CHAPTER 12

Strategies for Declining Industries

MILTON DE GUIA
SAT 11:30 2:30
DR. OFELIA CARAGUE

16-1

Strategies for Declining Markets

Three sets of factors help determine the
strategic attractiveness of declining
product markets:
Conditions of demand,
Exit barriers, and
Factors affecting the intensity of future
competitive rivalry.

16-2

Strategies for Declining Markets

Conditions of demand
Technological advances produce substitutes
often with higher quality or lower cost.
Demographic shifts.
Change in needs, tastes, or lifestyles.
Cost of inputs or complementary products.

Exit barriers
The higher the exit barriers, the less
hospitable a product-market will be.
16-3

Strategies for Declining Markets

Intensity of future competitive rivalry
Size and bargaining power of the customers
who continue to buy the product,
Customers ability to switch to substitute
products or to alternative suppliers, and
Any potential diseconomies of scale involved
in capturing an increased share of the
remaining volume.

16-4

Strategies for Declining Markets

Divestment or liquidation
The firm that divests early runs the risk that its
forecast of the industrys future may be wrong.
Quick divestment may not be possible if the
firm faces high exit barriers.
By planning early for departure, the firm may
be able to reduce some of those barriers
before the liquidation is necessary.

16-5

Strategies for Declining Markets

Marketing strategies for remaining
competitors
Harvesting strategy
The objective is to generate cash quickly by
maximizing cash flow over a relatively short
term.
This typically involves:
Avoiding any additional investment in the business,
Greatly reducing operating expenses, and
Raising prices.
16-6

Strategies for Declining Markets

Profitable survivor strategy
Investing enough to increase share position
and establishing itself as the industry leader
for the remainder of the markets decline.
The key to the success is to encourage other
competitors to leave the market early.

16-7

Strategies for Declining Markets

Niche Strategy
May be viable if one or more substantial
segments will either remain as stable pockets
of demand or decay slowly.
Even smaller competitors can sometimes
successfully pursue this strategy.

16-8

Strategies
Strategies for
for Declining
Declining Industries
Industries

Features
of declining
industries

- Excess capacity
- Lack of technological change
- Consolidation (but some new entry
as new firms exit)
- Old machines and employees

Smooth adjustment
of capacity
depends upon

- Predictability of decline
Durable assets
Costs of closure
- Barriers to exit
Management
commitment
- Strategies of surviving firms

16-9

Strategy
Strategy Options
Options in
in Declining
Declining
Industries
Industries
LEADERSHIP

Establish dominant market position

-encourage exit of rivals
-buy market share through acquisition
-acquire capacity
-demonstrate commitment
-dispel optimism about the industrys future
-raise the stakes

NICHE

Identify an attractive segment and dominate it.

HARVEST

Maximize cash flow from existing sources

DIVEST

Get out while there is still a market for industry assets

16-10

Selecting
Selecting aa Strategy
Strategy in
in aa Declining
Declining
Industry
Industry
COMPANYS COMPETITIVE POSITION
Strengths in remaining
demand pockets

Favorable

INDUSTRY
STRUCTURE

LEADERSHIP

to

or

decline

NICHE

Lacks strength in
remaining demand
pocket
HARVEST
or

DIVEST
Unfavorable
to
decline

NICHE
or
HARVEST

DIVEST
QUICKLY

16-11

Traditional models suggest that entry of new rival will be

countered quickly by incumbents.

Several factors prevent effective retaliation:

Managers of incumbent firms may fail to see the
entrant.
Even after new entrant is detected, many
managers may assume that niches occupied by
new entrants are not important enough to be of
concern (see examples of Western Union and
emergence of natural cereals).

16-12

 When confronted by new rivals, the

managers of new entrants are likely to
respond in the following ways:
Withdraw to supposedly safer area in
competitive space.
Diversify.
Improve current offerings of products and
services.

16-13

 Managers of incumbent firms rarely enjoy

any sort of long-term benefit from a
strategic withdrawal from market
segments invaded by new entrants.
Likely to find that competition has actually
escalated (and will continue to intensify).
New entrants often totally restructure the
industries they enter.

16-14