How industries change.
McGahan’s (2004) Trajectories of Industry Change provides one of the time tested explanation of the drivers of change in any given industry and thus stand as a sobering reminder for us scholar practitioners on the need to stay sensitive and vigilant in facing them. I fully concur with McGahan that we can’t make intelligent investments within your organization unless you understand how your whole industry is changing. Although the need to understand change in our industry is obvious one such knowledge is not always easy to collect and even more difficult to decipher and interpret.
McGahan argues that industries evolve as a result of two types of threats of obsolescence:
1, A threat to core activities of the industry. That is a threat to the recurring activities of the company which historically generated profits for the industry. New entrants, complacency, differing objectives of the payers within the company and across its competitive landscape, and the complex adaptive nature of the organizational and industry systems are among the major drivers for this change.
2. A threat to the core assets of the industry. That is a threat to the durable resources, including intangibles such as actionable knowledge and brand capital which have historically made the organization efficient at performing core activities may as quickly become irrelevant.
Resulting out of a combination of the above two types of threats, industries change along one of Four Trajectories of Industry Change:
- Radically. When core assets and core activities are both threatened with obsolescence.
Perform a balancing act. The pull has always been – in most cases – towards aggressive pursuing profits in the short term while avoiding investments that could quickly turn an organization to becoming irrelevant in the face of increasing competition. Blindsided, any previously determined assumptions of the possession of a unique competence to quickly protect a competitive position may in fact become a liability. The advice is for companies to keep that all important balance between short term goals and long term investment. In a fast changing globalized world, the only sustainable competitive advantage any company should strive for is the ability and willingness to acutely balance the pursuing of defense and offence, of learning and doing, of planning and implementation, and, of formal and informal.
- Progressive. When neither core assets nor core activities are jeopardized.
Develop a system of interrelated activities that are defensible because of their compounding effects on the company’s overall performance and because the competence is unique to the company and its core actors.
- Creative. When core assets are under threat but core activities are stable.
Assess how quickly your core assets are depreciating. And determine the segments in which you can protect your competitive position from those in which your position will erode quickly.
- Intermediating. When core activities are threatened while core assets retain their capacity to create value.
Invest heavily on the future and on current and future core competences. Ensure speed, decisiveness and the creativity to overwhelm the current and would be competitors.
The Trajectories of Industry Change typically unfold themselves over decades. Fighting the industry change is almost always too costly to be worthwhile. Rather organizations should reconfigure to align its strategy to its competitive landscape while continuing to strengthen the ability to co-evolve with the environment, and, not least, to stay sufficiently agile and determined to partake in the reshaping of the industry. Systematically analyzing the business environment is not easy, but the payoff is great: better strategic decision-making for your company.