Corporate Strategy and Governance

Week 2: Industry Life Cycle

 Industry
Industry as a concept is evolving – and definition is
critical
An industry is a group of companies that are related
based on their primary business activities.
In modern economies, there are dozens of industry
classifications, which are typically grouped into larger
categories called sectors.
Individual companies are generally classified into an
industry based on their largest sources of revenue.

For example, while an automobile manufacturer might

have a financing division that contributes 10% to the
firm's overall revenues, the company would be
classified in the automaker industry by most
classification systems.
Porter’s Five Forces
First described by Michael Porter in
his classic 1979 Harvard Business
Review article, Porter’s insights
started a revolution in the strategy
field and continue to shape
business practice and academic
thinking today. A Five Forces
analysis can help companies assess
industry attractiveness, how trends
will affect industry competition,
which industries a company should
compete in—and how companies
can position themselves for
success.
 Porter's Five Forces is a framework for analysing
a company's competitive environment.

The number and power of a company's

competitive rivals, potential new market
entrants, suppliers, customers, and substitute

Five Forces products influence a company's profitability.

Five Forces analysis can be used to guide
business strategy to increase competitive
advantage.
The Five Forces model can help businesses
boost profits, but they must continuously
monitor any changes in the five forces and
adjust their business strategy
.
Threat of Substitutes
A substitute is another product or service that
meets the same underlying need that the
industry’s product meets in a different way.
Videoconferencing is a substitute for travel.
Email is a substitute for express mail.

The threat of a substitute is high if it offers an

attractive price-performance trade-off versus
the industry’s product, especially if the buyer’s
cost of switching to the substitute is low.
BARGAINING POWER OF BUYERS
Powerful customers can use their clout to
force prices down or demand more service
at existing prices, thus capturing more
value for themselves. Buyer power is
highest when buyers are large relative to
the competitors serving them, products
are undifferentiated and represent a
significant cost for the buyer, and there are
few switching costs to shifting business
from one competitor to another. They can
play rivals against each other—especially if
an industry’s products are undifferentiated,
it’s inexpensive to switch loyalties, and
price trumps quality.

There may be multiple buyer segments in

each industry with different levels of
power.
 THREAT OF NEW ENTRANTS
The threat of new entrants into an industry can force
current players to keep prices down and spend more to
retain customers. Entry brings new capacity and pressure
on prices and costs. The threat of entry, therefore, puts a
cap on the profit potential of an industry. This threat
depends on the size of a series of barriers to entry,
including economies of scale, to the cost of building brand
awareness, to accessing distribution channels, to
government restrictions.

The threat of entry also depends on the capabilities of the

likely potential entrants. If there are well established
companies in the industry operating in other geographic
regions, for example, the threat of entry rises.
BARGAINING POWER OF SUPPLIERS

Companies in every industry purchase

various inputs from suppliers, which
account for differing proportions of cost.
Powerful suppliers can use their
negotiating leverage to charge higher
prices or demand more favourable terms
from industry competitors, which lowers
industry profitability. If there are only
one or two suppliers of an essential input
product, for example, or if switching
suppliers is expensive or time
consuming, a supplier group wields more
power.
 Criticisms of Five Forces
difficult to define the industry
too general analytical framework
predisposition to subjective results
lack of quantitative dimensions
susceptibility to biased results
unsuitable for complex firms
inapplicable non-profit
organisations
time of analysis
 The industry life cycle refers to the evolution of an industry or
business based on its stages of growth and decline.

The phases of the industry life cycle are the start-up, growth,
shakeout, maturity, and decline.

Industry The industry life cycle ends with the decline phase, a period
lifecycle when the industry or business is unable to sustain growth.

The standard model typically deals with manufactured goods,

but today's service economy can function somewhat
differently, especially in the digital economy.

Important from an investor, shareholder and strategy

perspective .
Stages of Industry Lifecycle
Start-up Stage
At the start-up stage, customer demand is limited due to unfamiliarity
with the new product’s features and performance. Distribution
channels are still underdeveloped. There is also a lack of
complementary products that add value for the customers, limiting the
profitability of the new product.
Companies at the start-up stage are likely to generate zero or very low
revenue and experience negative cash flows and profits, due to the
large amount of capital initially invested in technology, equipment, and
other fixed costs.
Growth Stage
As the product slowly attracts attention from a bigger market segment,
the industry moves on to the growth stage where profitability starts to
rise. Improvement in product features increases the value to customers.
Complementary products also start to become available in the market, so
people have greater benefits from purchasing the product and its
complements. As demand increases, product price goes down, which
further increases customer demand.
At the growth stage, revenue continues to rise and companies start
generating positive cash flows and profits as product revenue and costs
surpass break-even.
 Shakeout Stage
Shakeout usually refers to the consolidation of an industry. Some
businesses are naturally eliminated because they are unable to grow
along with the industry or are still generating negative cash flows. Some
companies merge with competitors or are acquired by those who were
able to obtain bigger market shares at the growth stage.
At the shakeout stage, the growth rate of revenue, cash flows, and
profit start slowing down as the industry approaches maturity.
 Maturity Stage
At the maturity stage, most of the companies in the industry are well-
established and the industry reaches its saturation point. These
companies collectively attempt to moderate the intensity of industry
competition to protect themselves, and to maintain profitability by
adopting strategies to deter the entry of new competitors into the
industry. They also develop strategies to become a dominant player and
reduce rivalry.
At this stage, companies realize maximum revenue, profits, and cash
flows because customer demand is fairly high and consistent. Products
become more commonplace and popular among the general public,
and the prices are fairly reasonable, as compared to new products.
 Decline Stage
The decline stage is the last stage of an industry life cycle. The intensity
of competition in a declining industry depends on several factors: speed
of decline, the height of exit barriers, and the level of fixed costs. To
deal with the decline, some companies might choose to focus on their
most profitable product lines or services in order to maximize profits
and stay in the industry.
Some larger companies will attempt to acquire smaller or failing
competitors to become the dominant player. For those who are facing
huge losses and that do not believe there are opportunities to survive,
divestment will be their optimal choice.
Industry Life
cycle
 Diffusion of Innovation (DOI) Theory
 Diffusion of Innovation (DOI) Theory, developed by E.M. Rogers in 1962 Originated in
communication to explain how, over time, an idea or product gains momentum and diffuses
(or spreads) through a specific population or social system.
 The result of this diffusion is that people, as part of a social system, adopt a new idea,
behaviour, or product.
 Adoption means that a person does something differently than what they had previously
(i.e., purchase or use a new product, acquire and perform a new behaviour, etc.).
 The key to adoption is that the person must perceive the idea, behaviour, or product as new
or innovative.
 It is through this that diffusion is possible.
 Adoption of a new idea, behaviour, or product (i.e., "innovation") does not happen
simultaneously in a social system; rather it is a process whereby some people are more apt
to adopt the innovation than others.
Adoption Curve
 Diffusion of Innovation Model
 Innovators - These are people who want to be the first to try the innovation. They are venturesome and
interested in new ideas. These people are very willing to take risks and are often the first to develop new
ideas. Very little, if anything, needs to be done to appeal to this population.
 Early Adopters - These are people who represent opinion leaders. They enjoy leadership roles and
embrace change opportunities. They are already aware of the need to change and so are very comfortable
adopting new ideas. Strategies to appeal to this population include how-to manuals and information
sheets on implementation. They do not need information to convince them to change.
 Early Majority - These people are rarely leaders, but they do adopt new ideas before the average person.
That said, they typically need to see evidence that the innovation works before they are willing to adopt it.
Strategies to appeal to this population include success stories and evidence of the innovation's
effectiveness.
 Late Majority - These people are sceptical of change and will only adopt an innovation after it has been
tried by the majority. Strategies to appeal to this population include information on how many other
people have tried the innovation and have adopted it successfully.
 Laggards - These people are bound by tradition and very conservative. They are very sceptical of change
and are the hardest group to bring on board. Strategies to appeal to this population include statistics, fear
appeals, and pressure from people in the other adopter groups.
 Limitations of Diffusion of Innovation Theory
Much of the evidence for this theory, including the adopter
categories, might not apply to all industries and sectors
It does not foster a participatory approach to adoption
It works better with adoption of behaviours rather than cessation or
prevention of behaviours
It doesn't take into account an individual's resources or social support
to adopt the new behaviour (or innovation)
Product Life
Cycle
A product life cycle is the
amount of time a product
goes from being introduced
into the market until it's
taken off the shelves.
There are four stages in a
product's life cycle—
introduction, growth,
maturity, and decline.
 Product Life Cycle
For successful products, a business will want to do all it can to extend
the growth and maturity phases of the life cycle, and to delay the
decline phase. extension strategies are:
Advertising- try to gain a new audience or remind the current
audience
Price reduction- more attractive to customers
Adding value- add new features to the current product, e.g.
improving the specifications on a smartphone
Explore new markets- selling the product into new geographical areas
or creating a version targeted at different segments