Industry Evolution OUTLINE The industry life cycle Industry structure, competition, and success factors over the life cycle. Anticipating and shaping the future. 37

The Industry Life Cycle Industry Sales Introduction Growth Maturity Decline Time Drivers of industry evolution : demand growth creation and diffusion of knowledge 38

Product and Process Innovation Over Time Product Innovation Process Innovation Rate of innovation Time 39

Standardization of Product Features in Cars FEATURE INTRODUCTION GENERAL ADOPTION Speedometer 1901 by Oldsmobile Circa 1915 Automatic transmission 1st installed 1904 Introduced by Packard as an option, 1938. Standard on Cadillacs early 1950 Electric headlamps GM introduces 1908 Standard equipment by 1916 All-steel body GM adoptes 1912 Standard by early 1920s All-steel enclosed body Dodge 1923 Becomes standard late 1920s Radio Optional extra 1923 Standard equipment, 1946 Four-wheel drive Appeared 1924 Only limited availability by 1994 Hydraulic brakes Introduced 1924 Became standard 1939 Shatterproof glass 1st used 1927 Standard features in Fords 1938 Power steering Introduced 1952 Standard equipment by 1969 Antilock brakes Introduced 1972 Standard on GM cars in 1991 Air bags GM introduces 1974 By 1994 most new cars equipped with air bags 41

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 1900 50 90 07 1930 50 70 90 07 MOTORCYCLES TV’s Life cycle model can help us to anticipate industry evolution—but dangerous to assume any common, pre- determined pattern of industry development Color B&W Portable HDTV ? 42

Evolution of Industry Structure over the Life Cycle INTRODUCTION GROWTH MATURITY DECLINE DEMAND Affluent buyers Increasing Mass market Knowledgeable, penetration replacement customers, resi- demand dual segments TECHNOLOGY Rapid product Product and Incremental Well-diffused innovation process innovation innovation technology PRODUCTS Wide variety, Standardization Commoditiz- Continued rapid design change ation commoditization MANUFACT- Short-runs, skill Capacity shortage, Deskilling Overcapacity URING intensive mass-production TRADE -----Production shifts from advanced to developing countries----- COMPETITION Technology- Entry & exit Shakeout & Price wars, consolidation exit KSFs Product innovation Process techno- Cost efficiency Overhead red- logy. Design for uction, ration- alization, low cost sourcing 43

The Driving Forces of Industry Evolution 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 Price competition intensifies Production becomes less R&D & skill-intensive Production shifts to low-wage countries Excess capacity increases Bargaining power of distributors increases Demand growth slows as market saturation approaches Distribution channels consolidate 44

Changes in the Population of Firms over the Industry Life Cycle: US Auto Industry 1885-1961 Source: S. Klepper, Industrial & Corporate Change, August 2002, p. 654.

The World’s Biggest Companies, 1912 and 2006 (by market capitalization) 1912 $ bn. 2006 US Steel 0.74 Exxon Mobil 372 Exxon 0.39 General Electric 363 J&P Coates 0.29 Microsoft 281 Pullman 0.20 Citigroup 239 Royal Dutch Shell 0.19 BP 233 Anaconda 0.18 Bank of America 212 0.17 211 Singer Wal-Mart Stores 197 American Brands Toyota Motor Navistar 0.16 Gazprom 196 BAT HSBC 190 De Beers Procter & Gamble

ROI at Different Stages of the Industry Life Cycle

Strategy and Performance across the Industry Life Cycle Note: The figure shows standardized means for each variable for businesses at each stage of the life cycle.

Preparing for the Future : The Role of Scenario Analysis in Adapting to 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 changes and outcomes Consider implications of each scenario for the company Identify key signposts pointing toward the emergence of each scenario Prepare contingency plan

Innovation & Renewal over the Industry Life Cycle: Retailing Warehouse Clubs e.g. Price Club Sam’s Club Internet Retailers e.g. Amazon; Expedia Discount Stores e.g. K-Mart Wal-Mart “Category Killers” e.g. Toys-R-Us, Home Depot Mail order, catalogue retailing e.g. Sears Roebuck ? Chain Stores e.g. A&P 1880s 1920s 1960s 2000

Gary Hamel: Shaking the Foundations OLD BRICK NEW BRICK Top management is responsible for setting strategy Everyone is responsible for setting strategy Getting better, getting faster is the way to win Rule-busting innovation is the way to win Unconventional business concepts create competitive advantage IT creates competitive advantage Being revolutionary is high risk More of the same is high risk We can merge our way to competitiveness There’s no correlation between size and competitiveness Innovation equals new products and new technology Innovation equals entirely new business concepts Strategy is the easy only if you’re content to be an imitator Strategy is the easy part, Implementation the hard part Change starts with activists Change starts at the top Our real problem is execution Our real problem is execution Big companies can become gray-haired revolutionaries Big companies can’t innovate

BCG’s Strategic Environments Matrix FRAGMENTED SPECIALIZATION apparel, housebuilding pharmaceuticals, luxury cars jewelry retailing, sawmills chocolate confectionery STALEMATE VOLUME basic chemicals, volume jet engines, food supermarkets grade paper, ship owning motorcycles, standard (VLCCs), wholesale banking microprocessors Many SOURCES OF ADVANTAGE Few Big Small SIZE OF ADVANTAGE 45

ENVIRONMENTAL VARIABILITY BCG’s Analysis of the Strategic Characteristics of Specialization Businesses CREATIVE EXPERIMENTAL fashion, toiletries, magazines general publishing food products PERCEPTIVE ANALYTICAL high tech luxury cars, confectionery paper towels low ABILITY TO SYSTEMATIZE high high low ENVIRONMENTAL VARIABILITY 46