3/2/23, 3:34 PM Competitive Strategy: Chapter 8

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Porter, M. E. 1980. Competitive Strategy: Techniques

for Analyzing Industries and Competitors. The Free
Press.
Chapter 8: Industry Evolution

Study Guide by James R. Martin, Ph.D., CMA

Professor Emeritus, University of South Florida

Porter's Competitive Strategy Main Page

Chapter 8: Industry Evolution p. 156

The purpose of this chapter is to provide some analytical tools for predicting the
evolutionary process in an industry and how to use it for the development of
competitive strategy. Porter describes some basic concepts related to evolution,
identifies the driving forces of industry change, and discusses some related
economic relationships and their strategic implications.

Basic Concepts in Industry Evolution p. 157

A simple approach to analyzing industry evolution is to begin by asking the

question, are there any changes occurring in the industry that will affect any
of the five competitive forces described in Chapter 1? Answering this
question is difficult and requires some analytical techniques.

Product Life Cycle p. 157

A basic concept in the area of industry evolution is the life cycle. The
life cycle concept illustrated in the graphic below has been applied to
both products and industries. The typical S-shaped curve shows how
an industry goes through the various stages from introduction to
growth, to maturity, and finally decline.

However, there are criticisms of the life cycle concept that include:

The duration of the various stages varies from industry to

industry,

Sometimes industries skip some stages, e.g. go from growth to

decline.

Companies can affect the growth stage through innovation and

repositioning, and

Competition in the various stages is different in different

industries.

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Since industry evolution takes so many different paths, the typical life
cycle pattern is not reliable. With this fact in mind Porter includes an
illustration (Figure 8-2) showing what is predicted to happen over the
various stages of the life cycle related to: Buyers and buyer behavior,
products and product change, marketing, manufacturing and
distribution, foreign trade, overall strategy, competition, risk, margins
and profits. For example, buyers must be convinced to try the product
in the introduction stage, the buyer group is predicted to widen in the
growth stage, and become a mass market in the maturity stage. In the
area of margins and profits, there are low profits predicted in the
introduction stage, high profits in the growth stage, and lower profits
again in the maturity and decline stages.

A Framework for Forecasting Evolution p. 162

Industries evolve because of evolutionary processes, i.e., forces that

create incentives and pressures to change. Therefore, a more useful
way to examine industry evolution (than attempting to describe it) is to
examine the processes that drive changes in an industry. Industries
begin with an initial structure, and then evolutionary processes drive
them towards their potential structure.

Evolutionary Processes p. 163

Porter describes fourteen evolutionary processes as follows:

1. Long-Run Changes in Growth p. 164

There are five reasons long-run growth in an industry changes:

Demographics - group income levels, educational levels,

geographic location, population growth, age group
demographics etc. For example, the U.S. birthrates affect a wide
variety of products.

Trends in Needs - Changes in consumer tastes, lifestyles, social

conditions, and government regulation drive changes in the
demand for many products.

Changes in the Relative Position of Substitutes - Changes

related to the cost and quality of substitute products affect the
demand for a product, e.g., television decreased the demand for
other type of entertainment.

Changes in the position of Complementary Products -

Complementary products defined broadly include any product,
resource or service that supports the industry's product, e.g.,
credit supports durable goods purchases.

Penetration of the Customer Group - An industry will eventually

reach penetration where sales are primarily made to repeat
buyers. The growth rate after penetration will mainly depend on
the average time before the product needs to be replaced.

Product innovation can improve an industry's growth rate by

offsetting some of the affects on industry growth mentioned
above, e.g., innovations in the design of bicycles.

2. Changes in Buyer Segments Served p. 169

New buyer segments can be created, or additional segmentation of

existing buyer segments can occur when firms create new products or
develop new marketing techniques. These new segments affect
industry structure in many ways, e.g., economies of scale, capital
requirements etc. For this reason, an analysis of industry evolution
should include buyer segments and how they affect industry structure.

3. Learning by Buyers p. 170

The accumulation of knowledge about a product tends to reduce

product differentiation over time as buyers learn and require more in
terms of the product's features, warranty protection, and related
service. Changes in the product can offset this tendency to a certain

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extent by expanding the customer base and extending the benefits of
product differentiation.

4. Reduction of Uncertainty p. 171

Uncertainty about the future of an industry (e.g., its potential size,

optimal product configuration, potential buyers) provides some
protection for early entrants, but this is reduced over time as questions
about the industry are resolved. As the risk of entry into the industry is
reduced, new types of entrants will emerge and successful strategies
will be imitated.

5. Diffusion of Proprietary Knowledge p. 172

In the absence of patent protection, proprietary protection will erode

for a number of reasons: Competitors learn from the physical
inspection of proprietary products, proprietary information is
embedded in the inputs of outside suppliers, personnel who leave the
firm provide proprietary information to other firms or start spin-off
firms, and specialized personnel become more numerous from
consulting firms, university technical programs and other sources.
Offsets to the diffusion of proprietary knowledge include: patent
protection and the continual creation of new proprietary technology.
Two of many possible situation are illustrated in the graphic below.
Proprietary technology provided initial mobility barriers in both
industries, but it was soon eroded by diffusion. In industry 1,
economies of scale in research and development lead to a rise in
mobility barriers from proprietary technology that would probably
lead to a profitable maturity phase. In industry 2, mobility barriers
quickly declined to a low level and a profitable maturity phase would
depend on other barriers to entry.

6. Accumulation of Experience p. 174

The learning or experience curve can be a major factor for industry

competition and change when firms can establish significant and
sustainable advantages over competitors, particularly when experience
can be kept proprietary. Firms that are left behind must either use a
rapid imitation strategy, or adopt a differentiation or focus strategy.

7. Expansion (or Contraction) in Scale p. 175

Growth in an industry tends to increase the strategies available (e.g.,

where firms are able to adopt manufacturing and distribution methods
related to economies of scale, and use vertical integration), and also
tends to attract new entrants who have waited for the industry to reach
a significant size to justify the cost of entry.

8. Changes in Input Costs and Exchange Rates p. 176

Changes in the cost or quality of an industry's inputs can cause

changes in the structure of the industry. Industry inputs include wage
rates, material costs, the cost of capital, communication costs, and
transportation costs. For example, increases in labor costs tends to
promote the substitution of capital for labor (automation). Exchange
rate fluctuations can also create shifts in an industry's structure.

9. Product Innovation p. 177

Product innovations can affect an industry in many ways including:

widening the market, nullifying buyer experience, and creating the

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need for new marketing, distribution, and manufacturing techniques
that change mobility barriers in the industry.

10. Marketing Innovation p. 178

Innovations in marketing and distribution can affect industry structure

by expanding the product to new customer groups, reducing product
price sensitivity, changing the balance between fixed and variable
costs, and increasing mobility barriers.

11. Process Innovation p. 178

Changes in manufacturing processes or methods can increase or

decrease economies of scale, extend the experience curve, change the
balance between fixed and variable costs, affect vertical integration,
and affect industry structure in other ways. These changes can also be
initiated by customers or suppliers, or come from outside of the
industry.

12. Structural Change in Adjacent Industries p. 180

Changes in the structure of suppliers' and customers' industries can

have important affects on the evolution of an industry. Porter provides
an example of the chain store development in retailing during the
1960s and 1970s that caused manufacturing, marketing, and
distribution strategies to adjust to the new mass merchandising
revolution.

13. Government Policy Change p. 181

Government policy changes that affect industry structure include

licensing requirements, pricing regulations, tariffs, product quality and
safety regulations, and environmental relations. Although some of
these changes provide social benefits, they all increase the costs of
doing business in various ways and raise barriers facing new firms in
the industry.

14. Entry and Exit p. 182

Entry into an industry, particularly by established firms from other

markets can drive structural change. These new entrants have no ties
to historical strategies and may be in a better position to apply
technology not available to current firms in the industry. The U.S.
wine industry in the 1960s provides an example. Large consumer
marketing companies entered the wine industry that had previously
been dominated by small family firms selling in regional markets. This
caused significant structural change in the industry.

Exit barriers (e.g., requirement for specialized assets, high fixed costs
to exit, strategic interrelationships, emotional barriers and government
and social restrictions) may increase the dominance of the leading
firms, worsen the position of the remaining firms and lead to
competitive warfare.

Each evolutionary process raises a key question about the future of the
industry, and identifies a number of key strategic signals, or red lights that
the firm must continuously look for in the environment. These signals should
generate an analysis to predict the affect of the changes for the industry
along with the appropriate response. Firms must also be on the lookout for
hidden changes that may be resulting with no apparent signals.

Key Relationships in Industry Evolution p. 184

Industries are interrelated systems that change in many different ways. A

change in one element of an industry tends to be followed by changes in
many other elements of the industry. The point is that industries are always
changing in a variety of ways and there is no single model of industry
evolution. Therefore, the idea of using the product life cycle as the single
model of industry evolution should be rejected.

Will the Industry Consolidate? p. 185

Whether consolidation will occur in an industry depends on the

interrelationships between the elements of the industry structure. If

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industry mobility barriers (e.g., high advertising, national distribution,
brand identification) are high, concentration in an industry usually
increases. Where mobility barriers are low or decreasing, firms that
exit are replaced by new firms and consolidation will not occur. Exit
barriers may also prevent consolidation and tend to hold firms in the
industry even when they are not obtaining an adequate return on
investment.

Changes in Industry Boundaries p. 186

Industry evolution tends to change industry boundaries (represented by

the dotted line in the illustration below). Industry boundaries may be
enlarged in many ways, e.g., by new entrants, substitute products,
structural changes that make it easier for suppliers to integrate
forwards, or buyers to integrate backwards.

Firms can Influence Industry Structure p. 187

Structural changes in an industry can be influenced by firms that

understand how these changes will affect their competitive position.
Therefore, the point of this last section is that firms should view
industry change as an opportunity for improvement.

__________________________________________________

Go to the next Chapter. Porter. 1980. Competitive Strategy. Part II. Chapter 9:
Competitive Strategy in Fragmented Industries. (Summary), or back to Porter's
Competitive Strategy Summaries Main Page.

Summaries related to the product life cycle:

Hayes, R. H. and S. C. Wheelwright. 1979. Link manufacturing process and

product life cycles. Harvard Business Review (January-February): 133-140.
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Hayes, R. H. and S. C. Wheelwright. 1979. The dynamics of process-product life

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Martin, J. R. Not dated. Product life cycle management. Management And

Accounting Web. PLCSummary.htm

Other related summaries:

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Clinton, B. D. and A. H. Graves. 1999. Product value analysis: Strategic analysis

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O'Reilly, C. A. III. and M. L. Tushman. 2004. The ambidextrous organization.

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