chapter 5 Industry Evolution Robert M. Grant

I.Introduction  Industry structures continually evolve and are driven by :- –Forces of competition –Fundamental changes in technology and economic growth   Companies need to develop capabilities and redeploy them to sustain their competitive advantage.   Patterns in the industry can help to anticipate evolution and shape of future   The industry life cycle is a common pattern that shows the stage of development in an industry.  Our task is to :- –Identify patterns of industry evolution and the forces that drive them. –Explore the implications for competition and competitive advantage.

II.The life cycle model  The product life cycle –Products are born –Their sales grow –They reach maturity –They go into decline –They ultimately die  The industry life cycle is –The supply side equivalent of the product life cycle –Of longer duration –Divided into 4 phases IntroductionIntroduction GrowthGrowth MaturityMaturity DeclineDecline

The life cycle model   Two factors are fundamental to driving industry evolution:   (1) demand growth and production (2) diffusion of knowledge.   Figure 5.1 page 110 shows the industry life cycle model. Demand grows through this life cycle.

A.Demand growth  The characteristic profile is an S- shaped growth curve i.Introduction stage: he rate of market penetration is low but high entry. i.Introduction stage: sales are small and products are little known. There is not much experience and the technology is new. Costs and prices are high, quality is low. Customers are few, but are affluent and innovation- oriented,the rate of market penetration is low but high entry. ii.Growth stage: Product technology is more standardized ii.Growth stage: accelerated market penetration. Prices start to fall. Mass market starts. Product technology is more standardized iii.Maturity stage: iii.Maturity stage: market becomes more saturated slowing most of the demand for product iv.Decline stage : Industry challenged by new industries iv.Decline stage : Industry challenged by new industries Technologically superior substitute products start to appear.

B.Creation and diffusion of knowledge  New knowledge is in the form of product innovation ( introductory stage). Knowledge diffusion is also important on the customer side. better able to judge value-for-money. A d ual process continue to drive industry evolution  New knowledge is in the form of product innovation ( introductory stage). Knowledge diffusion is also important on the customer side. Customers become more knowledgeable and informed, and more price sensitive as life cycle progresses.They are now better able to judge value-for-money. A d ual process continue to drive industry evolution –Knowledge creation –Knowledge diffusion. i.Introduction phase –Product technology advances rapidly –No dominant product technology.Competition is primarily between alternative technology & design configuration ii.Growth phase Dominant technology and design starts to emerges and this result in standardization. Increased standardization encourage firms to reduce cost through large-scale manufacturing methods - Witnesses cost reduction.The technology shifts from product innovation to process innovation such as assembly line, just in time, and continuous improvements. Dominant technology and design starts to emerges and this result in standardization. Increased standardization encourage firms to reduce cost through large-scale manufacturing methods iii Maturity stage : –Product technology and design stabilize. The challenge here –Product technology and design stabilize. The challenge here is to produce the product at acceptable cost and higher quality –Operational efficiency is sought.

How general is the life cycle pattern:  Life cycle pattern –Railroad industry 1830s till 1950s –US Auto industry Introduction stage 25 yearsIntroduction stage 25 years Growth lasted about 40 yearsGrowth lasted about 40 years Maturity set during 1950sMaturity set during 1950s –PCs introduction phase lasted 4 years – –Food processing or clothing may never enter a decline phase. – –Growth of the DVD market forced VHS into the decline stage. – –New products or new markets can rejuvenate a life cycle. An industry can be at different stages of life cycles in different countries (US auto market is starting a decline phase, while in China and India it is in growth phase).

III.Structure, competition, & success factors over the life cycle  Changes in demand growth & technology over the cycle have implications for industry structure, competition and the sources of competitive advantage ( success factors)   Table 5.2 page 115 shows the evolution of industry structure and competition over the life cycle.

A.Product differentiation  Standardization during growth and maturity phases increases product uniformity   During maturity, there is less differentiation because of product standardization. Ancillary services (like after-sales service) can help increase differentiation.  Product may evolve toward commodity status unless producers are effective in developing new dimensions for differentiation

B.Industry structure and competition  In most industries the introduction phase is associated with –fragmented structure –diversity of products and technologies.  The Growth stage may attract further new entries  The growth stage has scale efficient production and lower costs. Growth stage may attract further new entries   Maturity is characterized by more consolidation and fewer players, along with aggressive price competition.  Industries that begin with patent-protected new products –are likely to start as near monopolies –then become increasingly competitive

 Entry barriers play a key role in the evolution of industry concentration  Where entry barrier rise, due to – Increasing capital requirement (Aircraft & auto) –Product differentiation (soft drinks, beer) –Access to distribution channels (cosmetics)  The seller concentration is likely to increase over the life cycle

 Where entry barriers fall –because technology becomes more accessible –Product differentiation decline  Concentration may decline over time  At the retail level, –the size of Individual retail units increases –Independent retailers are displaced by chains  Increasing concentration at one stage of the value chain may encourage increased concentration in other parts as firm seek countervailing power.

C.Location and international trade  The life cycle theory of trade and direct investment is based on 2 assumptions –Demand for new products emerge 1 st in the advanced industrialized countries, and then diffuse internationally –With maturity, products require fewer inputs of technology and sophisticated skills,and they become more like commodities due to operational effectiveness.  The result is the following development patterns i.New industries began in high-income countries ii.As demand grow in other markets, they are serviced initially by exports iii.Continued growth of overseas markets and reduced need for inputs of technology and sophisticated labor skills make production attractive in newly industrialized countries and thus a shift occurs. iv.The advanced industrialized countries began import

D.The nature and intensity of competition   Competition starts as non-price and then shifts to price competition, and it becomes increasingly intense through the life cycle.  During introduction stage –Competition battle is for technological leadership. –Competition battle is for technological leadership. Heavy investments in innovation but limited sales volume, which means it’s unprofitable unless there is patent protection.  Growth stage –is more conductive ( leads to ) to profitability as market demand outstrip industry capacity That is –is more conductive ( leads to ) to profitability as market demand outstrip industry capacity That is more market demand and more profitability.  With the onset of maturity –Increased product standardization increases the emphasis on price competition.   Decline phase: intense and destructive price wars.

  Figure 5.3 page 117 shows the major driving forces of industry evolution.   Leading companies acquire experience, reputation, distribution channels and brand recognition. This gives them stability in mature industries.   Customers become more knowledgeable and more price conscious.   When demand slows down, distribution channels become more concentrated and their bargaining power increases.

E. Key success factors during industry evolution Introduction stage: product innovation and strong financial resources are very important for success. Capabilities in product development, marketing, manufacturing and distribution. Vertically integrated capabilities are important. Growth stage: adaptation of product design and manufacturing capability to large-scale production. High investment in R&D, equipment and sales force. Administrative and strategic skills become crucial, plus access to distribution. Maturity stage: cost efficiency becomes a very critical success factor during this stage. Marketing and R&D investments are lower in maturity than during growth stage. Decline phase: very destructive price competition starts. Maintaining a stable industry environment becomes very important. To remain competitive at this stage, a company needs to build a strong position in relation to residual market demand.

IV.Anticipating & shaping the future  Sustaining competitive advantage over time is important.  Ensuring that one’s competitive advantage is not rendered obsolete by changes in the industry environment   The investments and capabilities of the firm should always match the industry’s current and future success factors. As industries evolve and advance, requirements for success change.   Strategies for the present are concerned with maximizing the effectiveness of the firm’s resources and capabilities. Competing for the future is concerned with redeploying and developing the existing resources and capabilities to maintain competitive advantage.

A.Managing with dual strategies  Comapanies should be competing in 2 time zone –Strategy is about maximizing performance under today’s circumstances –Developing and deploying resources and capabilities for competing in the future

B.Competing for the future  For most companies, emphasis on competing in the present means that too much management energy is devoted to preserving the past and not enough to creating the future.   According to Gary Hamel and C.K. Prahalad, competing for the future means the following :-   Senior management should be far-sighted, not only reactive.   The company should be rule maker rather than rule follower.   The company should be innovative and getting ahead, instead of just catching up.   Designing the future and having foresight are more important than maintaining the status quo.   Strategy should redefine the future industry environment, and should create the future (not just anticipate the future).  The key is not to anticipate the future but to create the future.

In conclusion:   The life cycle model classifies industries according to their stage of development. This is helpful in :- (a) Determining what strategy is likely to be effective and how to allocate the company’s resources. (b) Gaining a deeper understanding of the industry structure and the nature of competition and success factors. (c) Understanding the forces of evolution, and anticipating & managing change.   There is a dual nature of strategy: maximizing competitive performance in the present, while preparing for the future (this might be a dilemma)