MKT 490 Innovation & New Venture Growth Mishari Alnahedh

INDUSTRY EVOLUTION

Can Industry Evolution be Anticipated? Mishari Alnahedh Can Industry Evolution be Anticipated? Although every industry follows a unique development path, it is possible to detect some common patterns that are the result of common driving forces The key is to identify these patterns of industry evolution, the forces that drive them, and their implications for competition and competitive advantage Is the industry life cycle a valid and useful description of how industries evolve? Does categorization of industries according to their stage of development serve any useful purpose?

Drivers of industry evolution: The Industry Life Cycle Mishari Alnahedh Industry Sales Introduction Growth Maturity Decline Time Drivers of industry evolution: Demand growth Creation and diffusion of knowledge © 2013 Robert M. Grant www.contemporarystrategyanalysis.com

Patterns of evolution differ across industries How Typical is the Life Cycle Pattern? Mishari Alnahedh Patterns of evolution differ across industries Some industries may retain features of emerging industries - Technology-intensive industries (e.g. pharmaceuticals, semiconductors, computers) Some industries reach maturity, but never enter a decline phase - Especially those providing basic necessities, e.g. food processing, construction, apparel Some industries may experience a rejuvenation of their life cycle - The world motorcycle industry, the TV monitor industry Sales Sales Flat screen Color Portable HDTV B&W MOTORCYCLES TELEVISIONS 1900 1950 1980 2012 1930 1950 1970 1990 2010 © 2013 Robert M. Grant www.contemporarystrategyanalysis.com

Industry Life Cycle Mishari Alnahedh To what extent do industries conform to the industry life cycle pattern? The tendency over time has been for life cycles to become compressed Competing on internet time An industry is likely to be at different stages of its life cycle in different countries Life cycle model can help us to anticipate industry evolution—but dangerous to assume any common, pre-determined pattern of industry development

Retailing Innovation & Renewal over the Industry Life Cycle Mishari Alnahedh Retailing Warehouse clubs e.g. Sam’s Club Internet Retailers e.g. Amazon Mail order catalogue retailing e.g. Sears, Roebuck Chain stores e.g. A&P Discount stores e.g. WalMart “Category Killers”, e.g. Toys R Us 1880s 1900s 1920s 1940s 1960s 1980s 2000 © 2013 Robert M. Grant www.contemporarystrategyanalysis.com

Demand growth as a driver of industry evolution Mishari Alnahedh The S-shaped growth curve Introduction stage: Sales are small and the rate of market penetration is low because the industry’s products are little known and customers are few Growth stage: Market penetration accelerates as product technology becomes more standardized and prices fall Maturity stage: Market saturates and demand is wholly for replacement Decline stage: The industry becomes challenged by new industries that produce technologically superior substitute products

Creation and diffusion of knowledge as a driver of industry evolution Mishari Alnahedh New knowledge in the form of product innovation is responsible for an industry’s birth The dual processes of knowledge creation and knowledge diffusion have a major influence on the pattern of development In the introduction stage, product technology advances rapidly. - Rival technologies and business models compete to become the dominant design Then there is a shift from product innovation to process innovation - Firms seek to reduce costs and increase product reliability through large-scale manufacturing methods Over the course of the life cycle, customers become increasingly informed.

Product and Process Innovation Over Time Mishari Alnahedh Product Innovation Process Innovation Rate of innovation Time © 2013 Robert M. Grant www.contemporarystrategyanalysis.com

The Driving Forces of Industry Evolution Mishari Alnahedh 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 Production becomes less R&D and skill-intensive Production shifts to low-wage countries Price competition intensifies Excess capacity reached Bargaining power of distributors increases Demand growth slows as market saturation approaches Distribution channels consolidate © 2013 Robert M. Grant www.contemporarystrategyanalysis.com

Changes in the Population of Firms Over the Industry Life Cycle Mishari Alnahedh US Auto Industry 1895 - 1960 Source: S. Klepper, Industrial & Corporate Change, August 2002, p. 654. © 2013 Robert M. Grant www.contemporarystrategyanalysis.com

Production shifts from advanced to emerging companies The Driving Forces of Industry Evolution Mishari Alnahedh Introduction Growth Maturity Decline Demand Early adopters and affluent buyers Rapid increase in market penetration Replacement/ repeat buying; price sensitive customers Obsolescence – Knowledgeable customers Technology Competing technologies; rapid product innovation Standardization; rapid process innovation Diffused know how; incremental knowledge Little innovation – Well-diffused technology Products Wide variety of features and designs Design & quality improve; dominant design emerges Commoditization; brand differentiation Differentiation difficult Manufacturing Short-runs, skill intensive Capacity shortage; mass production Over-capacity emerges, deskilling Overcapacity Trade Production shifts from advanced to emerging companies Competition Few companies Entry, mergers exist Shakeout and consolidation Price wars and exit KSFs Product innovation Design for manufacture; process innovation Cost efficiency (scale economics low cost inputs) Low overheads; rationalization © 2013 Robert M. Grant www.contemporarystrategyanalysis.com

The Role of Scale Economies and Entry Barriers Mishari Alnahedh Scale economies and entry barriers play a key role in different paths of evolution between industries Concentration increases substantially over the life cycle When entry barriers rise due to increasing scale economies and capital requirements - Automobiles, commercial aircraft, telecommunications equipment Or when entry barriers rise due to product differentiation and access to distribution channels - Soft drinks, ice cream, cosmetics Concentration may decline When entry barriers fall because technology becomes more accessible Or when product differentiation declines - Credit cards, television broadcasting, frozen foods

The nature and intensity of competition at each stage of life cycle Mishari Alnahedh Introduction stage: Competitors battle for technological leadership Competition focuses on technology and design Gross margin can be high, but heavy investments in innovation Market development tend to depress return on capital Growth stage Market demand outstrips industry capacity – especially if incumbents are protected by barriers to entry Maturity stage: Maturity is associated with strong price competition Increased product standardization increases the emphasis on price competition Decline stage Strong price competition may degenerate into destructive price wars and dismal profit performance

ROI at Different Stages of the Industry Life Cycle Mishari Alnahedh

ROI at Different Stages of the Industry Life Cycle Mishari Alnahedh © 2013 Robert M. Grant www.contemporarystrategyanalysis.com

Adapting to faster rates of change Mishari Alnahedh At the heart of the business model is core strategy Business mission Product/market scope A basis for differentiation The foundations for competitive advantage are strategic resources and capabilities What the firm knows (core competencies) What the firm owns (strategic assets) What the firm does (core processes)

The industry life cycle model is a useful approach to Today’s Main Takeaway Mishari Alnahedh The industry life cycle model is a useful approach to Explore the impact of temporal processes of market saturation, and technology development and dissemination, and Their impact on industry structure and the basis of competitive advantage The model acts as a shortcut in strategy analysis Categorizing an industry according to its stage of development can alert us to the type of competition likely to emerge and the kinds of strategy likely to be effective The model directs attention to the forces of change and direction of industry evolution thereby helping us to anticipate and manage change