What Defensive Strategies might industry incumbents pursue in turbulent and hypercompetitive markets?
A topic that has become more prevalent with the continuation of globalization is the various defensive strategies needed to contend with a hypercompetitive or turbulent industry. Carpenter and Sanders (2008) discuss complexity theories as those firms that are able to make changes on the fly to processes and practices, while being able to adapt to changes that come from a competitive environment. We see this occur often in the technology industry as new technologies are offered, and existing incumbents have to change quickly to match or find new ways to compete with new innovations that are frequently introduced.Furthermore, Grant (1999) states that due to unstable conditions as a reaction to innovations and increasing competition have resulted in organization’s capabilities being a more central focus of long-term strategies. Anderson (1999) outlines modem complexity theory as some systems with many interactions among highly differentiated parts that can produce surprisingly simple, predictable behavior. Being able to forecast the types of behaviors within the industry may provide a firm the competitive advantage it needs to better position itself within the industry for present day success and long term success.
The second defensive strategy comes from reviewing previous and future strategies, and the review of previous outcomes to determine the future strategies that could benefit the company. In this model firms will connect past activities and future forecasted conditions to create a backbone in which research and development can be guided along. (Carpenter and Sanders, 2008) This is similar to the the learning curve that we discussed last week in that a firm will take its previous experiences and use those to improve and perfect the process to gain additional opportunities in the manufacturing process. Carpenter and Sanders (2008) go on to support the idea that using this approach and strategy companies can utilize a low-cost approach to experiment with product innovations to test and verify possible changes that will lead to future changes of the product as consumer demand requires it.
The last strategy described by Carpenter and Sanders (2008) is for firms to set the pace and rhythm. Firms that are able to construct and implement structured strategy are able to better enter industries, because they understand the various fluctuations that are present and can mirror those changes in the strategy being implemented. (Carpenter & Sanders, 2008) I have experienced how a company being late to market affects the sales and forecasting of the company. It often results in resources and capabilities being used during the wrong time within the calendar year, resulting in a misallocation of resources and often a shortage during dire times. This delay lead to countless customers moving to similar products, because they could no longer wait for the companies products, which resulted in poor sales for the sales cycle of the industry. Moving forward there will be a different emphasis on the action of creating strategy that will encompass the timing of implementation and introduction to market.
How can the use of Real-Options Analysis help in putting a Value on Staging and Pacing?
Real-Option analysis allows a firm to analyze the financial aspects of their own dynamic strategies to determine if they are correctly positioned to maximize the company’s opportunity. (Carpenter & Sanders, 2008) It provides managers with greater strategic flexibility in the process of reviewing projects and development of new products. Carpenter and Sanders (2008) state that those firms able to manade the timing of strategy also can benefit of understanding the internal rhythm of introducing products to consumers. By understanding that the rhythm is synchronized with two factors within the industry allows managers to add importance to the Real-Option analysis. “The idea behind real options is to preserve flexibility so that the firm has an ability to be well positioned in the future when the competitive environment shifts.” (Carpenter & Sanders, 2008, p. 190)
Keeping with the theme for this week’s chapter readings and articles real-option analysis is based on the concept of strategic flexibility as functions of managers to evaluate alternative outcomes from certain actions. (Carpenter & Sanders, 2008) The underlying logic that we see in real-options is that the planned future investment opportunities are based upon the previous investment commitment that the company has made in the same or similar industry. (Adner & Levinthal, 2004) As we discussed in the previous discussion point the turbulent and hypercompetitive markets that firms face today present uncertainties that lead managers to use these types of analysis to adjust their financial investment. Carpenter and Sanders (2008) were able to provide useful categories to help classify real options, waiting to invest, growth options, flexibility, exit for abandonment, and learning option. Personally I was able to find great application for the waiting to invest option and the learning option. The waiting to invest option states that there is inherently value in waiting to build a manufacturing facility until the industry is better mapped out. Carpenter & Sanders, 2008) The other is the learning option where initial small investment may create further understanding of an industry, and can help a firm better understand if more capacity is required for the particular industry. These two options specifically could present some great opportunities in the StratSim environment, and I hope to find new ways to use this particular analysis in everyday application.
Adner, R., & Levinthal, D. A. (2004). What is not a real option: Considering boundaries for the application of real options to business strategy. Academy of management review, 29(1), 74-85.
Anderson, P. (1999). Perspective: Complexity theory and organization science. Organization science, 10(3), 216-232
Carpenter, M.A. & Sanders, Wm. G. (2008). Strategic Management: A Dynamic Perspective. Upper Saddle River, NJ: Pearson Education.
Grant, R. M. (1999). Prospering in dynamically-competitive environments: Organizational capability as knowledge integration. In Knowledge and strategy (pp. 133-153).
Ilinitch, A. Y., D’Aveni, R. A., & Lewin, A. Y. (1996). New organizational forms and strategies for managing in hypercompetitive environments. Organization Science, 7(3), 211-220.
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