The changes that often accompany transition to maturity repre-sent possible changes in the basic structure of the industry. Each ma-jor element of industry structure often is changing: overall mobility barriers, the relative significance of various barriers, the intensity of rivalry (it usually increases), and so on. Structural change nearly al-ways means that firms must respond strategically, because it implies that the fundamental nature of competition changes correspondingly in the industry.
Some characteristic strategic issues often arise in transition. These are presented as issues to examine rather than generalizations that will apply to all industries; like humans, all industries mature a little differently. Many of these approaches can be a basis for the en-try of new firms into an industry even though it is mature.
1. OVERALL COST LEADERSHIP VERSUS DIFFERENTIATE VERSUS FOCUS—THE STRATEGIC DILEMMA MADE ACUTE BY MATURITY
Rapid growth tends to mask strategic errors and allow most, if not all, companies in the industry to survive and even to prosper fi-nancially. Strategic experimentation is high, and a wide variety of strategies can coexist. Strategic sloppiness is generally exposed by in-dustry maturity, however. Maturity may force companies to con-front, often for the first time, the need to choose among the three generic strategies described in Chapter 2. It becomes a matter of sur-vival.
2. SOPHISTICATED COST ANALYSIS
Cost analysis becomes increasingly important in maturity to (1) rationalize the product mix and (2) price correctly.
RATIONALIZING THE PRODUCT MIX
Although a broad product line and frequent introduction of new varieties and options may have been possible during growth, and often necessary and desirable for industry development, this sit-uation may no longer be viable in the mature setting. Cost competi-tion and fights for market share are too demanding. As a result, a quantum improvement in the sophistication of product costing is necessary to allow pruning of unprofitable items from the line and to focus attention on items either that have some distinctive advantage (technology, cost, image, etc.) or whose buyers are “good” buyers.1 Average costing for groups of products, or the loading of average overhead for costing purposes, becomes inadequate for evaluating the product line and possible additions to it. The need to rationalize the product line sometimes creates the need to install computerized costing systems, which had not been of high priority during the in-dustry’s developmental years. Such line pruning has been crucial to RCA’s success with Hertz, for example.
Related to product line rationalization is the change in pricing methodology that is often necessary in maturity. Although average- cost pricing, or pricing the line as a whole rather than as individual items, may have been sufficient in the growth era,2 maturity often requires increased capability to measure costs on individual items and to price accordingly. Implicit cross-subsidization within the product line through average-cost pricing hides products whose mar-kets cannot support their true costs and gives away profits in those situations in which buyers are not price sensitive. Cross-subsidiza-tion also invites price cutting or new product introductions by com-petitors against the items priced artificially high. Competitors who lack the costing sophistication to price rationally, and hence who re-tard the adjustment of prices on unrealistically low-priced items, are sometimes a problem in mature industries.
Sometimes other aspects of pricing strategy can and should be changed in maturity. For example, Mark Controls has achieved great success in the tough valve business by eliminating unprofitable lines and also by renegotiating contracts with buyers to include esca-lator clauses for inflation. Contracts in the industry traditionally had been fixed price, and inflation adjustments were not critical to raising prices in the growth phase; no other firm had ever had to ne-gotiate escalator clauses. However, they have proved to be of great benefit in the mature phase, when making price increases stick has become increasingly difficult.
We might summarize this and the other points in this section by saying that an enhanced level of “financial consciousness” along a variety of dimensions is often necessary in maturity, whereas in the developmental period of the industry areas such as new products and research may have rightly held center stage. Raising financial con-sciousness may be more or less difficult in the industry depending on the training and orientation of management. In the Mark Controls case, for example, it took a financially oriented outsider to initiate financial innovations in an industry dominated by established family firms.
3. PROCESS INNOVATION AND DESIGN FOR MANUFACTURE
The relative importance of process innovations usually in-creases in maturity, as does the payoff for designing the product and its delivery system to facilitate lower-cost manufacturing and con-trol.3 Japanese industry has put a great premium on this factor, to which many attribute its success in industries such as television re-ceivers. Designing for manufacture has also been key to Canteen Corporation’s improvements in position in the maturing industrial food service business. Canteen has moved from allowing local cooks latitude in the preparation of meals toward common dish formula-tions nationwide. This change has improved the consistency of the quality of meals, allowed easier shifting of cooks among locations, facilitated easier control of operations, and led to other cost-savings and productivity improvements.”
4. INCREASING SCOPE OF PURCHASES
Increasing purchases of existing customers may be more desir-able than seeking new customers. Incremental sales to existing cus-tomers can sometimes be increased by supplying peripheral equip-ment and service, upgrading the product line, widening the line, and so on. Such a strategy may take the firm out of the industry into re-lated industries. This strategy is often less costly than finding new customers. In a mature industry, winning new customers usually means battling for market share with competitors and is consequent–ly quite expensive.
This strategy has been or is being practiced successfully by such firms as Southland Corp. (7-Eleven Stores), Household Finance Corporation (HFC), and Gerber Products. Southland is adding fast food, self-service gas, pinball machines, and other lines to its stores to capture a bigger share of its customers’ dollars and to increase im-pulse buying and avoid the cost of establishing new locations. Simi–larly, HFC is adding new services, such as tax preparation, larger loans, and even banking, to broaden the product line it can sell to its very large customer base. Gerber’s strategy of “more bucks per baby” is another variation of the same approach. Gerber has added infant clothes and other infant products to its dominant baby-food line.
5. BUY CHEAP ASSETS
Sometimes assets can be acquired very cheaply as a result of the company distress that is caused by transition to maturity. A strategy of acquiring distressed companies or buying liquidated assets can improve margins and create a low-cost position if the rate of techno-logical change is not too great. This strategy has been employed suc-cessfully by little-known Heilman in the brewing industry. Despite increasing concentration at the top of the industry, Heilman grew at 18 percent per year from 1972-1976 (to $300 million in sales in 1976), with a return on equity in excess of 20 percent, by acquiring regional brewers and used equipment at bargain prices. Industry leaders have been blocked from acquisitions by the antitrust laws and have been forced to build large new plants at current prices. White Consolidated also employs a variant of this strategy. It spe-cializes in purchasing distressed companies, such as Sundstrand’s ma-chine tool business and Westinghouse’s appliance business, at prices below book value and then reducing overhead. In many cases this strategy results in a profitable going concern.
6. BUYER SELECTION
As buyers become more knowledgeable and competitive pres-sures increase in maturity, buyer selection can sometimes be a key to continued profitability. Buyers who may not have exercised their bargaining power in the past, or had less power because of limited product availability, will usually not be bashful about exercising their power in maturity. Identifying “good” buyers and locking them in, as discussed in Chapter 6, becomes crucial.
7. DIFFERENT COST CURVES
There is often more than one cost curve possible in an industry. The firm that is not the overall cost leader in a mature market can sometimes find new cost curves which may actually make it a lower- cost producer for certain types of buyers, product varieties, or order sizes. This step is key to implementing the generic strategy of focus described in Chapter 2. Consider Figure 11–1, for example:
FIGURE 11-1. Alternative Cost Curves
The firm explicitly designing its manufacturing process for flex-ibility, rapid setups, and short lots (general purpose, computer-con-trolled machines, for example) may well enjoy cost advantages over the high-volume producer for servicing custom orders or small lots. A viable strategy in such a situation is to focus on orders in the cir-cled area of Figure 11-1. Cost curve differences allowing such a strategy may be based on small orders, custom orders, particular small-volume product varieties, and others. Wickham Skinner has described how such manufacturing strategies can be implemented in his concept of the “focused factory.”5
8. COMPETING INTERNATIONALLY
A firm may escape maturity by competing internationally where the industry is more favorably structured. This straightforward ap-proach has been practiced, for example, by Crown Cork and Seal in metal containers and crowns, and Massey-Ferguson in farm imple-ments. Sometimes equipment that is obsolete in the home market can be used quite effectively in international markets, greatly lower-ing the costs of entry there. Or industry structure may be a great deal more favorable internationally, with less sophisticated and powerful buyers, fewer competitors, and the like. The drawbacks to this strat-egy are the familiar risks of international competition and the fact that it may only postpone maturity rather than deal with it.
9. SHOULD TRANSITION BE ATTEMPTED AT ALL?
It should not be taken as given that the strategic shifts required to compete successfully in a maturing industry should be attempted at all, in view of the substantial and perhaps new types of resources and skills that may be required. The choice depends not only on re-sources but also on the number of other firms who have the capabil-ity to keep playing in the industry, the expected duration of the tur-moil in the industry while adjustments to maturity are made, and the future prospects for industry profits (which depend on future indus-try structure).
For some companies, a disinvestment strategy may be better than making further reinvestments with an uncertain payout—which is what Dean Foods has done in fluid milk. Emphasis at Dean has been on cost cutting and highly selective investments in cost-saving equipment rather than on expansion of market position.
Industry leaders may or may not be in the best position to make the adjustments required by transition if they have substantial iner-tia built into their strategies and strong ties to the strategic require-ments of the growth phase of the industry’s development. The flex-ibility of a smaller firm may prove advantageous in transition, provided the resources needed to adjust are available. The small firm may also be able to segment the market easier. Similarly, a new firm entering the industry during the transition phase, possessing finan-cial and other resources but no ties to the past, is often able to estab-lish a strong position. The turmoil caused by the transition period yields opportunities for the potential entrant provided long-run in-dustry structure is favorable.
Source: Porter Michael E. (1998), Competitive Strategy_ Techniques for Analyzing Industries and Competitors, Free Press; Illustrated edition.