3 industry evolution

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How Industries Evolve?

Dr.L.Prakash Sai

Labour Economics Industrial

Organization

Economics

Technology and

Innovation

Resource-based View

What is an

industry?

Built around a trade,

craft, or skills

Group of firms

producing close

substitutes

Built around a

technology

Activities carried out by a

dense network of inter-

firm cooperation

Industries

differ by:

Technology (factor

intensity and factor

substitution)

Cost structure,

concentration, entry

and exit barriers

Nature of

technology lifecycle

characteristics

Firms (rather than

industries) differ in their

resources & capabilities

Institutions

that define

industry

boundaries

Labour unions in

some countries;

Employers„ assocns.;

Collective bargaining

Cartels and

collusion;

Anti-trust policy;

Statistical

classification

Standards

(technical);

Patent

classification

Firms themselves

design their structure,

vertical scope, and in

turn industry boundaries

Typology/

paradigm

in use

Craft, mass, lean

production

Monopoly vs

perfect competition

„Technology

regimes‟

Cooperation vs

competition

Example of

industries

Car assembly plant

shopfloor

Product-based markets

with different

concentration ratios

Producers with a

specific set of

technologies;

„General purpose‟

technology pose

problems with

industry boundary

Car manufacturers plus

(where network links

are dense) dealers,

service providers,

component and

materials suppliers

Different Conceptions of Industry

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Radical Change Everything is up in the air

Intermediating Change Relationships are fragile

Creative Change The industry is constantly

redeveloping assets and

resources

Progressive Change Companies implement

incremental testing and adapt

to feedback

Core Activities

Core

Assets

Threatened Not Threatened

Thre

ate

ned

Not T

hre

ate

ned

Structural Change

Often Misunderstood

Not Easy to See:

Forest for the Trees

Confused by Popular Press

– One Size Does Not Fit All

Threats of Obsolescence

To Core Profit Making

Activities

To Fundamental Assets,

including IP

Understanding is important

Determines Investment

Approach

Competitive Positioning

Organizational Structure

Corporate Strategy Cannot

Succeed Unless it is

Aligned with its Industry Change

Trajectory!

Trajectories of Industry Change

Core activities : The recurring actions a company performs

that attract and retain suppliers and buyers.

Core assets : The durable resources, including intangibles,

that make a company more efficient at performing core

activities.

Radical Change Everything is up in the air Landline telephone manufacturers,

Overnight delivery services,

Travel agencies.

Intermediating Change Relationships are fragile Automobile dealerships,

Investment brokerages, and

Fine- art auction houses.

Creative Change The industry is constantly

redeveloping assets and

resources Motion picture, Pharma, and

Investment banking

Progressive Change Companies implement

incremental testing and adapt

to feedback Commercial airlines, discount retailing

and Long-haul trucking.

Core Activities

Co

re A

ssets

Threatened Not Threatened

Thre

ate

ned

Not T

hre

ate

ned

Trajectories of Industry Change

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Core Assets and Core Activities

DEFINITIONS

ASSET An object qualifies as an asset only if it is:

Durable: The object must retain its potential to create value even

after lying dormant for a year.

Property: The object must be owned by one or more firms within

the industry.

ACTIVITY An action qualifies as an activity only if it is:

Controlled: The action must be directed by one or more firms within

the industry.

Profit-oriented: The action must be designed to increase revenues or

lower costs or both for one or more firms within the

industry.

CORE An asset or activity is “core” if it is essential to the value-created by

the industry in the following sense:

Its eradication today (and continuing eradication for one year) would lead to

diminished profitability as of a date one year from now, despite efforts to replace

the eradicated asset or activity.

Progressive Change

Rules of Change

Constant market testing before full-scale

commitment

Competitive benchmarking and openness

about accomplishments

Building capabilities incrementally over time

rather than through acquisition of assets

Opportunities for Innovation

Building a system that dominates a geographic

or product market

Tightly linking activities

Commercial airlines

Long-haul trucking

Discount retailing

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Creative Change

Rules of Change

Committing resources to high-potential projects

without reliable market information

Developing a system for bringing successful

projects to market

Abandoning failing projects


Creating breakthrough asset-development

projects

Developing efficient and effective systems for

delivering projects to markets

Pharmaceuticals

Motion-picture production

Oil & gas exploration

Intermediating Change

Rules of Change

Adapting to new ways of transacting with

customers and suppliers

Scaling back commitments to fixed

infrastructure

Finding ways to redeploy assets out of the

business into more profitable uses


Focusing early on a core group of loyal

customers

Engaging in partnerships and alliances with

rivals, customers, or suppliers

Forward or backward integrating into a

customer‟s or supplier‟s business

Investment brokerage

Fine-arts auctions

Automobile dealerships

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Radical Change

Rules of Change

Carefully identifying profitable activities

and scaling back unprofitable activities

Avoiding the commitment of long-lived

assets into the business


Assessing the timing of change accurately

and retaining a profitable position as long

as possible

Developing efficiencies by replacing fixed

assets with variable activities

Overnight letter delivery

Landline telephone mfg.

Typewriter mfg.

Publishers are in the

communications business

Intermediary connecting the

content supplier with the

consumer

Perform services for the supplier

that the supplier can‟t or doesn‟t

want to do

A trusted source to the consumer

Need to look at each segment

individually to understand how

each is changing

Publishing/Media Industry

Publishing Industry Segments:

Consumer Trade

B2B Trade

Financial

News Providers & Publishers

Scientific, Technical & Medical

Legal, Tax, Regulatory

K-12 Education

Higher Education

Yellow Pages & Directories

Business Research & Reports

Search, Aggregation & Syndication

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Traditional activities of publishers are:

collecting, organizing, filtering and distributing

In the networked world, new publishing activities are:

aggregate, integrate, associate and syndicate

Let‟s take a closer look at three publishing industry segments:

Higher Education

Legal, Tax, Regulatory

News Providers & Publishers

Identifying an industry evolutionary trajectory is not easy

- but the payoff is better decision making

Higher Education

Assets:

Textbooks; Course Materials; Authors

Activities:

Collect, Organize, Filter, and Distribute

Threats:

Textbooks turn over constantly because

of used books

Companies have neglected relationship

with student

Widespread changes to instructional

models have failed to appear

Change Trajectory: Creative

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Legal, Tax and Regulatory

Assets:

Historical databases of legislation,

regulations, case law and explanations;

Relationship with governmental entities

Activities:

Collect, Organize, Filter, Aggregate,

Integrate, Associate, Syndicate and

Distribute

Threats:

Governments offer free content

More than “what”; Customers want to

know “how”

Customers expect best-of-breed

experience

Change Trajectory: Progressive

News Providers & Publishers (Newspapers)

Assets:

Brand (“All the News fit to Print”);

Subscribers

Activities:

Collect (Reporting), Organize, Filter

and Distribute

Threats:

Readership in decline

Advertising business model moving

to Web (Classifieds)

Change Trajectory: Radical

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Industry Evolution Assessment

Step 1: Defining your industry

Common buyers/suppliers,

Shared competitive intent, and

Shared technical platforms


Step 1: Defining your industry Common buyers/suppliers

Warner Bros. and Paramount: may star same actors and target same

customers.

General Electric and Philips Electronics: both sell bulbs and target

same customers.

Common buyers but not common suppliers: McD and Burger King in

the same industry.

Diversification of IBM into new industries: Mainframe; PC & networked

e-biz solutions.

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Step 1: Defining your industry Shared competitive intent

How buyers/suppliers behave if the terms of the deal were to change by

5 percent?

Switching employees from one industry to another signals common

industry.

Competitive Intent: Virgin and Continental have ability to attract

transatlantic business.

Competitive Intent: Disney entering the cruise line business.


Step 1: Defining your industry Shared technical platforms

Shared Platform: Offset printing (radical change) and digital printing

(progressive change) businesses are in distinct industries

Shared Platform: Microbreweries and general breweries compete in

the same industry.

Common technical platform tends to broaden industry definition to

include close competitors with the capability to attract each other‟s

buyers and suppliers regardless of competitor intentions.

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Radical

Creative

Intermediating

Progressive

Nature of Change and

Trajectory

[Threat to Core Assets]

[Threat to Core Activities]


Step 2: Determining whether change is architectural Core activities threatened?

Architectural Change: Defined by a threat to the core activities in an industry.

Architectural change in the industry structure is defined only by

reference to activities that influence both revenues and costs today.

Each core activity can be tied directly to both the cost and revenue

streams of the industry.

• Store-door delivery of soft-drink bottlers to supermarkets is a core activity

(its stoppage would affect industry‟s cost and revenues).

• Research affects today‟s cost, but not today‟s revenue: Not a core activity

(though vital)!

Core activities of discount retailing industry (Wal-Mart, Kmart, Target):

Trucking merchandise from central DCs to stores

Negotiating with merchandise vendors centrally.

Operating warehouse stores in malls with large parking lots.

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Step 3: Determining whether change is foundational Core assets threatened?

Foundational Change: Defined by a threat to the core assets in an industry.

•Core assets lie at the foundation of economies of scale and scope.

•Patented drugs of pharmaceuticals are constantly threatened by rival R&D.

•Assets of movie production industry face constant threat of obsolescence.

•Core assets of Coke or Pepsi in soft-drink business:

The legislative right to long-term, exclusive contracts with bottlers

conferred by the “Soft Drink Interbrand Competition Act 1980” in USA

Trademarked logos

Brand capital

The Industry Lifecycle

Relevant for understanding

the phases of progressive

and creative change

Relevant for understanding

the phases of radical

and intermediating change

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Step 4: Assessing the stage of industry evolution Lifecycle stage (Fragmentation/Shakeout/Maturity/Decline) –

Progressive or Creative change

Transformation phase (Emergence/Convergence/Co-existence/

Dominance) - Radical or Intermediating change

Initial fragmentation phase tends to be accompanied by low volumes.

When shakeout occurs, volumes increase dramatically.

The point of demarcation between shakeout and maturity occurs when the

rate of growth in aggregate volume stops increasing.

When volumes drop in absolute sense, then the industry has reached the

point of decline.


Step 4: Assessing the stage of industry evolution Lifecycle stage (Fragmentation/Shakeout/Maturity/Decline) –

Progressive or Creative change

Transformation phase (Emergence/Convergence/Co-existence/

Dominance) - Radical or Intermediating change

As a new approach emerges, its volumes tend to be small but the growth

rate is greater than in the established industry. (online auctioneers versus

flea markets/state fairs)

The convergence phase begins when the growth in the new approach is

high enough to allow the new industry to gain ground on the established

industry.

B/n convergence & co-existence, the growth rate of the new industry begins

to slow (but higher than established) – landline vs wireless; music recording

vs online distribution.

B/n Co-existence & dominance, greater volume of new industry over

established industry.

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Effective Corporate Strategy: Pre-requisites

1. Anticipate constant testing on whether ownership is justifiable as

the industries of different divisions evolve.

2. Decide if the firm will deal with industry evolution through

divestitures, acquisitions, alliances, or long-term contracts.

3. Clarify how core activities and core assets will be shared by

divisions on different evolutionary trajectories.

4. Develop lines of authority for resolving disputes between

divisions on different evolutionary trajectories.

5. Identify the right level of commitment to particular buyers and

suppliers when activities are shared across divisions on different

evolutionary trajectories.

6. Identify the right level of commitment to particular buyers and

suppliers when assets are shared across divisions on different

evolutionary trajectories.

“If you violate the rules of industry

transformation, it’s like hitting a barrier

on a highway; you just cannot succeed.”

Anita McGahan

The book offers a series of principles or rules

for assuring that a company‟s strategy works

within the bounds of industry evolution. The

goal is to support executives in avoiding

strategies that cannot possibly succeed

given the course of change in their industries

and to discern true opportunities in their

environment.

3 industry evolution

Business

Transcript of 3 industry evolution