Competitive Advantage and Industry Evolution The industry life cycle Industry structure, competition, and success factors over the life cycle. Anticipating.

Competitive Advantage and Industry Evolution

Competitive Advantage and Industry Evolution

The industry life cycle

• Industry structure, competition, and

success factors over the life cycle.

• Anticipating and shaping the future.

OUTLINE

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”

How?(Technology)

Who?

(Customers)

What?(Products/Services)

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.)

– Products and Services (the “what” dimension)• Size

• Availability

• Accessories

• Cost

Using the Dynamic Model for Industry Analysis (cont.)

– Technologies (the “how” dimension)• State-of-the-Art?

• Effectiveness

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.)

• 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 (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

Introduction Growth Maturity Decline

Ind

ust

ry S

ales

Time

Product and Process Innovation Over TimeProduct and Process Innovation Over Time

Time

Rat

e o

f in

no

vati

on

Product Innovation

Process Innovation

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.

ColorB&W Portable

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

TECHNOLOGYRapid 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 EvolutionThe Driving Forces of Industry Evolution

Customers become more knowledgeable

& experienced

Demand growth slows

Diffusion of

technology

Customers become more price conscious

Products become more standardized

Production becomes less R&D

& skill-intensive

Production shifts to low-wage

countries

Distribution channels

consolidate

Excess capacity increases

Quest for new sources of

differentiation

Price competition intensifies

Bargaining power of distributors increase

BASIC CONDITIONS INDUSTRY STRUCTURE COMPETITION

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

• 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

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 MatrixBCG’s Strategic Environments Matrix

Small BigSIZE OF ADVANTAGE

Many

Few

SOURCESOF

ADVANTAGE

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

BCG Analysis of the Strategic Characteristics of Specialization Businesses

BCG Analysis of the Strategic Characteristics of Specialization Businesses

high low

ENVIRONMENTAL VARIABILITY

ABILITY TOSYSTEMATIZE

low

high

CREATIVE EXPERIMENTAL

fashion, toiletries, magazines

general publishing food products

PERCEPTIVE ANALYTICAL

high tech luxury cars, confectionery

paper towels

Key Success Factors in Mature IndustriesKey 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

TIME

RA

TE

OF

INN

OV

AT

ION

Processinnovation

Strategicinnovation

Productinnovation

Strategies for Declining IndustriesStrategies 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

• 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.)

• 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 (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.