Rising Fixed Costs

This increase may force the industry to consolidate because only the largest competitors can cover these fixed charges.

The simplest form of transition is triggered by substantial increases in fixed costs,  especially product development costs.  This increase may force the industry to consolidate because only the largest competitors can cover these fixed charges.

For example, in the photographic film industry, the movement from black-and-white to color film in the 1960s strengthened the industry leaders.  One insightful analysis of this wave of change points to is that in the previously mature black-and-white photo film industry, there was little incentive for competitors to invest heavily in R & D because film quality already exceeded the needs of most buyers.

But there were large returns to improvements in quality and the ease of processing color film.  As the costs of color film R & D escalated, many firms were forced out of the market, including Ilford in the United Kingdom and Ansco in the United States.  That wave of change left behind a consolidated industry of fewer but larger firms, dominated by Kodak and Fuji.

A similar dynamic was IBM's rise to dominance in computing in the late 1960's, driven by the surging costs of developing computers and operating systems.  Still another was the transition from piston to more sophisticated jet aircraft engines, cutting the field of player down to three: GE, Pratt & Whitney, and Rolls-Royce.

ACTION POINT: Watch for rises in fixed costs that may indicate a transition in your business.