SGMA 591

Chapter 5:
Industry Evolution and Strategic
Change

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Technological Innovations Have Fundamentally
Changed Major Industries
 E-commerce has changed the way we shop
 The rapid growth of peer-to-peer marketplaces and the so-
called “sharing economy” has reshaped many industries,
including travel and hospitality
• 50% reduction in brick-and-mortar
bookstores
• Borders went out of business in 2011

• From rental to streaming

• Blockbuster went bankrupt in 2010

• $2.1B total impact on the NYC lodging

market and economy (Sept. 2014- Aug.
2015)
• 50% reduction in medallion price in
NYC

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Blockbuster vs. Netflix

(source: Saleh, Gormley, Pham, Pearce, & Tsang’s presentation, 2019) (source: https://www.viima.com/blog/disruptive-innovation)
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Joseph Schumpeter’s Creative Destruction
“The fundamental impulse that sets
and keeps the capitalist engine in
motion comes from the new
consumers’ goods, the new methods of
production or transportation, the new
markets, the new forms of industrial
organization that capitalist enterprise
creates. … [This process] incessantly
revolutionize the economic structure
from within, incessantly destroying the
old one, incessantly creating a new
one. This process of Creative
Destruction is the essential fact about
capitalism” (1942: 83)
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Learning Objectives
Recognize the different stages of industry
development and understand the factors that drive
the process of industry evolution

Understand different types of innovation

Managing strategic change

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Learning Objectives
Recognize the different stages of industry
development and understand the factors that drive
the process of industry evolution

6
An Industry Evolves and Changes Over Time:
Transportation
 Transportation provides a
dramatic, ongoing example of
Joseph Schumpeter’s concept of
creative destruction at work,
whereby the old is incessantly
destroyed or replaced by the new

7 Steve Jobs on Market Research:

https://www.youtube.com/watch?v=2U3w5Blv0Lg
An Industry Evolves and Changes Over Time:
Image Sensors
 The innovation of digital photography disrupted the photographic film
industry by effectively displacing it. Disruption is, hence, largely
consonant with Schumpeter’s concept of creative destruction

8
An Industry Evolves and Changes Over Time:
Telecommunication
In 2003, smartphone sales outgrew feature
Performance

phone sales worldwide for the first time ever

The IBM Simon (the

world’s first
smartphone) unveiled in
1992, available to
consumers in 1994

Then came Blackberry in

2002

In 2007, Apple entered

the smartphone race

Time

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The Industry Lifecycle as an S-Shaped Curve
 As products are born, their sales grow, they reach maturity,
they go into decline and they ultimately die, so too do the
industries that produce them
 Most new product categories follow similar trajectories – they
progress slowly at first, pick up speed, then level off. But the rate
at which they change varies dramatically

(source: Suarez & Lanzolla, 2005, HBR)

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The Industry Lifecycle as an S-Shaped Curve
 As products are born, their sales grow, they reach maturity,
they go into decline and they ultimately die, so too do the
industries that produce them
 The industry lifecycle often lasts much longer than a typical
product lifecycle
Industry Sales

Introduction Growth Maturity Decline

Time

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The Industry Lifecycle (cont.)
Introduction Growth Maturity Decline
Demand Early adopters Rapidly increasing Replacement/repeat Obsolescence
market penetration buying; price sensitive
customers
Technology Competing Standardization; rapid Well-diffused technical Little product or
technologies; rapid process innovation knowhow; incremental process innovation
product innovation innovation
Products Wide variety of Design and quality Commoditization; Differentiation
features and improve; emergence of attempts to difficult and
technologies; poor dominant design differentiate unprofitable
quality
Manufacturing Short production runs; Capacity shortage; mass Emergence of Chronic
and high-skilled labor production; competition overcapacity; deskilling overcapacity
Distribution content of production
Trade Production shifts from advanced to developing countries
Competition Limited: few companies Emerging: entry, Fierce: shakeout & Fading: price wars
mergers and exits consolidation and exits
Key Success Product innovation; Process innovation; Cost efficiency through Low overheads;
Factors and establishing credible design for capital intensity (i.e., rationalizing
strategy image of firm and manufacture; access to scale efficiency and low capacity; buyer
product distribution; brand cost inputs) selection
building; fast product
development

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Dynamics of Product and Process Innovation:
From Product to Process Innovation
 An industry evolves and changes over time according to the
pattern described below: Uttberback’s 3-phrase of innovation
• Explosion of different • Standardization of • Contraction of
designs design competitors
• Era of radical product • Emergence of process • Era of incremental
innovation innovation innovation
Product
Rate of Major Innovation

innovation Process
innovation
Lowest costs

Dominant
design

Fluid phase Transitional phase Specific phase Time

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Dynamics of Product and Process Innovation:
From Product to Process Innovation (cont.)
 A (dominant design) is a de facto if not de
jure industry standard that defines what
a product is and what its core features are

 Since 1885, the auto industry has been

perfecting internal combustion engines.
Electric cars were available in the middle of
the 19th century, but fell out of favor after
Henry Ford developed his Model T in 1908.
Recently, battery electric vehicles has been
(slowly) displacing internal combustion
engine vehicles

 In the PC industry, IBM’s PC is an example of a

dominant design

 But it is not necessarily based on the best

technology (e.g., QWERTY keyboard vs.
Dvorak keyboard)

14 https://www.cnn.com/interactive/2019/08/
business/electric-cars-audi-volkswagen-tesla/)
Dynamics of Product and Process Innovation:
The PC Industry
 IBM PC was established as a dominant design in the PC
industry and has been followed by more incremental
improvements
MITS’s Altair 8800 as the first PC Dominant design

Rate of Major Innovation

established
Product Process
innovation innovation

1975 1976 1981 1984 Time

PC history begins

Steve Wozniak completes the Apple 1 IBM enters

PC market

Dell enters PC market to

sell IBM PC compatibles

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Dynamics of Product and Process Innovation:
The Typewriter Industry
 The keyboard you use is a QWERTY
keyboard invented in 1868

 The Dvorak keyboard was invented in

1936 by August Dvorak

 The most used keys were in the middle

row of the keyboard, with the vowels to
the left and the consonants to the right

 While the Dvorak keyboard offers a

faster, more comfortable typing
experience than the QWERTY
keyboard, users were reluctant to
switch from the latter to the former
partly because they had to get used to
the new layout
https://www.youtube.com/watch?v=tIJNusYZXMA
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How General is the Industry Lifecycle Pattern?
 The duration of the industry lifecycle varies greatly from
industry to industry
 The evolution of the music industry: The end of physical format?

1999: Launch of Napster

2003: Launch of iTunes Store

17 https://www.visualcapitalist.com/our-top-infographics-of-2018/
How General is the Industry Lifecycle Pattern?
 An industry is likely to be at different stages of its industry
lifecycle in different countries
 TVs, smartphones, and cars

 Multinational enterprises can exploit such differences

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How General is the Industry Lifecycle Pattern?
 Patterns of evolution differ across industries
 Some industries may never enter a decline phase, especially those
providing basic necessities such as education
 Other industries may experience a rejuvenation of their lifecycle
Major Eras of the Computer Industry: Evolution of Information Architectures
Industry Sales

Time

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Learning Objectives

Understand different types of innovation

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Industries Evolve and Change Based on
Sustaining versus Disruptive Innovation
 Clayton Christensen’s theory of disruptive innovation explains
how great firms or better-resourced incumbents can—and
often do—fail in the face of new, disruptive innovations

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Industries Evolve and Change Based on
Sustaining versus Disruptive Innovation
 (Sustaining innovations) are how
incumbents move along established
improvement trajectories in an existing
market, typically improving existing
products (e.g., Apple making iPhones
better)
 (Disruptive innovations) tend to be
produced by new entrants that introduce
substitute products using technology that
is cheaper but initial inferior to products
offered by mature incumbents. Then the
disruptor that attacks from below moves
upmarket by improving its performance
over time, with a new value proposition
and either reshape an existing market
with a “good enough product” or create a
new one where non-customers, or
potential new customers, exist
(source: Christensen et al., 2015, HBR)

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Industries Evolve and Change Based on
Sustaining versus Disruptive Innovation
 Better-resourced incumbents outperformed new entrants in a
sustaining innovation context but underperformed in a
disruptive innovation context
Industries Change Based on Sustaining versus
Disruptive Innovation: Computers
va tions
ve inno
i sr upti
D Laptops

Desktops
Industry Sales

Minicomputers
Mainframes
Sustaining
innovations
Apple

Dell

DEC

IBM
1952 1964 1977 1983 Time

A disruptive innovation can itself be disrupted

24
Apple’s iPhone: Was It a Disruptive Innovation?
The iPhone created a new market by putting together traditional components
used in the smartphone industry with a different “architecture” designed
around a completely new way of interacting with a handheld device

“Apple won’t succeed with the iPhone. … It’s not
[truly] disruptive. History speaks pretty loudly on
that, that the probability of success is going to be
limited”
– Clayton Christensen, BusinessWeek, 2007
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“The product that Apple debuted in 2007 was a
sustaining innovation in the smartphone market. …
The iPhone’s subsequent growth is better explained
by disruption—not of other smartphones but of the
laptop as the primary access point to the internet”
– Clayton Christensen, HBR, 2015
The iPhone is also disruptive to digital cameras and
GPS devices
Is Tesla Disrupting the Automobile Industry?

Clayton Christiansen wrote in a BusinessWeek article:

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When It Comes to a Platform Business like Uber
Is it a sustaining innovation, meaning that Uber represents only
an incremental improvement on the existing taxi industry? Or is
it a disruptive innovation? Why?
https://techcrunch.com/2016/02/27/why-clayton-christensen-is-wrong-about-uber-and-disruptive-innovation/

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Learning Objectives

Managing strategic change

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Why Strategic Change Is Essential
 Traditional approaches to strategy assume a
relatively stable world
 Herein the goal is to build a sustainable competitive
advantage by assembling the right resources, capabilities, and
core competencies [Chapter 3]—and establishing clear
market positioning in a given industry or market [Chapter 4]

 But in a world of constant change, your

corporate and business strategy must
constantly change

 To make intelligent investments, top managers

must understand how the whole industry is
changing
 If the industry is experiencing incremental change, the
incumbent firm will need to reinvest in its core
 If the industry is in the midst of disruptive change, new
entrants as attackers may have a competitive advantage while
an industry’s incumbent firms will eventually have to
dismantle old businesses
(sources: McGahan, 2004, HBR; Reeves & Deimler, 2011, HBR) (source: Kunisch et al., 2017, AMA)

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Overcome Strategic Persistence
 Industries evolve and change over time. But why is strategic
change so difficult? The forces of organizational inertia are strong
Cognitive schemata become blinders The innovator’s dilemma:
(e.g., BlackBerry co-CEOs Jim Balsillie and The tendency of
Mike Lazaridis to the announcement of the
iPhone: “No one would want it because it
successful companies to
was an inferior product” focus on their high-
Organizational margin customers and
Strong relationships become shackles
(e.g., HP was slow to Dell’s direct sell model, inertia dismiss disruptive
fearing a backlash from the resellers) innovations that initially
fall short on quality
Shared beliefs/values harden into dogmas
(e.g., Kodak’s film/marketing culture
standards
(Clayton Christensen, 1997)
impeded its devotion to digital photography)

(Source: Sull, 1999, Harvard Business Review)

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Where Nokia Went Wrong
 Nokia was reluctant to transition into a new era. And there was
another mistake. Nokia overestimated the strength of its brand,
and believed that even it was late to the smartphone game it
would be able to catch up quickly

31 (source: https://www.newyorker.com/business/currency/where-nokia-went-wrong)
(source: Bakshi, Liang, Poon, Tran, Tran, & Truong, 2020)
A Tale of Two Film Makers: Kodak vs. Fuji
 Eastman Kodak was once the leading film producer in the world,
with 80% market share compared to its next closest competitor,
Japanese owned Fujifilm, whom trailed with a mere 17%

32 (source: Lucas & Goh, 2009, JSIS)

A Tale of Two Film Makers: Kodak vs. Fuji
 In the 1980’s, “both Fujifilm and Kodak knew the digital age was surging
towards [them], but the question was, what to do about it
 Each company took a different approach to addressing digital
transformation and the results were significant: in 2012, Kodak filed for
bankruptcy, sold its patents, and exited its legacy businesses while Fujifilm
grew into a $20.8 billion revenue company
 While Kodak remained focused on the film industry, Fujifilm questioned
what business it was in.  Was it in the camera film business or the imaging
business?  After recognizing it could leverage prior expertise in other
industries, Fujifilm redefined itself as both an imaging and information
technology company.  As early as 1983, Fujifilm demonstrated this
expanded position when it produced the world’s first digital x-ray imaging
diagnostic machine, the FCR. Fujifilm’s experience led it to pursue three
lines of effort: Imaging, Information, and Document Solutions

33 (source: https://digital.hbs.edu/platform-rctom/submission/fujifilm-outlasting-the-kodak-moment/)
 Don’t Be Afraid of Strategic Change
 Just because your current business
model is widely used and profitable
doesn’t mean it will you serve well in
the future

 No business survives over the long

term without reinvesting itself

 When an industry reaches an

inflection point, old ways of
measuring success can lead to a sharp
decline—or failure
“It is not the strongest of the species
that survives, nor the most
intelligent, but the one most
responsive to change.”
― Charles Darwin (1859, The Origin
of Species)

(source: Bertolini et al., 2015, HBR)

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Ambidexterity as a Dynamic Capability:
Resolving the Innovator’s Dilemma
 When a company creates an ambidextrous organization, it can
develop dynamic capabilities that help solve the innovator’s
dilemma and survive in the face of change

Develop new
Exploit existing
strengths to

+ =
resources,
capabilities, and
explore the new What firms
growth should do
core competencies
opportunities that
in core businesses
arise from the
disruption

Create organizationally distinct

units that are tightly integrated
at the CEO level

(source: O’Reilly & Tushman, 2004, HBR; Tushman et al., 2011; Christensen et al., 2015, HBR)
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Why Companies Should Invest in Disruptive In-
novation
 What is an adequate balance between sustaining and
disruptive innovation investments?
Rebalancing the portfolio can increase return on investment
(ROI) by up to 20%, with marginal increase in risk

36 (https://www.mckinsey.com/~/media/McKinsey/dotcom/client_service/Strategy/PDFs/The_Eight_Essentials_of_Innovation_Performance.ashx)
But the Importance of Incremental/Sustaining In-
novation Must Not Be Underestimated Either
 Nondisruptive creation is a powerful
alternative path to growth

 Creation without disruption occurs when you

create a new market where there once wasn’t
any. So unlike disruption, there is no
displacement of existing companies and
industries

 Blue oceans are less about disruption, and

displacing the existing order, and more about
nondisruptive creation, where one’s gain
doesn’t have to come at the expense of others
 With the creation of Viagra, Pfizer shifted its focus from the pharmaceutical
industry’s largely functional orientation – medical treatment – to lifestyle
enhancement, an emotional orientation

37 (Source: Kim & Mauborgne, 2019, MIT Sloan Management Review)

 As You Analyze Companies and Formulate Good Strategies,
You Need Clear Answers to Four Key Questions
Corporate-level • Where do we compete? • What resources
Strategy and capabilities
Firm growth and performance do we
are overwhelmingly utilize/acquire?
determined by the industries Resource-based view
or markets in which
companies choose to compete
Chapters 2, 7,
Chapter 3
&8
“Strategy is about both
resources (Chapter 3)
and positioning
(Chapter 4)”
by Roger Martin (2015, HBR)

Chapter 5 Chapter 4
Business-level
Strategy Dynamic capabilities Jockeying for positioning
• How do we sustain our • What unique
value? value do we
bring? Or, how
do we compete
and win?
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