INDUSTRY EVOLUTION Chapter 10 Introduction. Introduction. Industry structures continually evolve, driven both by the forces of competition and by fundamental changes in technology and economic growth. Industry structures continually evolve, driven both by the forces of competition and by fundamental changes in technology and economic growth. Firms that develop the capabilities and strategies suited to emerging industry circumstances prosper and grow; those that do not are eliminated Firms that develop the capabilities and strategies suited to emerging industry circumstances prosper and grow; those that do not are eliminated

OBJECTIVES: Recognize the different stages of of industry development and understand the factors that drive the process of industry evolution Identify the success factors associated with industries at different stages of their development Identify the strategies, organizational structures, and management systems appropriate to different stages of industry development Use scenarios to explore industry futures Recognize the challenges that managers face when adapting their organizations to industry evolution Recognize the different stages of of industry development and understand the factors that drive the process of industry evolution Identify the success factors associated with industries at different stages of their development Identify the strategies, organizational structures, and management systems appropriate to different stages of industry development Use scenarios to explore industry futures Recognize the challenges that managers face when adapting their organizations to industry evolution

THE INDUSTRY LIFE CYCLE One of the best-known and most enduring marketing concepts is the product life cycle. Products are born, their sales grow, they reach maturity, they go into decline, and they ultimately die./ Figure: The industry life cycle/ One of the best-known and most enduring marketing concepts is the product life cycle. Products are born, their sales grow, they reach maturity, they go into decline, and they ultimately die./ Figure: The industry life cycle/ The life cycle comprises four phases: introduction/or emergence/, growth, maturity, and decline. Two factors /forces that are driving industry evolution/ are fundamental : demand growth and the creation and diffusion of knowledge The life cycle comprises four phases: introduction/or emergence/, growth, maturity, and decline. Two factors /forces that are driving industry evolution/ are fundamental : demand growth and the creation and diffusion of knowledge.

Demand Growth The life cycle and the stages within it are defined primarily by changes in an industrys growth rate over time. In the introduction stage, sales are small and the rate of market penetration is low because the industrys products are little known and customers are few. The novelty of the technology, small production scale, and lack of experience mean that costs and prices are high, while quality is low.Customers for new products tend to be affluent, innovation oriented, and risk tolerant. The life cycle and the stages within it are defined primarily by changes in an industrys growth rate over time. In the introduction stage, sales are small and the rate of market penetration is low because the industrys products are little known and customers are few. The novelty of the technology, small production scale, and lack of experience mean that costs and prices are high, while quality is low.Customers for new products tend to be affluent, innovation oriented, and risk tolerant.

Demand Growth The growth stage is characterized by accelerating market penetration as product technology becomes more standardized and prices fall.Ownership spreads from higher-income customers to the mass market The growth stage is characterized by accelerating market penetration as product technology becomes more standardized and prices fall.Ownership spreads from higher-income customers to the mass market

Demand Growth Increasing market saturation causes the onset of the maturity stage and slowing growth as new demand gives way to replacement demand. Increasing market saturation causes the onset of the maturity stage and slowing growth as new demand gives way to replacement demand. Finally, as the industry becomes challenged by new industries that produce technologically superior substitute products, the industry enters its decline stage Finally, as the industry becomes challenged by new industries that produce technologically superior substitute products, the industry enters its decline stage

Creation and Diffusion of Knowledge New knowledge in the form of product innovation is responsible for an industrys birth, and the dual processes of knowledge creation and knowledge diffusion have a major influence on its pattern of development New knowledge in the form of product innovation is responsible for an industrys birth, and the dual processes of knowledge creation and knowledge diffusion have a major influence on its pattern of development

Creation and Diffusion of Knowledge In the introduction stage, product technology advances rapidly. There is no dominant product technology, and rival technologies compete for attention. Competition is primarily between alternative technologies and design configurations In the introduction stage, product technology advances rapidly. There is no dominant product technology, and rival technologies compete for attention. Competition is primarily between alternative technologies and design configurations

Creation and Diffusion of Knowledge The outcome tends to be convergence around a dominant technology, which may involve particular technical standards. Such standards may be imposed by governments and public authorities or they be de facto standards that emerge out of competitive rivalry, e.g., the establishment of the VHS format as the industry standard for video recording during the early 1980s. The outcome tends to be convergence around a dominant technology, which may involve particular technical standards. Such standards may be imposed by governments and public authorities or they be de facto standards that emerge out of competitive rivalry, e.g., the establishment of the VHS format as the industry standard for video recording during the early 1980s.

Creation and Diffusion of Knowledge The convergence process also involves the emergence of a dominant design – a generally adopted configuration of components that defines the look, functionality, and production criteria for the product. The IBM PC launched in 1981 established the basic design parameters of the personal computer as well as the key technical standard that was eventually to dominate the industry/ the so called Wintel standard/ The convergence process also involves the emergence of a dominant design – a generally adopted configuration of components that defines the look, functionality, and production criteria for the product. The IBM PC launched in 1981 established the basic design parameters of the personal computer as well as the key technical standard that was eventually to dominate the industry/ the so called Wintel standard/

Creation and Diffusion of Knowledge The transition from heterogeneity of technologies and designs toward greater increased standardization typically marks a shift from radical to incremental innovation. Such a transition may be necessary to inaugurate the industrys growth phase. The result is a shift from product innovation to process innovation as firms seek to reduce costs and increase product reliability through large- scale manufacturing methods. The transition from heterogeneity of technologies and designs toward greater increased standardization typically marks a shift from radical to incremental innovation. Such a transition may be necessary to inaugurate the industrys growth phase. The result is a shift from product innovation to process innovation as firms seek to reduce costs and increase product reliability through large- scale manufacturing methods. Figure:Product and innovation over time Figure:Product and innovation over time

How General Is the Life Cycle Pattern? The duration of the life cycle varies greatly from industry to industry. The life cycle of the US railroad industry extended from the 1840s to the 1950s before entering its decline phase. The introduction stage of the US automobile industry lasted about 25 years, from the 1890s until growth took off in The growth phase lasted about 40 years. Maturity set in during the mid-1950s. The duration of the life cycle varies greatly from industry to industry. The life cycle of the US railroad industry extended from the 1840s to the 1950s before entering its decline phase. The introduction stage of the US automobile industry lasted about 25 years, from the 1890s until growth took off in The growth phase lasted about 40 years. Maturity set in during the mid-1950s.

How General Is the Life Cycle Pattern? In personal computers, the introduction phase lasted only about four years before growth took off in Between 1978 and 1983 a flood of new and established firms entered the industry. Toward the end of 1984, the first signs of maturity appeared. Compact discs, introduced in 1984, passed almost immediately from introduction to growth phase. The market matured during the 1990s and went into decline in In personal computers, the introduction phase lasted only about four years before growth took off in Between 1978 and 1983 a flood of new and established firms entered the industry. Toward the end of 1984, the first signs of maturity appeared. Compact discs, introduced in 1984, passed almost immediately from introduction to growth phase. The market matured during the 1990s and went into decline in 2000.

How General Is the Life Cycle Pattern? Patterns of evolution differ. Patterns of evolution differ. Industries supplying basic necessities such as food processing, clothing may never enter a decline phase because obsolescence is unlikely for such needs. Industries supplying basic necessities such as food processing, clothing may never enter a decline phase because obsolescence is unlikely for such needs. Some industries may experience a rejuvenation of their life cycle. Some industries may experience a rejuvenation of their life cycle.

How General Is the Life Cycle Pattern? The TV monitor industry has experienced successive revivals: maturity of the market for black and white sets was followed by the color TV boom, the demand for computer monitors video games spurred another cycle. The TV monitor industry has experienced successive revivals: maturity of the market for black and white sets was followed by the color TV boom, the demand for computer monitors video games spurred another cycle. An industry is likely to be at different stages of its life cycle in different countries. Although the US auto market is in the early stages of its decline phase, markets in China, India, and Russia are in their growth phases. An industry is likely to be at different stages of its life cycle in different countries. Although the US auto market is in the early stages of its decline phase, markets in China, India, and Russia are in their growth phases.

Structure, Competition,and Success Factors over the Life Cycle. Changes in demand growth and technology over the cycle have implications for industry structure, competition, and the sources of competitive advantage. Changes in demand growth and technology over the cycle have implications for industry structure, competition, and the sources of competitive advantage. Table: The Evolution of Industry Structure and Competition over the the Life Cycle Table: The Evolution of Industry Structure and Competition over the the Life Cycle

Structure, Competition,and Success Factors over the Life Cycle. Product Differentiation Product Differentiation Emerging industries are characterized by a wide variety of product types that reflect the diversity of technologies and designs- and the lack of consensus over customer requirements. Standardization during growth and maturity phases increases product uniformity, with the result that a product may evolve toward commodity status unless producers are effective in developing new dimensions for differentiation. Emerging industries are characterized by a wide variety of product types that reflect the diversity of technologies and designs- and the lack of consensus over customer requirements. Standardization during growth and maturity phases increases product uniformity, with the result that a product may evolve toward commodity status unless producers are effective in developing new dimensions for differentiation.

Industry Structure and Competition In most industries, the introduction phase associated with a fragmented structure and diversity of products and technologies. In most industries, the introduction phase associated with a fragmented structure and diversity of products and technologies. The growth stage may also attract further new entry. The growth stage may also attract further new entry. Rapid consolidation around fewer players is certainly a feature of the transition to maturity Rapid consolidation around fewer players is certainly a feature of the transition to maturity

Location and International Trade The life cycle theory of trade and direct investment is based on two assumptions: The life cycle theory of trade and direct investment is based on two assumptions: First, that demand for new products emerges first in the advanced industrialized countries of North America, Western Europe, and Japan and then diffuses internationally. Second, that with maturity, products require fewer inputs of technology and sophisticated skills. The result is the following development pattern: First, that demand for new products emerges first in the advanced industrialized countries of North America, Western Europe, and Japan and then diffuses internationally. Second, that with maturity, products require fewer inputs of technology and sophisticated skills. The result is the following development pattern:

Location and International Trade 1. New industries begin in high-income countries because of the presence of a market and the availability of technical and scientific resources. 1. New industries begin in high-income countries because of the presence of a market and the availability of technical and scientific resources. 2. As demand grows in other markets, they are serviced initially by exports. 2. As demand grows in other markets, they are serviced initially by exports.

Location and International Trade 3. Continued growth of overseas markets and reduced need for inputs of technology and sophisticated labor skills make production attractive in newly industrialized countries. 3. Continued growth of overseas markets and reduced need for inputs of technology and sophisticated labor skills make production attractive in newly industrialized countries. 4. With maturity, a reduced need for skilled production workers, and an increased perception of the product as a commodity, the production activity shifts increasingly to developing countries in search of low-cost labor. 4. With maturity, a reduced need for skilled production workers, and an increased perception of the product as a commodity, the production activity shifts increasingly to developing countries in search of low-cost labor.

Location and International Trade For example,Consumer electronics were initially dominated by the US and Germany. During the early 1960s, production shifted towards Japan. The 1980s saw the rise of Korea, Hong Kong, and Taiwan as leading exporters. By the mid-1990s, assembly had moved to lower- wage countries such as China, the Philippines, Thailand, Mexico, and Brazil. For example,Consumer electronics were initially dominated by the US and Germany. During the early 1960s, production shifted towards Japan. The 1980s saw the rise of Korea, Hong Kong, and Taiwan as leading exporters. By the mid-1990s, assembly had moved to lower- wage countries such as China, the Philippines, Thailand, Mexico, and Brazil.

The Nature and Intensity of Competition During the introduction stage, competitors battle for technological leadership and competition focuses on technology and design. During the introduction stage, competitors battle for technological leadership and competition focuses on technology and design. The growth phase is more conducive to profitability as market demand outstrips industry capacity – especially if incumbents are protected by barriers to entry. The growth phase is more conducive to profitability as market demand outstrips industry capacity – especially if incumbents are protected by barriers to entry. With the onset of maturity, increased product standardization increases the emphasis on price competition With the onset of maturity, increased product standardization increases the emphasis on price competition

Key Success Factors and Industry Evolution During the introductory stage product innovation is the basis for initial entry and for subsequent success. In an emerging industry, firms need to support their innovation with a broad array of vertically integrated capabilities. During the introductory stage product innovation is the basis for initial entry and for subsequent success. In an emerging industry, firms need to support their innovation with a broad array of vertically integrated capabilities. Once the growth stage is reached, the key challenge is scaling up. As the market expands, the firm needs to adapt its product design and its manufacturing capability to large –scale production Once the growth stage is reached, the key challenge is scaling up. As the market expands, the firm needs to adapt its product design and its manufacturing capability to large –scale production

Key Success Factors and Industry Evolution With the maturity stage, competitive advantage is increasingly a quest for cost efficiency- through scale economies, low wages and low overheads become the key success factors. With the maturity stage, competitive advantage is increasingly a quest for cost efficiency- through scale economies, low wages and low overheads become the key success factors. The transformation to the decline phase raises the potential for destructive price competition. The transformation to the decline phase raises the potential for destructive price competition.

Adapting to Change and Shaping the Future Industry evolution poses a huge challenge to managers: How can the organization adapt to keep pace with the rate of change in the external environment? Industry evolution poses a huge challenge to managers: How can the organization adapt to keep pace with the rate of change in the external environment? Organizations adjust to external change in two ways: selection and adaptation. Organizations adjust to external change in two ways: selection and adaptation.

Adapting to Change and Shaping the Future SELECTION. Competitive process is a selection mechanism, in which competition results in the survival of those organizations whose characteristics match the requirements of their environment and the failure of those ones that do not fit their environment. SELECTION. Competitive process is a selection mechanism, in which competition results in the survival of those organizations whose characteristics match the requirements of their environment and the failure of those ones that do not fit their environment. The result is that different companies tend to be industry leaders at different stages of an industrys life cycle. The assumption here is that companies do not adapt easily to change The result is that different companies tend to be industry leaders at different stages of an industrys life cycle. The assumption here is that companies do not adapt easily to change

Adapting to Change and Shaping the Future ADAPTATION. ADAPTATION. Companies can and do adapt to change. Nevertheless change is difficult. Organizational change requires building new capabilities, it threatens the existing power structure, and it is likely to require changes in top management teams. Companies can and do adapt to change. Nevertheless change is difficult. Organizational change requires building new capabilities, it threatens the existing power structure, and it is likely to require changes in top management teams. The ability to adapt to external change depends very much on the implications of change for the existing capabilities of the company. The ability to adapt to external change depends very much on the implications of change for the existing capabilities of the company.

Managing with Dual Strategies Adapting to change requires that companies must simultaneously compete in two time periods : (1)Short-term planning that focuses on strategic fit and performance over a one-or two-year period. (2) Longer-term planning to develop vision, reshape the corporate portfolio, redefine and reposition individual businesses, develop new capabilities and redesign organizational structures over periods of five years or more. Adapting to change requires that companies must simultaneously compete in two time periods : (1)Short-term planning that focuses on strategic fit and performance over a one-or two-year period. (2) Longer-term planning to develop vision, reshape the corporate portfolio, redefine and reposition individual businesses, develop new capabilities and redesign organizational structures over periods of five years or more.

New Strategy Paradigm Hamel and Prhalad develop what they describe as a new strategy paradigm, that emphasizes the role of strategy as a systematic approach to redefining both company and its industry environment in future. Hamel and Prhalad develop what they describe as a new strategy paradigm, that emphasizes the role of strategy as a systematic approach to redefining both company and its industry environment in future. The key is not to anticipate the future, but to create the future! The key is not to anticipate the future, but to create the future!

Preparing for the Future: Scenario Analysis We cannot predict the future. We cannot predict the future. Only a fool would make predictions – especially about the future/ Samuel Goldwin/ Only a fool would make predictions – especially about the future/ Samuel Goldwin/ But although we cannot predict the future, we can think about what might happen. But although we cannot predict the future, we can think about what might happen.

Preparing for the Future: Scenario Analysis And we can do so in a systematic way that builds on what we know about current trends and signals to future developments. This is what scenario analysis does. And we can do so in a systematic way that builds on what we know about current trends and signals to future developments. This is what scenario analysis does. Scenario analysis is not a forecasting technique, but a process for thinking and communicating about the future. Scenario analysis is not a forecasting technique, but a process for thinking and communicating about the future.

Preparing for the Future: Scenario Analysis The multiple scenario approach constructs several- typically three or four- distinct and internally consistent views of how the future may look 10 to 25 years ahead The multiple scenario approach constructs several- typically three or four- distinct and internally consistent views of how the future may look 10 to 25 years ahead Scenario analysis is a powerful tool for knowledge management in terms of bringing together different ideas and insights about the business environment and building consensus about possible outcomes. Scenario analysis is a powerful tool for knowledge management in terms of bringing together different ideas and insights about the business environment and building consensus about possible outcomes.

Summary Strategy is about establishing an identity and direction for the development of a business into the future. Strategy is about establishing an identity and direction for the development of a business into the future. The dual nature of strategy – maximizing competitive performance in the present while preparing for the future - is a central dilemma for strategic management.

Summary If the industry environment is subject to fundamental change, the more successful a company is in achieving fit between its resources and capabilities and the current key success factors, the greater the difficulties of adapting to the requirements of the future. If the industry environment is subject to fundamental change, the more successful a company is in achieving fit between its resources and capabilities and the current key success factors, the greater the difficulties of adapting to the requirements of the future.