In the context of this analysis, how do industries change? They do not change in a piecemeal fashion, because an industry is an inter-related system. Change in one element of an industry’s structure tends to trigger changes in other areas. For example, an innovation in marketing might develop a new buyer segment, but serving this new segment may trigger changes in manufacturing methods, there-by increasing economies of scale. The firms reaping these economies first will also be in a position to start backward integration, which will affect power with suppliers—and so on. One industry change, therefore, often sets off a chain reaction leading to many other changes.
It should be clear from the discussion in this chapter that whereas industry evolution is always occurring in nearly every busi-ness and requires a strategic response, there is no one way in which industries evolve. Any single model for evolution such as the product life cycle should therefore be rejected. However, there are some par-ticularly important relationships in the evolutionary process that I will examine in this section.12
1. WILL THE INDUSTRY CONSOLIDATE?
It seems to be an accepted fact that industries tend to consoli-date over time, but as a general statement, it simply is not true. In a broad sample of 151 4-digit U.S. manufacturing industries in the 1963-1972 time period, for example, 69 increased in 4-firm concen-tration more than 2 percentage points, whereas 52 decreased more than 2 percentage points over the same period. The question of whether consolidation will occur in an industry exposes perhaps the most important interrelationship among elements of industry struc-ture—that involving competitive rivalry, mobility barriers, and exit barriers.
Industry Concentration and Mobility Barriers Move Together. If mobility barriers are high or especially if they increase, concentra-tion almost always increases. For example, concentration has in-creased in the U.S. wine industry. In the standard-quality segment of the market, which represents much of the volume, the strategic changes described earlier in this chapter have greatly increased bar-riers to mobility (high advertising, national distribution, rapid brand innovation, etc). As a result, the larger firms have gotten further ahead of smaller ones, and few new firms have entered to challenge them.
No Concentration Takes Place if Mobility Barriers Are Low or Falling. Where barriers are low, unsuccessful firms that exit will be replaced by new firms. If a wave of exit has occurred because of an economic downturn or some other general adversity, there may be a temporary increase in industry concentration. But at the first signs that profits and sales in the industry are picking up, new entrants will appear. Thus a shake-out when an industry reaches maturity does not necessarily imply long-run consolidation.
Exit Barriers Deter Consolidation. Exit barriers keep compan-ies operating in an industry even though they are earning subnormal returns on investment. Even in an industry with relatively high mo-bility barriers, the leading firms cannot count on reaping the benefits of consolidation if high exit barriers hold unsuccessful firms in the market.
Long-run Profit Potential Depends on Future Structure. In the period of very rapid growth early in the life of an industry (espe-cially after initial product acceptance has been achieved), profit levels are usually high. For example, growth in sales of skiing equip-ment were in excess of 20 percent per year in the late 1960s, and nearly all firms in the industry enjoyed strong financial results. When growth levels off in an industry, however, there is a period of turmoil as intensified rivalry weeds out the weaker firms. All firms in the industry may suffer financially during this adjustment period. Whether or not the remaining firms will enjoy above-average profit-ability will depend on the level of mobility barriers, as well as the other structural features of the industry. If mobility barriers are high or have increased as the industry has matured, the remaining firms in the industry may enjoy healthy financial results even in the new era of slower growth. If mobility barriers are low, however, slower growth probably means the end of above-average profits for the in-dustry. Thus mature industries may or may not be as profitable as they were in their developmental period.
2. CHANGES IN INDUSTRY BOUNDARIES
Structural change in an industry is often accompanied by changes in industry boundaries. As discussed in Chapter 1, industry boundaries are a judgmental placement of the dotted line in Figure 8-4.
Industry evolution has a strong tendency to shift these bounda-ries. Innovations in the industry or those involving substitutes may effectively enlarge the industry by placing more firms into direct competition. Reduction in transportation cost relative to timber cost, for example, had made timber supply a world market rather than one restricted to continents. Innovations increasing the reliabil-ity and lowering the cost of electronic surveillance devices have put them into effective competition with security guard services. Struc-tural changes making it easier for suppliers to integrate forward into the industry may well mean that suppliers effectively become com-petitors. Or buyers purchasing private label goods in large quantities and dictating product design criteria may become effective competi–tors in the manufacturing industry (Sears-Roebuck). Part of the analysis of the strategic significance of industry evolution is clearly an analysis of how industry boundaries may be affected.
FIGURE 8-4. Industry Boundaries
3. FIRMS CAN INFLUENCE INDUSTRY STRUCTURE
As described briefly in Chapter 1 and highlighted here, industry structural change can be influenced by firms’ strategic behavior. If it understands the significance of structural change for its position, the firm can seek to influence industry change in ways favorable to it, either through the way it reacts to strategic changes of competitors or in the strategic changes it initiates.
Another way a company can influence structural change is to be very sensitive to external forces that can cause the industry to evolve. With a head start, it is often possible to direct such forces in ways appropriate to the firm‘s position. For example, the specific form of regulatory changes can be influenced; the diffusion of innovations coming from outside the industry can be altered by the form that li-censing or other agreements with innovating firms take; positive ac-tion can be initiated to improve the cost or supply of complementary products through providing direct assistance and help in forming trade associations or in stating their case to the government; and so on for the other important forces causing structural change. Indus-try evolution should not be greeted as a. fait accompli, to be reacted to, but as an opportunity.
Source: Porter Michael E. (1998), Competitive Strategy_ Techniques for Analyzing Industries and Competitors, Free Press; Illustrated edition.