Strategy Paths During an Industrial Life Cycle- Valutrics
The innovation context of companies and industries affect their ability implement strategy due to the competitive challenges that arise in the different life stages of industries and companies. the industrial life cycle shows the general pattern of any industry as to:
• The early market growth and eventual saturation of any market over time, which explains phenomena such as the rapid growth of new markets and saturation of older markets, such as Cisco’s extraordinary market opportunities and the saturation of the U.S. automobile market.
• The peaking of rates of product and production innovations over time, which describes that all technologies mature and explains why all industries (based on the technologies) eventually mature of become obsolete, such as the automobile industry (mature) or the sailing industry (now recreational and no longer commercial).
• The peaking and decline of the numbers of companies in an industry, which describes the initial spurt of new companies in an industry and the harsh and continual weeding out of businesses to a handful of survivors of very large firms in a mature industry, such as the continuing concentration of firms in the world’s automobile industry.
We can see that this strategic idea about the impact of innovation upon industrial dynamics is a powerful descriptive and explanatory concept for describing why business opportunities change in an industry and what challenges business’s face over time in an industry. Moreover, it is a useful concept for strategy implementation. It can provide a theoretical ground for considering what kind of needs strategy implementation must address in the different conditions of life stages. We will call the different strategic directions in these different lifestage conditions “strategy implementation pathways.”
Strategy implementation depends upon the stages of the life cycle of the industry in which the company operates.
As we have seen major force for change and opportunity for business has been innovation. Now we can see just how innovation conditions affect the implementation of strategy.
An implementation path is a pattern of strategic challenges that need to be met in implementing strategy due to the innovation context of an industry and business.
We can classify the general patterns of strategy implementation pathways according to the challenges of
• Starting a new business
• Rapidly growing a new business
• Moving a business into market dominance
• Diversifying a large business
• Meeting the new challenges of e-commerce
For new business ventures, in implementing the strategy of starting a new business, management styles should be entrepreneurial, and the early milestones of new business ventures should be met with the challenge of becoming profitable before working capital is exhausted. This did not happen in the case of Boo.com, as it failed to meet the critical milestone of sales generating sufficient revenue before working capital was expended. However, Cisco under the Bosacks met all these milestones successfully.
To grow a large business, the next stage in a successful start-up of a new business (e.g., as Limited Inc.), is to grow from a small business into a large, well-run competitive business. The challenges needed to do this have been called a “first mover” implementation strategy. This was the strategy challenge Wexner faced in changing the management style of the Limited from entrepreneurial to professional in order to develop people to run a large organization. Morgridge successfully moved Cisco onto a first-mover path that enabled it to grow to dominate the market.
However, becoming a major player and then the dominate player is a path that requires not only being an early first mover but later adopting a redirecting strategy. Chambers took Cisco into a strategy of appropriate acquisitions that made Cisco dominant. Repositioning a large business after achieving success through start-up and into a large, competitive organization, is always periodically necessary to meet new competitive challenges. All large organizations periodically require strategic redirection to meet new competition and to adapt to new innovation and market changes. The challenges here areto attainand retain a dominant market position, through new strategic policies and redirecting business practices.
Diversification of a large firm—all dominant players in an industry will find the control of the firm under challenge when growth of the market ceases and business diversification can be sought to create new growth. How strategy is implemented for successful diversification and to meet the challenges of managing a diversified firm is the final stage in the life of large businesses.
A strategic plan may involve one, two, or all of these styles and challenges.
And finally, because of the continuing pace of progress in informationtechnology, modern strategy implementation also needs to address the challenges of integrating the business trade-offs between physical facilities to serve customers and electronic means of serving customers as an e-commerce path.
New Venture Path
The first application of a new applied knowledge as technology is important. This is what makes forecasting the conditions of competition in the applicationslaunch phase difficult. New technology will create new applications and new markets.
That is easy to forecast. But which new applications and which new markets?
That is what is difficult. We do know that in the applications launch phase, the more radical the functional capability provided by a new technology the more radical and different will be the applications created for the technology.
The best implementation strategy in the applications launch phase will be an early innovator strategy that fosters a particular application and quickly gets to market a new product focused upon an application.
In the case of Cisco, the Bosacks were early innovators of network routers focused on academic and corporate networking applications. In the case of the U.S. auto industry, Ford was an early innovator of the Model T, focused upon a rural market for automobiles.
In a new industry, many competitors fight to enter the market and for market share as the applications of the industrial product evolve:
1. A clear performance/price advantage is necessary to enable product entry through product substitution.
2. When competitors enter with new high-tech products, the competitor’s product that facilitates new applications of the products will gain the competitive advantage.
3. Applications generation is encouraged most rapidly by software or standards compatibility that enables the immediate and easy transfer of the new technology to existing applications.
4. Applications generation is also encouraged by customer service which adapts or generates new applications of the technology.
Thus in the applications launch phase of an industrial life cycle, earlyinnovator strategies need to provide either unique function or dramatic increases in performance/price ratio over existing products (based on older technologies).
Competitors that provide a better applications focus will have an advantage over other early competitors.
An application focus on creating a new market, although slower to build, may over the long term prove to be beneficial and profitable by creating new market niches. Only after an innovative product is completed with the availability to the customer of the needed supplies and peripherals for an application system will the product succeed in the marketplace as a new application. An innovative product without proprietary information in the design of the product or in its production will eventually have no technology competitive advantage against competitors with me-too products.
The pace of development of applications for a new-technology product is critical to the rate of market growth. Several techniques for strategy implementation can facilitate the development of applications, including:
1. Research performed by the product manufacturers for user applications development (e.g., when aluminum producers developed aluminum beverage cans for its beverage-producing customers)
2. Assisting the formation of technical-user groups and communicating with them and assisting them (e.g., when Apple helped hobbyist groups share information on new personal computer applications)
3. Use of selected customers as beta test sites for first use of product prototypes (e.g., when a software company releases new product upgrades to a few clients for early feedback)
4. Provision of industrial standards or open architectures to facilitate thirdparty development of application software (e.g., when Cisco participated in the formalization of Internet standards).
First-Mover Path
The first rapid winnowing out of the early innovators always occurs during the product design-standardization phase. This happens even as the market grows dramatically, with only a few firms capturing this growth. Survival depends on gaining market share.
Which companies of the many companies begun in a new industry finally succeed in emerging and surviving as dominant firms? We recall that Alfred Chandler suggested that a successful firm that is the first among its competitors to make necessary investments in (1) advancing the new technologies,(2)inlargescale production capacity, (3) in developing a national distribution capability,and (4) in developing the management talent to grow the new firm.
The reason the investment in advancing technology is important is that in the early competition as the technology changes rapidly, a competing company must not lag behind technologically and can gain competitive advantage from being innovative.
Investments in large-scale production capacity and a national distribution system are necessary for an emerging firm to gain a dominant market share in the new national market. In a global economy, a first-mover firm must also move to establish presence in international markets.
Developing management talent to run a growing, large firm is also a necessary investment. For example, many firms fail after an initial success because the entrepreneural founder of the firm does not build a management team that can succeed the founder.
Therefore, the concept of a first mover in a new industry is the strategic leadership in a company that establishes strategic policies covering essential functions of the business—innovation, production, organization.
The best implementation strategy in the design/standard phase will be a first-mover strategy that emphasizes building market share and brand recognition and develops efficient national/global production and distribution capabilities. Cisco under the entrepreneurial Bosacks is a good example of a successful early-innovator implementation strategy, while Cisco under Morgridge and Chambers is a good example of a successful first-mover implementation strategy.
In the automobile industry, Ford was not only a successful early innovator in the design of the Model T but a first mover in the development of mass production systems in automobile manufacturing.
First-mover strategies are also important to the later dominance of the firm, as they become business conventions. Lowell Steele emphasized the point that all successful firms embody their strategic policies into what then becomes the business conventions of successful firms:
To a remarkable extent, a management team manages from a base of shared beliefs and conventions. These beliefs and conventions are not so much taught orinculcated as they are absorbed. Many of them so deep in the bones that they are not even evident to those who live by them. They may persist for decades and literally go back to the foundation of a company.
In Steele’s view, the shared beliefs and conventions are the sets of policies, explicit or implicit, that strategically guide the operations of a firm:
What are these shared beliefs and conventions, and why are they so important? I am not referring to the values and practices that characterize leadership, interpersonal behavior, or organizational development, important though they are. I am talking about the way you run a business and determine what it will become in the future.
Included in the these policies are informal management assumptions about the nature of the business:
• Common beliefs and rationalizations about the nature of the business of the company
• Shared assumptions about competitive advantage is gained
• Shared stories about how the company successfully grew
• Shared conventions about what is appropriate quality of operations and products
• Assumptions about what are appropriate procedures for decision making
• Conventions about appropriate kinds of control and measures for evaluating performance
Shared beliefs and conventions that act as implicit policies for a management team arise in the history of the firm from policies that first led to the success of the firm. As Steele commented: “I have always been struck by the time and energy people in management spend in reassuring themselves about the rationale that glues their business together. People in GE talked of the “electrical ring,” the self-reinforcing sequence of generating electricity, transmitting, and distributing it, and then using and controlling it that has traditionally provided the unifying themes of the company. Even the apparent departures from electrical power were rationalized: engineered materials grew out of a need for insulating materials with unusual properties; GE Credit grew out of service to dealers; Apparatus Service grew out of service to industrial customers; jet engines and gas turbines had their roots in high-speed rotating machinery, and Medical Systems, in high-voltage engineering and electronics.”
Dominant-Player Path
After an industrial product standard is established, the business and consumer markets grow around the design standard as the technology continues to improve with successive improved design standard models. These markets then partition into luxury, middle, and economy markets with corresponding differences in per formance and features in their product focus. Firms establishing reputation for quality prosper, and survival in the economy markets become fierce with price cutting margins to where many firms fail.
Technology innovations will have shifted from a focus on product improvement to production improvement. Increasingly the competitive conditions turn from performance (and product differentiated by performance) to similar products competing primarily upon price and quality.
Excess production capacity can also appear in the mature phase, when the market has saturated but competitors have continued to expand capacity. Also during the course of this market growth, if technology discontinuities in product performance do occur, new product design standards will also occur. These discontinuities may also partition the market into different industrial segments for high-end performance market to low-end performance market. When technology discontinuities occur, there are opportunities for new firms to began. Existing firms that are slow to change over lose market share rapidly and may fail.
As we noted all successful businesses create conventions in the shared experiences of their management teams that are transmitted as company folklore and beliefs to younger members. For a dominant player, these conventions arise from a successful first-mover strategy. If however times change, thesestrategicpolicies, conventions, and shared beliefs create practices that no longer lead to success, and then a strategic reformulation is necessary:
Diversification Path
Finally as technology progress in the product slows or stops and the market enters a product-technology-maturity phase, products by all producers look alike in performance, differentiated only by fashion or luxury features. In the so-called technology maturity phase of the technology life cycle, products areof a“commoditytype,” that is, functionally undifferentiated. Then innovation continues primarily in production processes, and competition is principally in price. Here competitive conditions become very fierce, with low profit margins.
High productivity, and low-production costs, and high-quality production capability are critical. Brand recognition, market-share and shelf-space determine the survivors. The surviving competitors will shrink to a handful, each large. Only those with at least a 20 percent share of the market have much chance for long term survival. Business cycles provide critical conditions for eliminating marginal competitors.
Moreover, if a superior new technology is then innovated, the existing product technology will become obsolete and a process of product substitution in the market will begin. Large firms in the existing technology will likely be slow to move because of their major investments in plant and equipment and are then likely to fail. New firms in the substituting technology will be founded and grow.
If, however, no substituting technology occurs, the market for the technology will continue, and market volume becomes a function of product replacementand demographic growth (with business cycles superimposed).Ifproductionimprovements continue to lower the cost of the product dramatically, the market may grow even if market demographics do not change due to multiple copies of products purchased by the market. International competition in mature technology markets will become the dominant competitive conditions with whole industries in different countries struggling to survive (if cartels are not allowed). In the industrial maturity stage, implementation strategy should focus on four principal factors:
1. Cost/quality leadership in production,
2. Market share and brand recognition
3. Product variation and market niching
4. Fashion and demographic and life-style and environment/regulatory changes
Of these, improvements in product performance and functionality will likely play only a small role (due to the maturity of the product technology) in competitive strategy. Product differentiation will be mostly limited to market niching and fashion. Product improvement will, however, still continue, but mostly in the adding of features of luxury models down into economy models, improving product dependability and reducing product maintenance, and improving product safety. Products may also have to be improved to meet increasingly higher standards of public safety and environmental quality. But technological change will play primarily the important role principally in production technology through improving production quality and lowering production costs.
Comparing the maturity-stage of a industrial life cycle to its earlyapplications stage, the major difference in competitive conditions is the later dominance of production cost/quality competitive factors over the early dominance of performance/applications competitive factors.
However, even when successful in maintaining a survival and dominant player position in a mature-market industry, corporate growth cannot be found in this market. Accordingly, most mature market companies turn to diversification in businesses in different markets to find new corporate growth.
E-Commerce Path
Because of the pervasive innovation impact of the Internet upon all business, now a new strategy implementation path must be added to the traditional paths. This is an e-commerce path. As in the case of Amazon versus Barnes and Noble , Barnes and Noble had to add a book retail Website to compete with Amazon. However, because of Amazon’s early lead barnes and noble.com had a very small share of the e-commerce book retail market in 2000.
The applications of the Internet to commerce created several kinds of e-commerce businesses, including:
• Internet portal services (e.g., AOL)
• Retail consumer businesses (e.g., Amazon)
• Commercial supply businesses (B2B)
• Auctions (e.g., eBay)
• Materials trading markets (commodity products)
• Financial trading markets (stocks and bonds)
• Financial services (banking, mortgages, etc.)
• Information and reservations services
• Entertainment services
• Educational and training services (e.g., distance education)
For each kind of business, the kind of information strategy and business strategy required for success differed, and the paths to successful implementation of e-commerce modes differed.
Implementation of strategic plans
A practical technique for guiding successful implementation of strategic plans in a large organization includes:
1. Choose the correct implementation pathway. Successful implementation of strategy requires using the right kind of strategic pathway, depending upon the life stage of an industry and of the business in the firm.
2. Form appropriate strategy implementation teams. Each kind of strategic pathway requires different kinds of organization and procedures of implementation.
A. New venture path
• If the strategic plan (or one of its parts) is directed toward exploiting the technical progress of a basic innovation, a new-venture team should be formed to launch an early-innovator new business in the new industry.
• The milestones of a new venture can be used to guide the implementation of the new business plan.
B. First-mover path
• If the strategic plan (or one of its parts) is directed toward taking a successful new start-up business into a growth mode, then a firstmover strategic team should be formed to implement the plan in all its first-mover components of:
– Continuing to advance the new technologies
– Developing large-scale production capacity
– Developing a national distribution capability
– Developing the management talent to grow the new firm
• The milestones of an expanding first-mover strategy can be used to guide the implementation of the new business plan.
C. Dominant player path
• If the strategic plan (or one of its parts) is directed toward reengineering a large firm to maintain and strengthen its dominant competitor challenges through:
– Maintaining leadership as low-cost, high-quality producers,
– Maintaining national and international distribution capability and brand recognition.
D. Diversification path
• If the strategic plan (or one of its parts) is directed toward diversification of businesses for corporate growth, then implementation of strategy should take the form of systematically searching for, acquiring, and integrating new growth businesses (and divesting inappropriate businesses. (We will discuss this approach in greater detail in a later chapter.
E. E-Commerce Path
• For the type of e-commerce business, devise an appropriate information strategy and strategic business model to implement.