How Industries Change?

by Anita McGahan, HBR, October 2004

1. Why do we need to understand change in the industry?

Basing from the intellectual perspectives of Ms. Anita McGahan, the following
are the logical reasons why we need to understand change in the industry, to wit:
a. We cannot make wise or intelligent investments unless we appreciate the essence of
changing the industry for the better.
A wise man said There is nothing permanent in this world but change. If we
want to keep our business, we should go with the present trends, or simply innovate.
We should try selling novel items. We will not just sit down but do something to
monitor and evaluate regularly if our business is still making optimum profits.
b. We have to dismantle old businesses. In other words, we need to re-invest
something on new and different from those offered by the competitors. This is what
we aim for in the business industry: competitive advantage and total quality
management to achieve customer satisfaction.
c. We need to shut out ourselves from the popular business press and the pressure of
competitive threats and take a long-term look at the context of the business itself. In
other words, we must likewise focus on our own intuition and sound judgment.
d. We need to conduct research and refocus on how industry structure affects business
profitability and returns on investment. This is the so-called feedbacking.

McGahan analyzed statistically the hypotheses to test how industries evolve

which were refined in a series of case studies on industry structure, industry change and
competitive advantage.
One must have an edge over other competitors doing the same business. There
must be a distinct identity of a product or service offered to achieve total customer
satisfaction if one aims to claim for the distinction being the only business that offers the
best than the rest.
She emphasized the threats to business industry and has the point citing the
statement: No innovation strategy works for every company in every industry. But if

you understand the nature of change in your industry, you can determine which strategies
are likely to succeed and which will backfire.
In my own analysis, the idea of McGahan is very challenging and requires
thought-provoking efforts to gather information or feedback through empirical testing.
We need to determine its applicability in the real world and prove that the trajectories of
change can be possibly done. The choice should match the type of business, the
customers and other stakeholders that can benefit from the change.
The business industry at present is so fragile that CHANGE should focus on all
areas, more importantly on structure, technology, people and services/products. Ours is a
fast-pacing type of world with all the new gadgets that make life so easy and comfortable.
Regardless of the status in life, everyone wants to enjoy the amenities in life and so the
needs and wants of the clients are very important to consider when we want to innovate.
McGahans point of view is timely and relevant to the present trends if we want to
succeed in the industry. The findings from the research conducted by them can be
beneficial to those who want to be guided.
It is only a matter of finding the right strategies and activities to undertake
including the right persons to handle the job of changing appropriate changes in those
gaps that the management finds to fill in.
If one does not welcome change, he will be left behind and eventually, loses its
name in the industry.

The message being conveyed in the article can assist all

stakeholders who have the political will to take the trail towards innovation.
It is a good input for those managers who are willing to make a BIG difference in
the industry. Kudos to those who belong to the group of catalysts of CHANGE.
McGahan identified four distinct trajectories of change such as radical,
progressive, creative and intermediating which will be discussed in the next question.
These will guide us what to choose or adopt all of them.

2. Discuss the trajectories of change. Discuss similarities and differences of these

changes in the industry.

According to McGahan, those four trajectories of change are defined by the two
types of threats: First, threat to the industrys core activities which historically generated
profits for the industry. These are threatened when they become less relevant to suppliers
and customers because of some new, outside alternative, when they are no longer needed
or less valued by the customers.
This is the effect of the non-innovating businesses. They are so complacent of
what they sell, without thinking how they can improve to achieve excellence and total
quality management to satisfy the customers.
Second, it is the threat to the industrys core assets such as resources, knowledge
and brand capital that historically made the organization unique. They fail to generate
value.
They fail to understand that the needs and values of the customers are also
changing. People grow and so their needs and wants.
The similarities and differences of change are presented below:
The exhibit Trajectories of Industry Change maps the relationships between
these two threats and the four change trajectories. Radical change occurs when an
industrys core assets and core activities are both threatened with obsolescence. This
trajectory is closest to the concept of disruptive change that Harvards Clayton M.
Christensen discusses. Under this scenario, the knowledge and brand capital built up in
the industry erode, and so do customer and supplier relationships. During the 1980s and
1990s, an estimated 19% of U.S. industries went through some stage of radical change. A
good example is the travel business. Agencies core activities and core assets came under
fire as the airlines implemented systems to enhance direct price competition (such as
SABRE and other reservations systems) and as the agencies clients turned to Webenabled systems (such as Expedia, Orbitz, and Travelocity) that offered new value
(online monitoring of available flights and fares, for instance).
When neither core assets nor core activities are threatened, the industrys change
trajectory is progressive. Over the past 20 years, this has been by far the most common

trajectory; about 43% of U.S. industries were changing progressively, including longhaul trucking and commercial airlines. In those industries, the basic assets, activities, and
underlying technologies remained stable. Innovators like Yellow Roadway, Southwest,
and JetBlue succeeded not because the incumbents strengths became obsolete but
because the upstart firms had smart insights about how to optimize efficiency.
The other two change trajectoriescreative and intermediatinghave been
neglected in the management literature, possibly because of their nuances. Creative
change occurs when core assets are under threat but core activities are stable. This means
that companies must continually find ways to restore their assets while protecting
ongoing customer and supplier relationships; think of movie studios churning out new
films or oil companies mining for new wells. About 6% of all U.S. industries are on a
creative change trajectory.
In intermediating, relationships are fragile. Examples are automobile
dealerships, investment brokerages and auction houses.
In my own analysis, these form trajectories are interrelated with some specifics
and uniqueness that make each one applicable to the industry.
It depends on the type of business one is engage in which he/she may opt to adopt
if ever any of the trajectories of change may deem appropriate.
For me, inasmuch as I am a very flexible type of person, I will use all the form
trajectories of change. It takes different strokes for different folks. It is situational,
depending on the style of management and the nature of the industry that would allow
these forms to come in.

Six Rules for Effective Forecasting by Paul Saffo

1. Which is more appropriate to use accurate forecasting or effective forecasting?
Why?

Basing on the logical perspectives of Paul Saffo, he justified the significance of

effective forecasting from accurate forecasting. The six rules for effective forecasting
are well-defined, citing some examples. For me, I agree with him that the more
appropriate is effective forecasting.
Rule 1 is to define possibilities that extend out from a particular event or moment.
We are using the so-called strategic judgment here. The most important thing is defining
its breadth which is a measure of overall uncertainty. We should consider both internal
and external factors that affect the business the behavior of consumers and the social
and economic trends that are part of its environment.
For him, good forecasting can generate hypotheses or assumptions about
outcomes and eventual responses to some questions and gray areas in mind.
A cone that looks narrow in shape, may leave you open, in contrast, to avoidable
unpleasant surprises. On the other hand, it may be worse if it will cause you to miss the
most important opportunities.
I agree with Paul Saffo that the art of defining the cones edge lies in carefully
distinguishing the highly improbable and the wildly impossible. All areas for
consideration should be analyzed carefully.
Generally it is a common sense way of visualizing the understanding that lies
ahead. Whereas for accurate forecasting, Saffo highlighted the fact that it is very difficult
and at times impossible just because of the uncertainty of whatever situation one is
facing. Other things may be overlooked. Effective forecasting is all about understanding
the certainty that lies ahead and not rushing to a conclusion. Hence, it doesnt follow that
the word accurate is precisely correct forecasting.
The rule that follows is the S- curve, wherein Saffo corrected the theory that just
because it looks like something really exciting and about to happen, chances are it will
take a lot longer to arrive than you expect. And when it finally does arrive, it will unfold

in unexpected ways. Hence, he pointed out that one should never mistake a clear view for
a short distance.
I agree with him on the other rule such as enhancing the things that dont fit. Lets
not underestimate what can happen. There are certain factors and variables that are
capable to happen in forecasting and beneficial to the business.
Fourth rule focuses on the strong opinions that should be held weekly. He
explained that he tries to come to a conclusion as quickly as he could, based on the
information gathered, and then he systematically attempts to dismantle his own
conclusions. I like this because he prefers to look at others perspectives and to welcome
other possibilities. Rule No. 5 is more of a lesson to me because of the significance of
looking back twice as far as looking forward. Its not going down to conclusions easily
and making wrong decisions but to perceive the patterns first that underlie the change we
see. The last rule is to know when not to make a forecast. This is so because there are
times when uncertainty becomes so great and you have to pause and wait a little bit.
Haste makes waste is a true motto.

2. How forecasting may affect managerial decision-making?

One of the crucial functions of a manager is to make wise and sound decisions.
Decisions will be based on data gathered, analysis of cases/problems using in-depth
quantitative and qualitative primary and secondary information to arrive at the correct
decision.
Some managers utilize the focus group discussion and workshops by allowing
them to do the brainstorming of ideas to assist them to make accurate decisions.
Likewise, researches are conducted even they are too expensive, to get data. Others are
doing forecasting using the three types of decision-making such as certainty, uncertainty
and risk. There are certain risks involved in making decisions. Virtually, all decisions are
made in an environment with at least some uncertainties and risks. Hence, forecasting to
some managers is a useful tool. However, it is not always precise. There are still areas
that intuition and judgment using qualitative data can be more applicable to some extent.
It may also be perception-based and value-laden type of decision-making. Forecasting
can guide the managers if the data are relevant, accurate and analyzed well.
Under the uncertainty situation, the manager has a meager database or
information. He may not be so sure if these data are valid and reliable. Some unexpected
events may occur. Due to unlimited information, one cannot evaluate the interactions of
the different variables and he cannot predict, not even with the use of forecasting such as
liner programming, feasibility studies, decision tree, etc. There are many possible
changes in the environment such as social, economic, political, cultural and
environmental factors.
In a situation with risks, factual information may exist but it may be incomplete.
Under the risks category, the manager will use the estimate of objective probability of an
outcome. Example: using mathematical and statistical models. On the other hand, for
subjective probability, these are based on judgment and experiences.
Some decisions are relatively straightforward and simple. An organized and
systematic decision-making process usually leads to better decisions. Without a welldefined process, you risk making decisions that are based on insufficient information and
analysis. Many variables affect the final impact of your decision. However, if you

establish strong foundations for decision-making, generate good alternatives, evaluate

these alternatives rigorously, and then check your decision-making process, you will
improve the quality of your decisions. In decision-making, theres usually some degree of
uncertainty, which inevitable leads to risk. By evaluating the risk involved with various
options, you can determine whether the risk is manageable.
Managers who are making decisions with uncertainty should know the degree and
nature of the risk they are taking in choosing any course of action.
The SWOT analysis can likewise be helpful. The manager will consider the main
problem with strengths, weaknesses, opportunities and threats of a case before arriving at
alternatives or options for careful and thorough analysis, thus, decisions are made with
intellectual or scholarly analysis.
In general, using all types of forecasting will be helpful, useful and beneficial to
managerial decision making. However, there are other useful schemes/tools to
supplement forecasting.
The manager should be flexible enough to use his intuition, judgment,
experiences and personal observation with statistical/mathematical analysis, as well as
the information gathered from the experts, which are valid and reliable.
Any decision made should be considered correct. It is just a matter of learning
from the mistakes committed in decision-making to serve as lessons for wise decisions in
the future. YES, FORECASTING AFFECTS MANAGERIAL DECISION-MAKING
POSITIVELY OR NEGATIVELY.