class presentation for strategic management.

1. Presented By: Ajit Kunwar

2. INTRODUCTION
 Variation in performance of incumbents and entrants
 Deregulation of price and entry in airline industry
 Theory of heterogeneity in performance among firms
 Test interfirm heterogeneity within an industry
 Purpose: is to argue and show that heterogeneity differs
across two classes of firms- entrants and incumbents and
that is higher for entrants

3.  Deregulation of entry and price
 Entry of new firms: major change in technology and
environment
 New entrants likely to be contributor to performance
difference
 Entrants more diverse and incumbents more similar
 Entrants come with new strategies
 Incumbents: traditional practices and initiate new
programs

4.  How does heterogeneity occurs in industry?
 New entrants
 Lack of past experience
 Perceive wide range of opportunities
 Develop different strategies to address them
 Wider variations in behavior to explore market opportunities
 Incumbents
 Eliminates market sharing arrangements
 Exploration of alternative strategies
 Increase in experimentation should lead to the heterogeneity

5. THEORATICAL BACKGROUND
 When industry deregulates, new firms enter and initiate a
new wave of industry evolution
 These entrants are likely to introduce cost reduction or
quality improvement innovations, exposing buyers to
new products and services, thereby expanding the
number of purchase criteria and altering customer
preferences(Jewkes, Sawyers and Stillerman,
1958;Mitchell, 1989; Winter, 1984)

6.  Entrants are less subject to intertia of bureaucratic
procedures, likely to differ in the their rates of
development, increasing further the degree of
heterogeneity.
 The diversity of strategies used by rivals may inhibit the
ability of incumbents to adapt rapidly to environmental
change (Millerand Chen, 1994)
 A lower rate of adaptation by incumbents is likely to
perpetuate their historical range of capabilities, which
should be less than the range of capabilities among
entrants

7. Hypothesis 1: Following industry deregulation, the
heterogeneity among entrants will exceed the
heterogeneity among incumbent firms.

8.  To compete effectively in the new regime, incumbent
firms must revise their existing capabilities and resources
or suffer decreasing performance (Carroll, Delacroix and
Goodstein, 1988; Wade, Swaminathan and Saxon, 1998).
 In the airline industry after deregulation, incumbent firms
adopted various marketing devices, such as frequent flyer
programs and travel agent commission bonuses, in efforts
to maintain their brand equity and their customer base
(Borenstein, 1989).

9. Hypothesis 2: The heterogeneity among incumbents
during deregulation will be greater than the heterogeneity
of incumbents during regulation.

10. RESEARCH DESIGN
 Industry
 Hypothesis tested using data from U.S. airline industry from 1968 to 1988
 Inequities stemming from entry, route and fare restrictions
 Deregulation of industry in 1978
 Entrants: Southwest, Muse Air and Peoples Express
 Brought novel strategies to compete against incumbents
 By 1980, 22 new carriers entered with lower cost than incumbents
 Industry’s financial conditions weakened
 After 1988 stability

11.  Data
 Obtained from Department of Transportation
 From all the airlines that were classified as national carriers by Civil
Aeronautics Board
 Quarterly data for 80 periods
 Analysis
 Includes two techniques: variance component analysis and ordinary least
square (OLS)
 Performance was defined as either Return on Sales(ROS), or Return on
Assets (ROA)
 Estimate a baseline model with dummy variables
 SAS was used to estimate the variance components
 Hypothesis were tested using OLS and baseline model
 OLS regression was used to measure financial performance

12. RESULTS
 For ROS and ROA: H1 was supported but H2 is not.
 For ROS there was decrease in incumbent performance
heterogeneity under deregulation
 For ROA no heterogeneity in incumbents performance
under either regulation or deregulation
 In ROS entrant effect is higher than the effects of its
interaction with strategic group membership
 More variance in ROS is explained then the variance in
ROA

13. DISCUSSION
 Incumbents have difficulty copying wide-ranging
entrepreneur strategies
 Incumbents stick to commonly understood ways of doing
business
 To understand the effects of entry or institutional change
on performance variations, one need to compare the
differences among entrants to difference among
incumbents

14.  Higher relative variance in performance among entrants:
 Is not due to difference among the capabilities but to a
common investment pattern over histories.
 Due to difference in performance across the stages of
development

15. CONCLUSION
 Interfirm heterogeneity is clearly higher among entrants
than incumbents
 Variation among incumbents does not grow rapidly after
deregulation occurs
 Variation in performance within deregulation is higher
than with in regulation

16. THANK YOU