Chapter 10
What can a firm do in a declining industry?
A declining industry exhibits generally excess capacity, lack of technical change, a declining number of competitors, a high average age of resources, and strong price competition. Two factors determine the intensity of competition in a declining industry: the balance between capacity and output, and the demand for the product. The adjustment of capacity to demand is itself determined by three elements: the predictability of decline, barriers to exit, and the strategies of the surviving firms. Four strategies are identified by Harrigan and Porter for declining industries: a/ Leadership - Showing commitment to the industry, acquiring rivals, helping competitors to exit, and providing pessimistic forecasts, are ways to play a dominant role in that industry b/ Niche - Identifying a niche where demand is stable, where demand is inelastic, and that other firms are not likely to invade. Then, playing a dominant role in that niche allows firms to reap profits. c/ Harvest - This strategy involves the maximization of a firm's cash flows from its existing assets, while avoiding further investment. d/ Divest - Divesting before the decline of an industry will allow the firm to sell its assets.
How should a firm consider innovation in mature businesses?
A firm should not think that innovation is impossible and that the only viable strategy is exiting the industry. Baden-Fuller and Stopford provide interesting tips about that topic. Maturity is a state of mind, and not a state of the business. All firms comprise potential for innovation, regarding their own resources and competencies, and their specific scope of products and markets. An industry is only a context, and a firm matters most, and can contribute to the transformation of that industry. The essence of strategic innovation relies upon the reconciliation of goals generally considered as opposite. A firm that wants to achieve strategic innovation needs an entrepreneurial organization, with freedom to experiment, and the capacity to learn. Managers exhibit propensity to be trapped within their industry's conventional thinking about business practices and the world in general. These common cognitive patterns are referred as "industry recipes" by JC Spender. Studies have shown that the ability of managers to think out-of-the-box, to question their assumptions and beliefs, and to change their business models, are strengths for a firm's ability to adapt.
Is a competitive advantage in a mature industry possible? How can a firm differentiate in a mature industry?
A mature industry has fewer opportunities to establish competitive advantages, and these opportunities shift from differentiation-based to cost-based factors. A trend towards standardization narrows the scope for differentiation, and reduces customer willingness to pay for it. In other words, this means that it is more difficult to build a competitive advantage, and that the evolution of that industry pushes rivals to compete on a cost basis. However, this does not mean that differentiation is not possible. A firm can differentiate in complementary services, which are often associated with product standardization. A strong avenue for differentiation is "strategic innovation", which can be defined as a third stage of innovation, once product innovation and process innovation have been exhausted. Strategic innovation implies new game strategies, and the reconfiguration of the sequence of activities undertaken by a firm. Redefining markets and market segments are an approach to differentiate through: a/ Embracing new customer groups for the same product, b/ Adding products and services that perform new but related functions (the experience economy is an illustration of such a differentiation) and c/ Rejuvenating the industry by breathing new life into that industry. To achieve those innovations, thinking out of the box is necessary, and a different vision of the strategic management process should be adopted, as well as critical thinking, and the implementation of creativity techniques.
In the case of a given industry, why is maturity associated with its specific attributes?
Because maturity often implies that an industry has evolved according to regular patterns of stages and that, at the maturity stage, it exhibits attributes that are the product of time. Two main characteristics are, first, the reduction of the number of potential opportunities for establishing competitive advantages and, second, a shift from differentiation-based factors to cost-based factors. a/ Reduction of opportunities for competitive advantages Over time, because customers experience increased knowledge about the product, and better information, and because the product is prone to standardization, there is less room left for differentiation. Process technology is largely diffused and makes improvement more difficult. Highly developed infrastructures and the presence of powerful distributors makes competition easier for firms occupying a niche. b/ A shift from differentiation-based factors to cost-based factors The trend towards commoditization narrows the scope for differentiation and reduces customer willingness to pay a premium for differentiation. The general evolution towards standardization produces a similar effect. Competitive pressure and the limited opportunities for technology-based advantages create incentives to explore innovations in other areas of competitive strategy. However, a mature industry does not imply an absolute impossibility for innovation.
How can a firm fight the negative effects of bureaucracy, and build a structure more conducive to innovation?
Bureaucracy is defined as an organization based on standardized routines, division of labor, horizontal and vertical specialization, close management control, high level of formalization, and incentives based on security and tenure, rather than creativity and risk-taking. Therefore, bureaucratic contexts seldom contribute to creativity and innovation, which are ways for maintaining dominance and good returns in a mature industry. Many firms have undertaken changes to fight the negative effects of bureaucracy, and to change their structure and managerial habits. In the strategic management process, the role of middle managers has been increased and that of top managers reduced, shrinking corporate staffs. These firms have tried to put their customers first, to be adaptable to change, and to focus less on internal variables such as economies of scale for cost reduction. Employees are motivated through profit incentives and their interest in working, as well as more efficient organizational practices such as teamwork, cooperation, and responsiveness. The challenge is to be able to be cost-efficient, to fit customers' needs and requirements, and at the same time to adapt to a changing environment.
How can a firm reduce its costs?
Costs are driven by three main factors: a/ Economies of scale in many different functions, amplified by the standardization effect, b/ Low-cost inputs (a cheap workforce, a privileged access to some critical resources at a lower price, a better access to capital, etc.) and c/ Low overheads, because of a lean structure, or a parsimonious culture, or because of tight managerial control and concern about costs. Cost reduction techniques encompass: 1/ outsourcing, which frees capital, 2/ headcount reduction (reduction of resources), 3/ asset and cost surgery (cutbacks in expenditures, and halting new investments), 4/ refocusing on markets and products that are more attractive or where the firm owns specific competencies and 5/ piecemeal productivity moves (adjustments to current market position through small moves and the search for productivity increases). Cost reduction is sometimes necessary and allows a firm to take advantage of a declining industry or to wait for better times in a turbulent era. However, managers implementing these techniques must be aware that they reduce the resources available to pursue new opportunities, as well.