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

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)

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

Industry Sales

Introduction

Growth

Maturity

Decline

Time

Drivers of industry evolution : demand growth creation and diffusion of knowledge

Product and Process Innovation Over Time

Product Innovation

Rate of innovation

Process Innovation

Time

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
B&W Color Portable HDTV ?

1900 50 60 90 MOTORCYCLES

1930

50 60 TVs

90

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

Evolution of Industry Structure over the Life Cycle

DEMAND INTRODUCTION Affluent buyers GROWTH Increasing penetration MATURITY Mass market replacement demand DECLINE Knowledgeable, customers, residual segments Well-diffused technology Continued commoditization Overcapacity

TECHNOLOGY

Rapid product innovation

Product and Incremental process innovation innovation Commoditization Deskilling

PRODUCTS

Wide variety, Standardization rapid design change Short-runs, skill intensive Capacity shortage, mass-production

MANUFACTURING TRADE COMPETITION

-----Production shifts from advanced to developing countries----TechnologyEntry & exit Shakeout & consolidation Cost efficiency Price wars, exit Overhead reduction, rationalization, low cost sourcing

KSFs

Product innovation

Process technology. Design for

The Driving Forces of Industry Evolution

BASIC CONDITIONS
Customers become more knowledgeable & experienced

INDUSTRY STRUCTURE
Customers become more price conscious

COMPETITION

Quest for new sources of differentiation Products become more standardized Diffusion of technology Production becomes less R&D & skill-intensive Production shifts to low-wage countries Price competition intensifies

Excess capacity increases Demand growth slows Bargaining power of distributors increase

Distribution channels consolidate

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

BCGs Strategic Environments Matrix

FRAGMENTED Many apparel, housebuilding jewelry retailing, sawmills SOURCES OF STALEMATE ADVANTAGE basic chemicals, volume Few grade paper, ship owning (VLCCs), wholesale banking Small

SPECIALIZATION pharmaceuticals, luxury cars chocolate confectionery

VOLUME jet engines, food supermarkets motorcycles, standard microprocessors Big

SIZE OF ADVANTAGE

BCG Analysis of the Strategic Characteristics of Specialization Businesses

CREATIVE fashion, low ABILITY TO SYSTEMATIZE high general publishing EXPERIMENTAL toiletries, magazines food products

PERCEPTIVE high tech

ANALYTICAL luxury cars, confectionery paper towels

high

low

ENVIRONMENTAL VARIABILITY

Key Success Factors in Mature Industries

Opportunities for sustainable competitive advantage are limited -- limited potential for differentiation -- technology stable and well diffused -- ease of entry due to well developed industry infrastructure and powerful distributors -- international competition : domestic cost advantage vulnerable -- Economies of scale -- Low-cost inputs -- Low overheads -- As general industry environment deteriorates, important to locate attractive segments and link up with successful customers. -- Emphasis on image differentiation and differentiation through complementary

Sources of cost advantage

Segment and customer selection advantage

Sources of differentiation advantage 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 innovation RATE OF INNOVATION Strategic innovation

Process innovation

TIME

Strategies for Declining Industries

Features of declining industries - Excess capacity - Lack of technological change - Consolidation (but some new entry as new firms exit) - Old machines and employees - Predictability of decline Durable assets Costs of closure - Barriers to exit Management commitment - Strategies of surviving firms

Smooth adjustment of capacity depends upon

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 industrys future -raise the stakes Identify an attractive segment and dominate it. Maximize cash flow from existing sources Get out while there is still a market for industry assets

NICHE HARVEST DIVEST

Selecting a Strategy in a Declining Industry

COMPANYS COMPETITIVE POSITION

Strengths in remaining demand pockets pocket Favorable LEADERSHIP or NICHE DIVEST Unfavorable to NICHE or DIVEST QUICKLY HARVEST or Lacks strength in remaining demand

INDUSTRY STRUCTURE

to decline

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.