Strategy and the Crystal Cycle

Strategy and the Crystal Cycle John A.

Mathews en 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 Somewhat). L However, the frameworks rarely place these business decisions in a context where time matters?and in particular, in the dynamic setting of industry cycles.

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In such a eating, 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. Industry cycles have been demonstrated in many sectors?most notably in semiconductors, but also in such diverse sectors as shipbuilding, chemicals, and oilier operations. Such industries are hardhearted 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 Dry.

Mel-Chi Huh in the preparation of this article. Richard Longish and John Cantle gave me helpful comments as discussants at DRUID 2004.

In Taiwan, useful data and discussions were secured from the Market Intelligence Center (MICE) of the Institute for Information Industry (Ill) and from the Industrial Economic and Knowledge Center (EEK) of the Industrial Technology Research Institute (DIRT). Special thanks are due to Ross Young, of Disappearance; Paul Semen’s, of supply; and Michael Cockiness, of the U. S. Display Consortium; and in particular to Dry.

Fan Lou of AU Optics and Dry. I-Wee Www of Topple 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. One has to go back to Summerset’s works to appreciate the full force of a theory of entrepreneurial dynamics, innovation, and cyclical fluctuations set within a dynamic, disequilibrium context. 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 learning 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.

Schumacher 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 (FED) industry is the latest industry to demonstrate extreme cyclical behavior and cycle-related strategic choices made by firms. The industry as a whole as 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 Strategic applications for these panels keep being Management at Manchuria Graduate School of Management, Manchuria University, Sydney. Developed, from the original application of flat screens for notebook computers, to the rapid penetration of desktop monitors (displacing traditional cathode ray tube displays), to LCD TV’s that are now invading the consumer television market, to small splays lighting up cell phones, digital still cameras, and personal digital assistants, as well as to large displays such as the light-emitting diodes that are illuminating our cities in a way never seen before.

The driving core of the FED sector is the production of large-panels utilizing amorphous silicon Thin Film Transistor-Liquid Crystal Display (TFTP-LCD) technology, developed on a commercial scale by Sharp, Toshiba, and IBM Pan) in the late sass. The market for these large panels has grown even faster than for Fads as a whole, reaching a value of nearly IIS$44 billion in 2004 and expanding at a rate of 40 to 50 percent per year.

This market size has been reached just 12 years after the industry launch.

By contrast, the semiconductor industry took until 1987 to reach a comparable market size?around 25 years from its beginnings. 8 The firms involved are mostly new and?to western ears?unheard of. Japanese firms started the industry, but Korean and Taiwanese firms have rapidly entered, and Singapore and China, and now India as well, are straightening furiously over how to effect entry. U.

S. And European firms, by contrast, appear to be pinning their strategic aspirations on the development of new 7 CHART 1 .

The Crystal Cycle and Strategic Initiatives LCD Market Growth, 1990-2003 Third downturn 1997-98 Taiwanese firms enter Second downturn 1995-96 Korean firms enter 1997-98 Asian financial crisis Fourth downturn 2001 New Taiwanese entrants First downturn 1993-94 New Japanese entrants Year/Quarter applications and new technologies, having apparently abandoned the effort to manufacture active-matrix TFTP-LCD in mass quantities. 9 Firms such as Kodak have important patent rights over emerging FED technologies such as organic light- emitting diodes (Leeds).

A whole new supply industry has been created, with U.

S. Firms such as Applied Materials and Corning (and more recent arrivals such as Photon Dynamics and Applied Films Corporation) achieving a strong position in the supply of equipment and materials. The industry spent close to IIS$II billion in 2003 on new fabrication equipment. The barriers to entry in this young industry are extremely high for any company that wants to become involved in fabricating flat panels. With investment needed of the order of IIS$2 billion, this is not an industry for amateurs.

What is so striking is the fact that new entrants have indeed breached Hess barriers?but in very characteristic bunches, or clusters.

As shown in Chart 1, the cyclical of the industry has created opportunities for new entrants. In the first downturn, new Japanese entrants made their way into the industry; the Korean firms Samsung and LOG in the second downturn; five Taiwanese firms in the third downturn; and more Taiwanese firms in the fourth downturn. By contrast, it appears from the record that not a single firm has managed to penetrate the entry 8 CHART AAA.

FADS Market Growth and ET-LCD Share, 1990-2003 Year Source: Display Search; CUBIC World Markets. Barriers during an upturn.

This is a remarkable empirical fact. It speaks strongly to the fact that the successful entries are not random or haphazard features, but reflect fundamental strategies linked to the sector’s cyclical industrial dynamics. The explosive market growth of this industry is shown in Chart 2 (using annual production data, as opposed to the quarterly data for Chart 1). This growth has been driven by the expanding applications being discovered for panels made with the dominant ET-LCD technology.

This technology (as shown in Chart AAA) is likely to remain dominant for some time to come, meaning that those firms that have made it heir central focus have likely made good strategic bets. Chart b, which shows annual volume of output rather than dollar revenues, reveals how the Koreans and Taiwanese now dominate in large-panel ET-LCD panel production.

In comparison to the semiconductor industry, these are the DRAMS of the FED industry, driving the technology trajectory and creating niches that other firms are rushing to fill.

Japanese firms are moving rapidly into highly profitable niche sectors such as small displays for digital still cameras and camcorders?but the Korean and Taiwanese firms are also moving into these sectors as well. Chart c shows the main players at the end of 2003, demonstrating that the Korean firms Samsung and LOG-Philips, together with the Taiwanese firms Opticians and Chime Optoelectronic, have pushed the Japanese leader Sharp into fifth place in terms of overall revenues and numbers 9 CHART B.

Large-Area ET-LCD Shipments and Shipment Share, by Firm, 2002-2004 Source: Display Search. Demonstrates vigorous Centenarians competitive dynamics. The straightening engaged in by firms in this young industry is therefore a matter of great interest.

Strikingly, none of the leading companies involved in this sector has followed a tragedy that could conventionally be identified as innovative?although it is true that as they acquire leadership positions (as Samsung has done in both DRAMS and TFTP- LCD displays), they do become more innovative and creative.

However, the firms did not acquire these leadership positions through innovation. They acquired them through a strategy of fast fellowship?a strategy of rapidly following trends being established elsewhere. Clearly “fast fellowship” as a strategy has paid handsome rewards for companies all over Asia in Flat Panel Displays and other knowledge- intensive sectors. Despite the efforts of the U.

S. Display Consortium in the sass, there is no fabrication of large-scale ET-LCD panels in the U. S. R in Europe?a fact that has generated semidetached debate in industry policy circles. 10 There are of course U. S.

Firms involved in such fabrication?IBM through its link to Detect (now owned and operated 10 by Chime in Taiwan) and Soda’s connection via its JP with Sandy to produce organic Leeds (still a very small part of the total FED market