Critical Thinking: The Nature of Change

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CONTEMPORARY STRATEGY ANALYSIS

tenth edition

Robert M. Grant

John Wiley & Sons Ltd., 2019

Chapter 8

Industry Evolution and

Strategic Change

• The industry life cycle

• The challenge of organizational

adaptation and strategic change

• Managing strategic change

Industry Evolution and

Strategic Change

OUTLINE

INTRODUCTION

GROWTH

MATURITY

DECLINE

In d

u s tr

y S

a le

Time

Stages of the Industry Life Cycle

THE INDUSTRY LIFE CYCLE

Drivers of industry evolution :

• demand growth

• creation and diffusion of knowledge

Product

Innovation

Process

Innovation

Time

R a

te o

f In

n o

v a

ti o

n Product and Process Innovation Over Time

THE INDUSTRY LIFE CYCLE

• Life cycle model can help us to anticipate industry evolution—but

dangerous to assume any common, pre-determined pattern of industry

development

Color

B&W Portable HDTV

Flat

screen

How Typical is the Life Cycle Pattern?

• Technology-intensive industries (e.g. pharmaceuticals, semiconductors,

computers) may retain features of emerging industries.

• Other industries (especially those providing basic necessities, e.g. food

processing, construction, apparel) reach maturity, but not decline.

• Industries may experience life cycle regeneration, e.g. motorcycles, TVs:

SalesSales

1900 1950 1980 2017 1930 1950 1970 1990 2010

TELEVISIONSMOTORCYCLES

THE INDUSTRY LIFE CYCLE

1840 1880 1900 1920 1940 1960 1980 2000 2018

“Category

Killers” e.g. Toys”R”

Us, Home

Depot

Internet

Retailers e.g. Amazon,

JD.com

Mail Order,

Catalogue

Retailers e.g. Sears

Roebuck,

Montgomery

Ward

Chain

Stores e.g. A&P,

Woolworth’s,

W.H. Smith Discount

Stores e.g. K-Mart

Wal-Mart

Warehouse

Clubs e.g. Price Club

Sam’s Club

Pop-Up

Stores

Department

Stores e.g. Le Bon

Marché,

Macy & Co.,

Harrods

Innovation and Renewal over

the Life Cycle: Retailing

THE INDUSTRY LIFE CYCLE

Evolution of Industry Structure over the Life Cycle

INTRODUCTION GROWTH MATURITY DECLINE

DEMAND Early adopters Rapid increase in market penetration

Replacement/ repeat

buying; price

sensitive customers

Obsolescence

TECHNOLOGY Competing technologies;

rapid product

innovation

Standardization;

rapid process

innovation

Diffused know how;

incremental

innovation

Little

innovation

PRODUCTS Wide variety of features and

designs

Design & quality

improve; dominant

design emerges

Commoditization;

brand differentiation

Differentiation

difficult

MANUFACTURING Short-runs, skill intensive

Capacity shortage,

mass-production

Over-capacity

emerges; deskilling

Overcapacity

TRADE ------Production shifts from advanced to emerging countries------

COMPETITION Few companies Entry, mergers exit Shakeout & consolidation

Price wars &

exit

KSFs Product innovation Design for manu- facture; Process

innovation

Cost efficiency

(scale economies,

low cost inputs)

Low

overheads;

rationalization

THE INDUSTRY LIFE CYCLE

Customers become

more knowledgeable

& experienced

Diffusion of

technology

Demand growth

slows as market

saturation approaches

Customers become

more price conscious

Products become

more standardized

Distribution channels

consolidate

Production shifts

to low-wage

countries

Price competition

intensifies

Bargaining power

of distributors

increases

BASIC CONDITIONS INDUSTRY STRUCTURE COMPETITION

Excess capacity

increases

Production

becomes less R&D

& skill-intensive

Quest for new

sources of

differentiation

The Driving Forces of Industry Evolution

THE INDUSTRY LIFE CYCLE

100

150

200

250

1895 1905 1915 1925 1935 1945 1955

No. of firms

Source: S. Klepper, Industrial & Corporate Change, August 2002, p. 654.

Changes in the Population of Firms over the

Industry Life Cycle: US Auto Industry 1895-1960

THE INDUSTRY LIFE CYCLE

Note: The figure

shows

standardized means

for each variable for

businesses at each

stage of the life cycle.

Strategy and Performance across the Industry Life Cycle

R O

V a

lu e

A d

d e

d /R

e v

e n

u e

T e

c h

n ic

a l C

h a

n g

N e

w P

ro d

u c

% S

a le

s f

ro m

N e

w P

ro d

u c

P ro

d u

c t

R &

D /S

a le

A g

e o

f P

la n

t &

E q

u ip

In v

e s

tm e

n t/

S a

le s

A d

v e

rt is

in g

/S a

le s

Growth

Maturity

Decline

THE INDUSTRY LIFE CYCLE

1. Organizational Routines: existing patterns of coordinated activity

make it difficult to develop new capabilities

2. Social & political structures: change threatens existing social

relationships and power structures

3. Conformity: imitation locks firms into common structures and

strategies (“institutional isomorphism”)

4. Limited Search: “bounded rationality” encourages local search; this

is reinforced by managers’ contentment with satisfactory rather than

optimal solutions

5. Complementarities between strategy, structure, and systems:

firms create unique configurations of close-fitting organizational

features--localized changes tend to be dysfunctional, while

systematic change difficult

Organizational Adaptation and Change:

The Sources of Inertia

THE CHALLENGE OF ORGANIZATIONAL ADAPTATION AND STRATEGIC CHANGE

The World’s Biggest Companies by Market

Capitalization, 1912 and 2018

1912 $ bn. 2018 $ bn.

US Steel 0.74 Apple 876

Standard Oil NJ (Exxon) 0.39 Alphabet 737

J&P Coates 0.29 Microsoft 658

Pullman 0.20 Amazon 567

Royal Dutch Shell 0.19 Facebook 511

Anaconda 0.18 Tencent 496

General Electric 0.17 Berkshire Hathaway 488

Singer 0.17 Alibaba 441

American Brands 0.17 Johnson & Johnson 376

Navistar 0.16 JP Morgan Chase 371

British American Tobacco 0.16

De Beers 0.16

THE CHALLENGE OF ORGANIZATIONAL ADAPTATION AND STRATEGIC CHANGE

Some types of technological change are more difficult for established

firms to adapt to than others:

▪ Competence Enhancing versus Competence Destroying

Technological Change—established firms will have difficulty in

adjusting if the new if technology requires different resources and

capabilities from those they already possess

▪ Architectural versus Component Innovation—established firms have

greater difficulty adjusting to innovation that involve a new product

architecture than those that relate to particular components

▪ Sustaining versus Disruptive Technologies—new technologies that

augment existing performance attributes are easier to adapt to that than

those that incorporate different performance attributes than the existing

technology

The Threat of Technological Change

THE CHALLENGE OF ORGANIZATIONAL ADAPTATION AND STRATEGIC CHANGE

Managing Strategic Change: Dual

Strategies and Organizational Ambidexterity

Dual Strategies

Firms need

(a) A strategy for today that exploits existing resources and capabilities

and current market positions

(b) A strategy for tomorrow that prepares the firms for the future

Organizational Ambidexterity

Firms need to

(a) Exploit existing resources and capabilities and market positions

(b) Explore new opportunities for the future

Doing both simultaneously requires ambidexterity:

Structural ambidexterity: exploration and exploitation

allocated to different organizational

units

Contextual ambidexterity: same organizational units and people

perform both exploration and

exploitation

MANAGING STRATEGIC CHANGE

• Creating Perceptions of Crisis—a crisis facilitates organizational

change. If there’s no crisis—create the perception of one!

• Establishing Stretch Targets—demanding performance targets can

generate ambition and mobilize effort

• Organizational Initiatives—initiatives launched by the CEO can be

vehicles for change

• Reorganizing Company Structure—restructuring breaks down

existing power bases and creates openings for external hires

• New Leadership—capacity of the existing leadership to initiate change

is limited by investment in the status quo and lack of cognitive

flexibility—hence, the need for new leadership

• Scenario Analysis offers a structured approach for managers to

address the forces s that are changing their business environment and

to prepare for the future

Combatting Organizational Inertia

MANAGING STRATEGIC CHANGE

Firm Capability Early history

Exxon Financial Exxon’s predecessor, Standard Oil (NJ) was the

management holding co. for Rockefeller’s Standard Oil Trust

RD/ Coordinating Shell a j-v formed from Shell T&T founded to

Shell decentralized sell Russian oil in China, and Royal Dutch

global empire founded to exploit Indonesian reserves

BP “Elephant Discovered huge Persian reserves, went on to

hunting” find Forties Field and Prudhoe Bay

ENI Managing deals & Pioneering spirit of the founder, Enrico Mattei; the

relationships in challenge of managing government relations in post-

difficult political war Italy

environments

Mobil Lubricants Vacuum Oil Co. founded in 1866 to supply

patented petroleum lubricants

Distinctive Capabilities as a Consequence

of Childhood Experiences: The Oil Majors

MANAGING STRATEGIC CHANGE

ORGANIZATIONAL

CAPABILITIES

RESOURCES TANGIBLE INTANGIBLE HUMAN

•Financial

•Physical

•Technology

•Reputation

•Culture

•Skills/know-how

•Capacity for

communication

& collaboration

•Motivation

Integrating Resources to Create

Organizational Capability

Processes Organizational

Alignment Motivation

Organizational

Structure

MANAGING STRATEGIC CHANGE

•Assembly

•Production

engineering

•Local

marketing

•Auto styling

&design

•Casting &

forging

•Chassis

design

•Tooling

•Body

production

•Export mktg.

•FWD

engineering

•CAD/CAM

•Assembly

control

systems

•Advanced

component

handling

•Hydrodynamics

•Thermodynamics

•Fuel engineering

•Emission control

•Lubrication

•Kinetics& vibration

•Ceramics

•Electronic control

systems

•Large-scale design

integration

•Global logistics

•Lifecycle engineering

SKD CKD

Ford Cortina Pony

Accent

Avante

Sonata

Excel

Products

Capabilities

‘Alpha’

engine

1968 1970 1974 1985 1994-95

Hyundai Motor: Developing Capabilities through

Product Sequencing

MANAGING STRATEGIC CHANGE

❑ Dynamic capability is a “firm’s ability to integrate, build, and

reconfigure internal and external competences to address rapidly

changing environments”

❑ Dynamic capabilities typically viewed as “higher order”

capabilities that orchestrate change among lower-level “ordinary”

or “operational” capabilities.

❑ There are three types of dynamic capability:

(1) sensing and shaping of opportunities and threats

(2) seizing opportunities

(3) maintaining competitiveness through enhancing, combining,

protecting, and, when necessary, reconfiguring the

enterprise’s intangible and tangible assets

Dynamic Capabilities

MANAGING STRATEGIC CHANGE

OLD BRICK NEW BRICK

Top management is responsible

for setting strategy

Everyone is responsible for setting

strategy

Getting better is the way to win Innovation is the way to win

IT creates competitive advantage Unconventional business concepts

create competitive advantage

Being revolutionary is high risk More of the same is high risk

We can merge our way to

competitiveness

There’s no correlation between

size and competitiveness

Innovation is new products

and technologies

Innovation is entirely new business

concepts

Strategy is the easy part,

Implementation the hard part

Strategy is the easy only if you’re

content to be an imitator

Change starts at the top Change starts with activists

Big companies can’t innovate Big companies can become gray-

haired revolutionaries

Gary Hamel: The New Foundations of Management

MANAGING STRATEGIC CHANGE

Type of

Knowledge

Characteristics Implications

Explicit: knowing

about

Easy and cheap to

transfer. A “public

good” (non-exclusive)

Easy to exploit within the

firm—but difficult to protect

from rivals: hence, a weak

basis for sustainable

advantage

Tacit: knowing

how

Difficult to articulate or

codify. Transfer is slow

and costly: requires

observation and

practice

Sound basis for sustainable

competitive advantage;

challenge is to replicate it

internally

Knowledge Management and the

Knowledge-based View: Types of Knowledge

MANAGING STRATEGIC CHANGE

Knowledge

identification

• Managing intellectual

property

Corporate “yellow pages”

Texas Instruments’ appraisal and

licensing of its patent portfolio

Knowledge

Retention

Skandia (Swedish insurance co.);

Dow Chemical

Knowledge

Transfer and

Sharing

US Army Center for Lessons Learned

distils kn. from maneuvers & operations

into procedures

Accenture's Knowledge Xchange

Communities-of-Practice

Best practices transfer

Databases

Knowledge

Measurement • Intellectual capital

accounting

Ford Motor’s best practice replication

Benchmarks processes across all

its plants

Lessons learned

Knowledge Management Practices

Knowledge Types of Examples

process activity

BP's ‘Connect’ database of employees’

skills and experience

Schlumberger’s Eureka project of

virtual, distributed teams of experts

MANAGING STRATEGIC CHANGE

Data Analytics Big data analysis Walmart’s analysis of >1m. Customer transactions every hour

Individual Organization

Explicit

Tacit

Skills,

Know-how

Organizational

routines

Types

Knowledge

Levels of knowledge

Facts, Information,

Scientific kn.

Databases, Rules,

Systems, IP

Internalization

Externalization

CRAFT

ENTERPRISES

INDUSTRIAL

ENTERPRISES

Combination

Socialization

Routinization

Knowledge Conversion and the Power of

Systematization

MANAGING STRATEGIC CHANGE