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USC / Business / BUAD 497 / What are the stages of industry life cycle?

What are the stages of industry life cycle?

What are the stages of industry life cycle?


School: University of Southern California
Department: Business
Course: Strategic Managment
Professor: Michael mische
Term: Fall 2016
Tags: business, Management, and strategy
Cost: 50
Name: BUAD 497 Final Study Guide
Description: These notes cover the cases and concepts that will be on the final exam. If you have any questions, feel free to email me at elaurien@usc.edu
Uploaded: 12/06/2016
13 Pages 70 Views 13 Unlocks

Final Study Guide

What are the stages of industry life cycle?


Walmart China to India (with intro of regular Walmart Case) 

∙ Porter Model

∙ Marketplace

∙ Mobility barrier early 1900’s

∙ Breaks off before the prestige (high price, high image) stores

∙ Built on discrimination

∙ Had to be white and affluent to shop at these stores

∙ Woolworth’s and Grant’s were the “every person” stores

∙ After Sears

∙ Catalogue is blind to social class, ethnicity, etc. so everyone can shop there ∙ Entrants

∙ Consolidators—Woolworth’s and W.T. Grant

What is the difference between the supply chain and the value chain?

Don't forget about the age old question of Clay minerals are classified as what?

∙ Sears—doesn’t consider pricing, looks at distribution and selection

∙ All stores are brick and mortar so Sears introduces the catalogue

∙ Allows Sears to circumvent the issue of the physical location

∙ Circumvent the pricing barriers by moving to a standard price

∙ Prices are standard across the country

∙ Sears becomes the first store with low price, higher image (still not great image) ∙ Sears creates a private label

∙ Open their own profit sharing in 1916—first time employees shared profits ∙ Consolidation of power—Sears consolidates the power by selling so many  different categories, including insurance  

What are michael porter's five forces?

Don't forget about the age old question of What are barrier islands, and why are they important?

∙ Had their own credit card so you could use their credit to buy their products ∙ 1945 Sears sells over a billion dollars

∙ 1970’s mom and pop stores are wiped out

∙ Kmart enters this space

∙ Sears attracts two other competitors

∙ Ward’s and Penny’s also start to compete on the catalogue level

∙ Kmart—enters the market in the 1970’s with low price, low image.  

∙ Competes on price with a good selection  

∙ Competes on economies of scale with huge volume

∙ Distribution was brick and mortar

∙ Advertising—newspaper

∙ Introduces the term off-price

∙ Pricing off of and lower than the catalogue

∙ Blue plate special—whatever you had yesterday you mix together today

∙ Surplus food, loss leader, low price food you could buy anywhere We also discuss several other topics like Give an example of microeconomics.

∙ At Kmart—blue light special

∙ Took a shopping cart with a blue light on it and put specific items on sale  to drive volume

∙ Opened 271 stores in 1976

∙ Have a faster turnover than Sears

∙ Even though average price per item is cheaper, their sales make up for it so their  sales per sq. foot is higher than Sears

∙ Kmart starts to put pressure on the low price, high image sector in the 1980’s ∙ Walmart—began opening up stores 7 times faster than Kmart

∙ Everyday Low Price (EDLP)—higher than discount and low , lower price than  average and high We also discuss several other topics like What is a watershed?

∙ Keep quality up with EDLP strategy

∙ Used military installations as the base for his customers

∙ Focuses on rural areas

∙ Their strategy was to go where the enemy wasn’t

∙ They created, then expanded

∙ Now they’re almost entirely defensive

∙ Costco is threatening

∙ Target—slightly higher image, slightly higher price

∙ Suppliers—the stores

∙ Basis of competition if you’re a store is through distribution and pricing with a factor of  selection

∙ Buyers—us

∙ We have very low power in this market

∙ Only power is whether we can buy or not

∙ Substitutes

∙ Big Themes 

∙ Went where the competition wasn’t

∙ Competes on economies of scale

∙ Have to have high volume in stores

∙ Bring customers in through


∙ Broad selection

∙ Worked in the US but failed in China If you want to learn more check out What are eva hesse known works?

∙ Use PESTEL to analyze China

∙ Political

∙ Still a communist country

∙ Very monolithic political system that does understand economics

∙ Creates a political system that invites foreign investment (because it can’t afford to  build infrastructure itself)

∙ Jurisdictionally oriented—you pick where you want to go  

∙ Economy

∙ Economy has been in transition for about thirty years

∙ Largely illiterate and agrarian to more educated

∙ Outside of the city is still impoverished

∙ Wealth in the country comes from  

∙ The cities

∙ Foreign investment

∙ Bending the currency value

∙ Society

∙ Culturally people were trained to want to shop at smaller stores

∙ Freshness was a concern—thought Walmart wouldn’t have fresh product ∙ Selection—preferred more local product vs international brand

∙ How do most people live?

∙ Chinese want an even lower price than in US

∙ Don’t buy in bulk like US does—like small parcels

∙ This is because the Chinese don’t have a lot of cars—have to be able to get  everything home Don't forget about the age old question of What is the total ionic equation?

∙ US wants a wide selection you can get everything at one shop, China likes specialty  shops (one shop for each category focus)

∙ US is transaction oriented—we want speed and ease. China uses shopping as a  social experience

∙ China allows price negotiation as a cultural tradition

∙ Walmart model—

∙ Size

∙ Speed

∙ Infrastructure

∙ Technology

∙ Habits

∙ The Chinese experience doesn’t fit with the Walmart model

∙ Technical infrastructure

∙ Lack of roads

∙ Don’t have the same data communication analysis

∙ China has the most people using the internet of any country, but ranks 88th in the  number of transactions occurring over the internet

∙ Environment

∙ Favorable to business

∙ Legislative

∙ China is friendly toward foreign investment

∙ Communist government can nationalize the business any time they want which makes  this risky

∙ Result—the Walmart business model doesn’t fit into the culture of the company ∙ Understood political system well but didn’t understand the uniqueness of Chinese  shopping

∙ Major competitor entered the market with a model that was more appreciative of the  Chinese methodology

Walmart in India

∙ Does India have better infrastructure than China?

∙ Not really, has a lot of railroads but other than that infrastructure is still low ∙ Have a lot of people

∙ What did Walmart miss in India?

∙ Indians don’t have cars

∙ Purchasing power is lower than China

∙ Still have a caste system

∙ Poverty is higher

∙ Politics in India

∙ Lack of political awareness hurt Walmart 

∙ Had to pay 100 million just to get the license to go into the market

∙ Each providence/state required this money

∙ Walmart was only looking at the number of people in the market. Felt invincible  because of their volume and ignored other factors

∙ Need to understand the culture of a market before you enter it 

∙ Walmart had a lack of due diligence  

∙ Focused only on population

∙ Result—had to abandon because even though they understood the customer better, the 100  million barrier to entry was too high

∙ If you are entering a foreign market, what technique might you use to enter it? ∙ PESTEL

US Steel 

∙ Five key questions of industry analysis

o How is the industry defined?

▪ We’re in the manufacturing industry—capital intensive

▪ Producing a commodity

∙ Commodities are abundant and the buyer has the power

▪ It’s resource intensive

∙ Water

∙ Ore

∙ Coal

▪ Carbon steel and stainless steel

∙ Stainless doesn’t rust, carbon will

o What boundaries define the industry?

▪ Integrated manufacturers—big steel mills

∙ Trade

∙ Construction

∙ Defense

▪ Mini-mills—take steel that’s already been made, melt it and reconstitute it ∙ Residential construction

∙ Commercial construction

∙ Automotive

▪ Fabricators

∙ Specialty

∙ Mass

▪ Industry boundaries are often different than the market boundaries

o How does the industry behave and interact with ecology?

▪ Capital intensive—very expensive to run a steel plant

▪ Defense spending effects the steel industry—spend more on defense, more  money goes into the steel industry

▪ Resources drive costs

▪ Buyer drives prices

▪ Boundaries (markets) drive behavior

▪ Have to watch your supply costs and production costs

▪ Vertical integration in this industry gives you a lot of control of the factors of  production

o What drives industry behavior?

▪ Highly cyclical industry

▪ Macroeconomic events

▪ Clear demand

o How fast does the industry change?

∙ Big themes 

o The impact of labor unions—creates limitations in strategy

o Vertical integration—what made the industry mighty was also its downfall because it’s  hard to disaggregate that integration

▪ Can’t sell of the factories and do other things with them

o Chronic overcapacity is a signal for industry consolidation because the overcapacities  are inefficiencies

Ready to Eat 

∙ Competitive Parity  

∙ Value chain—at each point in the process (below) value is being created ∙ Economies of Scale

∙ Extension of markets

∙ Creation

∙ Strategic positioning through branding

∙ Lifestyle/product differentiation

∙ Create advantage through branding—the brand adds economic value and  draws in loyal customers

∙ Basic process

∙ Farmer????Processor????Distributor????Marketing—can add huge value if done  correctly????Grocer (at this point the product is a commodity) ????Product (value is  really created here)????Brand????Sales

∙ Attractiveness

∙ Barriers to entry are relatively low, which caused a lot of entry into the industry  which then creates turbulence

∙ The cereal industry created a market through innovation

∙ Huge return on investment with economies of scale

∙ Competition

∙ Oligopoly—highly concentrated, the big three have pricing power

∙ Low but expensive barriers to entry—it takes a lot of capital to begin producing ∙ Differentiation

∙ Cereals differentiate a vastly similar product through advertising and promotions ∙ Competitive Parity—when a farmer is willing to take a little less for a long term contract  or the company is willing to pay a little more for a better deal in the long term ∙ The certainty of getting paid is important to the farmer because the farmer has a  commodity

∙ Value Creation

∙ First value—the farmer with the commodity

∙ More value can be added based on organic/not organic gmo/non-gmo, etc. ∙ Second value—producer with technology, formula, and creates the product ∙ Plant can cost 100 million, production costs 300, marketing can cost 125 million ∙ Highly capital intensive which is why the producers capitalize on economies of  scale

∙ Segment Saturation

∙ Different segments—granola, organic, bran, etc—created an opportunity for smaller  companies to enter the market

∙ Big companies can easily go in and take over the segment, creating a barrier to entry ∙ Marketing—creates the value because without increased perceptions of why one brand  is superior, the products are very similar.  

∙ Private label—if you have a private label, bargaining power of the grocer goes up and  bargaining power of the producer goes down a little bit

∙ Can make good money because the price is lower and the product is the same. Often  run promotions an capture market

Coke vs. Pepsi 

∙ Coke vs Pepsi Case

∙ We want to understand profit migration

∙ Concentrators???? Bottlers ???? Distributors???? Marketing???? Retail???? Consumer ∙ Founding:

∙ No refrigeration at the time

∙ Beverage of choice at the time was alcoholic

∙ This was because it was safer to drink than water

∙ 1880’s distribution

∙ Small drugstores

∙ Bars

∙ Started locally in the south

∙ Coke followed the US army around and expanded in this way

∙ This encourages spirit and increased sales

∙ Coke had exclusivity, Pepsi competed on price

∙ Capital Intensity

∙ Bottler

∙ Make money through:

∙ Economies of scale

∙ Mega volumes

∙ Highly automated processes—this works with homogeneous products

∙ Focuses on:

∙ Speed

∙ Efficiency

∙ Quality

∙ Coke and Pepsi Co-opetition

∙ Compete on branding/marketing

∙ Power goes to the concentrator and the consumer

∙ Branding doesn’t move economies

∙ Retailer is just another distributor now

∙ The bottler is the most vulnerable part of this value chain. This is because the industry  competes on cost and the bottler is extremely capital intensive

∙ The current strategy for this industry is to capture the marketplace (Coke wants to convince  Pepsi drinkers to convert and vice versa)


∙ Airlines

∙ Looking for low fuel cost

∙ Have to remain safe, and reliable

∙ Make money based on…

∙ Desirable routes

∙ Travelling at capacity (selling the correct number of seats as to fly full)

∙ Having a fast turnaround—30-40 minutes on average, waiting planes burn fuel  and waste money

∙ Boeing vs. Airbus

∙ Boeing replaced hydronic system with controls that are electronically activated ∙ Airbus—flies with more computer intervention than the Boeing planes

∙ Eats into market share for Boeing and poses a threat

∙ Boeing Competition—transformational strategy

∙ Airplanes are built out of carbon instead of aluminum

∙ Fly higher and faster at lower cost because the carbon frame is lighter than most  aluminum frames

∙ Shaped the wing differently and curved it to change the way it flies ∙ Airbus Competition—outsources to compete on cost


∙ History of Technology

∙ 1940’s

∙ First computer at the University of Pennsylvania

∙ Used as the first flight simulator for Navy pilots

∙ 1950’s

∙ IBM embraces the computer

∙ Series 3—primitive computer

∙ 1953 IBM launched the 360 project

∙ 1960’s

∙ 360 was launched—what current computers and cell phones are based on ∙ Very early apps

∙ Materials resource planning—today enterprise resource planning

∙ 1970’s

∙ IBM launched 370 and 30xx

∙ 1975 the PC came about

∙ 1977 Apple began to show up

∙ Wozniak brings his computer to HP and they turn it down

∙ After HP turns down, Apple is launched

∙ Users are completely dependent on technical people

∙ 1979—people can begin to interact with their computers

∙ 1980’s

∙ 1981 IBM PC—this signified the acceleration of technology

∙ Everything before this was a mainframe

∙ IBM’s marketing strategy—had a series of computers with greater and greater  power. Each line had its own operating system

∙ Interacting with the OS are the apps

∙ As a company grew, it would trade up to the next level of computer. This  changed all the apps and operating systems

∙ Customers begin to realize that personal computers can reduce stress on  mainframes—led IBM to introduce desktops

∙ Apple in 1981

∙ When IBM created the dual purpose desktop machine, it legitimized personal  computing

∙ Up until this time, personal computing was thought of as a toy

∙ Concurrently, Steve Jobs was working on Macintosh

∙ Jobs, Bill Gates got the idea from Xerox PARC (Palo Alto Research Center)

∙ Xerox had something that looked like a mouse, an operating system, and a  special feature that had icons for applications that you could click on instead  

of entering a command

∙ 1984

∙ Directly attacks an established competitor that had tremendous mobility and entry  barriers in place

∙ Apple was not trying to capture market space, they wanted to create it

∙ Apple Macintosh

∙ For the first time, users could point and click, use different fonts, etc.

∙ Became very easy to use, didn’t have to have technological training

∙ 1984 Commercial

∙ Apple released 1984 commercial to break the status quo—going past IBM  

∙ The girl represents Apple—using a woman sent a signal of power and authority ∙ The audience in the commercial is us, the consumer

∙ 2000’s

∙ 2007—iPhone introduced

∙ Everything after this has been incremental

∙ What happened between 1977 and 1981?

∙ Acceleration of technology  

∙ When Jobs was forced out, Apple adopted a transactional strategy instead of transformational ∙ Apple today—mature company with incremental changes

∙ Strategy has been transformational, had trouble switching to incremental  

∙ Worried about changes with trade agreement with China

∙ Disruptive tech always trumps incremental strategy if it has commercial value ∙ Big question: What’s the next disruptive technology?


∙ Strategy—putting yourself in a better position than the one you’re in and/or creating  competitive economic dominance in the market you’re in

∙ Transformational—disruptive, redefining the industry. Significantly shifting—going from a  typewriter to a PC. These represent huge episodic shifts

∙ Example—Disney, Apple, Boeing

∙ Transactional—Porter tells us this, where we might be able to improve

∙ Situational—a turnaround

∙ Accidental

∙ Strategic intent 

∙ Create

∙ Capture

∙ Expand/Extend

∙ Defend

∙ Withdraw

∙ Bargaining powers 

∙ If there are more substitutes, the consumer has more bargaining power because they  can go to a competitor

∙ Greater number of competitors competing for a smaller market, greater rivalry ∙ More customers with few options gives us as the customer less bargaining power ∙ If you’re an exclusive producer, you have more control

∙ Could be brand, geographic, intellectual content, etc.

∙ If we are buying a commodity, we have more power and suppliers compete on cost ∙ Water

∙ Steel

∙ Barriers to entry—formed during the birth phase

∙ Barriers to exit—happen in the decline phase, exit may not be allowed by law (unions) or  may not be practical

∙ Mobility barriers 

∙ Harley created mobility barriers with their brand

∙ Levanthal tried to become a big 8 accounting firm but faced mobility barriers ∙ Walmart faced mobility barriers based on prestige and high image, high price stores ∙ Industry concentration and consolidation 

∙ Significant surplus capacity always creates a situation for consolidation ∙ Saw this in the US steel case—as demand for steel went down, the giant mills were  operating at a low utilization rate

∙ Value chain vs. supply chain—supply chain supplies components and is a resource of the  firm. The value chain takes those components and puts them together to create value. Value is added at each point in the chain

∙ Ready to eat—getting grain is part of the supply chain but all of the processing adds  value. Box is part of the supply chain, box w/ product has value

∙ Outsourcing 

∙ Can be more expedient  

∙ Can be competency based—buy the competency

∙ Can be cheaper—don’t incur as many burdens because they’re spread out with the  outsourcer

∙ Attractiveness—how attractive is an industry to enter?

∙ Cost of entry

∙ Capital intensity

∙ Competitive dynamics

∙ Rivalries

∙ Test—strategically, are you better off if you enter the market?

∙ Causality—have to link causality to your intent (creating, expanding, defending) ∙ Provide a set of filters to assess whether to enter an industry or buy a company ▪ How attractive are the customers?

▪ Will the customers stick with us?

▪ What are the buyer values?

▪ What factors indicate “attractiveness”?

▪ What is the relationship between attractiveness and industry structure? ∙ What makes an industry attractive?

o High potential

o Low barriers to entry

∙ Dual Advantage—the ability to create multiple advantages

∙ Boeing—creates the advantage for itself by having a revolutionary aircraft, and by  having that aircraft create an advantage for those who buy the airplane (the airlines).  Flies at a higher altitude and burns less fuel.  

∙ Economies of Scale—the greater the output, the lower the cost because you distribute your  fixed and variable costs over more and more costs until marginal cost = marginal revenue.  Large scale production, large scale distribution.

∙ Cereal industry

∙ Soft drink industry

∙ Essential for competing on price—without it your costs are too high

∙ First mover advantage—it’s fleeting. You might have first mover advantage but unless  there’s real exclusivity everyone else will flood into the market and compete against you ∙ Pharmaceutical companies

∙ Due Diligence—associated with m + a but also with market entry

∙ How attractive is the market, what’s the due diligence associated

∙ Have to understand the operational implications of a merger

∙ Vertical integration—the ownership of the resources and capabilities of the firm throughout  the value chain

∙ Allows you complete control over resources and gives you power, but the structure can  be very hard to break apart

∙ Vertical integration can become a problem because if you aren’t optimizing your  structure you have inherently high fixed costs—someone has to take care of the land,  etc.

∙ US Steel 

∙ Controlled ore, mining, water

∙ Tried to assert control over the labor which backfired when the union took control ∙ Companies become vertically integrated by owning multiple factors of production ∙ If you are vertically integrated, you can control price, costs, quality and quantity ∙ Often cannot control labor

∙ Disaggregation—opposite of vertical integration

∙ Boeing case 

∙ Capacity Utilization—the lower the capacity utilized, the less efficient the firm is ∙ You aren’t achieving true economies of scale

∙ Strategically, you want good economies of scale. Think about adding capacity in a  modular sense so you don’t add too much at once

∙ Hard to grow into capacity because the technology changes so quickly ∙ Capital intensity—the amount of capital it requires to compete in an industry

∙ Capital to enter (build a plant), and remain (sustain a plant)

∙ US steel—migrated to mini mills

∙ Apple—expensive to build and introduce a new computer

∙ High vs low differentiation 

∙ High—

∙ Apple, Disney

∙ Buy based on exclusivity and performance

∙ Low—presence of a private label in the cereal industry creates low differentiation ∙ If a product has low differentiation, you buy based on price

∙ Differentiation among product lines becomes highly limited in the maturity phase of  a life cycle

∙ Private labels—change level of differentiation

∙ Can help create economies of scale if you make products for multiple labels ∙ Water can make beer and coke and bottled water—complementary products—can be  used to absorb surplus capacity and can extend the product line

∙ Coke, cherry coke, vanilla coke are all complementary products

∙ Dominant design—generally associated with innovation and industry life cycle, emerges at  the end of the birth phase and leads to the growth phase

∙ After dominant design emerges, infrastructure will be built and established players will  begin to participate more

∙ Industry Life Cycle—birth, growth, maturity, decline, death

∙ Early in an industry, birth phase is highly turbulent. Lot of people entering and exiting  the industry. Most firms undercapitalized.

∙ Something pops out to be the dominant design that everyone gravitates to ∙ Signals the end of the birth phase and the beginning of the growth phase ∙ When the established industry players begin to flood the market

∙ Emphasis placed on differentiation and scaling up

∙ When growth slows, move into maturity—less emphasis on differentiation,  more emphasis on cost reduction and incremental improvement

∙ Decline phase—no R+D, all reduction of cost. Go after vendors, supply chain, cut  out overtime, cut employee benefits. Any innovation is incremental

∙ Death—first primary responsibility is to the government, followed by the  secured creditors, then general creditors, then shareholders in the order of  preference of preferred shareholders, then holders of common stock.

∙ Porter’s five forces

Rivalry/intensity—industry dynamics

∙ Resources and capability 

∙ You have x resources and y capabilities, forms the basis of your strategy and the  parameters you have to operate within

∙ Disney—capabilities in automated animation were very low

∙ Have to either acquire and develop, or emulate


∙ Culture

∙ Administrative

∙ Geography  

∙ Economics


∙ Political

∙ Economic

∙ Social

∙ Technology

∙ Legal

∙ Environmental

∙ Not a framework—tells you if you’re going to enter a market how to evaluate the  move  

∙ Think Walmart going into China

∙ Can think about the Japanese coming to the US to sell motorcycles

∙ Sun Tzu—Go vs. Chess 

∙ Vietnam—north Vietnamese used Go, US used chess strategy

∙ Walmart used Go over chess by going around the competition—started business in rural  area

∙ Didn’t work in China or India

∙ Too many governmental regulations

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