“Discussions of strategy for shrinking industries usually focus on divestment or harvest strategies, but there is a range of alternatives.” Michael Porter showed that “the range of strategies can be conveniently expressed in terms of four basic approaches” in the Competitive Strategy Techniques for Analyzing Industries and Competitors book.
There are four basic alternative strategies for firms in a declining industry. These are Leadership, Niche, Harvest, and Divest. These four plans for decline vary considerably, not only in their goals but also in their implications for investment.
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- Leadership: “Seek a leadership position regarding market share.” Porter stated that a company which follows 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, it turns into holding or controlled harvest position based on the subsequent pattern of industry sales.”
Under this strategy, the company’s dominant position should give it cost leadership or differentiation. Managers can achieve a leadership position via several tactical steps. It includes:
- Aggressive Actions in pricing and marketing and retiring competitor’s capacity;
- Purchasing market share by acquiring competitor’s product line which reduces the exit barriers;
- “Reducing competitor’s exit barriers in many ways like providing spare parts for competitor’s products, producing private label goods and taking over long-term contracts.”
- “Demonstrating a strong commitment to staying in the business.”
- “Developing and disclosing credible information which reduces uncertainty;”
- Raising the cost of competitors staying in business by reinvestment in new products or process improvements.
- Niche: “Create or defend a strong position in a particular segment.” Porter said that this strategy’s objective is to Identify and invest in a demand pocket using some of the tactics mentioned above for a leadership strategy to reduce uncertainty or exit barriers.
- Harvest: “Manage a controlled disinvestment, taking advantage of the firms’ strengths.” A harvest strategy is difficult to manage but includes an attempt to optimize cash flow, along with tactics such as “eliminating or limiting investment, reducing the number of models and channels, eliminating small customers, and reducing service” (delivery time, repair, sales assistance, etc.).
He showed that “ultimately the business is sold or liquidated.” These tactics make harvest a risky strategy and far from the universal cure-all that it is sometimes claimed to be.
- Quick Divestment: “Liquidate as early in the decline phase as possible.” “Selling the business early usually maximizes the value the firm,” Porter claimed that the earlier you sell the business, the higher the potential buyer’s uncertainty.
“Once it’s clear that the industry is waning, buyers for the assets will be in a strong bargaining position.” Exit barriers such as image and interrelationships may be a problem but are less for those who divest early.
“Putting aside until the next section the question of approaches to matching the strategy to the industry and the particular firm, we can explore the motivations for each strategic alternative and the common tactical steps in implementing it.” Through each step, a business manager can understand whether the business is in favorable or not favorable position.