Chapter 5: Industry Evolution & Strategic Change Troy Harris Homar Builtron Nicholas Sharp Nicholas Dieter

What do you think management’s greatest challenge is?

Management's greatest problem is CHANGE Managers need to ensure that the enterprise adapts to its environment and to the changes occurring within that environment.

Change in the industry is driven by the forces of: Technology Consumer Need Politics Economic Growth In some industries, these forces for change combine to create massive, unpredictable changes.

Changes in Google’s Industry Technology: Unprecedented changes in Google’s industry has caused massive growth in profits Consumer Need: Consumer need has caused products to become more portable, easier to use, and compatible with other devices Politics: The political situations in China and the European Union will make Google and other companies change their business strategy Economic Growth: With more money in consumers pockets, consumers are more willing to spend money on luxurious products. This is evidenced with the recent growth in the stock market.

Change is a good thing; however, it is difficult to ensure the adaption of the firm to these changes. Blockbuster, Polaroid, and Hastings failed to adapt to the changes in their respective industries. GameStop is struggling right now because they failed to see that consumers wanted digital downloads for games. They are having to have sales on newer games and expanded their digital download choices. They finally adapted to their industry’s change, but it may have been to little to late.

Implications of the Lifecycle for Competition and Strategy Changes in demand growth and technology over the cycle have implications for industry structure, competition and the sources of competitive advantage Categorizing industries according to their stages of development alerts to the types of competition likely to emerge and the strategies that are likely to be effective

The Introduction Phase The number of firms in an industry increases rapidly during the introduction phase of an industry’s lifecycle New entrants often have very different origins Start-up companies Established firms diversifying from related industries Typically features a wide variety of product types that reflect the diversity of technologies and designs and the lack of consensus over customer requirements. During this phase, gross margins can be high, but heavy investments in innovation and market development tend to depress return on capital

The Growth Phase As demand grows, a dominant design emerges As the market expands, the firm needs to adapt its product design and manufacturing capability to large-scale production To utilize manufacturing capacity, access to distribution becomes critical Financial resources also become important as investment requirements grow Production and assembly eventually may shift away from the advanced countries and these countries may start to import

The Maturity Phase Competitive advantage is increasingly a quest for efficiency, particularly in industries that tend towards commoditization The number of firms begins to fall as product standardization and excess capacity stimulate price competition Industries go through one or more ‘shakeout’ phases during which the rate of firm failure increases sharply With maturity comes the commoditization and de-skilling of production processes, and production eventually shifts to developing countries where labour costs are lowest

The Decline Phase The transition from maturity to decline can be a result of technological substitutions Shrinking market demand gives rise to acute strategic issues Key features of declining industries: Excess capacity Lack of technological change A declining number of competitors Aggressive price competition

Managing Organizational Adaptation and Strategic Change The sources of organizational inertia: Organizational routines Social and political structures Conformity Limited search Complementarities

Coping With Technological Change Competence-enhancing technological change Competence-destroying technological change Architectural and component innovation Disruptive technologies

Managing Strategic Change Duel Strategies- positioning for the present and adapting for the future Requires short-term and long-term planning Almost always focus on short term Hard to deal with disruptive technology

Ambidextrous Organization Two kinds of ambidexterity Structural ambidexterity Contextual ambidexterity

Structural Ambidexterity Different parts of the organization take part in exploitative activities. Easier to foster change in a new organizational unit rather than the existing organization This is done in separate units Ex: IBM and personal computers

Contextual Ambidexterity Involves the same organizational units and members pursuing innovation Use existing products while trying to add creativity Ex: Google gives employees 20% free time to work on exploratory products This is effective because engineers do not have to wait for approval

Tools for Strategic Change Management Creating perceptions of crisis Releases the status quo Establishing stretch targets Create organizational initiatives Reorganization and new blood

Dynamic Capabilities How to integrate, build, and reconfigure internal and external competences to address rapidly changing environments Google’s Dynamic Capabilities: Engineering skill in computer science Science based expertise in human capital Leadership that focuses on innovation culture and emphasis on people

Google’s Unorthodox Management Model Dynamic capabilities A continuously changing organization A people-centric approach An ambidextrous organization. An open organization that networks with its surroundings A systems approach to work differs from the conventional linear way of working

Shaping the Future Adapting to external change is how to fall behind and play catch-up, but creating the future is how to accrue competitive advantages Google: Revolution is required for a company to not go extinct, which requires changing the psychological and sociological norms of an organization that hinder innovation (next slide) BMW- survived two world wars and transformed Burberry- from raincoats and mountain gear to global fashion Amazon- from books to a full organization Enron-Utility and pipeline to trader/market-maker in energy futures, to collapse Vivendi-multimedia empire built on french water and waste utility fell apart Nokia-Able to change from forest products and cable manufacturer to biggest supplier of wireless handsets, but could not sustain it sharp

Shaking the Foundations sharp

Developing New Capabilities Adapting to a changing world requires developing the capabilities needed to renew competitive advantage Google created the algorithms that make a user’s searches bring up the most relevant articles or websites from the internet, which leads to Google being the most used search engine in the world Certain capabilities are Path Dependent: meaning that they are as a result of its history Walmart distribution Exxon and Royal Dutch Shell Established capabilities are a big barrier to creating new ones Dell direct sales vs. retail outlets sharp

Integrating Resources to Create Capability Many companies are able to create capabilities which is a good thing, and is done through a process Combining different resources and skills of members in the organization Success depends on the presence of suitable: Processes- efficient, repeatable, reliable Structure- the parts of a capability need to be located in the same unit if they want to achieve higher performance Motivation- with it, people will set aside their own aspirations to help the team as a whole Organizational alignment- all the pieces need to fit together and point in one direction in the context of the broader organization sharp

Developing Capabilities Sequentially Go from one or a few capabilities being created, to another set This helps with resource allocation including manager’s time Ensures that a new capability fits into the four pieces of processes, structure, motivation, and alignment before moving on to another project Helpful to not focus on the organizational capabilities themselves when developing them, but focus on developing and supplying the products that use those capabilities and this leads to a better understanding of the capability itself Very effective when developing an entirely new area of business The key being that each stage of development is to be linked to a clearly defined set of capabilities and not to a specific product sharp

Hyundai Motor: Developing capabilities through Product Sequencing Each phase of development was characterized by a clear objective in terms of product outcome, tight deadline, empowered development team, clear recognition of the desired capabilities, and a plan B. sharp

Summary It is hard to ensure if firms will adapt to change Several factors cause industries to change It is hard to ensure if firms will adapt to change Strategic change requires building new capabilities To understand how to build a capability, it is necessary to understand how resources are integrated into said capability, which points to the advantage of using a sequential approach to developing a capability