Industry Evolution & Strategic

Change

Sessions 15-16
Prof. Supriti Mishra
IMI Bhubaneswar
 Demand Growth: The Industry Life Cycle
Industry Sales

Introduction Growth Maturity Decline

Time
Drivers of industry evolution :
• Demand growth
• Creation and diffusion of knowledge
Creation & Diffusion of Knowledge
• Dominant design
– A product architecture that defines the look,
functionality, and production method for the
product and becomes accepted by the industry as
a whole
• Technical standard
– A technology or standard that is required for
compatibility
Product and Process Innovation Over Time

Product Innovation
Rate of innovation

Process Innovation

Time
 Evolution of Automobile Industry

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, e.g. motorcycles, TVs:
Sales Flat
Sales screen
Color Portable HDTV
B&W

MOTORCYCLES TELEVISIONS

1900 1950 1980 20121930 1950 1970 1990 2010

• Life cycle model can help us to anticipate industry evolution—but dangerous to

assume any common, pre-determined pattern of industry development
 Innovation & Renewal over the
Industry Life Cycle: Retailing

Warehouse Internet
Clubs Retailers
e.g. Price Club e.g. Amazon;
Sam’s Club Flipkart

Discount “Category
Stores Killers”
e.g. Big Bazar e.g. Toys-R-Us,
Mail order,
catalogue Chain
Home Depot
?
Stores
retailing
e.g. Modicare
e.g. Sears,
Steel utensil

1880s 1920s 1960s 2000

 Implications of Life Cycle for
Competition & Strategy
• Product differentiation
– wide variety of product types that reflect diversity of
technology and design in Introduction phase
– Convergence around a dominant design often
followed by commoditization during mature phase
unless producers develop new dimensions of
differentiation
• Organizational demographics & industry structure
– No. of firms in the industry increases rapidly in the
initial phase
– With onset of maturity, number of firms begin to fall
and industries go through a phase of shakeout
• In the shakeout phase intensive acquisition, merger, and exit
occurs
 Implications of Life Cycle for
Competition & Strategy
• Location and international trade
– Industries migrate internationally
• Nature and intensity of competition
– Changes in industry structure over the life cycle –
commoditization, new entry, and international
diffusion of production
• First, a shift from non-price competition to price
competition
• Second, margins shrink as intensity of competition
grows
 Evolution of Industry Structure
Over the Life Cycle
Introduction Growth Maturity Decline
Demand Early adopters Rapid increase in Replacement/ Obsolescence
market penetration repeat buying;
price sensitive
customers
Technology Competing Standardization; rapid Diffused know Little innovation
technologies; rapid process innovation how; incremental
product innovation knowledge
Products Wide variety of Design & quality Commoditization; Differentiation
features and improve; dominant brand difficult
designs design emerges differentiation
Manufacturing Short-runs, skill Capacity shortage; Over-capacity Overcapacity
intensive mass production emerges, deskilling
Trade Production shifts from advanced to emerging companies
Competition Few companies Entry, mergers exist Shakeout and Price wars and exit
consolidation
KSFs Product innovation Design for Cost efficiency Low overheads;
manufacture; process (scale economics rationalization
innovation low cost inputs)
10
 The Driving Forces of Industry Evolution
BASIC CONDITIONS INDUSTRY STRUCTURE COMPETITION

Customers become
Customers become
more knowledgeable
more price conscious
& experienced
Quest for new
Products become sources of
more standardized differentiation
Diffusion of
technology
Production
Production shifts
becomes less Price competition
to low-wage
R&D and skill- intensifies
countries
intensive

Demand growth slows
as market saturation
approaches
Excess capacity
reached Bargaining power
of distributors
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.

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
 Organizational Adaptation &
Industry Evolution
• Organizational ecology
– Industry is the unit of comparison
– Industries develop and grow through new entry
spurred by imitation and initial success of entrants
– Organizations that cope with the environment
stay, others perish
 Organizational Adaptation &
Industry Evolution
• Evolutionary economics
– Individual organizations are focus points
– Process of variation, selection, retention and rejection of
organizational routines
– Innovators that pioneer creation of new industry are different
from the consolidators
• In plant biotechnology, start-ups were led by Calgene, Mycogen, etc.
but leading suppliers of genetically modified seeds were DuPont,
Monsanto, Dow Chemical, etc.
– Whether innovators will stay in business depend on
• if flexible and entrepreneurial advantages of start-ups will outweigh
the superior resources and capability of established firms
• If resources and capabilities required in the new industry are similar to
those in the existing industry
• Ex. Of innovators staying in business: Google, Microsoft, etc.
 The World’s Biggest Companies by Market
Capitalization, 1912 and 2012
1912 $bn 2012 $bn
US Steel 0.74 Apple 429
Standard Oil NJ (Exxon) 0.39 ExxonMobil 407
J&P Coates 0.29 Microsoft 254
Pullman 0.20 IBM 228
Royal Dutch Shell 0.19 Wal-Mart Stores 212
Anaconda 0.18 Chevron Texaco 210
General Electric 0.17 ChinaMobile 204
Singer 0.17 General Electric 201
American Brands 0.17 China Construction Bank 198
Navistar 0.16 Google 194
British American Tobacco 0.16 Nestlé 191
De Beers 0.16 Johnson & Jonson 179
 Organization Adaptation and Change: The
Sources of Inertia
1. Organizational Routines - Existing patterns of coordinated activity
make it difficult to develop new capabilities
2. Social & Political Structures – Change threatens existing social
relationships and power structures
3. Conformity – Imitation locks firms into common structures and
strategies (“institutional isomorphism”) as their competitors
4. Limited Search – “bounded rationality”, preference of exploitation
over exploration, and satisfying behavior limit firms to incremental
change
5. Complementarities between strategy, structure, and systems –
Firms create unique configurations of organizational features;
localized changes tend to be dysfunctional; change needs to be
systematic
 Coping with Technological Change
• Competence enhancing vs competence destroying
technological change
• Turbofan in jet engine Vs. Quartz technology in watches
• Architectural and component innovation
– Whether innovation requires complete change in architecture?
– Ex. hybrid cars did not require any reconfiguration of existing
systems whereas electric cars needed architectural innovation
for charging of cars
– Supermarkets adapted online revolution by accepting it as a
form of marketing of their own products
• Disruptive technologies
– Incorporates different attributes than the existing technology
contrary to sustaining innovation that augments existing
performance attributes
– Ex. Steam powered ships vs sailing ships, disk-drive industry
 Managing Strategic Change
• Dual strategies and organizational
ambidexterity
– Structural ambidexterity: exploration and
exploitation of new technologies take place in
separate units
• Skunk work teams in John Deere, Apple, etc.
– Contextual ambidexterity
• Embedding innovation throughout organizations
• Whirlpool’s “innovation from everyone, everywhere” or
GE’s “innovation labs”
 Managing Strategic Change
• Tools of Strategic Change Management
– Creating perception of crisis (even amidst growth)
e.g. GE
– Establishing stretch goals e.g. Apple
– Creating organizational initiatives e.g. 3M
– Reorganization and new blood e.g. Flipkart and
Myntra reorganization, Satya Nadela in Microsoft