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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
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
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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
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
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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
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.
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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.
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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.
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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
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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.
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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.
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