I'd like to introduce the idea of a Competitive Life Cycle. Industry to industry, market to market, we see a very similar dynamic play out. We see the emergence of what we call an S-curve. These S-curves refer typically to cumulative revenues within the industry. So imagine the following, a new product or business or service model comes to market. At first, it takes some time to diffuse, the time to kinda get uptake amongst customers, but eventually, it takes hold and there is a significant growth and adoption phase. And then eventually, perhaps the market gets saturated and we see the growth rate decline, and eventually, a more mature phase in terms of that industry. So take come examples here. Consider the market for digital music players. Digital music players actually emerged in the late 1990s. There was a number of different entrants within the industry. And there was this emergent phase where their uptick wasn't too great, but there was a lot of interests and different attempts. Then, we had the introduction of the iPod. And suddenly, we saw a massive growth within the industry's segment. And we go through this growth phase. Eventually, though, we reach saturation within the market, and we start to see a decline in the growth rate and eventually even a decline ultimately in the adoption of iPods and other similar digital music devices. As we've seen other industry segments, such as smart phones begin to take hold and grow as well. Now, when we think about this S-curve, we can break it down into three phases. We can think of this emergent phase once again. We're experimenting trying out new business models or technologies. The growth phase, where it really takes off and establishes itself in the market. And then finally, this mature phase, where it's now it's an established technology or product within the market, and the growth is not quite as great. Between each of these phases, we can think of different changes that are occurring between the products during these phase transitions. So the first phase transition we refer to is annealing. Annealing is an engineering term referring to the hardening of steel into various types of shapes. Annealing here refers to what we call the emergence of a dominant design, the idea being that early on with a new technology or new business model, there's a lot of experimentation. It's not clear to the marketplace yet what the dominant standard might be, but once we reach this phase, we start to then see coalescing around an established standard. Think about the automobile industry, early on in the automobile industry there were dozens of different attempts for the internal drive train of the automobile, we had, of course, gasoline powered internal combustion engines, but there were also kerosene powered cars. There were electric vehicles. There was also even the Stanley Steamer, a steam powered engine. Eventually, there was a coalescing around the internal combustion engine and it was during that annealing that we then begin to see the emergence of the growth phase and significant adoption of the automobile. Similarly, if we think about the market for smartphones. Smartphones have been around for quite a while, however, it really wasn't until the introduction of the iPhone that we really see a coalescing around what a good smartphone would look like. And we saw then the entry of Android and Samsung using the Android platform when we then see growth within the market there. So we begin with that annealing process. The second phase transition is what we call the shakeout. The shakeout is a very interesting empirical regularity that we observe over many, many different industries. And it's the following, if we turn our attention from cumulative revenues to firms, what we often see is the following. Early on we see entry of new players within the industry segment. Some of those might be entrepreneurial entrants, and some of those might be existing firms who are diversifying into this new technology or new segment. We see that number grow to a point eventually, where perhaps there's too many competitors in the industry, and we get a shakeout. We get firms exiting the industry. Perhaps they exit because they go bankrupt, perhaps they exit because they are merged or acquired by another entity. We can look at many industries and see this dynamic play itself out. Here's data from the automobile industry over time. Each of these different graphs represent the automobile industry in different countries. So at roughly the same time here, we see, in a number of industrialized countries, massive entry into the automobile market. And then over a 30, 40 year period then eventually, a shakeout and a decline in the number of players in the automotive industry. If we take the US for example, what we saw eventually emerge out of the hundreds of manufacturers in automobiles at the turn of the 20th century, was the emergence of what is often referred to as the big three in the US auto market, Chrysler, Ford, and General Motors. Once again, in some cases it was the case of growth of firms like Ford that put out other firms out of business. In other cases, in General Motors case, they consolidated the industry by buying up a number of existing players. The end result was a lot fewer number of players within the industry than we had just a few years before. Here's my favorite example is the beer industry. Here we see graphs for both Germany and the US, and you'll notice that they look very similar here in terms of the growth and the number of large scale beer manufacturers, beer distributors. And then eventually a shakeout and decline. This is partly driven by the Industrial Revolution and new techniques that one could have in large scale mass brewing. You'll notice, by the way, the interesting little dip around the 1920s in the United States. That actually reflects prohibition, a constitutional amendment to ban alcohol sales in the United States over a period of time. But it's interesting, I think, to see that once prohibition was removed, the dynamics continued apace again in a similar fashion. In the US beer market now, we're dominated by a few big players, including Anheuser-Busch, who's part of InBev now, as well as Coors and Miller as the dominant brands within the industry. Last but not least, let's talk about the microprocessor industry. And I share this one just to highlight that these dynamics do vary across industry segments. So here we see less of a shakeout than a continual growth in the number of microprocessor companies, though it is interesting to note that there are various shakeouts along the way that presented themselves here. So again, these dynamics that we're seeing, these shakeouts that we're seeing are very common across industries, but they can very much vary in their intensity depending on the individual industry segment. Last but not least, I'd like to talk about margins, profits. This is probably the least reliable in terms of knowing exactly how this will play out within an industry. You see a lot of variability across industries and how margins play out over time. A common way to think about it though, would be that early on in an industry, early on when a new technology or business model emerges, margins are gonna be low. In fact in many industries they actually should be negative, they could be negative having losses there. Eventually, if the market is going to be successful, you will eventually see a turn, profit will be being made, they will probably start to grow as the market starts to grow. But then we have this competitive effect again, so as the number of firms come into the market, going back to our fundamental principle business strategy, that's gonna make profitability difficult to achieve and it's not uncommon to see then this little hill that I have illustrated here where profitability starts to decline. What's interesting, the interesting question to ask ourselves, is well, where does it eventually stabilize? And this is where tools like Porter's five forces analysis and the like, can be very helpful in understanding where, in the long run, an industry might settle, in terms of profitability. For example, is it a winner take all market where there's one dominant player? Or is this a market that's gonna support three or four large players? Or is it a market that's gonna support hundreds of players where we might imagine margins would even be thinner. So pulling this all together, what we see is this interesting interplay between the revenues and sales within an industry, the number of firms competing in an industry, and then the margins that an individual firm and then collectively as an industry that can be gained. We can see these three different phases, and we can see these transition points as well. And so the interesting question is to try to understand both the timing and when these phase transitions occur for a given market.
