Competitive Strategy in Declining Industries

Question 1

What is a Declining Industry?

Answer 1

An Industry that has experienced an absolute decline in unit sales over a sustained period.

Porter, Competitive Strategy —P. 311.

Question 2

Which Issues must be first analysed when examining a Declining Industry?

Answer 2

• Causes of decline, including: technological substitution, declining demographics, shifting needs, etc.
• Strength and causes of Exit Barriers, including: liquidation value, asset specialisation, fixed and hidden exit costs, regulation, strategic constraints, and managerial irrationality.
• Rate and pattern of demand decline:
  
  • The slower and more erratic, the harder to attribute to structural factors. The faster and smoother, the more volatile the Industry becomes.
• Real and perceived uncertainties re demand decline:
  
  • The more inaccurate and optimistic, the fiercer the competition.
• The structural favourability of remaining demand pockets.
  
  • The better, the fiercer the competition.

Porter, Competitive Strategy —P. 313-322.

Question 3

Which conditions maximise Rivalrousness in Declining Industries?

Answer 3

• High fixed costs.
• High Exit Barriers.
• High strategic commitment from Rivals.
• High uncertainty re Rivals’ relative strength.
• High balance between Rivals’ relative strength.
• High bargaining power of Suppliers and Distributers.
• Low Differentiation to the point of commodification.

Porter, Competitive Strategy —P. 323.

Question 4

What are the Four Strategic Alternatives for a Firm in a Declining Industry?

Answer 4

• Lead: Attain the dominant market position.
• Specialise: Create and defend a strong position in a profitable niche.
• Harvest: Gradually divest, leveraging your strengths.
• Abandon: Quickly divest either before or as early into the Decline phase as possible to minimise losses.

Porter, Competitive Strategy —P. 325.

Question 5

What are the Major Tactical Considerations for executing the Lead and Specialise Alternatives?

Answer 5

• Commiting strongly and publicly to perservering.
• Flauting clearly superior strength and positioning.
• Reducing uncertainty re demand decline by sharing information and other means.
• Aggressively investing to gain market share and squeeze out Rivals by raising the cost of competing.
• Reducing Rivals’ Exit Barriers, e.g. by offering above-market prices for their businesses or assets, novating their obligations, etc.

All of this can apply either Industry-wide or just to one niche.

Porter, Competitive Strategy —P. 326.

Question 6

How does a Firm execute the Harvest Alternative?

Answer 6

By eliminating or minimising all capital expenses, e.g. by cutting investment, and realising maximal value from the business, e.g. by increasing prices.

Mind the hidden costs of a controlled and prolonged liquidation.

Porter, Competitive Strategy —P. 327.

This presupposes some genuine strengths on which the firm can live, as well as an environment that does not degenerate into bitter warfare. If such conditions are absent, and the Leader and Specialise strategies are unachievable, abandonment is advised.

Question 7

Broadly, when should a Firm consider pursuing each of the Four Alternatives?

Answer 7

• Lead when your strength is superior and general conditions are favourable.
• Specialise when your strength is superior and specific conditions are favourable.
• Harvest when your strength is superior and conditions are unfavourable or vice versa.
• Abandon when your strength is inferior and conditions are unfavourable.

Porter, Competitive Strategy —P. 330.

Question 8

What are common Strategic Pitfalls for a Firm in a Declining Industry?

Answer 8

• Waging wars of attrition.
• Pursuing the wrong strategic alternative.
• Failing to recognize the presence and severity of decline.

Porter, Competitive Strategy —P. 332.