Strategy and the Crystal Cycle
John A. Mathews
ne of the unexplored areas of business dynamics is how the cyclical behavior of certain important industries poses strategic issues for incumbent ﬁrms as well as challengers. All frameworks used in strategy (such as the Porter’s “competitive forces” framework) attempt to capture the decisions made by businesses in the attempt to inﬂuence their “business landscape” (to use the language of Ghemawat).1 However, the frameworks rarely place these business decisions in a context where time matters—and in particular, in the dynamic setting of industry cycles. In such a setting, ﬁrms have to make rapid judgments as to whether they are in an upturn or a downturn and what might be the implications of this for their production, investment, and marketing operations. Their decisions about timing can give them a competitive edge or can set them back, perhaps irreparably. While the study of business cycles has a long scholarly pedigree,2 speciﬁc industry cycles and their link to strategic choices made by ﬁrms does not.3 Industry cycles have been demonstrated in many sectors—most notably in semiconductors, but also in such diverse sectors as shipbuilding, chemicals, and oilrig operations. Such industries are characterized by large investments, and it is the mismatches that occur between investment and production dynamics on the one hand, and market demand dynamics on the other, that appear to drive the cyclical behavior. In such industries, both incumbents and challengers must The author would like to acknowledge the most helpful assistance of Dr. Mei-Chih Hu in the preparation of this article. Richard Langlois and John Cantwell gave me helpful comments as discussants at DRUID 2004. In Taiwan, useful data and discussions were secured from the Market Intelligence Center (MIC) of the Institute for Information Industry (III) and from the Industrial Economic and Knowledge Center (IEK) of the Industrial Technology Research Institute (ITRI). Special thanks are due to Ross Young, of DisplaySearch; Paul Semenza, of iSuppli; and Michael Ciesinski, of the U.S. Display Consortium; and in particular to Dr. Fan Luo of AU Optronics and Dr. I-Wei Wu of Toppoly.
CALIFORNIA MANAGEMENT REVIEW
VOL. 47, NO.2
Strategy and the Crystal Cycle
make strategic choices in terms of timing and capacity. If they fail to do so, they will be quickly eliminated. The leading current models of industrial dynamics refer to product cycles and industry life cycles, but not to industry cycles as such.4 One has to go back to Schumpeter’s works to appreciate the full force of a theory of entrepreneurial dynamics, innovation, and cyclical ﬂuctuations set within a dynamic, disequilibrium context.5 Incumbent ﬁrms bemoan the existence of cycles, and the disruption that they cause to planning schedules. Nevertheless industry cycles play a vital economic role in that they create opportunities for challengers to stir up and renew the industry. While upturns create opportunities to harvest proﬁts and to expand production, markets, and employment, it is the downturns that play the cleansing role, forcing weaker players into bankruptcy and thereby releasing resources to be picked up by stronger incumbents or by challenger ﬁrms looking to enter the industry. Schumpeter was right on the mark when he insisted on the importance of cyclical behavior in industry as being linked to innovation and to the waves of “creative destruction” that such cyclical behavior could unleash.6 The Flat Panel Display (FPD) industry is the latest industry to demonstrate extreme cyclical behavior and cycle-related strategic choices made by ﬁrms. The industry as a whole has grown to be worth $62 billion in 2004, with anticipated yearly growth rate of approximately 40%. Within the next decade, it promises to become a $100 to $200 billion industry, making it comparable to semiconductors.7 New John A. Mathews is Professor of...
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