international strategic management - SUDZUCKER company Germany

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CORP 5039: International Strategic Management, Markets and Resources Industry Evolution and Strategic Change

Outline

Evaluate the industry life cycle

Identify key success factors associated with industries at different stages of their development

Discuss main approaches and tools for strategic change management

Appreciate the challenges of managing organizational change

The Industry Life Cycle

The industry life cycle is described as the supply equivalent of the product life cycle

As the industry produces multiple generations of a product, the ILC is likely to be longer in duration than that of a single product

ILC comprises of four phases: introduction (emergence), growth, maturity and decline

Industry evolution is driven by two fundamental factors:

Demand Growth

creation and diffusion of knowledge

The Industry Life Cycle

Introduction

Industry Sales

Time

Growth

Decline

Maturity

Creation and Diffusion of Knowledge

New knowledge in the form of product innovation is responsible for an industry’s birth

However, it is the creation and diffusion of the knowledge that helps the industry evolve

Furthermore, the emergence of dominant designs mark critical junction in this evolution

They constitute shift from radical to incremental product innovation

Dominant designs described as product or architecture that define look, functionality and production method; generally accepted across industry

e.g. McDonald’s Hamburger restaurant (1955); QWERTY Keyboard

From Product to Process Innovation

Rate of innovation

Product Innovation

Process Innovation

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:

Life cycle model can help us to anticipate

industry evolution – but dangerous to

assume any common, pre-determined

pattern of industry development

B&W

Color

Portable

Flat Screen

HDTV

Sales

1930 50 70 90 00 10

TV’s

Implications of Industry Life Cycle for Competition and Strategy

Product Differentiation

At introduction, lack of consensus exists over requirements

Convergence around dominant design is followed by commoditization

i.e. erstwhile differentiated products become undifferentiated

Organizational Demographics and Industry Structure

Early stages witness rapid increase in firm numbers

However, onset of maturity is marked by decline in entry and exit rates. Concentration leads to mass markets and may usher new phase of entry – possibility for new entrants to create niches

Implications of Industry Life Cycle for Competition and Strategy

Location and International Trade

New industries begin in advanced industrial countries due to presence of affluent customers, and availability of technical and scientific resources

Growth in foreign demand initially met by exports

With maturity, commoditization, and deskilling of production processes, production shifts to developing countries with lowest labour cost

Nature and Intensity of Competition:

Growth in intensity of competition leading to narrow margins

Shift from non-price competition to price competition

Evolution of Industry Structure over the Life Cycle

	INTRODUCTION	GROWTH	MATURITY	DECLINE
DEMAND	Early adopters	Rapidly increasing 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 & 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 developing countries------
COMPETITION	Few companies	Entry, mergers exit	Shakeout & consolidation	Price wars & exit
KSFs	Product innovation	Design for manufacture Process innovation	Cost efficiency (scale economies, low cost inputs)	Low overheads; rationalization

Key Success Factors and Industry Evolution

Introduction Stage:

Product innovation as the initial basis for entrance

Investment requirements and financial resources become increasingly important with subsequent generations of offering

Growth Stage:

Key challenge is increasing production scale due to market expansion

Internal administrative and strategic skills are also important due to tensions of organisational growth

Key Success Factors and Industry Evolution

Maturity Stage:

Efficiency as means of achieving competitive advantage; especially where industry tends to commoditization

Cost efficiency through scale economies, low wages and low overheads become KSFs

Decline Stage:

Transition to decline intensifies pressures for cost cutting

Stability is maintained by orderly exit of industry capacity and capturing residual market demand

Strategy Implementation in Mature Industries

Primary basis for CA is operational efficiency

Deriving cost advantage through economies of scale, low cost inputs, low overheads

But there is still the need to reconcile (cost) efficiency with innovation and customer responsiveness

Customer responsiveness may, for instance, involve:

focusing on specific segments thereby discouraging new entrants

targeting more attractive customers and transforming less valuable customers into more valuable customers

Strategy Implementation in Mature Industries

Strategic Innovation can be accomplished by:

Embracing new customer groups e.g. Video game consoles

Augmenting products and services

Bundling of range of products to create greater value for customers

Management proactivity

Not conforming to industry norms and convention about strategy

Promoting entrepreneurial mindset

Declining Industries

Key features of declining industries include:

Excess capacity

Lack of technical change

Declining number of competitors (Consolidation)

Possibility for new entrants due to acquisition of exiting firms

High average age of both physical and human resources

Aggressive price competition

Declining Industries

Factors affecting organisations’ ability to realise benefits in declining industries include:

Predictability of decline: where possible, effective planning can be put in place for transitions

Barriers to exit: can impede exit of capacity (e.g. Durable and specialised assets; Costs incurred in plant closure – accounting, redundancy, compensation etc; Management commitment: reluctance to closure due to emotional and moral reasons)

Strategies of surviving firms: stronger firms may facilitate exit of weaker firms through acquisitions and takeover of after-sales commitments

Strategic Alternatives for Declining Industries

Four strategic options can be pursued individually or sequentially dependent on industry profit potential and firm competitive position:

Industry Leadership: Establish dominant market position

encourage exit of rivals; buy market share through acquisition; acquire capacity; demonstrate commitment; dispel optimism about the industry’s future; raise the stakes

Niche: Identify an attractive segment and dominate it.

Harvest: Maximize cash flow from existing sources

Divest: Get out while there is still a market for industry assets

Strategic Alternatives for Declining Industries

COMPANY’S COMPETITIVE POSITION

Strengths in remaining demand pockets

Lacks strength in remaining demand pockets

Favourable to decline

Unfavourable to decline

INDUSTRY STRUCTURE

LEADERSHIP

NICHE

HARVEST

DIVEST QUICKLY

HARVEST

DIVEST

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The Driving Forces of Industry Evolution

Customers become more knowledgeable & experienced

Diffusion of technology

Demand growth slows as market saturation approaches

Customers become more price conscious

Products become more standardized

Production becomes less R&D and skill-intensive

Production shifts to low-wage countries

Excess capacity reached

Distribution channels consolidate

Quest for new sources of differentiation

Price competition intensifies

Bargaining power of distributors increases

BASIC CONDITIONS

INDUSTRY STRUCTURE

COMPETITION

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The Basic Concept of Strategic Change

The pace of organisational change is represented by two extremes:

Slow organisational change: less resistance, smooth progress, higher commitment.

Fast organisational change: usually as part of a major strategic initiative and may be associated with strategic change.

Strategic change is the pro-active management of change in organisations to achieve clearly identified strategic objectives. (Lynch, 2012:564)

Different strategic perspectives exist for understanding organisational change:

The prescriptive approach and the emergent approach

Distinction between Prescriptive and Emergent Theories

Prescriptive Theories

Change is clearly manageable and largely predictable.

It refers to implementation actions that result from the decision to pursue a specific strategy.

In extreme cases, it may be imposed on those who have to implement it.

Emergent Theories

Change acquires a momentum of its own and is therefore less predictable.

It may refer to the whole process of strategy development in addition to the actions that result once the strategy has been developed.

Such change may involve experimentation, learning and consultation among participants in the change.

Importance of Managing Strategic Change

Strategic change is concerned with people and the tasks they perform, and occurs through the organisation’s formal and informal structures.

Understanding the pressure points (links between change process and people involved) for influencing change is therefore important if such change is to be effective.

It is important because it may involve major disruptions, which could generate significant resistance.

Even if readily accepted, it may still be time-consuming, require careful thought and often carries important hidden (implementation) costs.

Prescriptive Approaches to Managing Strategic Change

Three-Stage Prescriptive Approach (Kanter et al 1992): Change process can take three major forms that can be linked with three categories of individuals:

Three Forms:

Changing identity of the organisation

Organisations respond to environmental changes e.g. reaction to political shifts

Coordination and transition issues due to life cycle evolution

Life cycle differences lead to relationship changes e.g. with growth in size, organisational age and product life cycles

Controlling political aspects of the organisation

i.e. political power changes among individuals and groups

Prescriptive Approaches to Managing Strategic Change

Three categories of people:

Change strategists – responsible for leading change. May or may not be responsible for detailed implementation.

Change implementers – have direct responsibility change management

Change recipients – receive change programme with varying degrees of anxiety; often perceive themselves to be powerless

Lewin’s Three-Stage Model of Change (1951)

Mobilise

(Move to new level)

Refreeze

(attitudes at new level)

Identify & mobilise the resources required to effect the change

Examine alternatives

Make information continuously available

Embed new ways of working in the fabric of the organisation

Engage in positive reinforcement and support for decisions taken

Unfreeze

(current attitudes)

Create the case for change

Dissatisfaction with the status quo

Need for change must be felt by those involved

Critical Comments on Prescriptive Approaches

There is an implicit assumption of clear movement from one state to another which may not be possible in turbulent environments and with uncertain outcomes

Assumes the possibility of refreezing. May be unrealistic given where internal organisation politics exists in a flux.

It may be difficult to judge when ‘refreezing stage’ is reached (especially where change is long-term).

Emergent Approaches to Managing Strategic Change

As with prescriptive theories, no single emergent approach exists.

Some emphasise the need to be responsive in an increasingly turbulent environment while others focus on longer term need for change in organisation’s skills, style and operating culture.

For example the learning theory suggests that organisations do not suddenly adopt strategic change but are perpetually seeking it through for instance; team learning, sharing views and visions for the future, exploration of ingrained habits/assumptions, personal development of skills and systems thinking (cf. Senge, 1990)

Emergent Approaches to Managing Strategic Change

Pettigrew and Whipp (1991) also identified five interrelated factors for successful strategic change management:

Environmental assessment

Leadership in change

Linking strategic and operational change

Strategic human resource management

Coherence in the management of the process through consistency of goals, feasibility, consonance, and delivery of competitive advantage

Tools of Strategic Change Management

Create perception of crisis – A crisis facilitates organizational change. If there’s no crisis—create the perception of one

Establish Stretch Targets – Demanding performance targets can generate ambition and mobilize effort

Create Organizational Initiatives – Initiatives launched by the CEO can be useful vehicles for change e.g. Jack Welch at GE

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Tools of Strategic Change Management

Reorganization and New Blood – Changing the the organizational structure breaks down existing power bases and creates openings for external hires

Develop Dynamic Capabilities - “ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments” (David Teece)

Undertake Multiple Scenario Analysis – This offers a structured approach for managers to address the forces that are changing their business environment and to prepare for the future