly specialized and
  are not owned by the firm, the innovator must
  accept a lower return. Second movers may win.
• When control of technology is tight and the
  complementary assets are highly specialized, the
  innovator may develop them itself (integrate),
  license or collaborate

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Why Second Movers Can Win

• Second movers are particularly likely to succeed
  when
• Control of the technology is loose the product
  or service can be easily copied
• The second mover has valuable complementary
  assets (e.g. reputation or cash) or has related
  products or services (e.g. Microsofts ability to
  cut Netscapes market share in web browsers by
  first giving away its web browser with Windows
  and then integrating the two)
• The situation is made worse if there are
  substantial spillover benefits between
  competitors in the market The first-mover
  develops the market for the benefit of all

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Alternative Growth Strategies

• Growth usually requires additional assets. A
  firm may
• Integrate develop the assets internally
• License rent out the technology
• Collaborate joint venture or strategic
  partnership
• Merger or acquisition purchase the required
  assets

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Internal Growth

• A pure internal growth strategy requires that the
  firm grows by developing and selling its own
  ideas, products and services
• Positive
• Control destiny quality and quantity
• Information not shared with anyone
• Option value open a bridgehead and establish a
  name
• Negative
• Incumbents may retaliate harshly
• Costly, in terms of up-front expenditures
• Risky may not have all the necessary skills
• Time it takes 10-12 years before ROI (new
  venture) ROI (mature venture)
• Loss of option value takes attention away from
  opportunities at home

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Advantages of Licensing

• Patented knowledge can be sold or rented in
  markets via licensing
• Advantages
• Circumvent government regulations or trade
  barriers
• Can enter small markets
• Conserve scarce firm resources (do not have to
  make investments, do not get into a fight)
• Avoid absence of fit e.g. GEs oil digesting
  micro organism
• Speed-up entry and diffusion of technology e.g.
  VHS (network externalities)
• Preempt imitative behavior (40 of original cost)
• Benefit from licensees complementary assets e.g.
  reputation, good local image
• Licensee provides valuable feedback

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Disadvantages of Licensing

• Disadvantages
• Give up opportunity to establish name which would
  help introduction of new products subsequently
• Give up some control licensee might shelve or
  shirk incentive problems
• Licensee might gain technical knowledge and
  become a competitor
• Costly to write complete contract
• Hard to get a fair price

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Cooperative Strategies

• Collaboration is a potential answer to problems
  with licensing
• Build win-win partnerships based on trust and
  mutual benefits
• Increasingly, firms are finding it difficult to
  grow without forming alliances and partnerships
  of various kinds
• This is particularly true in high-tech industries
  and in global industries
• Cooperative strategies or alliances can take a
  variety of forms

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Joint Ventures

• A JV is a separate legal entity that is owned by
  two (or more) firms
• There are two major types of joint ventures
• JVs between firms in the same industry
• JVs between firms from different industries or
  with very different skills

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Same Industry JVs

• Examples automobile industry, oil exploration
  industry, bank clearinghouses, research
  departments in pharmaceutical and other
  industries
• These are usually driven by economies of scale
  and the desire to reduce risk

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Different Industry JVs

• Both sides have complementary skills which they
  contribute to the JV
• In return, they often hope they will learn
  something from the other
• This type of JV is similar to a licensing
  agreement (with similar advantages and
  disadvantages), although the incentives are more
  closely aligned share capital, risk

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When Does a Different Industry JV Make Sense?

• Use a JV when the skills (products or services)
  provided by both parties are not easily marketable

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Problems with JVs

• Problem over half JVs fail to achieve their
  objectives
• There is failure to fully share information or
  resources
• Disagreements arise over strategies, even if
  agree on goals
• Free-riding begins with an n of 2!
• Better if not 5050