Study reveals which factors are important in identifying cross-industry competition

By Mike Koon

Successful businesses frequently assess their competition. In most cases, that means comparing themselves to competitors within their industry. Occasionally, however, emerging industries should also be considered a threat.

“A few years ago, you might have said there was no way that podcasts could replace music as the primary entertainment used in cars, but it’s happening,” said Olga Khessina, associate professor of business administration at Gies College of Business. “Although it may not significantly hurt music providers yet, it is becoming a growing threat.”

For example, Netflix has expanded into gaming and video podcasts, realizing its competition doesn’t just come from other streaming platforms.

Khessina co-authored a research study, “When should firms watch for cross-industry competition? A demand-side perspective,” to provide insight into how to identify when businesses need to respond to emerging industries as potential threats. Their study –  coauthored with Gies alum Ying Li (Hong Kong University of Science and Technology) and Samira Reis (Universidad Carlos III de Madrid) – was published in the Strategic Management Journal.

“As humans, we are limited in our cognitive capacity to search for and analyze information,” Khessina noted. “Managers mainly look at direct competitors, companies that make products like theirs. So, when something new emerges, either they don’t notice it because they haven’t expanded their information search, or they may notice it, but decide that it’s not worth their attention because they see it as clearly inferior or clearly different.”

As a foundation for the study, Khessina and her co-authors investigated the emerging TV programming industry from the mid-1940s to the mid-1960s. Until that point, it was common for Americans to head to movie theaters weekly; however, when TV sets popped up in homes, consumers chose to stay home and went to watch movies much less frequently, causing many theaters to close.

Khessina notes that when TV first came onto the scene, it broadcast in black and white, and the quality wasn’t great. Because programming was also not as robust as movies, theaters dismissed TV as a threat.

“What made TV preferable, however, was that it was convenient,” Khessina said. “You didn’t need to plan an outing and could watch it while doing other tasks around the house.”

Two Signals That Predict Emerging Threats

Khessina and her team identified two barometers, which could help established businesses identify whether emerging industries could make a dent in their market share: cultural embeddedness and social salience.

“These mechanisms allow us to predict which emerging industry will take off and which established industry is likely to suffer if these mechanisms gain power,” Khessina said.

Cultural embeddedness occurs when an emerging industry adopts artifacts from an established industry by embedding its products into the established industry’s designs, genres, frames, styles, norms, and stories. For instance, when Thomas Edison invented the light bulb, he strategically chose a design that resembled the gas devices people were already using for lighting. Or consider the emergence of TV programming. Consumers were more receptive to the first TV shows that adopted familiar movie genres, like comedy and drama.

“Drastically new products are unfamiliar to people. Consumers are less likely to try such products because they seem foreign. However, if you take a new product and embed it into cultural artifacts that people are well familiar with, they are more likely to give it a try.”

Social salience is the idea that we choose to pay more attention to things that closely reflect public discourse — timely and ongoing conversations shared by the general public.

“If you make your product appear connected to something people care a lot about, it becomes socially salient,” Khessina explained. “Theaters could have picked movies that were more socially salient. They could also have added post-showing events like curated discussions to increase the social salience of movies by connecting them to ongoing topics, but they didn’t do it. Instead, they focused on remodeling, which helped a little bit, but it ultimately couldn’t solve the problem of increasing competition from the TV programming industry.”

How Managers Can Respond to Emerging Industries

Khessina notes that decision-makers often make the mistake of relying simply on managers to identify competitors when they should be hyper-focused on consumers.  

“Consumers ultimately determine which industries companies compete with because they have the buying power,” Khessina said. “You need to observe consumers to predict how they are going to behave. If you react soon enough, you can adapt or even squelch the new industry, potentially. If you are late, you’re more likely to go out of business. That’s what happened to movie theaters.”

Because consumers are heterogeneous in their demand, the study identified three demographic indicators – economic capacity, education, and social preference – that help predict which consumer groups will be more likely to switch from established to new products.

“An average consumer will switch to a new product if it offers a new desirable function or it is a clear improvement over the established product,” Khessina said. “However, if a consumer has a high income, they don’t need to switch; they can buy both established and new products.”

More educated consumers, the study says, have greater cognitive flexibility and openness. They are less likely to see two similar things as substitutable and often desire diverse products. As a result, they are more likely to buy both new and established products.  

The third factor, social preferences, refers to the desire to use products and do things that help a person connect to other people.

“Immigrants, for instance, are less embedded in established cultural consumption patterns and are thus more likely to adopt products from an emerging industry.  At the same time, they prefer socially salient products to help them integrate better in a community,” Khessina said. “In our setting, TV shows gave immigrants salient topics for conversation to embed more easily in social circles.”

If companies in an established industry are too late to react to the threat from an emerging industry, they can partially savage the situation by focusing on markets with consumers who are less prone to product substitution and have economic capacity, education, and social preference to continue to purchase both new and old products.

“They are less likely to abandon the established industry completely because they have the capacity and desire to buy both,” she reiterated.

The bottom line is that managers should be aware of cross-boundary competitive threats. Yet, they don’t need to react to every novelty because there are a lot of emerging technologies that never take off.

“If there is a new product culturally embedded into existing products and it is more socially salient than existing products, then it’s something managers need to pay attention to,” Khessina said. “Managers can use the two mechanisms of cultural embeddedness and social salience to identify which novelties could potentially be a threat. If you know early where a threat comes from, you can prepare better.”