Digital transformation can be scary but the good news is, we have seen and observed common patterns of how transformation and disruption impacts industry over time. This results into what we like to call the competitive life cycle. Competitive life cycles are similar to the idea of a product life cycle but they're viewed at the industry level rather than the individual product level. The first observation we have with the competitive life cycle is what we call the S curve. The S curve refers to the common pattern in sales or revenues that we see over time. Early on, things are being figured out about a new technology or an emerging industry. Eventually, hopefully, you hit a sweet spot where the technology takes off and that's the steep part of the S curve. And then eventually, maybe you tap out the market and that S curve starts to curve off as you maybe hit a sustainable level of sales. So, we think about cumulative of revenues, we'll see this S curve over time. We could break that S curve up into a set of phases. That first phase where people are still learning about the technology and it hasn't quite diffused yet is the emerging phase. Sometimes, the emerging phase can take decades to occur as we're seeing, for example, in electric vehicles which actually had existed even back at the early stage of the automobile industry. In other industries, the emerging phase can happen relatively quickly or quite quickly as a new hot technology comes into the market. The second phase is the growth phase and this is the sweet spot of the S curve where we really see a lot of growth in sales. And then eventually, we enter into a mature phase where, again, growth starts to decline, we reach a more stable level of sales, and a lower level of growth within the industry. We can also think about three different phases that a technology goes through: annealing, shakeout, and disruption. So, let's talk about annealing. Annealing is this idea that over time, there'll be a coalescing around what we call the dominant design of the technology. Basically, figuring out how will the technology look moving forward. Shakeout refers to what happens to the number of competitors within the industry. So, let's look at that. If we turn our attention to the number of firms within an industry, we very often see the following pattern. Early on, a few intrepid entrepreneurs or incumbent firms enter into the industry. As the market starts to grow and take off, others come in as well seeing a market opportunity. More often than not, we eventually get over competition, too many players within the market, and we get a shakeout occur, in which we see firms either going out of business or firms merging and acquiring with one another limiting the overall number of firms within the market. Now, one of the interesting questions is, how severe will this shakeout be? We've talked before about winner-take-all markets, and a winner-take-all market, obviously, we're left with one last standing firm. In other industries, they might support multiple firms within the market. So, one of things we want to think about is, what's the likely outcome of this competitive life cycle for this particular industry that we're interested in? Last but not least, we want to think about what happens with margins. Margins are probably the most questionable piece of this and that there's a lot of variability. In many industries early on, margins might actually be negative. In fact, there might be no profits being made within the industry. But hopefully, as the industry starts to grow, we'll see margins improve. But as we discussed before, we also see increased competition, and as that competition increases, it's often the case that margins might get compressed. Where they end up, once again, that's an open question and there's lots of factors that we can discuss that will impact whether this is a profitable industry or not. So, to give you an example, here, we have some data on the automobile industry. And what you see here is that automobiles in the late 19th century begin as an industry to take off and we see massive entry by hundreds of different competitors within the industry. Then, over a roughly 20-year period, we have this competition ensuing that eventually leads to a shakeout. In the United States, we were left what we called the Big Three auto manufacturers of General Motors, Ford, and Chrysler. We saw similar patterns in other countries across the world as well. And then, that structure dominated for decades after that. Here's some data on the beer industry, very similar dynamics. In the mid 1880s, we start to see the emergence of mass produced beer that led to a massive entry by lots of different beer manufacturers, and then we see a competitive shakeout as well. And again, this was replicated in markets across the world. So overall, we have this idea of a competitive life cycle evolving over time as revenues increase and following S curve, as we might see a shakeout, and then the open question about margins within the industry. So, let me give you an example here. Think about the market for digital music players. We had, in the mid 1990s, an established industry of portable CD players led by Sony and a number of others in that marketplace. Now, many of you are probably familiar with the iPod, but the iPod, in fact, was not the first entrant for digital music players. That honor goes to a company called RÃo who is an entrepreneurial startup within the industry. There were then hundreds of others who offered products including the Microsoft Zune, Dell, HP, many others who came into the market with their own digital music player offerings. The iPod was actually a relatively late entrant into the industry but when it did enter, it established what we call the dominant design. It became the dominant form function, form factor, that we would see within the industry. Now, it's interesting to note that the iPod itself was effectively disrupted by the iPhone just a few years later as many of those music functions were incorporated into our smartphones. And in fact, now, the iPod is a very small part of Apple's overall sales. So, the competitive life cycle is a common set of patterns that we see across many different industries and understanding those patterns are going to be very important to try to understand how digital transformation might impact your industry.
