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Competitive Advantage and Industry Evolution. OUTLINE. The industry life cycle Industry structure, competition, and success factors over the life cycle. Anticipating and shaping the future. Building Blocks of a Dynamic Theory of Industry Structuring.

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competitive advantage and industry evolution
Competitive Advantage and Industry Evolution

OUTLINE

The industry life cycle

  • Industry structure, competition, and success factors over the life cycle.
  • Anticipating and shaping the future.
building blocks of a dynamic theory of industry structuring
Building Blocks of a Dynamic Theory of Industry Structuring
  • Industries are being restructured continuously.
    • Four factors help to explain patterns in the evolution of industries:

1. Changing industry dimensions;

2. Shared norms held by managers of firms in an industry;

3. Managers’ cognitive limitations; and

4. First-mover advantages.

exhibit 1 industry environment portrayed as competitive space
Exhibit 1: Industry Environment Portrayed as “Competitive Space”

How?

(Technology)

Who?

(Customers)

What?

(Products/Services)

using the dynamic model for industry analysis
Using the Dynamic Model for Industry Analysis
  • Any industry may be analyzed along three dimensions, but analysts must identify relevant labels.
    • Customers (the “who” dimension)
      • Age
      • Disposal income
      • Driving habits
      • First-time or repeat buyers
using the dynamic model for industry analysis cont
Using the Dynamic Model for Industry Analysis (cont.)
  • Products and Services (the “what” dimension)
    • Size
    • Availability
    • Accessories
    • Cost
using the dynamic model for industry analysis cont6
Using the Dynamic Model for Industry Analysis (cont.)
  • Technologies (the “how” dimension)
    • State-of-the-Art?
    • Effectiveness
changing dimensions of industries
Changing Dimensions of Industries
  • Consumer preferences and new product and process technologies are constantly changing over time.
    • As a result, competitive space is very fluid.
  • Development of new technologies has profound effect on industry environments.
    • New products or services.
changing dimensions of industries cont
Changing Dimensions of Industries (cont.)
  • Demographic trends and shifts also impact industry environments.
    • For example, Boston Market provides more convenience and speed than home cooking.
    • Aging baby-boomers demand new healthcare services.
  • As any dimension in industry changes, “holes” or areas of opportunity are created.
    • See example of Nucor and its minimill technology.
changing dimensions of industries cont9
Changing Dimensions of Industries (cont.)
  • These holes create problems for industry incumbents:
    • They may not perceive emergence of opportunities; and
    • New entrants may not be recognized as serious threats.
the industry life cycle
The Industry Life Cycle

Drivers of industry evolution :

  • demand growth
  • creation and diffusion of knowledge

Industry Sales

Introduction Growth Maturity Decline

Time

product and process innovation over time
Product and Process Innovation Over Time

Product Innovation

Process Innovation

Rate of innovation

Time

how typical is the life cycle pattern
How Typical is the Life Cycle Pattern?
  • Technology-intensive industries (e.g. pharmaceuticals, semiconductors, computers) may retain features of emerging industries.
  • Other industries (especially those providing basic necessities, e.g. food processing, construction, apparel) reach maturity, but not decline.
  • Industries may experience life cycle regeneration.

Sales Sales

1900 ‘50 ‘60 ‘90 1930 50 60 90

MOTORCYCLES TV’s

  • Life cycle model can help us to anticipate industry evolution---- but dangerous to assume any common, pre-determined pattern of industry development.

Color

Portable

B&W

HDTV ?

evolution of industry structure over the life cycle
Evolution of Industry Structure over the Life Cycle

INTRODUCTION GROWTH MATURITY DECLINE

DEMAND Affluent buyers Increasing Mass market Knowledgeable,

penetration replacement customers, resi-

demand dual segments

TECHNOLOGY Rapid product Product and Incremental Well-diffused

innovation process innovation innovation technology

PRODUCTS Wide variety, Standardization Commoditiz- Continued comm-

rapid design change ation oditization

MANUFACT- Short-runs, skill Capacity shortage, Deskilling Overcapacity

URING intensive mass-production

TRADE -----Production shifts from advanced to developing countries-----

COMPETITION Technology- Entry & exit Shakeout & Price wars,

consolidation exit

KSFs Product innovation Process techno- Cost efficiency Overhead red- logy. Design for uction, ration- alization, low

cost sourcing

the driving forces of industry evolution
The Driving Forces of Industry Evolution

BASIC CONDITIONS INDUSTRY STRUCTURE COMPETITION

Customers become more knowledgeable & experienced

Customers become more price conscious

Quest for new sources of differentiation

Products become more standardized

Diffusion of

technology

Price competition intensifies

Production becomes less R&D & skill-intensive

Production shifts to low-wage countries

Excess capacity increases

Bargaining power of distributors increase

Demand growth slows

Distribution channels consolidate

industry norms
Industry Norms
  • Firms in same industry develop a common body of knowledge and similar understandings.
    • These shared norms help in providing industry standards, encourage consumer acceptance of products, and facilitate incremental technological developments.
      • However, these shared understandings remain relatively stable over time and cause managers to become complacent regarding industry changes.
cognitive limitations
Cognitive Limitations
  • Even with sophisticated market research and planning departments, managers fail to perceive impact of changing industry dimensions.
    • Managers may fail to notice changes in their firms’ environments.
    • Managers may develop strategies that are based on untested assumptions or understandings of the environment that may no longer be valid.
competing for the future the role of scenario analysis in preparing for a industry change
Competing for the Future : The Role of Scenario Analysis in Preparing for a Industry Change

Stages in undertaking multiple Scenario Analysis:

  • Identify major forces driving industry change
  • Predict possible impacts of each force on the industry environment
  • Identify interactions between different external forces
  • Among range of outcomes, identify 2-4 most likely/ most interesting scenarios: configurations of changeforces and outcomes
  • Consider implications of each scenario for the company
  • Identify key signposts pointing toward the emergence of each scenario
  • Prepare contingency plan
bcg s strategic environments matrix
BCG’s Strategic Environments Matrix

FRAGMENTED SPECIALIZATION

apparel, housebuilding pharmaceuticals, luxury cars

jewelry retailing, sawmills chocolate confectionery

STALEMATE VOLUME

basic chemicals, volume jet engines, food supermarkets

grade paper, ship owning motorcycles, standard

(VLCCs), wholesale banking microprocessors

Many

SOURCES

OF

ADVANTAGE

Few

Big

Small

SIZE OF ADVANTAGE

bcg analysis of the strategic characteristics of specialization businesses
BCG Analysis of the Strategic Characteristics of Specialization Businesses

CREATIVE EXPERIMENTAL

fashion, toiletries, magazines

general publishing food products

PERCEPTIVE ANALYTICAL

high tech luxury cars, confectionery

paper towels

low

ABILITY TO

SYSTEMATIZE

high

high low

ENVIRONMENTAL VARIABILITY

key success factors in mature industries
Key Success Factors in Mature Industries
  • Opportunities for sustainable -- limited potential for differentiation

competitive advantage are -- technology stable and well diffused

limited -- ease of entry due to well developed industry infrastructure and powerful distributors

-- international competition : domestic cost advantage vulnerable

  • Sources of -- Economies of scale

cost advantage -- Low-cost inputs

-- Low overheads

  • Segment and customer -- As general industry environment deteriorates, selection advantage important to locate attractive segments and link up with successful customers.
  • Sources of differentiation-- Emphasis on image differentiation and advantage differentiation through complementary services.
  • Sources of innovation -- Limited opportunity for product and process innovation but considerable opportunity for strategic innovation
product process and strategic innovation over the life cycle
Product, Process, and Strategic Innovation over the Life Cycle

Product

innovation

Strategic

innovation

RATE OF INNOVATION

Process

innovation

TIME

strategies for declining industries
Strategies for Declining Industries
  • Features - Excess capacity

of declining - Lack of technological change

industries - Consolidation (but some new entry as new firms exit)

- Old machines and employees

  • Smooth adjustment - Predictability of decline

of capacity Durable assets

depends upon Costs of closure

- Barriers to exit Management

commitment

- Strategies of surviving firms

{

strategy options in declining industries
Strategy Options in Declining Industries

LEADERSHIP Establish dominant market position -encourage exit of rivals

-buy market share through acquisition

-acquire capacity

-demonstrate commitment

-dispel optimism about the industry’s future

-raise the stakes

NICHE Identify an attractive segment and dominate it.

HARVEST Maximize cash flow from existing sources

DIVEST Get out while there is still a market for industry assets

selecting a strategy in a declining industry
Selecting a Strategy in a Declining Industry

COMPANY’S COMPETITIVE POSITION

Strengths in remaining Lacks strength in demand pockets remaining demand pocket

Favorable LEADERSHIP HARVEST

INDUSTRY to or or

STRUCTURE decline NICHE DIVEST

Unfavorable NICHE DIVEST

to or QUICKLY

decline HARVEST

successful entry enhanced by new entrants first mover advantages
Successful Entry Enhanced by New Entrants’ First-Mover Advantages
  • Traditional models suggest that entry of new rival will be countered quickly by incumbents.
    • Several factors prevent effective retaliation:
      • Managers of incumbent firms may fail to “see” the entrant.
      • Even after new entrant is detected, many managers may assume that niches occupied by new entrants are not important enough to be of concern (see examples of Western Union and emergence of natural cereals).
incumbent firms responses to new entrants cont
Incumbent Firms’ Responses to New Entrants (cont.)
  • When confronted by new rivals, the managers of new entrants are likely to respond in the following ways:
    • Withdraw to supposedly “safer” area in competitive space.
    • Diversify.
    • Improve current offerings of products and services.
incumbent firms responses to new entrants cont27
Incumbent Firms’ Responses to New Entrants (cont.)
  • Managers of incumbent firms rarely enjoy any sort of long-term benefit from a strategic withdrawal from market segments invaded by new entrants.
    • Likely to find that competition has actually escalated (and will continue to intensify).
    • New entrants often totally restructure the industries they enter.