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Get a Head Start on Strategy

 
11/29/2004
Contrary to popular belief, most industries evolve slowly and in predictable ways, says strategy expert Anita M. McGahan. Here's how to align strategy with your "industry trajectory." A book excerpt from How Industries Evolve.

Every firm within an industry faces two related strategic choices, each of which is fundamental: (i) whether to lead or follow industry change; and (ii) whether to sustain its established competitive position or to attempt a repositioning.

Leading industry change is about driving the standards for operational effectiveness across the industry. It involves beating your rivals by setting the terms of competition in ways that work to your own benefit. EBay is currently leading industry change in the online auctions business, where it has exemplified the dominant model in the industry through its transaction security, ease of use, user-generated evaluations, and prompt notifications of auction results. Of course, the risk of trying to lead industry change is that you'll fail by incurring excessive costs, raising buyer expectations, ceding profits to suppliers, and provoking the competition unnecessarily. There is a fine line between leading change and trying to alter the direction of industry change.

Following industry change is a better choice for firms that can profit from the experience of firms that moved earlier. JetBlue, with short-haul routes, low prices, and a point-to-point system, is a relatively late entrant in the deregulated commercial airline industry that has benefited from the precedents set by defunct People's Express and New York Air (to name just two predecessors). The drawbacks: Following change exposes a firm to lower operational effectiveness, poor positioning opportunities, a reputation for imitation, finicky investors, and ultimately lower market share than a strategy of leading industry change.

Because repositioning often takes decades to complete successfully, it can be tantamount to exiting and then re-entering the industry.

The choice between sustaining competitive position and repositioning is just as complex. Sustaining competitive position, which involves committing new capital to augment the sources of a firm's uniqueness, is a natural choice when the firm has a healthy advantage based on a lower cost structure or on greater differentiation than other firms in the industry. Anheuser-Busch is sustaining its position in the brewing industry by reinvesting in distributed manufacturing capabilities, transportation economies, brand capital, and distributor relationships. The problems with this choice arise when a competitive advantage is thin or when the positioning bucks trends in industry evolution.

Repositioning provides a firm with the opportunity to abandon practices that have become constraining and to further distinguish itself from the competition. Over the past twenty years, Sears has repositioned several times in the department store industry, focusing in turn on soft goods, hard goods, and branded goods. The downside is that repositioning is expensive, makes a firm vulnerable to competitive attack, and can confuse buyers. Because repositioning often takes decades to complete successfully, it can be tantamount to exiting and then re-entering the industry. Getting the timing right is also difficult. You may discover later that you repositioned too early and committed yourself to a course of action that you regret. Or you may have repositioned too late and foreclosed options that would have been valuable.

There are relationships between the choices to lead or follow industry change and to sustain or reposition, but these two choices are distinctive. A firm may elect to lead industry change while sustaining its position or it may elect to lead industry change while repositioning. It is likewise possible to follow industry change while sustaining position or while repositioning. The right choice depends on both industry conditions and the firm's unique characteristics.

The payoff
Effective business-unit strategy depends on insights about the trajectory of change, the stage of change, the industry structure, and the firm's competitive position. Identifying the right course of action for a particular organization requires a deep understanding of the context in which the firm operates.

It's possible to anticipate a recession, competitive aggression, or a change in buyer needs without knowing exactly when these events may occur.

For all the hard work required to integrate an understanding of industry change into your strategy, the payoff is considerable. First, there is greater awareness throughout the organization about how to make tradeoffs with respect to industry evolution.4 What would you salvage if there were a fire and you had time to gather only one armload before you left the building? The customer list? The factory blueprints? A product prototype? Tradeoffs arise when there is more than one right answer to a question, and a choice must be made between attractive alternatives. Consistency in following a strategy allows employees to develop intuition about how to react in high-stress situations.

A second payoff to a carefully developed, comprehensive business-unit strategy is better resource allocation. Executives in an organization are responsible for making general management decisions about how to allocate resources among opportunities at a single point in time, and how to make choices that trade current profitability for future performance. An effective strategy that integrates an understanding of industry evolution offers principles for reacting quickly and flexibly to unforeseen opportunities.

Yet another payoff to a clear business-unit strategy is realism about how to deal with unforeseen opportunities and problems as they occur. The key is in understanding the kinds of contingencies that can arise, even when the outcome of the contingencies is unknown. It's possible to anticipate a recession, competitive aggression, or a change in buyer needs without knowing exactly when these events may occur. The reaction of the leadership team to unmet profit targets represents a moment of truth in an organization. When a strategy has been developed realistically to account for the possibility of poor results, then the organization is better equipped to turn away from unrealized opportunity and toward real opportunity without becoming burdened by internal politics.

The payoffs of formulating business-unit strategy are considerable, and yet they are only part of the story. Integrating insights about industry evolution and its implications for both business-unit and corporate strategy is essential for the organization's survival and for its long-term financial performance.

Reprinted by permission of Harvard Business School Press. Excerpted from How Industries Evolve by Anita M. McGahan. Copyright 2004 Harvard Business School Publishing Corporation. All rights reserved.

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Anita M. McGahan is Everett V. Lord Distinguished Faculty Scholar and Professor of Strategy and Policy at the Boston University School of Management. She is also Senior Institute Associate at Harvard's Institute for Strategy and Competitiveness.

Introduction to the Four Industry Trajectories

by Anita M. McGahan

Progressive

Examples: Discount retailing, long-haul trucking, commercial airlines

Rules of change include:

  • Constant market testing before full-scale commitment
  • Competitive benchmarking and openness about accomplishments
  • Building capabilities incrementally over time rather than through the acquisition of assets

Opportunities for innovation involve:

  • Building a system that dominates a geographic or product market
  • Tightly linking activities

Creative

Examples: Pharmaceuticals, motion-picture production, oil and gas exploration

Rules of change include:

  • Committing resources to high-potential projects without reliable market information
  • Developing a system for bringing successful projects to market
  • Abandoning failing projects

Opportunities for innovation involve:

  • Creating breakthrough asset-development projects
  • Developing efficient and effective systems for delivering projects to market

Intermediating

Examples: Investment brokerage, fine-arts auctions, automobile dealerships

Rules of change include:

  • Adapting to new ways of transacting with customers and suppliers
  • Scaling back commitments to fixed infrastructure
  • Finding ways to redeploy assets out of the business into more profitable uses

Opportunities for innovation involve:

  • Focusing early on a core group of loyal customers
  • Engaging in partnerships and alliances with rivals, customers, or suppliers
  • Forward or backward integrating into a customer's or supplier's business

Radical

Examples: Overnight letter delivery, landline telephone manufacturing, typewriter manufacturing

Rules of change include:

  • Carefully identifying profitable activities and scaling back unprofitable activities
  • Avoiding the commitment of long-lived assets into the business

Opportunities for innovation involve:

  • Assessing the timing of change accurately and retaining a profitable position as long as possible
  • Developing efficiencies by replacing fixed assets with variable activities



Reprinted by permission of Harvard Business School Press. Excerpted from How Industries Evolve by Anita M. McGahan. Copyright 2004 Harvard Business School Publishing Corporation. All rights reserved.

Anita M. McGahan is Everett V. Lord Distinguished Faculty Scholar and Professor of Strategy and Policy at the Boston University School of Management. She is also Senior Institute Associate at Harvard's Institute for Strategy and Competitiveness.

Footnote:

4. This is the central idea in Michael Porter's "What is Strategy?" Harvard Business Review, November-December 1996, 61-78.