Choosing a Strategy for Declining Industries

The previous discussion provides a series of analytical steps to determine the position of the firm in a declining industry:

  • Is the structure of the industry conducive to a hospitable (potentially profitable) decline phase based on the conditions in Section I?
  • What are the exit barriers facing each and every significant competitor? Who will exit quickly and who will remain?
  • Of the firms that stay, what are their relative strengths for competing in the pockets of demand that will remain in the industry? How seriously must their position be eroded before exit is likely, given their exit barriers?
  • What are the exit barriers facing the firm?
  • What are the firm‘s relative strengths vis-à-vis the pockets of demand that remain?

The process of selecting a strategy for decline is one of matching the desirability of remaining in the industry with the firm‘s relative position. The key strengths and weaknesses of the firm in determin-ing its relative position are not necessarily those that have counted earlier in the industry’s development; instead they relate to the seg-ments or pockets of demand that will remain and the particular con-ditions of the decline phase in terms of the nature of rivalry. Also central to the leadership or niche strategies is credibility in prompt-ing the exit of competitors. Differently situated firms will have dif-ferent optimal strategies for decline.

A crude framework for viewing the firm‘s choice of strategies is shown in Figure 12-2.

When the industry structure is conducive to a hospitable decline phase because of low uncertainty, low exit barriers, and so on, the firm with strengths can either seek leadership or defend a niche, de-pending on the structural desirability of competing in most of the re-maining segments versus selecting one or two particular segments. The firm with strengths has the clout to establish a leadership posi-tion—competitors.that lose the battle will exit—and the industry’s structure yields rewards once such a position is achieved. When the firm has no particular strengths, it will be unlikely to capture leader-ship overall or in a niche, but it can take advantage of the favorable industry to harvest profitably. It may choose to divest early depend-ing on the feasibility of harvest and the opportunities for sale of the business.

FIGURE 12-2.

When the industry is unfavorable for decline, because of high uncertainty, high exit barriers for competitors, and/or conditions leading to volatile end-game rivalry, investing to achieve leadership is not likely to yield rewards, and a niche position may not either. If the firm has a strong relative position, it is usually better off taking advantage of it by shrinking to a protected niche and/or harvesting. If the firm has no particular strengths, it is well advised to get out as quickly as its exit barriers permit, because other firms stuck in the in-dustry with high exit barriers will probably soon begin to attack its position successfully.

There is a third dimension to this simple framework, which is a firm‘s strategic needs to remain in the business. Strategic needs for cash flow, for example, may skew the decision toward harvest or early sale even though the other factors point to leadership. Opera-tionally, the firm must assess the nature of its strategic needs and overlay them with the other conditions for decline to determine the right strategy.

There may be advantages to an early commitment to one decline strategy or another. An early commitment to leadership may provide the signals necessary to encourage competitors to exit and the timing advantage necessary to achieve leadership. An early commitment to divestment yields the benefits that have been discussed. Postponing a choice of decline strategy tends to eliminate the polar options and forces the firm toward either niche or harvest.

A key part of strategy in declining industries, particularly ag-gressive strategies, is to find ways to encourage particular competitors out of the industry. Some ways of doing so are discussed under the leadership option earlier. Sometimes the actual exit of a competitor with high market share may be necessary before an aggressive de-cline strategy makes sense. In such cases, the firm may want to bide its time by harvesting until the major competitor resolves the exit de-cision one way or another. If the leader decides to exit, the firm can be prepared to invest, and if the leader stays, the firm may continue to harvest or divest immediately.

Source: Porter Michael E. (1998), Competitive Strategy_ Techniques for Analyzing Industries and Competitors, Free Press; Illustrated edition.

Leave a Reply

Your email address will not be published. Required fields are marked *