Strategy in declining industry
Strategic Alternatives for Declining Businesses
Choosing a strategy in a declining industry is akin to the final phase of a board game;
specifically the stage of a chess game following serious reduction of forces.
Discussions of strategy for shrinking industries usually focus on divestment or harvest
strategies, we should consider two other alternatives as well—leadership and niche. These
four strategies for decline vary greatly, not only in their goals but also in their implications
for investment, these can be pursued individually or sometimes sequentially.
Leadership
A company following the market-share leadership strategy tries to reap above-average
profitability by becoming one of the few companies remaining in a declining industry. Once
a company attains this position, depending on the subsequent pattern of industry sales, it
usually switches to a holding position or controlled harvest strategy. The underlying
premise is that by achieving leadership the company can be more profitable (taking the
investment into account) because it can exert more control over the process of decline and
avoid destabilizing price competition. Investing in a slow or diminishing market is risky
because capital may be frozen and resistant to retrieval through profits or liquidation. Under
this strategy, however, the company’s dominant position in the industry should give it cost
leadership or differentiation that allows recovery of assets even if it reinvests during the
decline period.
Managers can achieve a leadership position via several tactical maneuvers:
• Ensure that other companies rapidly retire from the industry by taking aggressive
competitive actions in pricing, marketing, and other areas that built market share
and dispelled competitors’ dreams of battling it out.
• Reduce competitors’ exit barriers. GTE Sylvania built market share by acquiring
competitors’ product lines at prices above the going rate. American Viscose
purchased—and retired—competitors’ capacity. (Taking this step ensures that others
within the industry do not buy the capacity.) General Electric manufactured spare
parts for competitors’ products. Rohm & Haas took over competitors’ long-term
contracts in the acetylene industry. Proctor-Silex produced private-label goods for
competitors so that they could stop their manufacturing operations.
• Develop and disclose credible market information. Reinforcing other managers’
certainty about the inevitability of decline makes it less likely that competitors will
overestimate the prospects for the industry and remain in it.
• Niche
The objective of this focus strategy is to identify a segment of the declining industry that will
either maintain stable demand or decay slowly and that has structural characteristics
allowing high returns.
Once identified the company moves preemptively to gain a strong position in this segment
while disinvesting from other segments.
To reduce either competitors’ exit barriers from the chosen segment or their uncertainty
about the segment’s profitability, management might decide to take some of the actions listed
under the leadership strategy.
“Operate only where pockets of demand are high…..”
Harvest
In the harvest strategy, undergoing a controlled disinvestment, management seeks to get the
most cash flow it can from the business.
To increase cash flow, management eliminates or severely curtails new investment, cuts
maintenance of facilities, and reduces advertising and research while reaping the benefits of
past goodwill. Other common harvest tactics include reducing the number of models
produced; cutting the number of distribution channels; eliminating small customers; and
eroding service in terms of delivery time (and thus reducing inventory), speed of repair, or
sales assistance.
Companies following a harvest strategy often have difficulty maintaining suppliers’ and
customers’ confidence, however, and thus some businesses cannot be fully harvested.
Moreover, harvesting tests managers’ skills as administrators because it creates problems in
retaining and motivating employees. These considerations make harvest a risky option
and far from the universal cure-all that it is sometimes purported to be.
Ultimately, managners following a harvest strategy will sell or liquidate the business.
Quick divestment
Executives employing this strategy assume that the company can recover more of its
investment from the business by selling it in the early stages of the decline, The earlier
the business is sold, the greater is potential buyers’ uncertainty about a future slide in demand
and thus the more likely that management will find buyers either at home or in foreign
countries for the assets.
In some situations it may be desirable to divest the business before decline Once it’s clear
that the industry is waning, buyers for the assets will be in a strong bargaining position. On
the other hand, a company that sells early runs the risk that its forecast will prove incorrect.
Divesting quickly will force the company to confront its own exit barriers.
Choosing a Strategy for Decline
With an understanding of the characteristics that shape competition in a declining industry
and the different strategies they might use, we can now ask ourselves what our position
should be:
Can the structure of the industry support a hospitable, potentially profitable, decline phase?
What are the exit barriers that each significant competitor faces? Who will exit quickly and
who will remain?
Do your company’s strengths fit the remaining pockets of demand?
What are your competitors’ strengths in these pockets? How can their exit barriers be
overcome?
In selecting a strategy, managers need to match the remaining opportunities in the industry
with their companies’ positions. The strengths and weaknesses that helped and hindered a
company during the industry’s development are not necessarily those that will count during
the end game, where success will depend on the requirements to serve the pockets of
demand that persist and the competition for this demand.
1.When, because of low uncertainty, low exit barriers, and so forth, the industry structure is
likely to go through an orderly decline phase, strong companies can either seek
leadership or defend a niche, depending on the value to them of remaining market
segments.
2.When high uncertainty, high exit barriers, or conditions leading to volatile end-game
rivalry make the industry environment hostile, investing to achieve leadership is not likely to
yield rewards. If the company has strengths in the market segments that will persist, it can try
either shrinking into a protected niche, or harvesting, or both. Otherwise, it is well advised
to get out as quickly as its exit barriers permit.
The best course, naturally, is anticipation of the decline. If a company can forecast
industry conditions, it may be able to improve its end-game position by taking steps during
the.
Avoiding checkmate
They recognize decline.
They avoid wars of attrition.
They don’t harvest without definite strengths.
They view decline as a potential opportunity.
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Barriers to entry in an industry
BARRIERS to entry are costs that must be paid by a new entrant but not by firms
already in the industry.
Here are seven (7) examples of barriers to entry:
1. Economies of Scale
The existence of economies of scale in an industry creates barriers to entry. Since existing
