Innovation opportunities presented by changes in industry and market structures

John W Lewis's picture
Chat Date: 
Thu, Feb 25, 2016

From time to time, the structures of markets and whole industries change rapidly. However, there are usually long periods of stability between those changes. So when they happen many people and organizations are taken by surprise. Identifying and responding effectively and in good time to major changes of this kind is essential to the survival of any organization.

This is the fourth of seven episodes in our series of innochat discussions on Peter Drucker's sources of opportunity for innovation, identified in his book "Innovation and Entrepreneurhip" first published in 1985.

We are discussing these sources in sequence in increasing reliability and predictability of the opportunities that they present. The previous three sources have been areas external to an organization and indistry. We are now moving into the remaining four which are closer to home, being internal to organizations or their industries.

Major issues

Drucker describes three main issues about the innovation opportunities presented by changes in market and industry structures:

  1. understanding the nature of the changes
  2. responding effectively to the changes when they occur
  3. detecting impending changes in good time.

The nature of changes

Industry and market structures tend to remain constant for long periods then to change abruptly. During these periods, many people are lulled into believing that these strcutures are permanent.

Drucker's main point is that, in reality, they are not permanent and are much more brittle than most people believe. So, when circumstances change, the structure of market and industries can change easily and quickly.
When this happens everyone in the industry is affected and those who do not to respond effectively are likely to experience a substantial reduction in their market share which is very difficult to recover when a new stable era after the change has settled.

He uses the example of the automobile industry, which has undergone several major changes. Around 1900 the market expanded beyond its original narrow segment of the most wealthy, and there was suddenly a much higher growth rate. Rolls Royce, Ford, General Motors, and Fiat all responded wirh quite different strategies, all of which succeeded. However there were many other manufacturers at that time, most of which remained small, could not compete, and did not survive into the new era.

The next major upheaval was in the period 1960-1980 when the automobile market moved from being organized along national lines to being global. Several Japanese manufacturee suddenly become world players and, although American manufacturers initially suffered heavily, most of them eventually orgniased themselves and become global players along with several major manufacturers from other countries. In the end, many prospered including: Ford, General Motors, Toyota, Honda, Mercedes, Volkswagen.

As in the previous transition, this was despite each successful manufacturer having formulated a different strategy. Some other large national manufactures fared much less well: Chrysler, British Leyland, Peugeot performed poorly because they did not have a coherent response to the globalisation of the industry.

At the same time, some smaller manufacturers saw the opportunity to become global and responded effectively. Drucker identifies Volvo, BMW, and Porsche as examples. I'd add others including SAAB, Audi, Renault, Citroen, and Jaguar.

Of course, Drucker's book was published in 1985 and a lot has happened since then. Most notably, in the last decade or so, the automobile industry has seen very large changes in the natre of power units and transmissions. Before that time there had been a variety of attempts with various combinations of clutches or not, fluid flywheels or not, and manual or automatic gearboxes, notably from Honda, Porsche and, more recently, Audi as well as, some time ago, as more ambitious continuously variable transmission from Daf. But the more recent radical developments have produced hybrid power units, most notably in the Toyota Prius and some others, and also all electric units most notably from Tesla and, now, from many others.

Tesla in particular has not only pioneered dramatically new capabilities and performance, it has also rolled out a substantial supporting infrastructure. These developments have completely changed the game for the foreseeable future for all automobile manufacturers. As these development enter the mainstream, every significant automobile manufacturer must have electric cars in its range, or risk missing out completely. Also the extensive structurual changes are not only in the customer market, but also in the supplier market, with power units and drive trains being supplied between manufacturers. For exapmle Tesla provides the power units for Mercedes electric vehicles.

Drucker also identified other industries and markets in which changes in the structure have generated opportunities, including:

  • financial securities
  • health services infrastructure, and
  • telephony services

And, of course, since the publication of his book, there have been enormous changes in telephony with the arrival of mobile telphones, associated developments in virtual networks, and the provision of Internet connection and software applciations.

Responding to changes

In particular, he points out that in any industry in which rapid change occurs, it is important for organisations to respond coherently with a strategy for achieving their purpose in the changed context.

These changes in the structure of markets and industries were not brought about by any individual orgnaization, and they could not have been. These are phenomena of whole industires, to which organizations must respond in their own distinctive way, or lose out badly. The changes result from tipping points in the relative size of industries and their markets. These points will inevitably be reached much sooner if an industry is growing rapidly. They also arise from changes in the relationship with and among customers and suppliers in the industry. And they sometimes arise due to technology, not simply the technology itself, but rather its applicability, often in new combinations and permutations.

He also emphasises the importance of the simplicity of the response. To address this form of opportunity by engaging in clever new and radical developments is largely pointless and unnecessarily risky. Effective response requires broad and thoughtful observation, understanding of the nature of the change, and application of intelligence to respond appropriately.

Indicators of impending change

Drucker identifies four main indicators of impending change in the structure of an indistry and market, which enable organisation to predict changes and to prepare to respond coherently at the appropriate time. These are:

  • rapid growth
  • changes in the perception of the market, its definition and segmentation
  • the fracturing of industries
  • changes in the way that business is done.

Drucker summaries overall that the main reasons for large organisations fail to survive the transition from one era to another are two fold:

  • firstly not seeing the change coming or even recognising that it has happened until far too late;
  • secondly, responding with a clever strategy based in some contrived view of the changing reality.

Also, he identifies the most important aspects of the repsonse of major organisation to be to well aware of the reality of what is happening including seeing it coming it good time, and responding with a simple effective strategy based on that reality which is cohererently implemented. He emphasises that the actual strategy chosen is much less important, because the changed reality opens up substantial numbers of opportunities, but it must be simple and sensible in the new circumstances.

Questions

Let's discuss the opportunities for innovation presented by changes in the structure of markets and industries, during #innochat on Twitter starting at 12pm Eastern time Thursday February 25th, 2016, based on the following questions:

  1. What are the major transitions in your industry over the last century?
  2. Which organisations have been adept at surviving transitions between eras, and which have not?
  3. Which types of strategies have been effective in responding to those transitions?
  4. What indicators have been, or would have been, most useful in detecting impending changes?
  5. Which industries and markets are currently experiencing the greatest structural changes?
  6. What indications are there of the next transition in your, or any other, industry?

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