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1 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 s 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 © 2016 Robert M. Grant, • 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 TELEVISIONSMOTORCYCLES THE INDUSTRY LIFE CYCLE “Category Killers†e.g.

Toysâ€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 8 The Driving Forces of Industry Evolution THE INDUSTRY LIFE CYCLE 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 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 I 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 e N e w P ro d u c ts % S a le s f ro m N e w P ro d u c ts P ro d u c t R & D /S a le s 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 isomorphismâ€) 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 $ 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: â–ª 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 â–ª 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 â–ª 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 Hyundai Motor: Developing Capabilities through Product Sequencing MANAGING STRATEGIC CHANGE â‘ Dynamic capability is a “firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments†①Dynamic capabilities typically viewed as “higher order†capabilities that orchestrate change among lower-level “ordinary†or “operational†capabilities. â‘ 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 of 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

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Contemporary Strategy Analysis: Industry Evolution and Strategic Change

Introduction
In today’s fast-paced business environment, organizations must navigate through the intricacies of industry evolution and strategic change. The industry life cycle framework provides a crucial understanding of the various stages an industry undergoes, namely growth, maturity, and decline. This analysis will delve into the nature of each stage, the challenges of organizational adaptation, and the effective management of strategic change.

The Industry Life Cycle

The industry life cycle serves as a conceptual framework to help strategists anticipate the evolution of an industry. According to Grant (2019), this cycle consists of four stages: introduction, growth, maturity, and decline. In the introduction phase, demand for a new product or service begins to develop, demanding innovation and marketing strategies aimed at capturing early adopters. The growth stage characterizes significant increases in market penetration and sales as companies refine their offerings, attracting late adopters and mass markets (Klepper, 2002).
In maturity, sales growth slows down, often leading to price sensitivity among consumers and increased competition. Firms experience demand obsolescence as markets saturate. Finally, during the decline stage, a reduction in sales propels a struggle for survival, leading to industry consolidation or exit (Agarwal & Bayus, 2002).

Drivers of Industry Evolution

Key drivers propel the evolution of industries, primarily demand growth and the diffusion of knowledge (Scherer & Ross, 1990). Industries characterized by technological advancement (e.g., semiconductors and pharmaceuticals) exhibit a continuous appearance of "emerging" traits where innovation never ceases. Conversely, more traditional sectors (like food processing) may stabilize without a prominent decline, illustrating varying life cycle trajectories (Porter, 1998).
Grant (2019) also points to external environments, such as economics and regulations, which strategically shape how industries evolve. The life cycle model thus assists firms not only in understanding past market behaviors but also in anticipating future trends.

The Challenge of Organizational Adaptation

Despite the utility of the industry life cycle in strategizing, persistent organizational inertia often obstructs firms' abilities to adapt effectively (Hannan & Freeman, 1984). Organizational routines can hinder the development of new capabilities, while established social and political structures may resist change, both fostering a culture of conformity (Bourgeois & Eisenhardt, 1988). Limited search strategies motivated by bounded rationality restrict companies to only localized solutions, thus reinforcing dissatisfaction with "good enough" approaches instead of optimal choices (Cyert & March, 1963).
For established firms, adapting to certain types of technological changes can be particularly challenging. For instance, competence-destroying innovations or those requiring architectural shifts demand radical reconfigurations of capabilities. Research by Christensen (1997) on disruptive technologies illustrates that traditional firms often falter under transformative changes, as their existing operational frameworks become inadequate.

Managing Strategic Change

To combat inertia and effectively manage strategic change, organizations can adopt dual strategies focused on both their current resources and future opportunities (O'Reilly & Tushman, 2004). This concept of organizational ambidexterity proposes that firms can exploit existing capabilities while simultaneously exploring innovative avenues. Contextual ambidexterity enables organizations to integrate these strategies within singular units, promoting agility and responsiveness (Tushman & O’Reilly, 1996).
Organizations facing crises may find opportunities for change increasingly available, as perceived urgency can galvanize action (Kotter, 1996). Establishing stretch targets or ambitious performance goals can mobilize employee effort towards transformational initiatives (Kaplan & Norton, 1992). Furthermore, involving new leadership can stimulate a fresh vision that challenges the status quo, alongside reassessing company structures to dismantle established power bases.

The Role of Knowledge Management

The modern era emphasizes knowledge management as a crucial capability in driving change (Nonaka, 1994). Organizations must create effective mechanisms for identifying, retaining, and transferring knowledge internally; this involves managing intellectual property and fostering communities of practice (Seufert, Stanoevska-Slabeva, & F. 2008). Efficient knowledge sharing can stimulate innovation, consolidate competitive advantage, and facilitate the adaptation of processes within established firms.
Dynamic capabilities also become pivotal in this context, encompassing the organization’s ability to sense opportunities, seize those opportunities, and maintain competitiveness through continuous reinvention of tangible and intangible assets (Teece, Pisano, & Shuen, 1997). This systemic approach allows firms to not only react to changes but to shape their environments actively.

Evolution of Industry Structure

Over time, industry structures change in response to the stages of the life cycle. During growth, many new firms enter the market, increasing competition and product diversity. As industries mature, consolidation occurs, leading to fewer competitors and enhanced efficiency (Granstrand & Sjölander, 1992). Companies must reevaluate their methods for maintaining market presence—balancing differentiation against the need for cost-efficiency. The need for consistent innovation surfaces once more in decline, spurring the quest for renewal, a phenomenon observed in industries like technology retail where companies like Amazon and others have reshaped conventional business models (Khan & Mela, 2006).

Conclusion

In conclusion, navigating industry evolution and managing strategic change are intrinsic to organizational success. Awareness of the various stages of the industry life cycle sets the foundation for responsive strategies. Overcoming organizational inertia involves robust structural change, effective knowledge management, and dual strategies that embrace both current capabilities and innovative possibilities. As industries continue to evolve, firms must remain agile and ready to reconfigure their strategies to not only survive but also thrive.

References

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