ENTERPRISE MANAGEMENT AND

EVOLUTION

for the M.Sc. in Business Administration

Prof. Roberto Cafferata University of Rome “Tor Vergata” October, 2012

INTRODUCTION

CHARLES DARWIN’S LEGACY

EVOLUTION AND SOCIAL

DARWINISM

- Organisms and organizations: similarities and

dissimilarities between them

- there are some principles or “rules which determine

evolution” within the “marvellous world” in which

we live

- we can argue there is a Darwinian interpretation of the

evolution of the firm

PRINCIPLES OF DARWINIAN

EVOLUTION

- exponential growth of the number of species of (living)

organisms within the natural system

- principle of variation � differentiation among

organizations

(N.B: evolution is slow, gradual and random)

- principle of natural selection � survival of the fittest!

- principle of heredity

(N.B: the external environment has a minor role in influencing

evolution)

- principle of the struggle for survival

marvellous fit (selecting in processes)

destruction (selecting out processes)

THE EVOLUTION OF THE FIRM

- The firm as the “object” of evolution (à la Darwin, 1859):

internal and external forces do matter, the firm is a locus of

interaction between them

- The firm as the “subject” and “object” of evolution (à la

Lewontin, 1983): forces are important, but the synergies

between them, and the firm as an entity also matter

EVOLUTION AND ADAPTATION OF THE FIRM TO THE ENVIRONMENT

(according to different Darwinist views)

Classical Darwinism

- Main thesis: The organism is the object of evolution and natural selection

- “The organism is molded and shaped to fit into a pre-

existent niche” (Lewontin, 1983, p.74) - “Adaptation reflects this point of view” (Supra). The

adaptation of the organism/organization to the environment is a “problem” and this problem is seeking the most effective solution � “those who adapt best displace the rest” (Henderson, 1989)

Contemporary Unorthodox Darwinism

- Main thesis: The organism is both the object and subject of evolution and natural selection

- “The organism and the environment are not actually

separately determined. The environment is not a structure, that is imposed on living beings from the outside, but is, in fact, a creation of those beings” (Lewontin, 1983, p.75)

- “The metaphor of adaptation must therefore be replaced by

one of construction” (Lewontin, 1983, p. 78)

- Adaptation is “dialectical” (Benson, 1977; Cafferata, 2009). It is also circular in the organisms’ historical process. It is circular in the sense that the organisms and the environment co-evolve in the historical process

THE ENTERPRISE SYSTEM AND THE COUNTRY-SYSTEM

• In a task environment, the enterprise’s competitiveness is influenced not only by market forces, but also by the conditions of the general environment, i.e. by the effectiveness and efficiency of the supply of goods and services on the part of other public or private organizations, as well as by the culture, education structures and material infrastructure of the country-system.

• In their turn, the organizational and economic conditions of the

enterprises and the competitive skills acquired by en- terprises during their evolutionary cycle not only influence the task environment, but also affect the general environ-ment, contributing to determine the country-system’s state of welfare.

Enterprise’s → Competitive → Task → “Country-System” systemic skills environment (general environment) nature

Enterprises’ systemic Welfare conditions conditions and competitive of the “country-system” skills

(a)

(b)

(a)

(b)

FIRST PART

BIRTH AND EXTINCTION OF ENTERPRISES

Index

• Birth, natural selection and competitive selection

of enterprises. • Competition. • Success, advantage, excellence.

BIRTH, NATURAL SELECTION AND

COMPETITIVE SELECTION OF ENTERPRISES

NATURAL SELECTION AND COMPETITIVE SELECTION OF

ENTERPRISES

0 1 2 3 4 5 n

Birth

Extinction

Natural selection Competitive selection

t

∞

Birth • At the zero point enterprises are born. Not all of them are

destined to last (to survive). Enterprises’ infant mortality is higher than that of human beings.

• In Europe, only one out of three today’s newborn enterprises

is expected to overcome the first 3-4 years of life.

Natural selection The first 3-4 years of life are critical → the meta-goal of the en-terprise’s owner is survival. Therefore it is necessary:

i) to prevent the enterprise’s crisis and infant mortality; ii) to come out the enterprise’s childhood in equilibrium condi-

tions (economic, financial, organizational conditions).

Competitive selection

After achieving short-term survival, the enterprise’s owner or controlling shareholder can aim at different alternative meta-goals. For example, he can:

i) seize the opportunities for size growth and – if it is neces-sary – change the firm’s organizational structure and legal status;

ii) make choices of profitability maximization, keeping the size achieved, in a situation of independence from other enter-prises;

iii) promote technological and organizational change, tempo-rarily sacrificing growth;

iv) collaborate with other enterprises through alliances and/or networks;

v) sell the firm to other enterprises or simply close down.

N.B.: i), ii), iii), iv) can alternate during the firm’s life cycle.

CHARACTERISTICS OF THE FIRST YEARS OF LIFE (I)

• Strength of the “rational” decision of entering the business. • Weakness of being “new” (liability of newness). • Temptation to die of “rapid success” (death by success), be-

cause one wants to turn the profit from his own activity into cash and enjoy it immediately.

CHARACTERISTICS OF THE FIRST YEARS OF LIFE (II)

Have you survived?

• Beware of acting under “emotional pressures” (for example: proposals of speculative re-use of the first profits).

• Beware of abandoning the core business to “diversify” your

activity. • Beware of “wasting” knowledge/experience which you have

methodically acquired. • Since those who make a profit during a period of time are

those who spend one Euro less than that they gain, it is not strictly necessary to maximize sales; it is better to be “cost-conscious”.

N.B.: The very successful entrepreneurs are those men/women that are not afraid of early dying!

DEATH RISK OF THE ENTERPRISE

d.r.

0 1 2 3 4 n t

• Death risk decreases in the course of time. • The risk curve is a “learning” curve.

COMPETITION

PRICE AND NON-PRICE FACTORS OF COMPETITION

• The enterprise considered as a system is a competitive force which comes into play and competes with other systems (competitive forces) in both the task environment (sector of economic activity) and the general environment.

• The enterprise competes not only through the price factor, but also through factors which are different from price (i.e. quality, services), acquired exogenously and/or created endogenously -thanks in particular to the internal capabilities that it develops in its parts and in its participants (not only shareholders, but also managers and workers).

COMPETITIVE SKILLS

• Apart from being a system, corporate competitiveness derives from the resources – which are also defined as material and immaterial competences (C.K. Prahalad, G. Hamel 1990) – acquired or generated by themselves during the firm’s life cycle. (For example: patented know how, electronic compo-nents of a product, an original turbine or engine, the high specialization of manual workers are “competences”.)

• However, we can distinguish competences from other resources by the inbuilt contents of know-how of the former.

• Functional resources/competences Every enterprise subsystem acquires, activates and reproduces specific material and immaterial resources (plants, artificial and personal intelligence, organization, finance, etc.) which can become, in the course of time, “distinctive” resources/com-petences.

• Core resources/competences Among the functional resources/ competences, some specific factors emerge which are at the core of both survival and competitive success of the enterprise. Sooner or later they become the “collective learning” of the entire organization (C.K. Prahalad, G. Hamel 1990).

• Distinctive resources/competences They are highly specific, and sometimes unique, material and immaterial factors, that motivate the existence of the “com-petitive advantage” of an enterprise compared with other pro-ducers.

• Excellent resources/competences They are the (distinctive) corporate resources/competences that produce a lasting advantage and become “exemplary” for all other competitors. The exemplary enterprise is an excellent enterprise, which con-stantly improves its own way of being a system and its own total competitive skills.

THE COMPETITIVE ENTERPRISE

The enterprise survives and is “competitive” thanks to: i) the acquired systemic conditions (this refers to the whole

enterprise): enterprise systems aren’t born, but made; ii) some points of strength (this refers to its resources and

peculiar competences, coming either from one of its parts or from a group of participants);

iii) the prevention of or the remedy for its weaknesses (this

concerns both things and people); iv) the leadership features emerging in its hierarchy (this refers,

in particular, to managers).

SUCCESS, ADVANTAGE, EXCELLENCE

(competitors, leaders and followers)

PORTER MODEL (I)

(Competitive Strategy, New York: The Free Press, 1980)

PRINCIPLE It is possible to classify forces acting for or against a firm into five main categories. The five forces can act continuously and adversely against the firm unless it defends itself or influences them in its favour. ELEMENTS • Potential entrants: These are new players which threaten the livelihood of firms

already in the market. • Buyers: Buyers are the customers of firm’s products. • Substitutes: These are the competitors’ products (services) which may be

alternatives to those supplied by the firm. • Suppliers: Suppliers can provide raw materials and other resources. • Industry competitors: These are firms which compete in the same market and act

as rivals to the organization.

Potential entrants

Industry competitors

Rivalry among existing firms

Threat of new entrants

Buyers Suppliers

Bargaining power of buyers

Bargaining power of suppliers

Substitutes

Threat of substitute products

PORTER MODEL (II)

ISSUES • Effects of the forces: The effect of the five forces upon organizations may vary

depending on the strength of the firm, the nature of the sector and the product.

• Potential entrants: They may be deterred by: • economies of scale achieved by existing firms • enhanced customer loyalty • capital costs of entry (for example, plant and equipment) • poor access to distribution channels • cost disadvantages such as licenses and adverse governement policy.

• Buyers: They may try to force down prices whilst requiring better quality or service and may play off competitors against one another. The influence of buyers’ groups is greater if: • they are large customers (in volume or spend) • many substitute products exist • profit margins are low • buyers decide to manufacture their own supplies and thereby replace the

supplier (backward integration) • Substitutes: The number of perceived substitutes deters existing firms from

increasing prices and profits. • Suppliers: They are powerful if:

• they are well integrated (for example, a cartel) • they supply small customers • their group products are differentiated • they integrate forward (for example, by setting up their own buyer

organizations to replace firms already in the market). • Competition: Competitive rivalry may increase where one or more of the

competitors is under threat – for example, from a price war, high exit barriers or economic recession.

PORTER MODEL (III)

HOW TO USE THE MODEL • Strategy development: This model could be used to develop a strategy to counter

competitive forces.

• Positioning: Ideally a firm would aim for a position in which it could counter potential competitive forces. It might also attempt to influence those forces in order to strengthen its position – for example, by improving customer loyalty to deter new entrants.

• Enhancing competitive advantage: The model could be applied in anticipating and exploiting changes in the forces ahead of competitors – for example, in the development of a product to counter the effect of an expected substitute.

Main references

• Porter M.E. (1980), Competitive Strategy: Techniques for Analyzing Industries and Competitors, New York: The Free Press.

• Porter M.E. (1985), Competitive Advantage: Creating and Sustaining Superior Performance, New York: The Free Press.

• Competitive success is a synonym for positive performance (market share or profitability) attained in a certain period of time, thanks to competences and/or other resources

− in natural selection, success corresponds to survival, even

without visible size growth, in conditions of “minimum” income equilibrium;

− in competitive selection, success corresponds to size growth

or even maintenance of the size, associated with an annual income which is higher than the “minimum” income;

− in competitive selection, survival and success can be sought

even through cooperation with other enterprises (producers, suppliers, distributors, customers) or other organizations created with a different purpose.

• Skills and ... time

What are the most important competences required to survive in environments characterized by competitive turbulence?

“The most important skills required for survival and success in the kind of uncertain, rapidly evolving world in which we live are: 1) skill in anticipating the shape of an uncertain future; 2) skill in generating alternatives for operating efficiently in changed environments; and 3) skill in implementing new plans rapidly and efficiently. These skills have to take a central place in the strategic planning process” (H. A. Simon 1993).

• Competitive advantage is a synonym for differential of success of an enterprise compared with the other enterprises, which can be assessed in terms of greater output and market share of a product/service (or even greater profitability) compared with those of direct competitors, due to:

− cost leadership, or

− leadership in the differentiation of product/service, or

− leadership in technological and/or organizational innova-tion.

N.B.: Many different athletes compete in different heats and may have

success, but only three step on to the podium! • Excellence derives from the advantage which creates exempla-

rity and inspires imitative strategies on the part of “followers”.

MODELS OF

SUCCESS AND GROWTH OF THE NEWBORN ENTERPRISE

SECOND PART

Index

• From the model of the “product life cycle” to the models of

the enterprise life cycle:

− Levitt model

− Steinmetz model

− Parks model

− Dewhurst and Burns model

− Scott model

− Pettigrew model

MODELS

• We start from the model of product life cycle that has been discussed by Theodore Levitt in an article published in 1965 in the “Harvard Business Review”.

• We then examine models of the mono-product enterprise life

cycle, which have been discussed by various authors during the ’70s and ’80s. Such models are based on Levitt’s proposal of a product life cycle from its start up to its possible crisis and decline.

LEVITT MODEL (I) (in Harvard Business Review 1965)

The product life cycle curve

Sales

Time

curve of the production

of the sector

curve of the sales of the "original" producer (pioneer or imitator)

0

I II III

P

IV

LEGEND

• STAGE I: market’s development and take off; • STAGE II: market’s growth; • STAGE III: market’s maturity; • STAGE IV: market’s decline; • P = “market stretching” point.

HOW TO USE THE MODEL

• to foresee the form and length of each evolutionary phase of the market of a product

• to enter the market with one’s own product • to wonder how one must behave in each phase

N.B.: Although owners/managers know that a new product will follow this cycle, they are not sure when each phase will start and for how long each one will last.

LEVITT MODEL (II)

OPEN PROBLEMS • Introduction: The depicted pattern can become the basis for

important life-giving policies and practices concerning the product.

• The length of the “market development stage” depends on the

product’s complexity, its degree of newness, its fit into the customer needs, and the presence of competitive substitutes.

• The more unique is the newness of the product, the longer it

does generally take to get the product successfully off the ground.

• Stage recognition: Perhaps the best way of seeing the current

stage of the product is to try to foresee the next stage and work backwards. This approach has several virtues:

1. It forces one to look ahead; 2. Looking ahead gives more perspective to the present

than looking at the present alone;

• On planning: when a company develops a new product or service, it should try to plan at the very outset a series of actions to be employed at various subsequent stages in the product’s existence. Planning in advance does have a great potential as an instrument of long-term product strategy.

LEVITT MODEL (III)

Extending the product life cycle

Time

Sales

Original uses A

B

C

D Subsequent extensions of life cycle

Point A shows the hypothetical point at which the product curve flattens out. Point B, C and D show the points at which the product life cycle might be extended, if specific actions were taken. Some examples of extending strategies 1. Promoting more frequent usage of the product among current users. 2. Developing more varied usage of the product among current users. 3. Creating new users for the product by expanding the market. 4. Finding new uses for the basic material.

LEVITT MODEL (IV)

(••••) The importance of pre-planning extension strategies

1. They generate an active rather than a reactive product policy. 2. They lay out a long-term plan designed to infuse new life into the product at the right time, with the right degree of care, and with the right amount of effort. 3. Perhaps the most important benefit of engaging in advance pre-introduction planning for sales-extending, market-stretching activities is that this practice forces a company to adopt a wider view of the nature of the product it is dealing with.

(••••••••) The Product Life Cycle Trap

(Roger C. Bennett and Robert G. Cooper, in Business Horizons 1984)

• “Many of the America’s most successful companies have gone through a life cycle similar to the product life cycle. They began as innovators, and then grew to be giants in their markets. But, as their products mature, they need new products to continue company’s growth”.

• “However, by focusing strictly on the non-product variables, the

firm loses some of its ability to develop genuine new products… And so the company’s major marketing strengths lie not in its ability to deliver new products, but rather in its ability to position, promote and sell variations of the old products as though they were new ones”.

• “Clearly the firm must continue to manage its mature

products…But the firm must also be poised to enter new and promising businesses. In short, the firm must acquire a dual mode of operation – one mode for existing businesses, a second and very different approach for new, embryonic businesses”.

(••••••••••••) Rejuvenating the Life Cycle Concept

(Robert U. Ayres and Wilbur A. Steger, in The Journal of Business Strategy 1985)

• “Traditionally, it has been thought that a product life cycle is as irreversible as biological life cycle. That is, a product inevitably moves from birth to adolescence, maturity and death”.

• “Now there is mounting evidence that a turnabout in management thinking is under way. The new thinking is that it is actually possible to reverse the product life cycle”.

• “The key lies in introducing technological considerations into the planning process from the beginning”.

• Three necessary conditions for reversal of the product life cycle are clearly identifiable:

a. Potential for accelerated technological change b. Management flexibility c. Manufacturing flexibility

STEINMETZ MODEL (in Business Horizons 1969)

Management problems of the monoproduct enterprise undergoing a few growth phases, beyond which decline starts.

N.B.: the model is applied to the enterprise that keeps on being a mono-product firm in the course of time.

Sales

Time0

START UP

TAKE OFF

RAPID GROWTH

SLOW GROWTH

MATURITY DECLINE

I II III IV VIV

LEGEND • STAGE I: to live or to die (simple division of labour and direct control of the

owner); • STAGE II: probably you have to know how to coordinate different parts and

participants; • STAGE III: you got what you wanted! Now you have to create departments and

delegate. Indirect control through the managers; • STAGE IV: problems of market stretching emerge. Either the firm has to differen-

tiate the product or it has to diversify its business; • STAGE V: you are in a stage of maturity. Downsizing or alliances to keep your

market share? • STAGE VI: now your market share is declining. Anti-crisis policies and strategies

have to be found.

HOW TO USE THE MODEL • to prevent the emergence of important organizational and management problems; • to understand when and how to change policies and strategies.

PARKS MODEL

(in Journal of Small Business Management 1977)

The enterprise grows through a complex “hurdle race”

Sales

Time

A

O

B

C

START UP

I

TAKE OFF

II

GROWTH

III

MATURITY

IV

DECLINE

V

C1

D EE'

F

H

G

PARKS MODEL LEGEND

OH CURVE = “normal” curve of the enterprise life cycle;

OTHER CURVES = “variants” of the normal cycle.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

OA CURVE start up hurdle (it is not possible to promote demand, consumers do not like output);

OB CURVE cash flow hurdle (caused by excessive optimism about sales);

a) financing hurdle to further growth (too rapidly expanding firm: OC CURVE it may alternatively be convenient to sell it);

b) leadership hurdle (decentralization of authority, if you don’t want a sell off);

OC1 CURVE success in financing/innovating strategy and structure;

OD CURVE overestimation of one’s own market, followed by success in overcoming difficulties (first steps towards integration or diversifi-cation);

OE CURVE market-stretching hurdle: but a) capability to extend the product life cycle, without altering strategy; b) or change of strategy (more

OE1 CURVE steps towards either integration or diversification);

OF CURVE succession hurdle: a) crisis and decline; b) from crisis to recovery with some technological innovation;

OG CURVE decline hurdle: downsizing and recovery with a few new ideas; “turnaround” possible;

OH CURVE hurdle from incapability/impossibility of stopping decline; to-wards closing down.

HOW TO USE THE MODEL

• to anticipate governance and/or management hurdles; • to interpret the variety of strategic alternatives.

and

RADICAL CHANGE OF THE PRODUCT AND THE ENTERPRISE

• On one hand, some established companies have achieved

radical change: • Nokia underwent a metamorphosis from a manufacturer of

paper and rubber goods into the world’s leading supplier of mobile phones.

• British Petroleum transformed itself from a bureaucratic state-

owned oil company to one of the most flexible and innovative of the supermajors.

• On the other hand, some others failed: • Enron’s transformation from a utility and pipeline company to a

trader and market-maker in energy futures and derivatives ended in disaster in 2001.

• Vivendi’s multimedia empire built on the base of French water

and waste utility fell apart in 2002. N.B.: The perils of strategic change are not difficult to understand. Competitive advantage depends on the deployment of superior organizational capabilities and these capabilities develop slowly. Strategic changes that take a company beyond its competence domain involve massive risks.

STRATEGIC AND ORGANIZATIONAL

CHANGE • On one hand, the firm’s change can be fostered by external

pressures. On the other hand, it can be triggered by the endogenous movement of some variables within the firm itself.

• Change can concern the relationship between a firm and its

external environment (strategic change) or the interaction between the intra-firm variables (organizational change).

• On one hand, strategic change affects the ways through which a

firm competes and interacts with the other competitive forces in the environment.

• On the other hand, organizational change affects the

differentiation and integration of the variables within the firm. • Both might be radical or local.

THE SOURCES OF ORGANIZATIONAL INERTIA

• Common to all the different analyses of organizational change is

the recognition that for organizations – as for individuals – radical change is difficult and painful.

• Indeed, change is more difficult for firms than for individuals

because change upsets patterns of social interaction and requires coordinated action among multiple individuals.

Change

External pressures Internal triggers

Opportunism Bounded rationality Inertias

Internal factors External factors

Continuity

DEWHURST & BURNS MODEL (in Small Business Finance & Control, McMillan 1983)

A possible evolution of the economic and financial equilibrium of the firm

Sales

A

B C

O

STA

RT

UP TAKE OFF GROWTH MATURITY DECLINE

D

EF

R&D

New plants

SUCCESS

Cash Flow

Cash flow curve

NEW ENTRANTS Salescurve

Time

Marketing

DEWHURST AND BURNS MODEL

LEGEND

• A, B, C: new entrants do not come out of the blue; every new product requires

planning, design and involves pre-birth investments, which influence negatively the cash flow of the firm.

• C: while post-birth sales increase, also cash flow increases, but it’s probable that cash flow values are not positive in the first years of firm’s life.

• D, E: only in a more advanced life cycle of the firm, the sales curve and the cash flow curve assume similar configurations.

• F: when the sector matures and the end market declines, cash flow deteriorates as well.

HOW TO USE THE MODEL

It is possible to plan the sales trend of a firm, but it is very important to take also into account the possible financial trend of the same firm, especially in pre-birth and maturity phases, in order to be successful and avoid decline.

SCOTT MODEL (in Harvard Business Review 1971)

Enterprises undergo historical evolution. They change the rela-tionship between growth strategy and organizational structure according to well defined phases.

N.B.: This model is derived from the study by Alfred D. Chandler, 1962.

EVOLUTION MANAGEMENT CHARACTERISTICS

GROWTH PATH/STRATEGIES

First phase: start up and take off ; we find small firms not so rapidly growing

− simple decision-making processes and few functional areas

− concentric

Second phase: growth by

rationalization of the use of resources

− separation between ownership and management

− creation of the structure

− horizontal expansion and differentiation

Third phase: growth by

internal reinvestment of profits and intensive use of resources (scale economies)

− top managers emerge

− structural complexity

− internal coordination and integration of different production functions

− upstream and/or downstream integration

Fourth phase: growth by

external investment; the multi-product firm with intense market relations (scope economies) emerges

− “to make” or “to buy”?

− divisionalization

− cross subsidization

− diversification by product or by geographic area

HOW TO USE THE MODEL • to foresee the enterprise’s virtuous growth, up to its internationalization; • to identify organizational problems emerging when strategy is changed.

PETTIGREW MODEL (in Administrative Science Quarterly 1979)

The enterprise life cycle consists of a series of governance and management “dramas”

Intensityof dramas

Time

(DRAMA 1)(DRAMA 2)

0Birth

ExtinctionClosing down

routine routine routine routine id. id.id.

(DRAMA 3)(DRAMA 4)

(DRAMA 5)

(DRAMA 6)

(DRAMA 7)

(DRAMA 8)

PETTIGREW MODEL

LEGEND

• drama 1: enterprise’s birth, thanks to the founder’s business idea; • drama 2: the founder leaves; a successor emerges; • drama 3: it is necessary to delegate, separating ownership from management; • drama 4: strategy changes: either the enterprise differentiates its product or it

integrates upstream and/or downstream;

• drama 5: growth continues, but the internal relationships among owners/share-holders can change;

• drama 6: from a change in strategy to a change in the organizational structure; for example: diversification involves divisionalization;

• drama 7: a crisis emerges; what managerial solutions to survive?; the

controlling shareholder may change; • drama 8: from incapability to impossibility of finding solutions and closing

down.

HOW TO USE THE MODEL

• To work out the enterprise’s evolution through a longitudinal analysis of socio-economic events which determine corporate dramas.

• To answer the dilemma: to continue or to change? What are the costs of strategic-structural change compared with the costs of conservation of the governance and management structures temporarily given?

THIRD PART

Index: • The Industry Life Cycle • How General is The Life Cycle Pattern? Main reference: Grant R.M. (2010), Contemporary Strategy Analysis, 7th ed., John

Wiley and Sons, Chichester, United Kingdom, (Ch. 11).

THE INDUSTRY LIFE CYCLE • The industry life cycle is the supply-side equivalent of the

product life cycle (Levitt, 1965). • To the extent that an industry produces a range and sequence of

products, the industry life cycle is likely to be of longer duration than that of a single product.

• As in the seminal model by Theodore Levitt (1965), the industry

life cycle comprises four phases: introduction (or emergence), growth, maturity and decline.

• Among the forces that drive industry evolution, two factors are

fundamental: demand growth and the production and diffusion of knowledge.

Demand growth • In the introduction stage, sales are small and the rate of market

penetration by enterprises is low because the industry’s products are little known and customers are few. Customers for new products tend to be affluent, innovation-oriented, and risk-tolerant.

• The growth stage is characterized by accelerating firms’ market

penetration, as product technology becomes more standardized and prices fall. Ownership spreads from higher income customers to the mass market.

• Increasing market saturation causes the onset of the maturity

stage and the slowing down of growth as new demand gives way to replacement demand. Once saturation is reached, demand is wholly for replacement, either direct (customers replacing old products with new products) or indirect (new customers replacing old ones).

• Finally, as the industry becomes challenged by new industries

that produce technologically superior substitute products, the industry enters its decline stage.

Creation and diffusion of knowledge

• The second driving force of the industry life cycle is knowledge. New knowledge in the form of innovation is responsible for industry’s birth.

• The dual processes of knowledge creation and knowledge

diffusion exert a major influence on industry evolution. • In the introduction stage, product technology advances rapidly.

There is no dominant product technology, and rival technologies compete for attention. Competition is primarily between alternative technologies and design configurations.

• Dominant designs and technical standards: The outcome of

competition between rival designs and technologies usually converges towards a dominant design, that is a product architecture that defines the look, functionality and production method for the product and becomes accepted by the industry as a whole.

• From product to process innovation: Once an industry coalesces

around a leading technology and design, there’s a shift from radical to incremental product innovation. This transition may be necessary to inaugurate the industry’s growth phase.

• The shift in emphasis from design to manufacture typically

involves increased attention to process innovation, as firms seek to reduce costs and increase product reliability through large-scale production methods.

HOW GENERAL IS THE LIFE CYCLE PATTERN? (I)

• The duration of the life cycle varies greatly from industry to

industry. Some examples: • The introduction stage of the US automobile industry lasted about 25

years, from the 1890 until growth took off in 1913-15. Maturity, in terms of slackening growth, set in during the mid-1950s.

• In personal computers, the introduction phase lasted only about four

years before growth took-off in 1978. Toward the end of 1984, the first signs of maturity appeared.

• Digital audio players (MP3 players) were first introduced in 1997. With

the launch of Apple’s iPod in 2001 the industry entered its growth phase. By 2007, the industry appeared to be entering its mature phase.

N.B: the tendency over time has been for life cycles to become compressed. This is evident for all consumer electronic products, communication products, and also pharmaceuticals. In e-commerce, life cycles have become even more compressed. Such time compression has required a radical rethink of strategies and management processes.

HOW GENERAL IS THE LIFE CYCLE PATTERN? (II)

• Patterns of evolution also differ. Industries supplying basic

necessities such as residential construction, food processing, and clothing may never enter a decline phase because obsolescence is unlikely for such needs.

• Furthemore, some industries may experience a rejuvenation of

their life cycle. In the 1960s, the world motorcycle industry, in decline in the US and Europe, re-entered its growth phase as Japanese manufacturers pioneered the recreational use of motorcycles.

• These rejuvenations of the product life cycle are not natural

phenomena. They are typically the result of companies resisting the forces of maturity through breakthrough product innovations or developing new markets.

• An industry is likely to be at different stages of its life cycle in

different countries (e.g. although the US auto market is in the early stages of its decline phase, markets in China, India, and Russia are in their growth phases).

• Multinational companies can exploit such differences:

developing new products and introducing them into the advanced industrial countries, then shifting attention to other growing markets once maturity sets in.

FOURTH PART

Index

• The growing enterprise: from a small to a large and interna-

tionalized enterprise. • A model of the internationalization process.

FIRST STEPS TOWARDS THE FIRM’S INTERNATIONALIZATION

• The newborn firm seldom possesses the characteristics of an internationalized enterprise. Still, a number of global born enterprises are emerging.

• The small firm can soon become indirectly internationalized,

by serving a larger organization that exports or produces abroad. In the meantime, it acquires competences.

• The above mentioned firm finds autonomously clients abroad;

it becomes an exporting firm, i.e. it becomes explicitly interna-tionalized.

• The exporting firm can operate abroad either through its own

foreign sales offices, or through intermediaries (either of its own country or from other countries).

DIRECT OR INDIRECT INTERNATIONALIZATION

OF THE FIRM

Domestic market

C

A

B1

B2

D5

D1

D4

D2

D3

Foreign market

LEGENDA

A and B1 : indirectly internationalized SMEs;

C : medium-sized/large exporting firm;

B2 : enterprise that has become an exporting firm;

D1,2... : foreign clients.

FURTHER STEPS TOWARDS A “VIRTUOUS”

INTERNATIONALIZATION

• The multinational firm indicates a radical shift in the enter-prise’s life cycle. The already internationalized firm sets up its own plants or offices abroad. It was previously only an export-ing firm, now it adopts a new way of doing its business and makes a direct investment abroad.

N.B.: this growth (abroad) takes place through any strategic path (hori-

zontal expansion, integration, diversification, conglomeration). • The multinational group, which controls or cooperates with

local firms , derives from the evolution of the “old” enterprise into a “new” system of enterprises, which includes a controlling company (with its headquarters) and a number of controlled companies (subsidiaries).

TRANSNATIONAL CORPORATIONS

• The transnational enterprise in the era of globalization is typical of the present day large internazionalized enterprise system. Its controlling shareholder can have his headquarters everywhere in the world; his investments can be made in every country. His managers have no peculiar “national” identity.

• The term transnationalization refers to the enterprise that looks

for effective and efficient production not only (and not so much) through replication, on an international scale, of Fordist models of organization − worked out in the “central area” of capitalism (the U.S.) − but also, and above all, through the modification and selective adaptation of such models to specific and differentiated demands from a number of national socio-cultural contexts.

• The transnational enterprise that can be based in any country

and operates at global level differs from classic multinationals in the way it interacts with host socio-cultural contexts, coop-erating with those environments and not dominating them.