Taking Advantage of Industry Shifts

Xavier Gilbert

Professor of Business Policy, ~MD, ~~5~n~e, Switzerland

maul S~rebel

Professor and Director of Research, IMD, Luusanne, Switzerland

Managers are at times caught on the wrong foot by sweeping industry changes which, they believe, were unpredictable, Indeed, corporate strategies often seem to be prepared as if such changes never occurred. As a result, reacting becomes a more pressing preoccupation than actually taking advantage of the change.

Xavier Gilbert and Paul Strebel define as industry shifts situations where industry members are challenged by a new price/benefit offer developed by an insider or by an outsider to the industry, which is superior to what has been available thus far, and that cannot be matched with their current competitive approach. They submit that a large proportion af such industry shifts follow recognisable patterns that provide opportunities for their exploitation.

The authors’ conclusions about industry shifts are based on observations drawn from a database of some one hundred competitive situations examined between 1980 and 1988. In each situation, the industry or industry sector was studied to identify the impact of industry trends on the prevailing generic strategies and their key success factors.

Important lessons can be extracted from these data: first, what triggers industry shifts; second, how industry shifts can be identified and exploited. These lessons have important implications for managing industry change through pro-active strategies.

What Triggers Industry Shifts?

Industry shifts originate with the competitive beha- viour of industry players. Over the period covered (1980-19881, the observed changes in the competitive behaviour of industry players that triggered industry shifts were always a response to an innovation oppor- tunity. Although other possible stimuli for industry shifts could be imagined, such as the rationalisation that was common in the seventies, they were not at play in the situations we observed.

Several examples can be used to illustrate industry shifts triggered by innovation. The personal computer

provides an example. In its initial versions, it was based on the availability of processor chips to replace bulky circuitry. It was still an incomplete product idea, produced in basements by outsiders to the computer industry establishment and sotd with no application software, no service, and through inappropriate channels. However, when IBM got interested in the product - after some time and through an entre- preneurial team working outside established structures - it was able to complete the competitive formula by adding to the new product several attributes that were more important to the end user than technological superiority and that could not be offered by its original developers. A shift had been triggered: most

TAKING ADVANTAGE OF INDUSTRY SHIFTS 399

trigger a shift by providing a selected segment with a better competitive offer than the previous, across-the- board, standard offer.

competitors felt compelled to join the IBM standard.

However, if innovation is a necessary ingredient to trigger an industry shift, it is not a sufficient one. Several situations covered brilliant innovations - a portable personal computer, solar panels, winter sport products, . . . - for which the companies observed were not able to put together a complete competitive formula. Solar panels are an example. These panels used a unique and highly innovative electrolytic process on stainless steel that ensured their durability. This was not sufficient, however, to trigger an industry shitt Some critical elements in the competitive formula could not be organised satisfactorily, such as distribu- tion and installation. They remained the “Concorde” of solar panels: an expensive up-market product for a very narrow segment.

These examples show that there are really two ingredi- ents to an industry shift. Innovation is a necessary one. But it is not sufficient. Innovation must be supported with a complete competitive formula which serves two purposes. Firstly, it ensures that the targeted market obtains all the product attributes that denote perceived value for this market: technology, but also design, positioning, distribution, service, among the most ob\sious. Secondly, the competitive formula ensures that this stream of perceived benefits is delivered at a price that indeed yields a better offer compared to what was previously available. Only then is the industry shift completed, catching other competitors on the wrong foot and eventually forcing them to join the new formula.

Other situations among those we observed showed that innovation and completion of the shift were not always concomitant. The time span between these two phases of an industry shift used to be long, allowing ample opportunity to catch up. There is evidence of efforts now to accelerate this sequence of events, by implementing simultaneously the innovative product and the complete competitive formula, thereby immediately ensuring a superior price/benefit offer.

Our observations suggest three main patterns through which industry shifts unfold; in order of increasing spited and decreasing opportunity for taking advantage of the shift: an incremental pattern, a trial-and-error pattern, and an all-at-once pattern.

Incremental

Market segmentation may lead to a sequence of small incremental industry shifts. The approach is not to segment the market and seek refuge from competition in an untapped segment. Rather, it is effectively to

As certain market segments become disenchanted with the standard offer, there is an opportunity to provide them with a more focused price-benefit trade-off that will be closer to their expectations. The product or service may not be new, but the complete competitive formula, from product to delivery, is uniquely focused on the needs of the selected market segment. This initial step will not lead immediately to a major industry shift. However, it will open the way to a sequence of similar steps addressing a wide range of market segments with targeted offers (see Figure 1). Incrementally, this sequence of steps will eat into the market share of the previous standard offer and, over a period of time, result in a substantial shift. We have observed numerous situations where this type of industry shift was taking place.

Perceived value

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The car-servicing sector is a point in case. A mass retailer seeking an extension of the activities of its chain of “do-it-yourself” stores observed that?he needs of second-hand car owners were not optimally served by the traditional service-dealer approach. With the mechanical reliability of modern cars, the maintenance needs of second-hard cars, beyond the warranty period, are limited to a few operations which do not require skilled labour nor complex equipment. These repairs can be performed more effectively and at a lower price, by specialised workshops independent from the authorised service dealers. The effects of this shift are apparently limited to the market segment of second-hand car owners. Most other car owners continue to rely on authorised service dealers. However, in addition to taking away some of the market from the latter, the shift is pushing the authorised service dealers into the more complex end of car servicing, thus affecting their cost structures. Some observers predict that car servicing will be

400 XAVIER GILBERT and PAUL STREBEL

polarised between a specialty side handling electronics and a mass-retail side handling simple mechanics.

Many similar examples of incremental shifts were observed in a wide range of industries: watches, sail boats, printing and writing paper, label paper, com- puter workstations, etc. They provide consistent data. All these sectors were described as mature. They were confronted with price competition on undifferentiated products, resulting from the rationalisation efforts carried out to respond to diminishing growth rates. All had segments to which a better competitive formula than the standard one could be offered. This is the terrain where the incremental industry shift develops.

Responding to an incremental shift is often perceived by competitors as optional: the potential damage of slow response or no response at all seems small. However, we have observed companies that have ignored such shifts until it was too late to respond. This has been the case in the sail boat sector where com- panies have kept offering commodity products when the market was shifting towards more segmented expectations, or in the workstation sector where the emergence of a market for low-cost workstations has not been seen by some competitors.

Often, these “mini-shifts” are perceived as isolated phenomena. But our observations suggest that it is not one such shift, which can probably be easily matched, that is significant, but a pattern of repeated shifts where it is the repeat performance that cannot be easily matched and will eventually catch competitors on the wrong foot. Repeated incremental changes to the competitive formula are the key to survival in so-called “mature” industries.

These observations provide some insight on how to respond to the situation resulting from an incremental shift. Matching one segmentation step is not enough. It may not even be needed. On the other hand, match- ing the pattern of successive incremental shifts with new, creative segmentations, implemented in faster sequence, each time with a focused competitive formula, is critical. Accelerating the sequence of incre- mental shifts is the best way of taking advantage of the situation.

Trial-and-error

This type of shift is characterised by the trial-and-error process that separates the innovation from the final completion of the shift. The initiators of a new product often have the tendency to keep refining their innova- tion in isolation, unaware of the other product attri- butes important to the customer. It is only through

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Figure 2 Trial-m&error Shift

trial and error that they can progressively turn their attention to actual market expectations (see Figure 2).

Several industries among those we observed provide examples of trial-and-error shifts. One such example is the machine tool sector where the cards are being re-distributed as a result of the implementation of computer-driven, flexible manufacturing systems. The shift was triggered from several sources, not only the machine tool users themselves seeking to develop competitive advantages, but also computer manufac- turers, engineering companies, and software com- panies. All these contenders, as well as the machine tool manufacturers, are now scrambling for standards and approaches that would allow them to put together all the components of an integrated manufacturing offer and provide a price/benefit trade-off that is superior to what each of them can do alone. A com- plete competitive formula still remains to be proposed.

Trial-and-error industry shifts have several features in common. They are often initiated by outsiders to the industry who could not see, at the outset, which other attributes required by the customer had to be included to complete the competitive formula. But it can be an insider who finally sees the potential of the innovation and puts together the complete competitive formula. It is also interesting to note that it is not always the technologically most sophisticated version of the product that first makes it to a broad market.

The delay between innovation and compIetion of the shift provides important opportunities to potential followers. It suggests that the best way of taking advantage of trial-and-error industry shifts is to develop a better, complete competitive formula com- prising the attributes valued by the customer beyond the new product itself which are not yet offered by the initiator.

In the personal computer sector, for example, the shift has only been completed recently. Although through

TAKING ADVANTAGE OF INDUSTRY SHIFIX 401

advice on hardware and software the retailing activity provides much of the value perceived by the customer, it was still absent from most competitive formulas. Some competitors saw the opportunity and put the retailers on their side through higher margins.

This window of opportunity is marked by two signals. The first signal is an innovation introduced without a complete competitive formula. This signal is often too weak and uncertain to be reliable. Indeed, many inno- vations never trigger any industry shift. On the other side, the imminent completion of an industry shift is signalled by the observation that distribution remains as the last element of the competitive formula that has to be reworked to provide the desired value. Available channels are often used initially as a make-do solution, before an appropriate distribution system is put in place. Devising how it should be reorganised provides an entry opportunity frequently used by followers. It is thus possible to exploit a trial-and-error shift by piggybacking on the innovation and devising a suitable competitive formula before someone else imposes one, rather than by scorning it and resorting to the “not invented here” response.

All-at-once

Instances of industry shifts that were implemented over a relatively short period of time were also observed. One example is provided by the Japanese toy. company, Nintendo, with the introduction of its Famicon game computer. At the same time as this new product was introduced, the shift was completed with a full, new formula comprising all the elements needed to provide perceived value to the customers, from design, parts selection and procurement, choice and management of subcontractors, to retailing and distri- bution of game software. New ways of doing things were introduced over a short period of time throughout the business system.

The all-at-once industry shifts have several characteris- tics in common. Firstly, they tend to be implemented by industry insiders with less trial and error than in the previous shift pattern, and with the explicit objec- tive of changing the rules of the game. In addition, in this type of shift, the innovation and the full competi- tive formula cannot be dissociated. The innovation is not merely the new product, but a complete new approach offering the customer a better trade off: more value at a price that is competitive with the previous version of the product. Here, innovation must be understood in a broad sense, covering not only product innovation, but also process innovation, marketing innovation, distribution innovation, service innovation, each being inseparable from the others (see Figure 3).

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Figure 3 All-at-once Shift

Responding to these shifts is difficult, as illustrated by the following example. In one of the situations we observed, a company was entering the still emerging fast-food market in one European country, while McDonald’s was systematically implementing its com- petitive standard. It soon became clear to this company that McDonald’s detailed implementation of a very elaborate competitive formula, with all its components working together, constituted a mighty entry barrier, even though the product itself was easy to copy.

An all-at-once shift does not leave much time to wonder what is happening. The new competitive formula is imposed in a complete and final form and those who did not initiate it cannot respond. This suggests that the best way to take advantage of this type of industry shift is not to fight the competitive formula that is emerging as a standard. Rather, it is to adopt it and to look for opportunities to improve it faster, or to work on the next generation of innovations.

It is critical to understand all the elements of the competitive formula put together by the initiator of the shift. Our observations indicate that companies con- fronted with an industry shift rarely try to understand how the leading competitor’s formula works. This understanding is necessary to find out whether there is still an opportunity to develop a better formula.

Industry Shifts in Perspective

Understanding industry change is a complex issue and it would be presumptuous to pretend that this article has diagnosed and provided responses to all sources of discontinuity in an industry. However, the patterns of industry shifts that have been described can be observed with enough regularity, in a sufficiently wide range of industries, to be somewhat predictable.

An important observation is that the sequence of

402 XAVIER GILBERT and PAUL STREBEL

industry shifts has accelerated. The first step of a shift and its completion used to be well detached, allowing progressive adaptation to a slowly evolving competi- tive situation. The capability developed by some competitors to manage a sequence of shifts has drama- tically changed these conditions. Increasingly, the complete competitive formula is implemented in one stroke, allowing very little time to respond. We will see fewer trial-and-error shifts and more briskly implemented all-at-once shifts.

Another observation is that innovation is not restricted to the early stages of the so-called industry cycle. Innovation is needed at all stages in triggering and completing industry shifts, or in responding to them. Not only product innovation is necessary, but more importantly innovation in putting together creative,

complete competitive formulas aimed at providing a better price/benefit offer than what is available. This across-the-board innovation raises the threshold for competitors. It is the foundation of a completed effective shift.

Finally, industry shifts are not isolated phenomena; they are part of a sequence forming a competitive pattern. Their repeated implementation, in a sequence that is effectively managed by some of the industry members, constitutes a powerful competitive approach aimed at constantly catching other industry members on the wrong foot. Managing one’s way through one shift is not enough. Pro-active strategies must be devised, not merely as the next move, but as a sequence of shifts designed to retain the initiative.