3 industry evolution
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  • 1. 1 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
  • 2. 2 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 CoreAssets Threatened Not Threatened ThreatenedNotThreatened 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 CoreAssets Threatened Not Threatened ThreatenedNotThreatened Trajectories of Industry Change
  • 3. 3 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
  • 4. 4 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 Opportunities for Innovation 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 Opportunities for Innovation 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
  • 5. 5 Radical Change Rules of Change Carefully identifying profitable activities and scaling back unprofitable activities Avoiding the commitment of long-lived assets into the business Opportunities for Innovation 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
  • 6. 6  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
  • 7. 7 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
  • 8. 8 Industry Evolution Assessment Step 1: Defining your industry Common buyers/suppliers, Shared competitive intent, and Shared technical platforms Industry Evolution Assessment 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.
  • 9. 9 Industry Evolution Assessment 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. Industry Evolution Assessment 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.
  • 10. 10 Radical Creative Intermediating Progressive Nature of Change and Trajectory [Threat to Core Assets] [Threat to Core Activities] Industry Evolution Assessment 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.
  • 11. 11 Industry Evolution Assessment 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
  • 12. 12 Industry Evolution Assessment 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. Industry Evolution Assessment 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.
  • 13. 13 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.