Download Chapter 10 : Industry Evolution and Strategic Change

Part IV: Business strategies in different
industry contexts
Chapter 10: Industry Evolution and Strategic
Change
10.1 Introduction and Objectives
Everything is in a state of constant change. Change can be massive and unpredictable (e.g.
telecommunications) or gradual and more predictable (food industry). Change can be driven
by technology, consumer preference, economic growth, competition
Understanding patterns of change and life cycles of industry can help to predict evolution of
industry. Life cycles of firms = shorter then life cycles of industry, changes in industry can
pass through the end of an existing firm and the birth of a new firm, rather ten through
continuous adaptation of same firms. The Management has to adapt the firm to changes.
10.2 The industry Live Cycle
The best known marketing concept = life cycle of product in 4 faces
- introduction (emergence)
- growth
- maturity
- decline
Industry life cycle = same concept but longer duration
Driving factors of industry evolution:
- demand growth
- creation and diffusion of knowledge
10.2.1 Demand Growth
Introduction stage:
- small sales, low rate of market penetration
< unknown products, few customers
- high costs & low quality
< new technology, small scale production, lack of experience
growth stage
- accelerating market penetration
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< technology becomes standardized, prices fall
maturity stage
- market saturation = replacement demand
< direct replacement (old products replaced by new ones)
< indirect replacement (old customers replace by new ones)
decline stage
new industries produce superior substitute products
10.2.2 Creation and Diffusion of Knowledge
In introduction stage, a product technology advances rapidly, there is no dominant product
technology and no rival technologies.
Dominant designs and technical standards
Dominant design = a product architecture that defines the look, functionality and production
method for the product and becomes accepted by industry as a whole. e.g. Mac Donald’s
restaurants. Can also apply to business models. It is not an intellectual property, there is no
profit advantage.
Technical standard = network effects: customers choose the same technology to avoid being
stranded
From Product to Process Innovation
Once there is an dominant design, there is a shift from radical to incremental product
innovation = inauguration products growth phase. As product innovation slows, process
innovation takes off
Process innovation + design modifications + scale economies result in falling costs + greater
availability > increase market penetration
Knowledge diffusion: the more the customer is informed, the more he becomes price
sensitive
10.2.3 How General is the Life Cycle Pattern?
Life cycle varies greatly from industry to industry. Over time, life cycles have been
compressed: US railroad <-> US automobile industry <-> PC <-> MP3 players. Patterns of
evolution also differ. Basic necessities industries (food, clothing) may never enter decline.
Some industries experience rejuvenation of their life cycle (TV). This is not a natural
phenomena, but results of company resisting maturity phase by product innovations. An
industry can be in different stages in different countries. Automobile industry in US <->
China, India & Russia
10.3 Structure, Competition and Success Factors over the Life
Cycle
The changes in demand growth and technology have implications for industry structure,
competition and sources of competitive advantage
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10.3.1 Product differentiation
Introduction stage:
- wide variety of product types, diversity of technologies
growth stage
- standardization, product uniformity > evolve to commodity status
except when: new dimensions for differentiation
maturity stage
decline stage
10.3.2 Organizational Demographics and Industry Structure
Industry evolution= high entry & exit of firms = change in firm population.
Organizational ecology= evolution of industries :
size & composition of firms = determined by process of foundation and selection for survival
Introduction stage:
Few firms
growth stage
new entrants :
- startup companies (new firms),
- established firms diversifying
maturity stage
number of firms declines : intensive acquisition, merger and exit
average : 29 years of industry & number of producers is halved
decline stage
mass market
new entries : in niche markets e.g. microbreweries & brew pubs
Different industries have different evolutionary paths. Some industries start as monopolies,
then become competitive e.g. paper copiers : Xerox. Mature markets can be transformed by
a wave of mergers e.g. petroleum industry 1998-2001 & steel industry 2001-2006.
10.3.3 Location and International Trade
Life cycle of trade & investment : based on 2 assumptions
- demand for new products first in advanced industrialized countries
- with maturity products require fewer input of technology and skills
Introduction stage:
New industries in High-income countries
< presence of market
< availability of technical & scientific resources
growth stage
other countries served by export
maturity stage
production in newly industrialized countries
advances industrialized countries import
decline stage
production to developing countries where labor costs are lowest
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e.g. consumer electronics : US & Germany to Japan to Korea, Hong Kong to China,
Philippines
10.3.4 The Nature and Intensity of Competition
Competition changes in 2 ways in course of industry life cycle
- shift from non price to price competition
- intensity of competition grows, causing margins to narrow
Introduction stage:
Competition focuses on technology & design:technological leadership
Gross margins, but heavy investments : return on capital : low
growth stage
better profitability < market demand is bigger than industry capacity
maturity stage
product standardization > price competition
decline stage
strong price competition (price wars) dismal profit performance
10.3.5 Key Success Factors and Industry Evolution
Changes in structure, demand and technology have implications for sources of competitive
advantage at each stage of industry evolution
Introduction stage:
Product innovation = basis for initial entry
Capabilities in product development need to be matched by capabilities in manufacturing,
marketing and distribution
growth stage
key challenge = scaling up
adapt product design to large scale production
access to distribution (see chapter 11)
maturity stage
cost efficiency through scale economies, low wages & low overheads
decline stage
potential destructive price competition
maintain stable industry environment : orderly exist
Table 10,1 The evolution of industry structure and competition over the life cycle
Demand
Introduction
Growth
Maturity
Decline
Limited to early
adopters, high-income,
Rapidly increasing
market penetration
Mass market,
replacement/ repeat
Obsolescence
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avant-garde
buying. Customers
knowledgeable and
price sensitive
Technology
Competing
technologies. Rapid
product innovation
Standardization
around dominant
technology. Rapid
process innovation
Well-diffused technical
know-how: quest for
technological
improvements
Little product or
process innovation
Products
Poor quality. Wide
variety of features and
technologies. Frequent
design changes
Design and quality
improve. Emergence
of dominant design.
Trend to
commoditization.
Attempts to differentiate
by branding, quality,
bundling.
Commodities the norm:
differentiation difficult
and unprofitable
Manufacturing
& distribution
Short production runs.
High skilled labor
content. Specialized
distribution channels
Capacity shortages.
Mass production.
Competition for
distribution.
Chronic overcapacity.
Re-emergence of
specialty channels.
Trade
Producers and
consumers in
advanced countries
Exports from
advances countries
to the rest of world
Emergence of
overcapacity. Deskilling of production.
Long production runs.
Distributors carry fewer
lines.
Production shifts to
newly industrializing
then developing
countries
Competition
Few companies
Entry, merges and
exits
Shakeout. Price
competition increases
Price wars, exits
Key success
factors
Product innovation.
Establishing credible
image of firm and
product
Design for
manufacture. Access
to distribution. Brand
building. Fast product
development.
Process innovation
Cost efficiency through
capital intensity, scale
efficiency and low input
costs
Low overhead. Buyer
selection. Signaling
commitment.
Rationalizing capacity
Exports from countries
with lowest labor costs
10.4 Organizational Adaptation and Change
Importance of “fit”
To be successful, companies need to align their strategies and organizational structures with
their industry environments. Strategy and structure must adapt to keep pace with changes in
external environment = challenge to managers.
10.4.1 Evolutionary Theory and Organizational Change
Cfr. biological theories of evolution
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A company has to adapt to change through variation, selection & retention
Organizational ecologists : change = at industry level
Individual organisations are so resistant to change, no individual changes
Selection mechanism: organizations whose characteristics match the new environment
survive, the others don’t.
> Changing population of companies
evolution < changes in the composition of firms, than by adaptation to external change
Evolutionary theorists (Nelson & Winter)
Changes occur within individual organizations at level of organizational routine. Companies
have to look for new routines : imitate successful routines and abandon unsuccessful
routines
10.4.2 The Sources of Organizational Inertia
Change is difficult and painful for organizations (as for individuals). It upsets patters.
Organizational capabilities and routines
Capabilities are developed through routines = repeated patterns
The more developed routines, the more difficult to develop new ones
Social and political structures
Social patterns of interaction > stress during change
Stable system of political power > those who have power = resistant to change
Conformity
External pressure and risk aversion encourages companies to adopt similar strategies and
structures as their peers
Complementarities between strategy, structure and systems
As there is a fit between an organization’s structure, strategy, management systems, culture
& employee skills : when change is required, all these elements has to change = barrier to
change. Punctuate equilibrium = long periods of stability altered with radical and
comprehensive change.
Limited search and blinkered perceptions
Limit search to areas close to existing activities
Incremental changes < bounded rationality (limited info constraints people in search
activities)
Satisficing (search for satisfactory rather than optimal performance)
Preference for exploitation of existing knowledge, rather than new
10.4.3 Empirical evidence on Organization Adaptation
Few companies have been leaders in their industries for a century or more (Exxon Mobile,
Shell, General Electric). The ability of a firm to adapt to external change depends on the
nature of that change (evolutionary or radical change)
Adapting to changes over the life cycle
Life cycle involves changes that are predictable. Different changes are undertaken by
different companies: The innovative firms that create new products are rarely the ones
(consolidators) that scale them into mass markets.
Skills, competences needed for discovery & invention <-> those needed for
commercialization
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Adapting to technological change
The ability of firms to adapt to technological change depends on whether the change
involves a single process or product feature, or a new configuration of the product.
e.g. banks & grocery store on internet = new distribution channel
more radical change
> difficulty to adapt, startups = more successful
but customer relationships, sales networks can support established f
> can give new comers chance to unseat market leaders
because established firms are behind new comers
technological changes that create new industries
new startups compete with established firms (diversification)
- when the resources and capabilities of one industry are close to the new industry :
established firms have advantage over startups
10.4.4 Managing Organizational Change
Given the many barriers to change, managers have to recognize the sources of the inertia
(existing routines, power structures, entrenched perceptions regarding the nature of the
business).
Dual Strategies and Separate Organizational Units
It is easier to create new organizational units, rather than change existing organization . This
may create difficulties to manage simultaneously multiple strategies, but a large number of
companies were already successful in doing so.
Dual strategies require dual planning systems : short term (strategic fit and performance) +
long term (develop vision, redefine & reposition businesses)
Bottom-up Processes of Decentralized Organizational Change
Simply decentralizing decision making is not enough to speed the processes of organizational
adaption.
- if there is satisficing behaviour, top management needs to stimulate performance by raising
performance expectations
- Top management have to challenge divisional and business unit managers to seek new
opportunities by specific company wide initiatives
- be alert to strategic dissonance, created by divergent strategic directions within the
company. It can signal “strategic inflection point”, = fundamental change in industry
dynamics
- by periodically changing organizational structure: stimulate local initiatives
Imposing Top-down Organizational Change
Most large companies exhibit periodic restructuring involving simultaneous changes in
strategy, structure, management systems and top management personnel; orchestrated
from the top.
The challenge is to do it before declining performance.
Using scenarios to prepare for the future
A company’ ability to adapt to changes depends on its capacity to anticipate such changes.
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Scenario analysis = systematic way of thinking and communicating about the future. It is not
a forecasting technique.
The multiple scenario approach constructs several distinct, internally consistent views of how
the future may look five to 25 years ahead.
Scenario can either be qualitative or quantitative or a combination.
It is used to explore likely paths of industry evolution.
Shaping the future
The key to organizational change is not to adapt to external change but to create the future.
Companies that adapt to change, always have to catch-up
Role of strategy is to give a systematic an concerted approach to redefining the company
and its industry environment in the future
What about radical change in established companies:
- some = success (Nokia from paper & rubber into mobile phones)
- for most companies radical change = disaster (Enron)
Competitive advantage depends on the deployment of superior organizational capabilities
and these capabilities develop slowly.
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