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.
Industry Sales
The Industry Life Cycle
Introduction
Growth
Maturity
Time
Drivers of industry evolution :
• demand growth
• creation and diffusion of knowledge
Decline
Product and Process Innovation Over Time
Rate of innovation
Product 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
TV’s
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
INTRODUCTION
Affluent buyers
GROWTH
Increasing
penetration
TECHNOLOGY
Rapid product
innovation
Product and
Incremental
process innovation innovation
PRODUCTS
Wide variety,
Standardization
rapid design change
Commoditization
Continued commoditization
MANUFACTURING
Short-runs, skill
intensive
Deskilling
Overcapacity
DEMAND
TRADE
Capacity shortage,
mass-production
MATURITY
Mass market
replacement
demand
DECLINE
Knowledgeable,
customers, residual segments
Well-diffused
technology
-----Production shifts from advanced to developing countries-----
COMPETITION
Technology-
Entry & exit
KSFs
Product innovation
Process technology. Design for
Shakeout &
consolidation
Cost efficiency
Price wars,
exit
Overhead reduction, rationalization, low
cost sourcing
The Driving Forces of Industry Evolution
BASIC CONDITIONS
Customers become
more knowledgeable
& experienced
INDUSTRY STRUCTURE
COMPETITION
Customers become
more price conscious
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
Distribution channels
consolidate
Bargaining power of
distributors increase
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
BCG’s Strategic Environments Matrix
Many
FRAGMENTED
SPECIALIZATION
apparel, housebuilding
pharmaceuticals, luxury cars
jewelry retailing, sawmills
chocolate confectionery
SOURCES
OF
STALEMATE
ADVANTAGE
basic chemicals, volume
Few
VOLUME
jet engines, food supermarkets
grade paper, ship owning
motorcycles, standard
(VLCCs), wholesale banking
microprocessors
Big
Small
SIZE OF ADVANTAGE
BCG Analysis of the
Strategic Characteristics of
Specialization Businesses
low
ABILITY TO
SYSTEMATIZE
CREATIVE
EXPERIMENTAL
fashion,
toiletries, magazines
general publishing
food products
PERCEPTIVE
ANALYTICAL
high tech
luxury cars, confectionery
paper towels
high
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
•
Sources of
cost advantage
-- Economies of scale
-- Low-cost inputs
-- Low overheads
•
Segment and customer
selection advantage
-- As general industry environment deteriorates,
important to locate attractive segments
and link up with successful customers.
•
Sources of differentiation
advantage
services.
-- Emphasis on image differentiation and
differentiation through complementary
•
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
RATE OF INNOVATION
Product
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
• Smooth adjustment
of capacity
depends upon
- Predictability of decline
Durable assets
Costs of closure
- Barriers to exit
Management
commitment
- Strategies of surviving firms
{
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 industry’s future
-raise the stakes
NICHE
Identify an attractive segment and dominate it.
HARVEST
Maximize cash flow from existing sources
DIVEST
Get out while there is still a market for industry assets
Selecting a Strategy in a Declining
Industry
COMPANY’S COMPETITIVE POSITION
Strengths in remaining
demand pockets
Favorable
INDUSTRY
STRUCTURE
LEADERSHIP
to
or
decline
NICHE
Unfavorable
to
decline
NICHE
or
HARVEST
Lacks strength in
remaining demand
pocket
HARVEST
or
DIVEST
DIVEST
QUICKLY
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.