Industry types and the opportunities they offer

Along with studying the factors discussed previously, it is helpful for a new ven- ture to study industry types to determine the opportunities they offer.13 The five most prevalent industry types, depicted in Table 5.3, are emerging industries, fragmented industries, mature industries, declining industries, and global in- dustries.14 There are unique opportunities associated with each type of industry.

1. Emerging industries

An emerging industry is a new industry in which standard operating proce- dures have yet to be developed. The firm that pioneers or takes the leadership of an emerging industry often captures a first-mover advantage. A first-mover advantage is a sometimes insurmountable advantage gained by the first com- pany to establish a significant position in a new market.

Because a high level of uncertainty characterizes emerging industries, any opportunity that is captured may be short-lived. Still, many new ventures enter emerging industries because barriers to entry are usually low and there is no established pattern of rivalry.

2. Fragmented industries

A fragmented industry is one that is characterized by a large number of firms of approximately equal size. The primary opportunity for start-ups in fragmented industries is to consolidate the industry and establish industry leadership as a result of doing so. The most common way to do this is through a geographic roll- up strategy, in which one firm starts acquiring similar firms that are located in different geographic areas.15 This is an often observed path for growth for busi- nesses such as auto repair shops and beauty salons. It is difficult for them to generate additional income in a single location, so they grow by expanding into new geographic areas via either organic growth or by acquiring similar firms.

3. Mature industries

A mature industry is an industry that is experiencing slow or no increase in demand, has numerous repeat (rather than new) customers, and has lim- ited product innovation. Occasionally, entrepreneurs introduce new product innovations to mature industries, surprising incumbents who thought nothing new was possible in their industries. An example is Steve Demos, the founder of White Wave, a company that makes vegetarian food products. White Wave introduced a new product—Silk Soymilk—into a mature industry—consumer milk. Silk Soymilk became the best-selling soymilk in the country. Soymilk isn’t really milk at all—it’s a soybean-based beverage that looks like milk and has a similar texture. Still, it has made its way into the dairy section of most supermarkets in the United States and has positioned itself as a healthy sub- stitute for milk. Who would have thought that a major innovation was possible in the milk industry?

The lure of mature industries, for start-ups, is that they’re often large industries with seemingly vast potential if product and/or process innova- tions can be effectively introduced and the industry can be revitalized. This is the hope for a company such as Beyond Meat, the subject of the You Be the VC 5.1 feature. Beyond Meat is producing a plant-based substitute for chicken strips, called Chichen-Free Strips, that replicate the look, taste, and sensory experience of eating meat. The company is not targeting people who are ultra careful about what they eat, but a more mainstream market of people who are trying to eat healthier. Beyond Meat is now working on a similarly healthy substitute for ground beef. Meat is a mature industry. If Beyond Meat’s products can be effectively introduced into the marketplace and it is successful in revitilizing the meat industry, the firm’s market po- tential is huge.

4. Declining industries

A declining industry is an industry or a part of an industry that is experienc- ing a reduction in demand. The renting of DVDs and video games by mail and producing and distributing hard copy textbooks are examples of products as- sociated with industries or segments of an industry that are in some state of decline. Typically, entrepreneurs shy away from declining industries because the firms in the industry do not meet the tests of an attractive opportunity as we described in Chapter 2. There are occasions, however, when a start-up will do just the opposite of what conventional wisdom would suggest and, by do- ing so, stakes out a position in a declining industry that isn’t being hotly con- tested. That is what Cirque du Soleil did in the circus industry.

Entrepreneurial firms employ three different strategies in declining indus- tries. The first is to adopt a leadership strategy, in which the firm tries to become the dominant player in the industry. This is a rare strategy for a start- up in a declining industry. The second is to pursue a niche strategy, which focuses on a narrow segment of the industry that might be encouraged to grow through product or process innovation. The third is a cost reduction strategy, which is accomplished through achieving lower costs than industry incumbents through process improvements. Achieving lower costs allows a firm to sell its product or service at a lower price, creating value for consumers in the process of doing so. Initially a small firm but now quite large as a result of its success, Nucor Steel revolutionized the steel industry through the introduction of the “minimill” concept, and is an example of an entrepreneurially minded firm that pursued this strategy. Historically, most steel mills in the United States used large blast furnaces to produce a wide line of products; however, the scale of these furnaces meant that firms had to produce and sell significant quantities of their products in order to be profitable. In contrast, Nucor’s then-innovative minimills were smaller and were used to produce a narrower range of products. Of great importance too is the fact that minimills are energy efficient and make high-quality steel.16 Nucor proved its concept and quickly found growth mar- kets within the largely declining U.S. steel industry.

5. Global industries

A global industry is an industry that is experiencing significant international sales. Many start-ups enter global industries and from day one try to appeal to international rather than just domestic markets. The two most common strat- egies pursued by firms in global industries are the multidomestic strategy and the global strategy. Firms that pursue a multidomestic strategy compete for market share on a country-by-country basis and vary their product or service offerings to meet the demands of the local market. In contrast, firms pursu- ing a global strategy use the same basic approach in all foreign markets. The choice between these two strategies depends on how similar consumers’ tastes are from market to market. For example, food companies typically are limited to a multidomestic strategy because food preferences vary significantly from country to country. Firms that sell more universal products, such as ath- letic shoes, have been successful with global strategies. Entrepreneurial firms can use both strategies successfully. The key to achieving success is gaining a clear understanding of customers’ needs and interests in each market in which the firm intends to compete.17

Source: Barringer Bruce R, Ireland R Duane (2015), Entrepreneurship: successfully launching new ventures, Pearson; 5th edition.