Industry Evolution & Analysis

Agenda

 Industry Evolution & Change

 We shall explore the forces that drive change and look for patterns
that predict how industries are likely to evolve. “It is not the strongest
1. Industry Life Cycle & Transformation of the species that
2. Schumpeter's Creative Destruction survive, nor the most
intelligent, but the one
 Industry Analysis & Attractiveness that is most responsive
 to change”.
We will identify the main structural features of an industry and
understand how they impact overall level of profitability. - Charles Darwin
1. First Mover Advantage
2. Five Forces Model
Industry Life Cycle & Transformation
Industry Life Cycle
 Introduction Stage
 Characteristics
 Sales are small and the rate of market penetration is low because the
industry’s products are little known and customers are few
 The novelty of the technology, small scale of production, and lack of
experience mean high costs and low quality
 Customers for new products tend to be affluent, tech-savvy, and risk-tolerant

 Strategy Imperatives
 Ability to shape the industry structure based on the timing of entry, reputation,
success in related industries
 Advantageous relationships with key suppliers and distributors
 Ability to establish the firms technology as the dominant one
 Early acquisition of a core group of customers
 Ability to forecast future competitors
 Growth Stage
 Characteristics
 Accelerating market penetration as technical improvements and increased
efficiency open up the mass market
 Strong increases in sales, repeat purchases
 Competition enters the industry
 Product acceptability

 Strategic Imperatives
 Ability to build specific customer preferences through brands
 Ability to acquire financial resources to support variety of value chain activities
 Ability to offer specific features to a segmented market
 Ability to rapidly improve product quality and performance
 Maturity Stage
 Characteristics
 Demand is for replacement
 Sales growth at the expense of each others share
 Sophisticated customers
 Customers expect lesser price and higher quality
 Capacity tops up
 New products hard to come by

 Strategic Imperatives
 Pruning the product line
 Emphasis on process innovation, cost reduction
 Careful buyer selection
 Horizontal integration
 Decline Stage
 Characteristics
 Substitute product appears
 Growth rate less than zero
 Cost consciousness
 Game of inches
 Hard choices to be made

 Strategic Imperatives
 Increase focus on segments
 Product Innovation & Quality Improvement
 Production & Distribution efficiency
 Gradually maintain, harvest, consolidate & exit
Strategic Imperatives and Implications
 Strategic Imperatives and Implications

Introduction Growth Maturity Decline

Strategy Differentiation Differentiation Differentiation Cost Leadership

Cost Leadership Focus
Market Growth Low Very Large Low to Moderate Negative

Number of Segments Very Few Some Many Few

Intensity of Competition Low Increasing Very Intense Changing

Emphasis on Product Very High High Low to Moderate Low

Design
Emphasis on Process Low Low to Moderate High Low
Design
Functions of Concern Research & Sales & Marketing Production General Management
Development & Finance
Overall Objective Increase Market Create Consumer Defend Market Share Consolidate, Maintain,
Awareness Demand & Extend PLC Harvest & Exit
Example - Automobiles
Example - Retail
Examples – Motorcycles & TVs
 Industry Transformation
1. Demand Cycle
 Introduction, growth maturity and decline
signal the lifecycle phases of the
industry

2. Creation and Diffusion of Knowledge

 Competition between rival designs leads
to convergence to a dominant design
i.e. a product architecture that defines
the look, functionality, and production
method

3. From Product to Process Innovation

 As product design standardizes there is
a shift to process innovation i.e.
emphasis on efficiency and reliability
Example – Bicycles
Example – Sandwiches
Schumpeter's Creative Destruction
 Creative Destruction
 Economist Joseph Schumpeter coined the seemingly paradoxical term creative
destruction in 1942. “It is the process of industrial mutation that incessantly
revolutionizes the economic structure from within, incessantly destroying the old one,
incessantly creating a new one.”
4. Creative destruction process is considered a key driver of economic growth and
industry development.
 Creative Destruction
 Entrepreneurs introduce new products
and technologies with an eye toward
making themselves better off i.e. the
profit motive.
 New goods and services, new firms, and
new industries compete with existing
ones in the marketplace, taking
customers by offering lower prices, better
performance, new features, catchier
styling, faster service, more convenient
locations, higher status, more aggressive
marketing, or more attractive packaging.
 In another seemingly contradictory
aspect of creative destruction, the pursuit
of self-interest ignites the progress that
makes others better off.
Waves of Innovation
Waves of Innovation
Waves of Innovation
Time and Scale of Innovations
First Mover Advantage
 First Mover Advantage - Size
1. Economies of Scale result when the
average cost of producing a good or
providing a service declines as output
increases.
 A large retail store can buy in bulk and
lower its cost per unit.
2. Economies of Scope are present
when provision of multiple different
goods or services by a single firm
results in lower costs and/or higher
buyer value through coproducts,
complementary processes or shared
inputs.
– Intel enjoys scope economies from its
production of both logic semiconductors,
such as microprocessor chips, as well as
memory semiconductors, including
DRAM, EPROM, and flash memory chips.
 First Mover Advantage - Size
3. Network effects exist whenever buyer value for a particular product or service
increases as the number of other buyers who purchase that particular product or
service increases.
 1st Order Effect - In a mobile telephone network the value of the first person connected is
essentially zero, since there is nobody else in the network. Value increases for all buyers as more
individuals are connected to the network. It is a direct result of other buyers becoming members
of the network.
 2nd Order Effect - Buyer value does not depend directly upon the number of other buyers, but
instead increases due to the responses of complementors or other players who are influenced by
the number of buyers in the network. Computer software must be programmed to be compatible
with a particular type of OS.
 First Mover Advantage - Size
4. Learning effects (experience curve) are based on the idea that the more
experience a firm has in producing a particular good or providing a particular
service, the better the firm becomes at doing so.
 First Mover Advantage - Time
1. Reputation Effect - Being the first player may produce long-term image where a
buyer who has a satisfying experience with an early product or service may be
hesitant to change to newer competing offerings.
 Unfamiliar products usually take up the name / brand of the fist mover due to
reputation e.g. pampers, easy paisa

2. Buyer switching costs provide a means by which market leaders “lock in” existing
customers. Such switching costs may arise from subsequent transaction costs or
specific investments that the buyer has previously made.
 Switching from Apple and IOS products will lead to setting up a complete new system

3. Patents or institutional barriers may be granted by a governing authority to a first-

mover firm in given technologies or markets, insulating such firms from
competitive threats.
 Pharmaceuticals are protected by patents, trademark and copyright laws.
 First Mover Advantage - Time
4. Preemption - Timing advantages relate to preemption of or preferred access to a
scarce resource or asset.
 Input preemption provides an advantage whenever a firm secures input factors under terms that
are better than the terms available to potential rivals.
 Channel preemption means early-movers in a market may have the opportunity to gain access to
a particular distribution channel under exclusive or preferred terms.
 Location preemption allows a leading firm to occupy the most ideal locations for production
facilities or sales outlets.
 Capacity preemption involves making irreversible commitments to a level of production or service
capacity that limits the profit opportunities for other firms.
 Positioning preemption means that in the absence of established competition, a market leader
will likely choose the most attractive market or product positioning
 First Mover Disadvantage
1. Pioneering costs are expenses 3. Technological Uncertainty - Such
incurred or efforts undertaken to technological discontinuities in
blaze the trail. These costs include industry evolution may leave early
the development of key movers on the wrong side of the
technologies, education of buyers, technological fence.
development of supporting 4. Incumbent inertia refers to the
infrastructure, improvement of input general reluctance or inability of
availability, satisfaction of regulatory established market leaders to
requirements, and investment in change strategic course. An
complementary products. incumbent firm may be locked-in,
2. Demand uncertainty may also allow financially or psychologically, to a
late-movers to gain an edge over particular distribution system,
early market leaders organizational structure, or
competitive position.
Dimensions of Evolution
Sustainability of First Mover Advantage
Five Forces Model
 Quick Concept Check
 One of the following is NOT a determinant of the threat of new entrants in Porter's Five Forces Model;
1. Brand equity
2. Government policies
3. Access to distribution
4. High level of product differentiation
5. Economies of scale

 According to five forces model all of the following makes a supplier powerful EXCEPT;
1. Its product is unique and differentiated
2. It posses credible threat of integrating forward
3. It is less concentrated than the industry is sells to
4. Its substitutes are inferior in value
5. Its product is important to the quality of buyers product or services

 All of the following EXCEPT one causes intense rivalry amongst firms in an industry; identify the exception;
1. Competitors are numerous and equal in size
2. Product or service lacks differentiation
3. Exit barriers are high
4. Capacity is augmented in small incremental cycles
5. Industry growth is slow
 Quick Concept Check
 XYZ is a medium sized pharmaceutical company operating in a developing country. Out of the following entities, which
will NOT be a part of its five forces analysis?
1. A small genetic research firm diversifying into manufacturing drugs
2. A government run medical facility buying life saving drugs in bulk
3. A large FMCG firm expanding its business to developing countries
4. A federal drug agency regulating approval and use of allopathic medicine
5. A flourishing cottage industry of herbal cures

 A substitute product or service is;

1. A competitors product or service
2. An alternative way of meeting the same need
3. A new entrant in the industry
4. A less attractive way of meeting the same need
5. A complementary product or service
Five Forces Model
Complexity
Attractiveness
Key Success Factors
Key Success Factors
Conclusion
Q&A