Four Trajectories of Industry Change
(McGahan)

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Summary

The Four Trajectories of Industry Change is a model to describe how industries change. The author of the model is Anita M. McGahan, Professor of Management in Boston. She published the model for the first time in the HBR of October 2004.


According to McGahan you can't make intelligent investments within your organization unless you understand how your whole industry is changing. The need to understand change in your industry may seem obvious, but such knowledge is not always easy to collect. Companies sometimes miss or misinterpret clues and arrive at false conclusions often.


Why industries evolve

Research by McGahan suggests that industries evolve as a result of two types of threats of obsolescence:

  • A threat to core activities of the industry. A threat to the recurring activities of companies, which historically generated profits for the industry.
  • A threat to the core assets of the industry. A threat to the durable resources, including intangibles such as knowledge and brand capital, that have historically made the organization efficient at performing core activities.

How industries change

Resulting out of a combination of the above two types of threats, industries change along one of Four Trajectories of Industry Change:

  1. Radically. When core assets and core activities are both threatened with obsolescence. Advice:
    • Perform a balancing act. Aggressively pursuing profits in the short term while avoiding investments that could later prevent you from decreasing your commitments, PLUS:
    • Assess how quickly your core assets are depreciating. And determine the segments in which you can protect your competitive position from those in which your position will erode quickly.
  2. Progressive. When neither core assets nor core activities are jeopardized. Advice:
    • Develop a system of interrelated activities that are defensible because of their compounding effects on profits, not because they are hard to understand or replicate; be the biggest.
  3. Creative. When core assets are under threat but core activities are stable. Advice:
    • Assess how quickly your core assets are depreciating. And determine the segments in which you can protect your competitive position from those in which your position will erode quickly.
  4. Intermediating. When core activities are threatened while core assets retain their capacity to create value. Advice:
    • Perform a balancing act. Aggressively pursuing profits in the near term while avoiding investments that could later prevent you from decreasing your commitments.

The Trajectories of Industry Change typically unfold themselves over decades. Fighting the industry change is almost always too costly to be worthwhile. Rather organizations should reconfigure themselves for lower revenue growth and develop the ability to remove activities and resources out of the business. Systematically analyzing the business environment is not easy, but the payoff is great: better strategic decision-making for your company.


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