Industry Evolution

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

The Industry Life Cycle

The product life cycle hypothesis is that an industry passes through a number of phases or stages; introduction, growth, maturity, and decline. Industry growth follows an S-shaped curve because of the process of innovation and diffusion of a new product.

The Industry Life Cycle

Industry Sales
Introduction

Growth

Maturity

Decline

Time Drivers of industry evolution : demand growth creation and diffusion of knowledge

Stages of the Life Cycle

1. Introduction: The flat introductory phase of industry growth reflects the difficulty of overcoming buyer inertia and stimulating trials of the new product. 2. Growth: Rapid growth occurs as many buyers rush into the market once the product has proven as successful.

Stages of the Life Cycle (contd.)

3. Maturity: Penetration of the products potential buyer is eventually reached, causing the rapid growth to stop and to level off to the underlying rate of growth of the relevant buyer group. 4. Decline: Finally, growth will eventually taper off as new substitute products appear. As the industry goes through its life cycle, the nature of competition will shift. Some of the most common predictions about how an industry will change over the life cycle and how this should affect strategy is shown in Figure 8-2.

Predictions of Product Life Cycle Theories About Strategy, Competition, and Performance

Predictions of Product Life Cycle Theories About Strategy, Competition, and Performance

Predictions of Product Life Cycle Theories About Strategy, Competition, and Performance

Criticisms of The Product Life Cycle Hypothesis

The product life cycle has attracted some legitimate criticism: 1. The duration of the stages varies widely from industry to industry, and is often not clear what stage of the life cycle an industry is in. This problem diminishes the usefulness of the concept as a planning tool. 2. Industry growth does not always go through the Sshaped pattern at all. Sometimes industries skip maturity, passing directly from growth to decline. Sometimes industry growth revitalizes after a period of decline. Some industries seem to skip the slow take off of the introductory phase

Criticisms of The Product Life Cycle Hypothesis

3. Companies can affect the shape of the growth curve
through product innovation and repositioning, extending it in a variety of ways. If a company takes the life cycle as given, it becomes an undesirable self-fulfilling prophesy. 4. The nature of competition associated with each stage of the life cycle is different for different industries. For example, some industries start out highly concentrated and stay that way. Others, like bank cash dispensers, are concentrated for a significant period and then become less so. Still others begin highly fragmented; of these some consolidate (automobiles) and some do not (electronic component distribution).

A Framework for Forecasting Evolution

Like any evolution, industries evolve because some forces are in motion that create incentives or pressures for change, which can be called an evolutionary process. Although initial structure, structural potential, and particular firm s investment decisions will be industry specific, it can be generalized about what are the important evolutionary processes.

Evolutionary Processes
There are some predictable (and interacting) dynamic processes that occur in every industry in one form or the other, though their speed and direction will differ from industry to industry: long-run changes in growth; changes in buyer segments served; buyers learning; reduction of uncertainty; diffusion of propriety knowledge

Evolutionary Processes (contd.)

accumulation of experience; expansion (or contraction) of scale; changes in input and currency costs; product innovation; marketing innovation; process innovation; structural change in adjacent industries; government policy change; entries and exits.

Evolutionary Processes (contd.)

1. Long-Run Changes in Growth: Perhaps the most ubiquitous force leading to structural change is a change in the long-run industry growth rate. There are five important external reasons why long-run industry growth changes: i. Demographics: In consumer goods, demographic changes are one key determinant of the size of the buyer pool for a product and thereby the rate of the growth in demand. Part of the effect of demographic changes is caused by income elasticity. For industrial products, the effects of demographic changes is based on the life cycle of the customer industries. Firms can attempt to cope with adverse demographics by widening the buyer group for their product innovations, new marketing approaches, additional service offerings, etc. ii. Trends and Needs: Demand for an industrys product is affected by changes in the lifestyle, tastes, philosophies, and social conditions of the buyer population, which any society tends to experience over time. iii. Change in the Relative Position of Substitutes: Demand for a product is affected by the cost and quality of substitute products.

Evolutionary Processes (contd.)

In predicting long-run change in growth, a firm must identify all the substitute products that can meet the needs its product satisfies. iv. Changes in the Position of Complementary Products: The effective cost and quality of many products to the buyer depends on the cost, quality, and availability of complementary products, or products used jointly with them. Just as it is important to identify substitutes for an industry s product, it is important to identify complements comprehensively. v. Penetration of the Customer Group: Most very high industry growth rates are the result of increasing penetration, or sales to new customers rather than to repeat customers. Once penetration is reached, the industry is selling primarily to repeat buyers. The key to achieving industry growth when selling to repeat buyers is either stimulating rapid replacement of the product or increasing per capita consumption. Whereas, penetration most often means that industry demand will level off, for durable goods, achieving penetration can lead to an abrupt drop in industry demand.

Evolutionary Processes (contd.)

An industry approaching penetration will thus have its first deep cycle, supplementing the problem of overshooting demand. 2. Changes in Buyer Segments Served: The second important evolutionary process is change in the buyer segments served by the industry. For example, early electronic calculators were sold to scientists and engineers, only later to students and bill payers. The significance of new buyer segments for industry evolution is that the requirements for serving these new buyers (or eliminating requirements for serving obsolete segments) can have a fundamental impact on industry structure. Analysis of industry evolution, should include an identification of all potential new buyer segments and their characteristics. 3. Learning by Buyers: Through repeat purchasing, buyers accumulate knowledge about a product, its use, and the characteristics of competing brands. Products have a tendency to become more like commodities over time as buyers become more sophisticated and purchasing tends to be based on better information.

Evolutionary Processes (contd.)

4. Reduction of Uncertainty: Most new industries are initially characterized by a great deal of uncertainty about such things as potential size of the market, optimal product configuration, nature of potential buyers and how they can best be reached, and whether technological problems can be overcome. Over time, however, there is a continual process by which uncertainties are resolved. Technologies are proven, or disproven, buyers are identified, and indications are gathered from the industrys growth about its potential size. Reduction of uncertainty may also attract new types of entrants into the industry. 5. Diffusion of Proprietary Knowledge: Product and process technologies developed by particular firms (or suppliers or other parties) tend to become less proprietary. In the absence of patent protection, propriety advantages will tend to erode. One key offsetting force to diffusion of propriety technology is patent protection, which legally inhibits diffusion.

Evolutionary Processes (contd.)

6. Accumulation of Experience: In some industries, unit costs decline with experience in manufacturing, distributing, and marketing the product. The significance of the learning curve for industry competition is dependent upon whether firms with more experience can establish significant and sustainable leads over others. 7. Expansion (or Contraction) is Scale: The growth in an industry is usually accompanied by increases in the absolute size of the leading firms in the industry. Increasing scale in an industry and firm has a number of implications for industry structure including increased economies of scale and capital requirements. Another consequence of industry growth is that strategies of vertical integration tend to become more feasible, which tends to elevate barriers. There may also be a tendency for large industry scale to attract new entrants, who make it tougher for existing leaders, particularly if the entrants are large.

Evolutionary Processes (contd.)

8. Changes in Input Costs and Exchange Rates: Every industry uses a variety of inputs to its manufacturing, distribution, and marketing process. Changes in the cost or quality of these inputs can affect industry structure. The most straightforward effect is in increasing or decreasing the cost (and price) of the product, thereby affecting demand. Exchange rate fluctuations can also have a profound effect on industry competition. 9. Product Innovation: A major source of industry structural change is technological innovations of various types and origins. Product innovation can widen the market and hence promote industry growth and/or it can enhance product differentiation. Product innovation also can have indirect effects. The process of rapid product introduction, and associated needs for high marketing costs, may itself create mobility barriers as these may require new marketing, distribution, or manufacturing methods that change economies of scale or other mobility barriers.

Evolutionary Processes (contd.)

10. Marketing Innovation: Innovations in marketing can influence industry structure directly through increasing demand. Breakthroughs in the use of advertising media, new marketing themes or channels can allow reaching new consumers or reducing price sensitivity (raising product differentiation). 11. Process Innovation: innovations can make the process more or less capital intensive, increase or decrease economies of scale, change the proportion of fixed costs, increase or decrease vertical integration, affect the process of accumulating experience and so on. 12. Structural Change in Adjacent Industries: Since the structure of suppliers and customers industries affects their bargaining power with an industry, changes in their structure have potentially important consequences for industry evolution. For example, there has been substantial chain-store developments in structure of retailing of clothing and hardware in the 1960s and 1970s. As the structure of retailing has become concentrated, the retailers bargaining power with their supplying industries has increased.

Evolutionary Processes (contd.)

13. Government Policy Change: Government influences can have a significant and tangible impact on industry structural change, the most direct through full-blown regulation of such key variables as entry into the industry, competitive practices, licensing, sanctioning procedures, etc. 14. Entry and Exit: An entry into an industry (by either acquisition or internal development) of an established firm is often a major driving force for industry structural change. Exit changes industry structure by reducing the number of firms and possibly increasing the dominance of the leading ones. Firms exit because they no longer perceive the possibility of earning returns on their investment that exceed their opportunity cost of capital. The Evolutionary processes are a tool for predicting industry changes. Each evolutionary process identifies a number of key strategic signals, or pieces of key strategic information, for which the firm must constantly scan its environment.

Product and Process Innovation Over Time

Product Innovation

Rate of innovation

Process Innovation

Time

Standardization of Product Features in Cars

FEATURE

INTRODUCTION

GENERAL ADOPTION

Speedometer 1901 by Oldsmobile Automatic transmission 1st installed 1904

Circa 1915 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 Air bags Introduced 1972 GM introduces 1974 Standard on GM cars in 1991 By 1994 most new cars equipped with air bags

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
Color B&W Portable HDTV ?

1900 50 90 07 MOTORCYCLES

1930

50 70 TVs

90

07

Life cycle model can help us to anticipate industry evolutionbut dangerous to assume any common, predetermined pattern of industry development

Evolution of Industry Structure over the Life Cycle

INTRODUCTION Affluent buyers GROWTH Increasing penetration MATURITY Mass market replacement demand DECLINE Knowledgeable, customers, residual segments Well-diffused technology Continued commoditization Overcapacity

DEMAND

TECHNOLOGY PRODUCTS MANUFACTURING TRADE COMPETITION KSFs

Rapid product innovation

Product and Incremental process innovation innovation Commoditization Deskilling

Wide variety, Standardization rapid design change Short-runs, skill intensive Capacity shortage, mass-production

-----Production shifts from advanced to developing countries----TechnologyProduct innovation Entry & exit 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 as market saturation approaches Bargaining power of distributors increases

Distribution channels consolidate

Changes in the Population of Firms over the Industry Life Cycle: US Auto Industry 1885-1961
250 200 150 100 50 0
No. of firms

1895

1905

1915

1925

1935

1945

1955

Source: S. Klepper, Industrial & Corporate Change, August 2002, p. 654.

The Worlds Biggest Companies, 1912 and 2006

(by market capitalization)
1912 US Steel Exxon $ bn. 0.74 0.39 2006 Exxon Mobil General Electric $ bn. 372 363

J&P Coates
Pullman Royal Dutch Shell Anaconda General Electric Singer American Brands Navistar

0.29
0.20 0.19 0.18 0.17 0.17 0.17 0.16

Microsoft
Citigroup BP Bank of America Royal Dutch Shell Wal-Mart Stores Toyota Motor Gazprom

281
239 233 212 211 197 197 196

BAT
De Beers

0.16
0.16

HSBC
Procter & Gamble

190
190

ROI at Different Stages of the Industry Life Cycle

25 20 15 ROI (%) 10 5 0
Growth Maturity Decline Real annual growth rate <3% Real annual growth rate 3-6% Real annual growth rate >6%

Strategy and Performance across the Industry Life Cycle

12 10 8 6 4 2
Value Added/Revenue Product R&D/Sales Advertising/Sales ROI Age of Plant & Equip. Investment/Sales Technical Change New Products % Sales from New Products

Growth Maturity Decline

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 Internet Clubs Retailers e.g. Price Club e.g. Amazon; Sams Club Expedia Discount Category Stores Killers e.g. K-Mart e.g. Toys-R-Us, Wal-Mart Home Depot

Mail order, catalogue retailing e.g. Sears Roebuck

Chain Stores e.g. A&P

1880s

1920s

1960s

2000