Strategic Pitfalls in Transition

In addition to failure to recognize the strategic implications of transition described above, there is the tendency for firms to fall prey to some characteristic strategic pitfalls:

  1. A company’s self-perceptions and its perception of the in-dustry. Companies develop perceptions or images of themselves and their relative capabilities (“we are the quality leader”; “we provide superior customer service”), which are reflected in the implicit as-sumptions that form the basis of their strategies (see Chapter 3). These self-perceptions may be increasingly inaccurate as transition proceeds, buyers’ priorities adjust, and competitors respond to new industry conditions. Similarly, firms have assumptions about the in-dustry, competitors, buyers, and suppliers which may be invalidated by transition. Yet altering these assumptions, built up through ac-tual past experience, is sometimes a difficult process.
  2. Caught in the middle. The problem of being caught in the middle described in Chapter 2 is particularly acute in transition to maturity. Transition often squeezes out the slack that has made this strategy viable in the past.
  3. The cash trapinvestments to build share in a mature mar-ket. Cash should be invested in a business only with the expectation of being able to remove it later. In a mature, slow-growing industry, the assumptions required to justify investing new cash in order to build market share are often heroic. Maturity of the industry works against increasing or maintaining margins long enough to recoup cash investments down the road, by making the present value of cash inflows justify the outflows. Thus businesses in maturity can be cash traps, particularly when a firm is not in a strong market position but is attempting to build a large market share in a maturing market. The odds are against it.

A related pitfall is placing heavy attention on revenues in the maturing market instead of on profitability. This strategy may have been desirable in the growth phase, but it usually faces diminishing returns in maturity. Hertz may very well have had this problem in the late 1960s, offering RCA much opportunity for achieving a prof-it turnaround in the mid-1970s.

  1. Giving up market share too easily in favor of short-run prof-its. In the face of the profit pressures in transition, there seems to be a tendency for some companies to try to maintain the profitability of the recent past—which is done at the expense of market share or by foregoing marketing, R&D, and other needed investments, which in turn hurts future market position. Unwillingness to accept lower profits during transition can be seriously shortsighted if economies of scale will be significant in the mature industry. A period of lower profits may be inevitable while industry rationalization occurs, and a cool head is necessary to avoid overreaction.
  2. Resentment and irrational reaction to price competition (“we will not compete on price”). It is often difficult for firms to ac-cept the need for price competition after a period in which it has not been necessary, and therefore, when avoiding it may have been a sa-cred Some managements even view price competition as un-seemly or beneath their dignity. This can be a dangerous reaction to transition, when a firm willing to price aggressively may be able to take share that will be crucial to establishing a low-cost position for the long run.
  3. Resentment and irrational reaction to changes in industry practices (“they are hurting the industry”). Changes in industry practices, such as marketing techniques, production methods, and the nature of distributor contracts are often an inevitable part of transiti They may be important to the industry’s long-run poten-tial, but there is often resistance to them. Substitutions of machines for hand methods are resisted, as they have been in some sporting goods businesses, and firms are unwilling to begin aggressively mar-keting their products (“marketing does not work in this industry; it requires personal selling”). And so on. Such resistance can put a firm seriously behind in adapting to the new competitive environ-ment.
  4. Overemphasis on “creative,” “new” products rather than improving and aggressively selling existing ones. Although past suc-cess in the early and growth phases of an industry may have been built on research and on new products, the onset of maturity often means that new products and applications are harder to come by. It is usually appropriate that the focus of innovative activity should change, putting standardization rather than newness and fine tuning at a premium. Yet this development is not satisfying to some com-panies and is often resisted.
  1. Clinging to “higher quality” as an excuse for not meeting aggressive pricing and marketing moves of competitors. High qual-ity can be a crucial company strength, but quality differentials have a tendency to erode as an industry matures (see Chapter 8). Even if they remain, more knowledgeable buyers may be willing to trade quality for lower prices in a mature business where they have pur-chased the products before. Yet it is difficult for many companies to accept the fact that they do not possess the highest quality product or that their quality is unnecessarily high.
  2. Overhanging excess capacity. As a result of capacity over-shooting demand, or because of capacity increases that inevitably accompany the plant modernization required to compete in the ma-ture industry, some firms may have some excess capacit Its mere presence creates both subtle and unsubtle pressures to utilize it, and it can be used in ways that will undermine the firm‘s strategy. For ex-ample, overhanging capacity can push a firm into the middle, in the terminology of Chapter 2, rather than maintaining a more focused approach. Or it can lead to managerial pressures to fall into the cash trap. It is often desirable to sell off or scrap excess capacity rather than hold it. Obviously, however, capacity should not be sold to anyone who will use it in the same business.

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

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