The evolution of strategic emerging industry: the earlier stage and the shake-out phenomenon

Xiao-mei Luo The Pilot College of Beijing University of

Technology, Beijing，China xmluochina@163.com

Lu-cheng Huang

School of Economic and Management Beijing University of Technology

Beijing, China hlch@bjut.edu.cn

Abstract—The industrial landscape is becoming increasingly complex and dynamic, with innovative technologies stimulating the emergence of new industries. Literatures searching life cycle always describe a smooth pattern of emergence over time in which the number of firms in an industry increases, hits a peak, decreases as a result of a shakeout, and then stabilizes as the industry reaches maturity. When these findings applied to the strategic emerging industry the life cycle curve need modified according the industries’ characteristics. This paper introduces an alternative pattern of evolution of strategic emerging industries in the earlier stage. Two phases are added in the process and the time axis extended into five phases. During the earlier stage, an industry experiences a sharp decrease in the number of firms – a “mini shakeout” – before increasing again, reaching a final peak and undergoing a major shakeout as described in the extant literature. We then propose a conceptual model that highlights the role of unexpected factors, the internal factors and strategic importance of the emerging industry to the firm in determining its likelihood of exit from the industry.

Key words: Strategic emerging industry; Life cycle; Earlier stage; Shake-out

I. INTRODUCTION Vernon [1] proposed product life cycle theory

initially in 1966, and then William j. Abernathy and James m. Utterback [2] developed the product life cycle theory further by dividing the development of product into three stages including fluxion, transition and determination. Based on this Gort and Klepper (1982)[3] investigated 46 industries according to series data 73 years and proposed the division of manufacture number in industries, which established the first industry life cycle model in the industry economics sense. And then progress has been done in the analysis of industry life cycle in various ways and with different methodologies, from quantitative analyses, to dynamic oligopoly models, to evolutionary models of industry evolution mainly in the following aspects: to describe the industry life cycle curve from empirical perspective; the

behaviors of entry and exit and the barriers for enterprises; the propel power of industrial evolution; how to formulate the corresponding policies according to industry life cycle.

In spite of the recognized importance of strategic emerging industries, there are few literatures describing the origins and early evolution of these new industries. Existing models of industry evolution describe a smooth pattern of emergence over time in which the number of firms in an industry increases, hits a peak, decreases as a result of a shakeout, and then stabilizes as the industry reaches maturity. Although these models have been well-accepted we propose that the finding is not as robust as is generally assumed when they are applied to strategic emerging industries for its characteristics including uncertainty, complexity, emerging technology oriented and so on.

To start filling this gap this paper proceeds as follows: In the first part of the paper, we will briefly discuss progresses about the emergence of emerging industry. In the second part of the paper we will analyze the existing gap in findings about life cycle and the concept and characteristics of strategic emerging industry. In the second part we discuss the life cycle curve in the earlier stage of strategic emerging industry. The shake-out phenomenon and the explanation is discussed in the third part. The paper concludes with a discussion of the patterns of industrial emergence that have been observed, and recommendations for further development and application of the framework.

II. CONCEPTUAL FOUNDATIONS

A. Life cycle Many studies that have used life cycle

frameworks as a core perspective for studying the evolution of industries, products, innovation and technology. Collins [4] reviewed approaches to new industry development suggesting that traditional industrial economics tends to view new industry

This paper was supported by National Soft Science Research Program 2010GXS3K083； Beijing Academic Human Resources Development Project PHR-IHLB； Beijing Science Technology Program Z101108001810019； The National Natural Science Foundation of China under Grant 70639002.

978-1-4244-6581-1/11/$26.00 ©2011 IEEE

development in terms of linear life cycles driven by competition among firms. However, from the perspectives of organizational management and entrepreneurship, industrial emergence is not necessarily linear, and interactions between organizations play a critical role, Tushman and Romanelli and Dawson[5-6]. Eldredge and Gould[7] proposed a‘punctuated equilibrium’ related to this issue. In summary, existing findings appear that there are several gaps in the literature:

♦ Most of the life cycles researches focus on the stages growth and maturity but not the earlier stage where emerging industry begin.

♦ Most of the literature focuses on the stages of evolution and its characteristics, rather than the interfaces or transitions between stages especially earlier stages, which may be more interesting in terms of understanding the dynamics of industrial emergence.

♦ Few literature focus on the essential factors determining the entrance and exit behavior of enterprises in the earlier stages, which affect the formation of life cycle curve

B. Strategic emerging industry Strategic emerging industry is different from

traditional industries. First of all it has a strategic position in the national economy and the economic and social development and national security; and second, these industries hold great importance on the future, and it must have the energy to become a country's future supporting industries in the economic development of the country. So strategic emerging industry is always the innovation-driven industries selected in global industrial system dynamically with the features of strategic implications, emerging avalanche and continuous diffusion. The core technologies evolve in high-frequency and develop dynamically. These decide the strategic possessing the characteristics of high uncertainty, complexity and levity in contrast with traditional industry.

III. THE EARLIER STAGE OF INDUSTRIAL EMERGENCE

The emergence of industry usually experiences these phases: from science to technology, from technology to application and from application to market. When applied to strategic emerging industry this division can not reflect its origin and characteristics. The conventional time axis is divided into four phases including ‘nurture’, ‘growth’, ‘maturity’,

‘decline/renewal’. In this paper we contend that based on this the time axis should be extended in the stage of growth:

♦ A ‘precursor phase’ which captures the historical context and ‘initial conditions’ of emergence, including key underpinning scientific developments, the first attempts to identify potential applications for the new science, the influence of existing analogous markets, etc.

♦ An ‘embryonic phase’, which describes the translation of applied science proof-of-concept demonstrators into technology prototypes and early application demonstrators.

A direct link between the phases of industrial emergence and the key perspectives that dominate each phase are science, technology, application and market in general. Although all phases and transitions of industrial emergence generally have some level of activity and interaction between science, technology, application and market, the different phases tend to be progressively dominated by events related to science (S), technology (T), application (A) or market (M). This paper focuses on the earlier stage and transitions of industrial emergence before growth and presents that its earlier stage can be divided into five parts as followed:

♦ Precursor phase (science-dominated, S): from observation of underpinning scientific phenomena through to the first demonstration of applied science potential, which stimulates industrial interest and investment.

♦ Science-technology transition (S-T): activity is focused on translating the potential of the applied science into technology demonstrators, showing that the technology is sufficiently robust to be integrated into a functional system.

♦ Embryonic phase (technology-dominated, T): activity is focused on improving the reliability and performance of the technology to a point where it can be demonstrated in the field.

♦ Technology-application transition (T-A): activity is focused on developing the technology and application to a point where the integrated system can be demonstrated to customers, leading to the first business sale.

♦ Application-market transition (A-M): activity focused on translating

price-performance demonstrators into a market with substantial growth potential.

IV. SHAKE-OUT PHENOMENON

The characteristics of strategic emerging industry determine that during the emergent stage, an industry experiences a sharp decrease in the number of firms – a “mini shakeout” – before increasing again, and then decreases again and finally it reaches a peak . Emphatically this phenomena usually appears in the course of growing in traditional industry as described in the extant literature. The explanation for this is generally illustrated as follows:

♦ Occurrence of technological events, including the emergence of dominant designs, or exogenous technological innovation.

♦ Competitive advantage for older and larger firms, which depends on assumptions regarding product and process innovation capability.

♦ Population ecology, expressed in terms of legitimacy and competition.

♦ Co-ordination problems that cause exit from the industry.

The above explanations just describe what make the shake-out happen. As characterized in the extant literature, when the major shakeout occurs, the market has already developed, with industry sales having taken off and stabilized. The drivers of exit in this situation have been primarily attributed to increased competition. In contrast, firms exiting during the mini shakeout do so even before the market fully develops. So the problems are: Why would a firm enter an emerging industry and then abandon it before the market materializes while others stay committed in the earlier stage? While some firms run out of resources and are

forced to exit but many firms abandoning the emerging industry is an explicit choice. We propose a conceptual model to explain firm exit. Our primary interest is to better understand what distinguishes firms that remain in a new industry and wait for the market to develop from those that choose to exit before the industry takes off.

In analyzing exit before and during the mini shakeout, we identify two primary, but related, factors that drive the exit decision. The first concerns unmet expectations, i.e., the disparity between a firm’s expectations about the industry’s development and the industry’s actual development. The second concerns the strategic importance of the emerging industry to the firm. We discuss each of these in turn.

A. The unexpected factors The reason why firms enter an emerging

industry is due to their expectation that there is an opportunity to be exploited in the future market. The assumptions always include how quickly the market will grow, how technologies will perform, what customers will value, how competitors will respond, etc. In the earlier stage of emerging industry these factors change in high frequency and big degree which make these pioneer alert. When they detect any change go against their expectation they will get ready to exit momentarily. For example the emergence of a new substituting technology or product, a sudden promulgation of policy by government, a transfer of consumer demand and so on. This variance is important in explaining a firm’s decision to abandon an emerging industry. Unmet expectations are an important consideration in deciding whether to exit, e.g., a firm that justified its entry into a new industry based on aggressive forecasts will have a greater motivation to abandon the industry when it actually develops more slowly.

B. The internal factor The internal factor is another factor influence

the behavior of these earlier entrants. Firms aim at emerging industry and market always hold large mix of products which make sure they can endure the risk brought by uncertainty in the emerging industry. How to allocate their resources is decided by the style of high-level leaders, the strategic objectives, the relative efficiency in different industry, the correlativity of these industries and so forth.

C. Strategic importance of the emerging industry The other major factor that explains whether a

firm remains committed to a new industry as opposed to exiting is the strategic importance of

Period

S T A M

Firm num

ber

Figure1 The earlier stage in life cycle of strategic emerging industry

the emerging industry to the firm. Is the emerging industry core to the firm’s future strategy and identity, or peripheral? A firm may be more willing to overlook disparities between expected and actual performance if an industry is believed to be central to the firm’s future. And likewise, a firm will be less willing to commit to a peripheral industry. For example, Christensen and Bower (1996) show that firms in the disk drive industry were less willing to sustain investments in emerging market segments that were viewed as small and peripheral relative to the firm’s existing customer base. Similarly, we find that different levels of strategic emerging industry helps explain firm exit.

V. CONCLUSION

In this paper, we challenge the widely accepted model of industry evolution in which the emergence of new industry is characterized by a smooth progression of three stages:(1) high levels of entry with an increasing overall number of firms; (2) a shakeout in which the total number of firms decreases significantly, and finally (3) stability, when the market matures with little change in the total number of firms. While this model holds for many new industries, when it is applied to the strategic emerging industry there is an additional stage of disillusionment, where many firms abandon their innovative efforts in a new industry before it has completely developed. We term this additional stage a “mini shakeout” in the firm number. In the mini shakeout, however, the industry has yet to develop and there are no obvious winners or losers. Instead, we argue that factors explaining exit may relate to patience and management of expectations. In particular, we find two factors that differentiate firms that chose to

exit from those that didn’t: (1) Expectations about the industry’s development, including how quickly the market would grow and what segments would develop first, (2) Internal factors and (3)The level of strategic importance the industry held for the firm. We hope that our study calls attention to the need to examine deviations in the stylized trends observed in the industry evolution literature, and concomitantly for a focus on exit decisions, in addition to entry, as firms invest in strategic renewal activities. [1] Vernon.R..The Product Cycle in the New International Environment. The Oxford Bulletin of Economics and Statistics.1966,41:255-267. [2] James Utterback, William J. Abernathy. A Dynamic Model of Process and Product Innovation [J].Omega, 1975(3):63-69. [3] Gort & Klepper. Time paths in the diffusion of product innovation [J]. The Economic Journal，1982. [4] Collins, R.J. (2005), ‘A model of new industry development in horticulture’, International Symposium on Harnessing the Potential of Horticulture in the Asian-Pacific Region, ISHS Acta Horticulturae,694, pp. 41-46. [5] Tushman. M.L. and Romanelli, E. (1985), ‘Organizational evolution: a metamorphosis model of convergence and reorientation’, Research in Organizational Behaviour, 7, pp. 171-222. [6] Dawson, P. (1996), ‘Beyond conventional change models: a processual perspective’, Asia Pacific Journal of Human Resources, 34, pp. 57-70 [7] Eldredge, N. and Gould, S.J. (1972), ‘Punctuated equilibria: an alternative to phyletic gradualism’, In T. Schopf (Ed.), Models in Paleobiology, Freeman, Cooper & Co., San Francisco. S T A M

Firm num

ber

Period

unexpected factors

internal factor

Strategic im

portance

Figure2 The shake-out phenomenon in life cycle of strategic emerging industry