Industry Change during Transition

Transition to maturity can often signal a number of important changes in an industry’s competitive environment. Some of the probable tendencies for change are as follows:

  1. Slowing growth means more competition for market share. With companies unable to maintain historical growth rates merely by holding market share, competitive attention turns inward toward attacking the shares of the ot This situation occurred in 1978 in the dishwasher business, which was becoming saturated, when both GE and Maytag began to attack Hobart aggressively in the higher- price segments of the market. Increased competition for market share requires a fundamental reorientation in a company’s perspec-tive and a completely new set of assumptions about how competitors will behave and react. Competitor analysis like that described in Chapters 3 and 4 must be repeated. Knowledge of competitors’ characteristics and their reactions that has been gained in the past must be reassessed, if not discarded. Not only are competitors prob-ably going to be more aggressive, but also the likelihood of misper- ceptions and “irrational” retaliation is great. Outbreaks of price, service, and promotional warfare are common during transition to maturity.
  2. Firms in the industry increasingly are selling to experienced, repeat buyers. The product is no longer new but an established, legitimate Buyers are often increasingly knowledgeable and experi-enced, having already purchased the product, sometimes repeatedly.

The buyers’ focus shifts from deciding whether to purchase the product at all to making choices among brands. Approaching these differently oriented buyers requires a fundamental reassessment of strategy.

  1. Competition often shifts toward greater emphasis on cost and service. As a result of slower growth, more knowledgeable buyers, and usually greater technological maturity, competition tends to become more cost– and service-orient This development shifts the requirements for success in the industry and may require a dramatic reorientation of the “way of life” in a company used to competing on other grounds. The added pressure on costs may also increase requirements for capital by forcing the firm to acquire the most modern facilities and equipment.
  2. There is a topping-out problem in adding industry capacity and personnel. As the industry adjusts to slower growth, the rate of capacity addition in the industry must slow down as well or overca-pacity will occur. Thus companies’ orientations toward adding ca-pacity and personnel must fundamentally shift and be disassociated from the euphoria of the past. A firm is confronted with the need to monitor competitors’ capacity additions closely and to time its ca-pacity additions with precision. Rapid growth will no longer quickly cover mistakes by rapidly eliminating excess capacity.

These shifts in perspective rarely occur in maturing industries, and overshooting of industry capacity relative to demand is com-mon. Overshooting leads to a period of overcapacity, accentuating the tendency during transition toward price warfare. The greater the size of efficient increments of capacity in the industry, the more difficult the topping-out problem. It is also more difficult if the person-nel to be added are highly skilled and require long periods to locate and train.

  1. Manufacturing, marketing, distributing, selling, and re-search methods are often undergoing change. These changes are caused by increased competition for market share, technological ma-turity, and buyer sophisticatio (Some of the possible changes have been discussed in Chapter 8.)The firm is faced with the need for either a fundamental reorientation of its functional policies or some strategic action that will make reorientation unnecessary. If the firm must respond to such changes in functional policy, capital resources and new skills are almost always required. Adoption of new manu-facturing methods may accentuate the problems of overcapacity dis-cussed above.
  1. New products and applications are harder to come by. Whereas the growth phase may have been one of rapid discovery of new products and applications, the ability to continue product change generally becomes increasingly limited, or the costs and risks greatly increase, as the industry mat This change requires, among other things, a reorientation of attitude toward research and new product development.
  2. International competition increases. As a consequence of technological maturity, often accompanied by product standardiza-tion and increasing emphasis on costs, transition is often marked by the emergence of significant international competition. The forces leading to internationalization of an industry are discussed in detail in Chapter 13, as are some of the key implications of global competi- International competitors often have different cost structures and different goals than domestic firms and a home market base from which to operate. Significant exports or foreign investment by domestic firms usually predates transition to maturity in a large mar-ket like the United States.
  3. Industry profits often fall during the transition period, sometimes temporarily and sometimes Slowing growth, more sophisticated buyers, more emphasis on market share, and the uncertainties and difficulties of the required strategic changes usually mean that industry profits fall in the short run from the levels of the pretransition growth phase. Some firms may be more affected than others, the firms with smaller share usually the most. Falling profits reduce cash flow during a period when it may be sorely needed. They also tend to send stock prices tumbling for publicly held companies and increase the difficulty of raising debt fi-nancing. Whether or not profits will rebound depends on the level of mobility barriers and other elements of industry structure which have been discussed in Part I.
  4. Dealers’ margins fall, but their power increases. For the same reasons that industry profits are often depressed, dealers’ mar-gins may be squeezed, and many dealers may drop out of the busi-ness—often before the effect on manufacturers’ profits is notice-able. This factor may be seen recently among dealers of television receivers and recreational vehicles. Such trends tighten competition among industry participants for dealers, who may have been easy to find and hold in the growth phase but not upon maturity. Thus, dealers’ power may increase markedly.

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

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