The cover notes of How Industries Evolve states "OVER THE LAST DECADE, many companies have failed to generate substantial returns on their investments in innovation. Executives lament that the pace of change is too fast, forcing companies to make uninformed and often costly decisions. But Anita McGahan argues that there is a different reason: strategy fails when a company breaks the rules of change in an industry. She identifies four distinct evolutionary paths that an industry can take- progressive, creative, intermediating, or radical- and explains the different requirements for successful strategy:
See below for an explanation of architectural and foundational change.
HMV, the music-to-books retailer, has blamed the imploding CD market for a 73 per cent slump in pre-tax profits. writes the Timesonline:
The struggling company, said this that annual profits have halved to £48m due to growing competition from online retailers such as Amazon.
The company attempted to stem the decline last year by cutting its prices, which sent annual sales up 3.8 per cent to £1.8 billion, though like-for-like revenues, which strip out gains from new stores opened during the year, fell by 3.5 per cent.
HMV said the slump was a result of consumers increasingly opting to download music. As part of its turna-round plan, HMV is shifting its products mix to compensate for falling CDs sales, by selling more electrical goods such as MP3 players as well as investing in its online sales by offering music and video downloads.
By 2010, HMV hopes 20 per cent of its sales will be online and that 13 per cent of stores sales will be generated from electrical products.
As I write this further snippets appear, The Independent reports:
The latest data from the BPI, the UK music industry trade body, showed that 60 million albums were sold in the first half of the year, down from 65 million in the same period in 2006. Nearly 97 per cent of those albums were sold as CDs.
Geoff Taylor, the BPI chief executive, said: "CDs remain very attractive to consumers because of the flexibility and outstanding value for money they offer, and for this reason they represent the overwhelming majority of sales. Consumers vote with their pay packets and 58 million CD album sales in just six months is a very significant number indeed."
The UK market for CDs is holding up better than other markets such as the US, helped by strong sales of UK artists such as Amy Winehouse and the Kaiser Chiefs. The BPI said that UK music fans buy more CDs per capita than anywhere else in the world, with the UK market accounting for more than 150 million sales for four years running.
The BPI also said the UK was "ahead of the curve" in terms of legally downloaded music, with digital album sales partially offsetting the decline in physical sales. It said that 2.1 million albums were downloaded in the first half, with more than 100,000 sales a week achieved during June. Digital sales have also breathed life into the flagging singles market, helping to drive a 23 per cent increase in single sales in the first half of the year.
So using Anita McGahan's model which was captured by Sente from her presentation at CSFB's Thought Leader Forum 2003 (the links have withered and died!). So from one of my old CD's here are the models:
Thr rules of industry change are like road barriers. They determine the general direction of innovation but not the pace or the precise strategy. Innovation is motivated by threats to the existing infrastucture of an industry There are two types of change:
1. Architectural change: The architecture of the firm's relationships come under fire and the income statement is under pressure. Examples are live auctions and car dealerships.
2. Foundational change: threatens assets, resources and capabilities of the organisation. These are balance sheet items. Examples are film production, car manufacturing, pharmaceuticals.
The four trajectories of change are
1. Progressive:
Rules can be summarised as "listen to the customer, develop efficient activities and don't over-react. Learning and adaptation can occur before too much capital is put at risk.
We can see in the case of HMV that they are being measured about their response to downloading as this is making inroads but is still a small percentage of the album market. They are smartening up their shops and expanding into "technology" as well as straight music.
2. Creative
If we look at the music production industry we see that they are undergoing creative change.
The rules are successful commercialisation of big projects with long lead-times; modularisation of innovation projects and cultivation of complementary activities that support the successful commercialisation of projects. In other words to package a group of artistes- the musicians- and shape, market and generally treat them as a project. EMI is the world’s largest independent music company. Their overview states
EMI Music represents more than 1,300 recording artists worldwide, spanning all musical tastes and genres, and owns one of the finest catalogues of recorded music ever assembled with over three million individual tracks. The company’s roster includes music legends such as The Beatles, the Rolling Stones, Pink Floyd and Mstislav Rostropovich; global superstars like Norah Jones, Robbie Williams, Gorillaz, Coldplay, Keith Urban and Joss Stone; breaking acts enjoying tremendous success on their home ground including LeToya, Cherish, 30 Seconds To Mars, Dem Franchize Boyz, Trace Adkins and Dierks Bentley in the US, Radja in Indonesia, Raphael and Diam's in France, RBD in Latin America and KT Tunstall, Corinne Bailey Rae, The Kooks, Lily Allen and Magic Numbers in the UK; plus some of the world’s finest classical artists including Nigel Kennedy, Simon Rattle, Itzhak Perlman and Angela Gheorghiu.
So supporting the growth of a music group is one of their core skills and spending a year or to developing a "band" is something they are very good at. At the height of the Beatles fame money came from records and the tours were the advertising. Now it seems that live performance is the moneyspinner and CDs and downloads are the promotion. Some record producers are becoming event specialists and the first original CD is hitting the newspaper stands shortly. see Daily Telegraph article that includes
Virgin Megastores has attacked arch rival HMV over its plans to sell a Sunday newspaper that will include the first free covermount of a new studio album, Prince's Planet Earth.
Less than two weeks ago HMV chief executive Simon Fox said it would be ''absolutely nuts'' for the music industry to give away new CDs through papers, saying such moves would ''devalue music''.
However, in a move that analysts said reveals the desperate times facing music retailers, HMV has now backtracked and agreed to sell this week's Mail on Sunday in its stores.......
Prince is the first artist to give away a new studio album, a move which caused his record company Sony BMG to scrap the UK element of its distribution agreement.
So this causes headaches for both the "creative", "progressive" and "intermediating" areas of the music business as the artists can distribute their music digitally (think iTunes Music Store) to support their big tours... who needs HMV or EMI?
3. Radical
Here, existing assets and relationships are disrupted and everything needs a good dose of redesign, innovation and diversification. This kind of transformation is more unusual than perhaps organisations think it is... both EMI and HMV could have thought they were in a radical change event but they were not. A typical response to radical change is diversification. The Royal Mail letter business is facing radical change and is responding in the short term by improving efficiency (cost-cutting) as it responds to new more efficient entrants into its monopoly market, even though it has had many years notice of change, which is a progressive response. but as the Independent reported in 2005 they are fighting with one or both hands tied behind their back:
Allan Leighton, chairman of Royal Mail, can only look on and weep. While overseas rivals respond to the challenge of deregulation by expanding into new businesses and new territories, he's condemned to make the best of what he's got. Trapped within the Treasury controlled boundaries of the public finances, all he can do to meet the challenge of postal competition is slash costs to match the decline in revenues. The already privatised Deutsche Post, by contrast, is moving to reduce its dependence on the German domestic market, where its monopoly is due to end in 2007, by expanding overseas.
So Deutsche Post are diversifying their market and poor old Royal Mail are shrinking their way to success. But the problem is, as P&G’s A.G. Lafley once commented, “Nobody ever cost-saves their way to sustainable growth.”
and
4. Intermediating change
Conventional wisdom maintains that technology has changed the music retailing industry forever. But James Hall hears that the high street itself is to blame from a man who intends to prove it.
So is Rough Trade out of its mind to think that now is a good time to open the nation's biggest record shop?
Absolutely not, says Stephen Godfroy, Rough Trade's store director. Godfroy believes that the public appetite for music is as strong as ever and that the decline in sales of physical albums is not a failure of the format but of mass-market retailers.
He argues that shoppers crave expert advice, broad choice and excitement when they buy music. Instead they are offered indifferent service, limited ranges and boring stores. "There are misconceptions about music retailing - that people don't want physical product - but the issue is that the high street has become the place for homogenous retail. Great music shouldn't be sold like this - it deserves more respect," he says.
"The failure of the high street is that it is a jack of all trades and a master of none. As a result music lovers have congregated online," he says.
Which puts his thinking firmly in PROGRESSIVE, as he follows the widom encapsulated in "The Experience Economy where Pine and Gilmore model the trends of commoditization and customisation so:
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