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 Chapter 8
Industry Evolution and Strategic Change

True or False Questions

1. According to Charles Darwin it is the strongest of the species that survive.

@ Pages and References: p207
a. T
*b. F

2. The main drivers of industry evolution are knowledge and demand.

@ Pages and References: p209
*a. T
b. F

3. The industry life cycle follows similar phases as the product life cycle.
@ Pages and References: p209
*a. T
b. F

4. During the introduction phase of the industry life cycle, competition is between different
technologies and different design configurations.
@ Pages and References: p210
*a. T
b. F

5. The firm which sets the dominant product design goes on to be the dominant firm in the
industry.
@ Pages and References: p 211
a. T
*b. F

6. The establishment of a dominant design marks an industry’s transition from the growth
phase to the maturity phase.
@ Pages and References: p211
*a. T
b. F

7. The establishment of a dominant design in an industry requires convergence around a

common technical standard.
@ Pages and References: p211
a. T
*b. F

8. When an industry coalesces around a common product design, innovation typically shifts
from radical to incremental.
@ Pages and References: p211
*a. T
b. F

9. The emergence of a dominant product design tends to coincide with a shift from process
innovation to product innovation
@ Pages and References: p211
a. T
*b. F
10. A major incentive for introducing a dominant design is to exploit the intellectual property
that is embodied within it.
@ Pages and References: p211
a. T
*b. F

11. Toyota’s system of lean production was the first major process innovation to transform the
manufacture of automobiles during the 20th century.
@ Pages and References: p212
a. T
*b. F

12. The emergence of a dominant design encourages large-scale capital investments in

production capacity
@ Pages and References: pp211-212
*a. T
b. F

13. Over time, industry life cycles have become increasingly compressed.
@ Pages and References: pp213
*a. T
b. F

14. A key factor encouraging the entry of new firms during an industry’s growth phase is
increasing legitimacy of the industry.
@ Pages and References: pp214-215
*a. T
b. F

15. With the onset of the decline phase of an industry’s development, an industry enters its
shake-out period.
@ Pages and References: p215
a. T
*b. F

16. Firms that develop high levels of capability tend to find change easy because they are
also able to develop new capabilities.
@ Pages and References: pp217-218
a. T
*b. F

17. Organizations tend to prefer exploitation of existing knowledge over exploration for new
opportunities.
@ Pages and References: p219
*a. T
b. F

18. “Punctuated equilibrium” refers to the tendency for organizations to follow a gradual
transition from one equilibrium to another
@ Pages and References: p219
*a. T
b. F

19. “Architectural innovations” tend to be “competence destroying”—they favor new entrants

at the expense of established firms.
@ Pages and References: pp222-223
*a. T
b. F
20. If a firm focuses closely on meeting the needs of its customers, it is unlikely to be
blindsided by disruptive innovation.
@ Pages and References: p224
a. T
*b. F

21. Two types of organizational ambidexterity have been identified: structural and contextual.
@ Pages and References: p225
a. T
*b. F

22. Scenarios are plausible alternative futures. Their value lies not so much in the choice of
plausible futures, but the flexibility gained by the process of considering what to do about
them
@ Pages and References: p228
*a. T
b. F

Multiple Choice Questions

23. Industries change mainly as a result of:

@ Pages and References: p208
*a. The death of existing firms and the birth of new firms
b. Continuous adaptation by a constant population of fi rms.

24. The main forces driving industry evolution are:

@ Pages and References: p208
*a. Technology and demand
b. Technology and globalization
c. The quest for cost and differentiation advantage
d. Government policies and global financial flows.

25. Which of the following developments is not a typical feature of the transition from the
“introductory” to the “growth” phase of the industry life cycle?
@ Pages and References: pp210-212
a. The emergence of a dominant design
b. The shift from product to process innovation
*c. The shift of production from mature to emerging countries
d. Rapid market penetration

26. The duration of the industry life cycle:

@ Pages and References: p213
a. Typically extends over a century or more
b. Is determined by the longevity of the firms within the industry
*c. Has become compressed as the pace of technological change has accelerated
d. Depends upon the ability of the firms within the industry to sustain innovation

27. The different stages of the industry life cycles are defined primarily on the basis of:
@ Pages and References: p209
*a. The rate of growth of industry sales
b. The characteristics of competition within the industry
c. The pace of innovation within the industry
d. None of the above

28. The characteristic profile of an industry life cycle has an ‘S’ shaped curve because:
@ Pages and References: p209
a. It is modeled on the Product Life Cycle, which is also ‘S’ shaped
b. It is generated by a quadratic function
c. It reflects the changing pace at which technology is diffused
*d. It is the result of changes in rates of growth of market demand.

29. Firm entry rates tend to be highest during the growth stage of an industry life cycle
because:
@ Pages and References: pp214-215
a. Shortage of production capacity keeps margins attractive
b. The propensity for entrepreneurs and venture capitalists to imitate one another
c. Growing legitimacy of the industry attracts resources to the industry
*d. Both (a) and (c).

30. The transition from the introduction to growth phase of the industry life cycle features:
@ Pages and References: p211
a. Increasing product differentiation
b. Declining innovation
c. Offshoring of production
*d. Product innovation giving way to process innovation

31. A dominant design is best described as:

@ Pages and References: p211
a. A technical standard
b. The product design chosen by the leading firm in an industry
*c. A common product architecture
d. The culmination of the process of commodification that accompanies industry evolution

32. Do all industries conform to the same life cycle patterns?

@ Pages and References: p213
a. The duration of the life cycle varies from industry to industry
b. The same stages exist, whatever the industry
c. The stages have tended to become shorter.
*d. All of the above

33. The evolution of the television receiver industry illustrates:

@ Pages and References: p213
a. The level of returns that an industry may generate
b. The phenomenon of consolidation
*c. Multiple revivals, based on radical new products
d. The maturity stage in the industry life cycle

34. A technical standards tends to emerge when:

@ Pages and References: p211
a. Economies of scale exist
b. An industry has converged around a dominant design
c. Economies of learning are present
*d. Network effects exist

35. A “proprietary technical standard” is one that:

@ Pages and References: p211
a. Is established by a public authority and is a “public good”
*b. Is embodied in patents or copyrights and owned by a single firm
c. Is owned by no one
d. Is specific to a particular industry

36. “Shakeout”--a period when many firms exit from an industry following a period of intense
competition—characterizes an industry’s transition from:
@ Pages and References: p215
a. Introduction to growth stage
*b. From growth to maturity
c. From maturity to decline
d. From product innovation to process innovation.
37. With the onset of the maturity stage, the number of firms in most industries:
@ Pages and References: p215
a. Remains relatively stable
*b. Decreases significantly, then tends to stabilize
c. Decreases significantly, and continues to do so
d. Decreases or increases, depending on the industry

38. .The term “competency trap”, refers to:

@ Pages and References: p218
a. The hubris that affects the senior managers of successful firms
b. The tendency for firms with competitive advantage based in one industry to fail when they
diversify into a new industry
*c The tendency for capabilities based on highly developed organizational routines to be a
source of inflexibility
d. The tendency for highly competent manager to be reluctant to change the strategies that
brought them their initial success.

39. According to institutional sociologists, the propensity for organizations to adopt similar
structures (“institutional isomorphism”) is primarily a result of
@ Pages and References: p218
a. Common key success factors within an industry
b. Bounded rationality
c. The complementarity among different managerial practices within firms’ “activity systems”
*d. The propensity of firms to imitate one another in order to gain legitimacy.

40. An organizational routine is:

@ Pages and References: pp217-218
*a. A stable, repeatable, pattern of coordinated activity among organizational members
b. A lower-level, operational capability (as opposed to a dynamic capability)
c. The resource needed to create a new capability
d. A new capability after it has been institutionalized within an organization

41. The field of “organizational ecology” studies:

@ Pages and References: p219
a. Companies’ contributions to environmental sustainability
*b. The evolution of the population of firms in an industry
c. The process of competition between different types of firm
d. Management practices that can best achieve the evolutionary adaptation of firms.

42. Which of the following is not a source of organizational inertia?

@ Pages and References: pp217-219
a. Limited search—the preference for exploitation over exploration
b. Organizational routines
c. Complementarities between the different activities of the firm
*d. The primacy of shareholder value maximization as a corporate goal..

43. When an industry is subject to technological change, the ability of new entrants to
displace incumbent firms will be increased by the following factors:
@ Pages and References: pp222-223
*a.. The extent to which the technological change is a source of architectural innovation
rather than component innovation
b. The technological change being competence enhancing rather than competence
destroying
c. Incumbent firms having close relationships with the industry’s largest customers
d. Incumbent firms being geographically dispersed.

44. The steam ship was invented in 1781, yet sailing ships remained dominant for ocean
transport for another 100 years. The main reason was that:
@ Pages and References: p224
a. Shipping company owners were resistant to new technology
*b. Sailing ships were faster and cheaper over most of the period
c. Complementary resources such as maintenance engineers and coaling stations were
scarce
d. Shipping company owners were unclear whether steam propulsion was a competence
enhancing or competence destroying change.

45. When a company organizes its research, new business development, and product
development activities into separate organizational units firm its operational and
administrative activities, this is an example of:
@ Pages and References: p225
a. Contextual ambidexterity
*b. Structural ambidexterity
c. Both contextual and structural ambidexterity
d. Neither contextual nor structural ambidexterity.

46. The main reason why a firm’s distinctive capabilities reflect the conditions that the firm
faced during the early years of its development is because:
@ Pages and References: p231
a. Most managers adhere to the old adage: “If it ain’t broke, don’t fix it”
b. Capabilities that develop early become embedded in a firm’s organizational culture ○
c. Exploitation tends to dominate exploration
d. New skills are difficult to acquire because of the propensity of senior organizational
members to hire and promote junior employees who resemble them.

47. The ability of firms such as BASF, Exxon, and General Electric to be industry leaders for
over a century indicates:
@ Pages and References: pp226-228
*a. Their capacity for adaptation to changes in their environment
b. The power of economies of scale to drive performance
c. Size is the key predictor of resource superiority
d. A firm’s age is an indicator for capabilities developed through learning.

Essay Questions

48. In what sense and through what mechanisms are demand growth and the production and
diffusion of knowledge the fundamental drivers of the evolution of an industry?

Answer: The demand dimension of a market is a main driver of its nature and size. At the early stages
of an industry, the rate of market penetration is low because customers are few, and products are
associated with low quality and high costs. Then, market penetration starts to take place and products
become standardized and prices fall. The next stage sees a slowing down in demand which
encompasses mostly market replacement. Finally, a new product replaces the existing one, frequently
proposing a better technology or a new business model.
On the knowledge dimension, product innovation gives birth to innovation. Over time, creation and
diffusion of technology transform the industry because different events are shaping it: emergence of
alternative technologies, convergence towards a dominant design, emergence of technological
standards, and radical vs. incremental innovations, etc. Demand and knowledge are two powerful forces
that transform the industry over time. Their impact is described in the industry life cycle model, through
four stages: introduction, growth, maturity, and decline.

49. To what extent is an industry life cycle pattern applicable to industries generally?

Answer: The industry life cycle is a general model applicable to all industries. However, the application
of such a model may vary depending on several factors. First, the duration of the four stages varies
depending on the industry. For example, life cycles last longer for heavy and infrastructure industries
than for consumer goods. Second, the nature of the industry impacts its life cycle. Some industries may
never enter a decline stage, because they provide customers with basic necessities, whereas others
may experience a rejuvenation stage (such as the motorcycle industry, and the TV manufacturing
industry).
Finally, geography entails different patterns of life cycle because the level of economic development of a
country influences the cycle of that industry. Overall, the applicability of this model must be modulated
regarding different variables, but does not eliminate its value for understanding the evolution of an
industry.

50. How are industry structure, competition, and key success factors related to the industry life cycle?

Answer: The two main factors impacting the evolution of an industry, demand and production/diffusion
of knowledge, have themselves a direct impact on these variables. The industry structure is impacted by
the nature of products, and, especially, the attribute of differentiation, which varies with time. Similarly,
differences in attractiveness lead to an evolution of the demographics (following the organizational
ecology theory), regarding the number of players and the degree of concentration. Globalization enters
into the picture when it benefits from the effects of international migration of production.
The nature and intensity of competition relate to the stage of the life cycle, following a non-price to price
competition shift, and a decrease in margins. Key success factors evolve as well, following the evolution
of the industry: first innovation, then financial resources, then manufacturing, then development, then
adaptation, then cost efficiency and, finally, exit from the industry.

51. When a technological change takes place in an industry, why do firms react differently?

Answer: Because the implications of the new technology are different depending on several variables.
First, the scope of the change (does it impact the existing technology at the component or at the
architectural level?) influences the propensity of incumbents to adopt the new technology. It is easier to
integrate this technology if it only requires a single process change or product feature change, whereas
a completely new reconfiguration necessitates more resources and strategic will. In industries such as
online grocery purchases and online banking traditional firms still dominate the industry because
technology impacts the component level only.
Second, the ownership of critical assets such as brand, customer relationship, and distribution
resources, can help to delay the adoption of new technologies and still allow a firm to prosper.
Third, the ability to change, to take risks, and the adaptability of incumbents are variables that will drive
a complete shift to the new technology, a partial development for the future, or its denial. The dilemma is
that incumbents generally listen to their customers, the majority of whom do not know about and do not
want the new technology at the beginning. Profits are generated around the old technology. But this
transitional situation should not hide the fact that the industry is going to make the shift in the future.
The central question boils down to: when and how should we shift to the new technology, and what are
the strategic implications of that shift?

52. How does the use of scenario analysis at Shell improve its strategic management?

Answer: Shell pioneered the use of scenarios as a basis for long term strategic planning. It operates in
an industry with a low-paced and long life cycle. Scenarios built by members of the organization, and by
outside experts integrate a broad scope of variables and target a relatively distant horizon (20 years
ahead). It is not a forecast, but a deeper and wider look at external influences on the industry, and a
coherent pattern of economic, political, and social development.
Three main scenarios were produced for the 2005 horizon: 1/ Low trust globalization (legalistic world
emphasizing security and efficiency), 2/ Open doors (a pragmatic world emphasizing security and
efficiency), and 3/ Flags (a dogmatic world focusing on security).
These scenarios are widely communicated, and form the basis for long term strategy discussions by
multiple levels of the organization. The central idea consists of the stimulation of the social and cognitive
processes through which managers think about the future. These scenarios are not detailed forecasts
about the possible futures, but a general framework within which strategic construction can take place. It
introduces some order into the gigantic overall uncertainty, and extracts its value as much from the
process itself as from the results.
References: p288-289

53. Does each industry have a different life cycle?

Answer: Yes, each industry has a specific pattern of evolution that can be described as its life cycle.
This life cycle depends on many variables which can be synthesized into two macro variables: the
evolution of demand, and the production and diffusion of knowledge, respectively the demand and the
supply sides.
The duration of the life cycle varies greatly across industries.
The nature of the industry also influences its life cycle. In fact, any variable that may influence the two
macro variables has an impact on an industry life cycle. It is very likely that some families of industries
can be identified, regrouping industries that share fundamental patterns in demand and in supply-related
variables. For example, food-related industries share some attributes, as well as the industries offering
products or services for entertainment. The variations intra family will be smaller than the variations
across families of industries.

54. What is scenario analysis?

Answer: The future is uncertain. Any firm needs to have some insight into what can happen in its
environment in order to be able to design accurate strategies. Ideally, a firm would like to know in
advance which probability is attached to each possible object in the future. Scenario analysis is a set of
techniques that help a firm or a group of people to look ahead and to envision what the future could be,
with the study of an “object”. This object can be an economic situation, the nature of the regulation in a
specific industry, the situation of the R&D in a country, the price of gas, etc. Scenario analysis
contributes by building possible scenarios of the future, which are possible configurations of the studied
object in the future, and by assigning a probability of occurrence to each.
Because the future is uncertain and no one knows how it will unfold, scenario analysis generally begins
with a study of the fundamental dimensions of the object which are combined to construct scenarios.
Models such as PESTEL are helpful for identifying the fundamental dimensions. This combination leads
to a large number of scenarios, this number being a function of the number of fundamental dimensions
and their scales. These scenarios are examined, and only the most likely or extreme or average are
selected. They are used to generate discussion, to build strategies, to test the robustness of strategies
regarding the scenario that emerges, and to identify key strategic zones of interest. Several parameters
must be defined in any scenario analysis: the object, the horizon of study, and the level of precision.

55. In an industry populated with few players, is it possible for one player to trigger a radical change that
may shift the entire industry position within its life cycle?

Answer: Such a situation is possible. The dominant player has more power and generally more
resources than the smaller players in the industry. It is also more likely to be a victim of the “innovator
dilemma” which, on the one hand, keeps it from switching to the new technology, and, on the other
hand, pushes it to switch because of the future gains in the industry.
If a dominant player is not obliged to change due to pressure from rivals, then it is in a good situation to
determine its own path of change. It will introduce the new technology at the best moment for its
strategy, waiting long enough to recoup its investments, gain returns on the first technology, and have
enough time to make the change, but not so long that it allows the introduction of a new technology by a
rival.
Microsoft, with the introduction of the different versions of its software, illustrates that behavior, as well
as Intel with its microprocessors. Boeing and Airbus, the two dominant players in the aircraft industry,
have headed in different strategic directions with the Dreamliner and the A380, both major innovations.
But, in most cases, the paralyzing situation of the innovator dilemma leads to a shift driven by a
challenger in the industry.

56. How can firms avoid falling into the “competency trap”?

Answer: This phenomenon can be described as a trap where firms owning and exploiting valuable
capabilities may fail. If the environment requires a change that conflicts with the existing capabilities and
a significant shift to a different type of capabilities or, worse, to a different business model, then existing
capabilities may act as brakes or obstacles which prevent that change.
The competency trap is more likely to occur if the firm has been very successful as a result of having
these capabilities, over a long period of time, and if these capabilities are sophisticated, unique, and
few. The culture of a firm also plays a role, especially the tolerance for ambiguity and the propensity to
change. Ways to avoid this trap include a strong will at the top level to make painful decisions if
necessary, an accurate system for scanning the environment and detecting new technologies or other
macro trends, and a pertinent system to assess the need to shift to another technology or business
model. Integrating flexibility, as the most important attribute of strategic management, is key, as is the
cultural dimension of permanent change as part of Nature.