Value Investing

Competitive Strategy For A Declining Industry

Choosing an appropriate strategy in declining industry requires a careful evaluation both of the industry’s revenue potentiality and the firm’s competitive position. Through the approach, the industry might experience survival or even recovery.

Key Discussion:

Michael Porter, the author of “Competitive Strategy”, suggested that the understanding of the characteristics that form competition in a declining firm provides a series of analytical steps.

To determine the strategy, managers can ask themselves whether the industry structure supports a hospitable, potentially profitable, decline phase based on the conditions of demand, exit barriers, and rivalry determinants.

“Additionally key to the leadership or niche strategies is validity in advancing the exit of contenders. Contrastingly arranged firms will have unique optimal systems for a decrease.”

The author drew a grid to show “the exit barriers that each significant competitor faces, and which industries might exit quickly or remain in the market.” The grid is shown below:

The grid suggests that if a company’s strength fits for the market segments because of low uncertainty, low exit barriers, and so on, the big firms will either seek leadership or a niche strategy for an orderly decline phase. “When a company has a lack of strengths for the remaining segments, it should either harvest or divest quickly.”

“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.” But if the company has some strength to remain in the market, it should choose either a protected niche, or harvesting, or both. “Otherwise, it is well advised to get out as quickly as its exit barriers permit. If it tries to hang on, other companies with high exit barriers and greater strengths will probably attack its position.”

Porter supplemented the third dimension for this simple framework, i.e., if the company’s strengths fit the remaining pockets of demand. For instance, “cash flow may skew the decision toward either harvest or quick sale even though the other factors point to leadership, as interrelationships with other units may suggest a more aggressive stance than otherwise. There may be advantages to an early commitment to one decline strategy or another.”

However, sometimes companies may want to bide their time by harvesting until indecisive competitors make up their minds.

Conclusion:

From the overall analysis, Porter suggests “if the leader or manager decides to exit, the firm can be prepared to invest, and if the leader stays, the firm may continue to harvest or divest immediately.”

In any case, however, successful companies should choose an end-game strategy rather than let one be selected for them, as many in the retail industry have learned (the hard way).

More from the book here