CHAPTER 15 Entry, Exit, and Long-Run Profitability
Competition makes it hard to stay on top for long.
“Nobody ever got fired for buying IBM.” For decades, this catchphrase was something of a meme among office managers, and it sums up the stranglehold that IBM held in the early years of the computer industry. It was simply the largest, most prestigious company in the world. Its computers were faster and more powerful than the alternatives. Its technology was better. Its research and development was so advanced that its scientists won the Nobel Prize in Physics two years in a row. IBM was not only the most valuable company on the U.S. stock exchange; if it split itself in half, it would have been the two most valuable companies.
But that’s no longer the case. Profits this big attract attention, and a slew of hungry entrepreneurs—including Steve Jobs, Michael Dell, and Bill Gates—were lured by the scent of opportunity. Their start-ups grew up to become Apple, Dell, and Microsoft, and they took much of IBM’s market share. Today, IBM is a shell of its former self, worth hundreds of billions of dollars less than if it had maintained its position as the world’s leading computer company.
Apple, Dell, and Microsoft don’t find their dominant positions easy to maintain. Like IBM, their success has led a new generation of entrepreneurs to challenge them. Today, some of the hottest tech companies, including Google, Samsung, and Amazon, are rapidly winning market share from this newer old guard. This process of creative destruction is continuing as dozens of ambitious start-ups are working to dethrone today’s tech giants.
IBM’s decline paints a vivid lesson for all managers: It’s hard to stay on top for long in a competitive market. You need to look beyond your current competitors and be aware that new entrants are always looking to disrupt your industry. The last chapter analyzed how to adjust your strategy to fit the structure of competition in your market. But when new rivals can easily enter your industry, today’s comfortable monopoly can quickly turn into tomorrow’s fiercely contested competition. That’s why this chapter turns to analyzing how the strategic choices that you and your rivals make determine the structure of competition.
As a manager, your task is to focus on your firm’s long-run profitability. That’s why in this chapter you’ll develop tools for assessing competitive threats and making the strategic decisions that will help you outcompete new entrants before they become fearsome competitors.