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Industry Evolution

OUTLIN
E
The industry life cycle
Industry structure, competition, and
success factors over the life cycle.
Anticipating and shaping the future.
The Industry Life Cycle
Industry Sales

Introduction Growth Maturity Decline

Time
Drivers of industry evolution :
demand growth
creation and diffusion of knowledge
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 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
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 1930 50 70 90 07
MOTORCYCLES TVs

Life cycle model can help us to anticipate industry


evolutionbut dangerous to assume any common, pre-
determined pattern of industry development
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
The Driving Forces of Industry Evolution

BASIC CONDITIONS INDUSTRY STRUCTURE COMPETITION

Customers become
more knowledgeable Customers become
& experienced more price conscious
Quest for new
sources of
differentiation
Products become
more standardized

Diffusion of
Price competition
technology Production intensifies
Production shifts
becomes less R&D
to low-wage
& skill-intensive
countries

Excess capacity
increases
Demand growth Bargaining power
slows as market of distributors
saturation approaches Distribution channels increases
consolidate
Changes in the Population of Firms over the
Industry Life Cycle: US Auto Industry 1885-1961

250

200

150
No. of firms
100

50

0
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 $ bn. 2006 $ bn.

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
General Electric 0.17 Royal Dutch Shell 211
Singer 0.17 Wal-Mart Stores 197
American Brands 0.17 Toyota Motor 197
Navistar 0.16 Gazprom 196
BAT 0.16 HSBC 190
De Beers 0.16 Procter & Gamble 190
ROI at Different Stages of the Industry Life Cycle

25

20

15 Real annual
ROI (%) growth rate <3%
10 Real annual
growth rate 3-6%
5 Real annual
growth rate >6%
0
Growth Maturity Decline
Strategy and Performance across the Industry Life Cycle

12
Growth
10 Maturity
Decline
8

2
Note: The figure
shows
0
Added/Revenue

standardized means
R&D/Sales

Advertising/Sales
ROI

Age of Plant &

Investment/Sales
Technical

New Products

% Sales from
New Products
Change

Product

for each variable for


Equip. businesses at each
Value

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 Internet
e.g. Price Club Retailers
Sams Club e.g. Amazon;
Discount Expedia
Category
Stores Killers
e.g. K-Mart e.g. Toys-R-Us,
Mail order, Wal-Mart
catalogue
Chain
Home Depot ?
Stores
retailing
e.g. A&P
e.g. Sears
Roebuck

1880s 1920s 1960s 2000


Gary Hamel: Shaking the Foundations
OLD BRICK NEW BRICK
Top management is responsible Everyone is responsible
for setting strategy for setting strategy

Getting better, getting faster Rule-busting innovation


is the way to win is the way to win

IT creates competitive advantage Unconventional business concepts


create competitive advantage

Being revolutionary is high risk More of the same is high risk

We can merge our way to Theres no correlation between


competitiveness size and competitiveness

Innovation equals new products Innovation equals entirely new


and new technology business concepts

Strategy is the easy part, Strategy is the easy only if youre


Implementation the hard part content to be an imitator

Change starts at the top Change starts with activists

Our real problem is execution Our real problem is execution

Big companies cant innovate Big companies can become gray-haired


revolutionaries
BCGs Strategic Environments Matrix

FRAGMENTED SPECIALIZATION
Many
apparel, housebuilding pharmaceuticals, luxury cars
jewelry retailing, sawmills chocolate confectionery
SOURCES
OF STALEMATE VOLUME
ADVANTAGE
basic chemicals, volume jet engines, food supermarkets
grade paper, ship owning motorcycles, standard
Few
(VLCCs), wholesale banking microprocessors
Small Big
SIZE OF ADVANTAGE
BCGs Analysis of the Strategic Characteristics
of Specialization Businesses

CREATIVE EXPERIMENTAL
fashion, toiletries, magazines
low general publishing food products

ABILITY TO
PERCEPTIVE ANALYTICAL
SYSTEMATIZE
high tech luxury cars, confectionery
high paper towels

high low
ENVIRONMENTAL VARIABILITY