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Chapter 5 Industry Evolution and Strategic Change - Notes
Chapter 5 Industry Evolution and Strategic Change - Notes
Chapter 5 Industry Evolution and Strategic Change - Notes
Chapter 5:
Industry Evolution and Strategic
Change
1
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
2
Blockbuster vs. Netflix
(source: Saleh, Gormley, Pham, Pearce, & Tsang’s presentation, 2019) (source: https://www.viima.com/blog/disruptive-innovation)
3
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)
4
Learning Objectives
Recognize the different stages of industry
development and understand the factors that drive
the process of industry evolution
5
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
8
An Industry Evolves and Changes Over Time:
Telecommunication
In 2003, smartphone sales outgrew feature
Performance
Time
9
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
11
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
12
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
13
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
IBM enters
PC market
16
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?
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
18
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
19
Learning Objectives
20
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
21
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)
22
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
25 (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
26
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 “The product that Apple debuted in 2007 was a
[truly] disruptive. History speaks pretty loudly on sustaining innovation in the smartphone market. …
that, that the probability of success is going to be The iPhone’s subsequent growth is better explained
limited” by disruption—not of other smartphones but of the
– Clayton Christensen, BusinessWeek, 2007 laptop as the primary access point to the internet”
– Clayton Christensen, HBR, 2015
The iPhone is also disruptive to digital cameras and
GPS devices
27
Is Tesla Disrupting the Automobile Industry?
28
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/
29
Learning Objectives
30
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]
31
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)
32
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
33 (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%
35 (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
36
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
(source: O’Reilly & Tushman, 2004, HBR; Tushman et al., 2011; Christensen et al., 2015, HBR)
37
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?
38
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