Friday 10 March 2023

The competitive lifecycle

Before we discuss the competitive lifecycle, let's quickly review the fundamental rule of business strategy.

Before we spoke of two types of profits:

Ricardian rents: Profits based on individual ability, there are organisations that have a competitive edge because they can do something better than the competition, processing, marketing, innovation, customers service, there is something that a particular organisation does that allows them to make profit, either by charging a premium or providing there product or service for a lower rate than the competition.

Monopoly rents: Profits exist because of some barrier to entry, Not everyone can enter the market allowing the incumbents to maintain an advantage and turn a profit. Barriers to entry could come in the form of: restrictive costs: it's just too expensive to enter the market, Licensing: there is a limited number of licences issued, Patent: a organisation has legal protection from imitation.

Now we are going to introduce a third type, the Entrepreneurial or Schumpeterian rent.

Entrepreneurial rents: Profits are based on dynamic capabilities, profits are the result of some sort of temporal advantage, namely in the form of technological innovation. These advantages come as organisations innovate, and then go as new technologies distrust the industry. A great example of this is the horse drawn carriage, disrupted by the combustion engine car, now being disrupted by the electric automobile.

The competitive life cycle

The competitive life cycle can by be broken up into three distinct phases
  • Emergent phase: during the emergent phase, organisation are trying out new business models or technologies, they are experimenting working on something that will give them an advantage. Profits are generally low during this phase if not negative, organisations are leveraging capital to bring something to market.
  • Growth phase: during the growth phase, organisations are expanding, new competition is entering the market. During this phase the demand is still high, thus organisations are generally aiming for new customers rather than competing for existing ones. During the growth phase profits begin to rise the dominant design has emerged, however as the industry grows more competition enters and profits begin to slow down if not dip.
  • Mature phase: The market has now accepted the technology and growth slows down, the customer base is established and only a few dominant players remain in the market.

Between each phase products are service are changing as they pass through transition gates:

  • Annealing: at the annealing gate the emergence of a dominant design takes root in the market, a coalescing around a particular design for a product ore service becomes the standard expected by the customer base.
  • Shakeout: at the shakeout gate, we see a reduction in the number of organisations within a market, this happens because some organisation go bankrupt whereas others are acquired by the dominant players in the market.
  • Disruption: at the disruption gate a new business model or technology enters the market and disrupts in incumbent players. This can be the result of either or both a technology push or a demand pull.
Below is a snapshot of how one cycle at a macro level may look 

During the emergent phase there are few organisations, the margins are low, if not negate and little revenue has be gained. As the product or service passes through the Annealing gate, a dominant design is established and adopted across the industry, this dominant design becomes the customer expectation. 

During the growth phase incumbents ramp up production and sales increase, and margins and revenues increase accordingly, however more organisations enter the market. entrepreneurial and established organisations alike enter the space. As competition increases margins dip and cumulative revenues slow down. Eventually the cycle passes through the Shakeout gate, at this point the market narrows down to the the best organisations, competitors either go bankrupt or are acquired by the biggest players.

During the Mature phase, the product or service remains stable there is little room for cost effective innovation, eventually the industry can expect to enter the disruption gate, where some new technology or service providing superior value enters into the market. An example of this is the entry of the iphone into the mobile market.