UNIVERSITY OF TECHNOLOGY, JAMAICA SCHOOL OF BUSINESS ADMINISTRATION STER I - FINAL AND R iT. EXAMINATION DATE: arrn./Hay 2005 DURATION: 2 HRS COURSE NAME: STRATEGIC MANAGEMENT — COURSE CODE: MAN4001 | INSTRUCTIONS: ANSWER ALL QUESTIONS IN | QUESTION ONE AND 01 0 QUES’ ‘TIONS A. ION FROM SEC’ B, AND C, ANSWER ; LearyEntry strategies — a challenge to conventional wisdom Regis Coeurderoy and Rodolphe Durand i A business voice Neither first movers nor followers are doomed from the start. What matters are the interactions between different causes and different effects. Key messages 1, Nie honecring i fugit wih faites. The dange pat nae terior means that many pioncers fal. Followers are never too far behind a successfl basiness, seeking to take advantage of proven demand. The question i whether tory te deminate the market by moving in first, orto wait he entry rks have been minimised. CO The authors suggest that cent eS ens between the three stages of mnarketitlevelupimeat (Business creation, desta conehaio Ae a Sto) an erp EEE anova differentiation and cost leaders the foundation for: siseaegereo While others may #2sultin deadlock. © Oraverage, the combination of ‘market pioneers and innovailo tities’, ‘carly followers aid differentiation strategies’ and /late market entrants and cost leadership strategies’ are the most efficient*for companties wanting to outperform the eompetition. PRABY COTY (Conventional wisdom has it that soscesefal market entry depahas Od ive roan uh etssVer oe tage ‘Such ‘pioneering’ is seen by many managers as cle cioagety Ene ae ‘economies and larger ‘market shares than so called ‘followers’, leading to a virtuous circle of cost reduction and burgeoning market power. Most recently, for example, the approach has seemed to be working in industries exhibiting network externalities: the phenomenon whereby volumes increase rapidly as a result of direct and indirect connections between customers To go or not to go First mover advantage, however, is not necessarily all that it seems. Above all, it is worth remembering that the much publicised success stories about pioneers are drawn from a very narrow population, namely the survivors. A lot of pioneers do not manage to pass even the firs tests of the marketplace forthe simple reason that their market does not exist und they therefore cannot possibly know how to flourish in it. A high failure rate is hardly surprising, of course. Even those few who do overcome the initial hurdles of starting a business cannot guarantee a prolonged or easy life since their early achievements inevitably draw the attention of competitors seeking new sources of profit. Followers therefore enjoy the advantage that demand for a product or service has already been proven, giving them the opportunity to fine-tune their strategy. They can avoid the pioneering costs of seeking their first customers, the development and re-design of product prototypes and the premium typically paid to investors in return for early stage support. Furthermore, some of the initial investments of early movers are hard to reverse — in terms of people as well 4s financial capital — which can make such companies unwieldy by comparison with their imitators. In these csircumstances innovators can clearly suffer from ‘first mover disadvantage’, and therefore, the series of competitive advantages that models of hyper-competition propose sccm well out of reach.‘So what to do? Is it best to jump in to the market or to wait and see? Therein lies the paradox of pioneefing: it could bbe more profitable and less tisky to wait, but if everybody does so, there are neither seized opportunities nor ‘businesses created. For the strategist it looks like a black hole in which actions are inhibited by anticipated reactions. ‘One can argue that a bounded rationality coupled with irrepressible optimism will be sufficient to maintain a constant business churning. Or one can talk about exceptions (‘a first mover dominates its business’) or examples (‘a success story") and allow people to dream about being on top of the Rich List. Such thinking, however, in our view falls short of strategic reasoning. Adjusting entry and generic strategies Ina series of academic articles we have shown that neither pioneers nor their followers are necessarily doomed from the start. By contrast, we have shown that the performance induced by an entry strategy can be leveraged through well-fitted strategic orientations. Our research is based upon evidence drawn on a large sample of French companies in manufacturing industries (See Box below on Banque de France). In the remainder of this article we present the main managerial implications rather than a direct summary of the research findings. It is often convenient to split the growth of a business into three main stages: 1. A first phase of business creation when the entrepreneurs discover what their business is about, who its ‘customers are, what their needs are, how best to serve them and what kind of trading relationships to develop with them. 2. Then there is a period of demand consolidation when the main goal is to maximise returns by efficient investments, 3 Finally supply consolidation takes place when the number of competitors starts to fall as price competition intensifies and the market reconfigures through mergers and acquisitions. ‘Over these stages of business growth three main strategic options are available: the innovation strategy, the differentiation strategy and the cost leadership strategy. 1. The innovation strategy is dependent on having the capability to introduce chariges and ruptures in business ‘on the demand side (new products) as well as on the supply side (new production processes). It generates a ‘dynamic process of “creative destruction’ in which the entry of novelty means the exit of obsolescent technologies. ‘The differentiation strategy is based on offering products with @ unique content, ie. features for which the customers are ready to pay a premium price to acquire ‘something different’. Cost leadership, finally, is based upon the capability of sustaining a cost advantage over competitors and of being price maker in the industry. We suggest that the two dimensions just described (i.e. the stages of the market development and the type of strategy) are closely related when observed through time and that certain combinations provide the foundation forsuccesstul paths of development, while others are more likely to result in deadlock. ‘The Banque de France ditabase on corporate strategies Our key arguments are detived from research fiypotheses, eiptically tested on a trge sample of ‘companies in France. From 1993 onwards, the Banque de Fraince fias surveyed 2000 ‘manufacturing businesses annually. The Banque de Franc’ database contains mostly small and medium-sized firms (between 30 and 2000 employees), but is tepresedtative of the industries studied. The main objective of the Banque de France is to research into French companies ‘and, more specifically, into SMEs. The data is collected in face-to-face interviews with CEOs, conducted by Banque-de France ageats spetially trained in survey teclitiques. For this kind of survey, the top mnanager is Considered the person with the midst coinpreliensive knowledge about the firm and its:strategy. ‘The questionnaire, largely inspiféd by the PIMS database, deals chiefly with the followig topics: the business environment, the fitin's strategy in each of its businesses, 2the firm's internal organisation and its management features. A set guide has beenideveloped and implemented to foster micity among the agents managifig the questionnaire: Some criticisms may'thus be addressed 16 such databases, pointing out their eross-sectionsl nature; the risks of smisunderstandin, -ms with the measurement of Var{ables. But the importance of Sages Famong aalso-widely: rademics and practitioners. ‘The case of pioneers ‘Those who set up a new business, at east at the outset, not only have all the cards in their hand but also the rules of the game. Along with their customers and suppliers they are able to establish the key assets they need as well as forging different types of relationships with them. These ure the cote resources from which a business will grow and expand, It is clearly in the best interests of a pioneer to keep his or her privileged position for as long as possible, not least by secking to impose the pace of technological and product changes and by keeping imitators at bay. An ‘innovation strategy’ is thus the most profitable one whereby the pioncer can exploit first mover advantage. When capital intensity and the number of consumers are high the ‘cost leadership’ strategy may be fruitful too. Pioneers.can effectively “surf * on the curve of economies of scale. Generally, though, this strategy involves designing products with standard specifications and ‘ready-made’ functions, the risk of this being that the sources of innovative advantage may be eroded. ‘Such a strategy should only be chosen if the business has a clear view of demand and feels capable of serving it fully. ‘Otherwise more rapid and flexible competitors may take advantage. In any case, marketing differentiation can be a ‘dubious approach for pioneers if it dissolves the core values of innovation. ‘The case of early followers Early followers typically enter the market when the first customers have positively responded to pioneers’ innovations: Early followers seize the opportunity to serve complementary needs expressed by customers. ‘Consequently they benefit most from “marketing differentiation’, either introducing incremental technical sophistication or design features to products launched by pioneering companies. Early followers play on the pioneering companies’ inadequacies and failures and may grasp the niches pioneers cannot reach. They are not more innovative than pionsers, but they offer something valuably different. ‘The case of late entrants ‘When late movers enter the business, both pioneers and early followers have largely contributed to creating a new market. Buta large share of their action is market oriented. Such a perspective is undoubtedly necessary during the phase of demand consolidation. These pioneering firms need counterparts on the demand side with all the associated expenses such as the information costs of tracking down new customers who may be scaitered and hard to identify (both in terms of quantity and quality). Secondly, early entrants’ initial investments are not often seized for large scale ‘operations. This supply gap leaves room for more efficient productive solutions by late entrants. Late movers can watch the economic and competitive situation evolve and make their investments on the basis of good information about customers and available technologies. They consequently have the opportunity-to supply more efficiently and penetrate the market through lower prices. For late movers, ‘cost leadership? js.the-best strategy both in terms of tarkotabanoet Cetin pattoaaces ie RY Rey ne : pe ed ‘The monospace industry Even if they do not formulate it explicitly, many firms confront these business dynamics and adapt their strategy accordingly. Letus briefly consider the introduction of a new car concept in Europe in the mid 1980s, the “monospace’ designed and sold by Matra and Renault. These two companies created a new business segment around the idea of a large car (with seven places inside, for instance, and ‘plancher plat’) using top-notch innovative plastic. 3‘materials which they had developed in their Romorantin plant. Demand quickly consolidated and ngw entrants followed the pioncers by adapting existing vehicles like the US Chrysler Voyager for the European market. By the ‘mid 1990s late entrants had entered the fray through alliances (e.g. Peugeot-Citroen-Fiat). in the process ‘consolidating the supply side by changing technologies. These new players used steel based rather than plastic-based techniques, betting on a cost advantage for steel technology used in bigger volumes. While Renault was forced to respond by switching to steel, its main strategic intent remained to stay ahead of its competitors by controlling the innovation race and introducing new models on a regular basis. Designing efficient strategic tracks ‘This raises three main issues when it comes to entry strategies: O Firstly, as we emphasised at the outset, our research findings suggest there is no winning strategy per se in the long run, Neither an entry nor a generic strategy will provide superior results in terms of profitability/performance. Itis, however. possible to identify better tracks than others. This means that, on average, pioncers developing innovation strategies, early followers developing differentiation strategies and late entrants developing cost leadership strategies are more likely to outperform their competitors over time. Such interactions appear more efficient. Secondly, we acknowledge that these observations are only true ‘on average’. Everybody can find counter examples. But we do not draw general rules from exceptions. Moreover strategic change is not cost free. Being aware of these tracks help anticipate such costs. 5 Lastly, having doubts about pioneering is understandable. By comparison with the risks, the premium in terms of reward nceds to be highly valuable. It should not be forgotten, though, that beyond the performance figures pioneers enjoy one more advantage over their competitors and that is that they benefit from more strategic options and have ‘more opportunities to control the timing of business developments. Even after the initial phase, competitors have to adapt their strategy to the pioneer's moves. Having destiny in one's hands is a great responsibility, but also a great chance. ‘The ‘conventional wisdom’ of strategy can be wise but it often does not take into account the interactions between different causes (entry order, business and technology strategy) and different effects (market share or financial performance). Strategy is about interactions, and strategic studies seck to disentangle these effects. Regit Cocurderoy is Professor of Managerial Economics and Strategic Management at IAG . School of Management, Universite Catholique de Louvain, Belgium (a CEMS member school). Rodolphe Durand is Professor of Strategic Management at EM- Lyon, France.