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Competitive Advantage and Industry Evolution

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1 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. 37

2 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.

3 Exhibit 1: Industry Environment Portrayed as “Competitive Space”
How? (Technology) Who? (Customers) What? (Products/Services)

4 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

5 Using the Dynamic Model for Industry Analysis (cont.)
Products and Services (the “what” dimension) Size Availability Accessories Cost

6 Using the Dynamic Model for Industry Analysis (cont.)
Technologies (the “how” dimension) State-of-the-Art? Effectiveness

7 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.

8 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.

9 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.

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

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

12 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 ‘60 ‘ 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 Portable B&W HDTV ? 42

13 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 comm- rapid design change ation oditization 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

14 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 increase Demand growth slows Distribution channels consolidate 44

15 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.

16 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.

17 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

18 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

BCG 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

20 Key Success Factors in Mature Industries
Opportunities for sustainable -- limited potential for differentiation competitive advantage are technology stable and well diffused limited ease of entry due to well developed industry infrastructure and powerful distributors -- international competition : domestic cost advantage vulnerable Sources of Economies of scale cost advantage -- Low-cost inputs -- Low overheads Segment and customer -- As general industry environment deteriorates, selection advantage important to locate attractive segments and link up with successful customers. Sources of differentiation Emphasis on image differentiation and advantage differentiation through complementary services. Sources of innovation Limited opportunity for product and process innovation but considerable opportunity for strategic innovation 25

21 Product, Process, and Strategic Innovation over the Life Cycle
RATE OF INNOVATION Process innovation TIME 27

22 Strategies for Declining Industries
Features - Excess capacity of declining - Lack of technological change industries - Consolidation (but some new entry as new firms exit) - Old machines and employees Smooth adjustment - Predictability of decline of capacity Durable assets depends upon Costs of closure - Barriers to exit Management commitment - Strategies of surviving firms { 30

23 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 31

24 Selecting a Strategy in a Declining Industry
COMPANY’S COMPETITIVE POSITION Strengths in remaining Lacks strength in demand pockets remaining demand pocket Favorable LEADERSHIP HARVEST INDUSTRY to or or STRUCTURE decline NICHE DIVEST Unfavorable NICHE DIVEST to or QUICKLY decline HARVEST 32

25 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).

26 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.

27 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.

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