Strategic Management 3 Growth Strategies Anthony Boardman

Strategic Management – 3 Growth Strategies Anthony Boardman

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

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

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

Do First Movers Win? Innovator Win Lose Follower

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

Sources of First-Mover Advantages Demand-Related Supply-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 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

Will the First Mover Make $? Who Appropriates the Rents? u If a firm is first to market with a new technology or a new product, who tends to benefit the most – – u The innovator? Competitors? Customers? Second mover? Besides competition in the market place, the answer depends on two factors: 1) Control of technology (appropriability and imitation) 2) Nature and ownership of complementary assets

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

Complementary Assets u Complementary assets refer to the additional capabilities, knowledge, or resources required to successfully commercialize a new technology u Complementary assets include access to distribution channels, sales and marketing, service capability, customer relations and linked technologies u 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

Is Buying a Good Idea? It depends on the nature of the complementary assets u 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! u 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

Who Benefits Most? NATURE OF THE COMPLEMENTARY ASSETS GENERIC C O N T R O L O F T E C H N L G Y WEAK TIGHT CUSTOMERS INNOVATOR SPECIALIZED OWNER OF THE COMPLEMENTARY ASSET SHARED AMONG THE OWNERS OF THE KEY ASSETS

Strategic Implications for First. Movers u 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. u When control of technology is tight and the complementary assets are highly specialized, the innovator may develop them itself (integrate), license or collaborate

Why Second Movers Can Win u 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. Microsoft’s ability to cut Netscape’s market share in web browsers by first giving away its web browser with Windows and then integrating the two) u 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

Alternative Growth Strategies u 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

Internal Growth u u 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 u 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”

Advantages of Licensing u u 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. GE’s 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 licensee’s complementary assets e. g. reputation, good local image – Licensee provides valuable feedback

Disadvantages of Licensing u 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

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

Joint Ventures u. A JV is a separate legal entity that is owned by two (or more) firms u 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

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

Different Industry JVs u Both sides have complementary skills which they contribute to the JV u In return, they often hope they will learn something from the other u 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

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 Firm A’s Asset Marketable Firm B’s Asset Marketable Non-Marketable Market transaction: A buys from B or B buys from A B licenses or contracts to A A licenses or contracts to B Joint venture

Problems with JVs u 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 u Free-riding begins with an n of 2! u Better if not 50: 50