About 80% of all U.S. industries
are now competing in “mature” industries that are characterized by:
Demand that is saturated and slow-growing if not
Excess supply of competition too willing to discount;
Eroding margins, profits, and returns;
Emphasis on cost-cutting to stay ahead of margin erosion;
And consolidation of competitors.
These difficult conditions are not
apt to change, because a growing excess of global supply wants a bigger piece
of the slow-growth, post-consumer-demand US market.
About 20% of the players in any
given industry are apt to be doing well in spite of mature conditions. By
looking at both financial results for an industry group and at individual
firms' operations within an industry, I infer that:
20% of the players may be making 100% of the real
profits, but only 80% of the reported profits. Because the best are expensing
investments for the future which are aimed at the living edge of targeted
customer needs while aggressively writing off assets that served dying or
nonexistent needs, they report less profits than they could.
Another 30% of the firms report 20% of the profits, but
most are unknowingly harvesting their businesses. They are managing the past;
cutting costs; postponing write-offs with wishful thinking - all to report
profits and pay unnecessary taxes.
The bottom 50% are breaking even or reporting losses
while doing the same as the second group. Because of depreciation, they may
generate a little positive cashflow in spite of accounting losses. Although
terminal, many hang on hoping for better times while practicing different types
of denial thinking. They might rearrange some furniture, but they are not doing
any significant restructuring or experimentation.
WHAT ARE THE SOLUTIONS?
There are no specific success
formulas for all businesses, but many firms have ineffective operating
strategies, because they are based on some simplistic and outdated strategic
assumptions. Three of the most common ones we might call – “lifecycle”
thinking; “cost-curve” fixation; and “lead-niche-or harvest” activity. Each of
these themes have value if applied carefully, but if applied loosely, they have
plenty of pitfalls.
Enough managers have seen the
diagram for the "product life-cycle" below to skip a detailed
description. This diagram also parallels the consumer lead growth of the US economy from
1946 to the present. Now that 75% of Americans have more activities and
possessions than they have waking hours to consume, aggregate demand for more
and more industries will grow with the population rate of 1%.
The Product Life Cycle
Some of the
pitfall thinking stimulated by this diagram:
Early Late Maturity Desire
“Our industry isn't going anywhere, lets milk the
business and diversify into some sexy growth business.” So, for example, US
firms harvested portable radios twenty years ago while the Japanese
microsegmented the market with lifestyle models and have stimulated growth ever
since. Conclusions: don't get bored with mature products too quickly, reinvent
them and niche. And, don't believe the outside experts’ forecasts for an
industry, their often wrong; instead stay close to the living edge of customer
needs and trust personal hunches more.
“There is too much capacity in the industry, let's
liquidate, sell, or consolidate with our competitors.” There is, for example,
worldwide auto manufacturing capacity of about 45 million cars annually with a
demand for about 30 million. There is a shortage, however, of just-in-time,
quality, demand-pull capacity which allows us to design our car today and get
it in two weeks. There is an excess, however, of mass-produced, ram-and-jam-it
through the channel capacity. Conclusion: become customer-needs, just-in-time,
quality driven to do well, and let traditional producers suffer.
BE THE LOW COST PRODUCER
The firms that are obsessed with
cutting costs and discounting prices reason that: whomever can get their
production costs for goods and/or services down the fastest can-cut prices
faster; win market share; achieve growing economies of scale to lower costs
further to support another round of discounting; etc. Wal-Mart has succeeded in
part due to this strategy.
Some of the pitfalls for this
competitive assumption are that:
It assumes that all products and services are like raw
commodities, yet most winning firms today are increasingly providing niche to
customized solutions for customers in a value-added way.
The few firms that do achieve large-scale economics risk:
becoming targets for deep-pocketed new entrants (often foreign); dying of a
thousand cuts due to nichers; and achieving diseconomies of scale for people,
service quality and general flexibility in a fast changing world. Size
economics have not worked well recently for Sears, GM, Texas Air, IBM-PCs,
major T.V. networks, and others.
This volume game is best played by companies with big
egos and public or deep-pocketed capital which would rule out many
privately-held firms that cannot generate enough capital internally and
Conclusions: cost efficiency over
competitors is of secondary importance to targeting customer needs and filling
them in a significantly differentiated way other than price. Because price
concessions are immediately apparent to and matched or beaten by too many
competitors, there is rarely a sustainable competitive advantage in initiating
them. A great majority of competitors should consider other strategies now that
mass-market demand for standard products and services doesn't exist.
There is, furthermore, no
correlation between volume(or market share) and profitability. In a growing,
mass market US economy there
was a positive correlation which ended in 1974. Today we want to identify
profitable win/win relationship customers and retain them a greater rate than
the competition. If customers leave for lower prices at which we would lose money,
then it is better to downsize all elements of the business while keeping the
best to become more focused and profitable with less headaches.
LEAD, NICHE, OR HARVEST/SELL - NOW
Conventional wisdom is that in
mature to declining industries each firm should pick one of several pathways to
boldly pursue. To “lead” implies cost-volume-price leadership as well as to
buy, merge, or bluff out competitors to rationalize excess capacity. Be the
last blacksmith or airline in business and then you will make money.
The pitfalls of “leading” with
cost-price-volume have already been addressed. And the problem of acquiring and
consolidating the weakest 80% of the competitors is that real money would be
paid for obsolete assets and poorly culturized employees to get bigger when
that may not help.
We might conclude that: to get
bigger, firms must start thinking smaller by targeting and perfectly serving
smaller niches within their existing customer base. The whole notion of economy
of scale doesn't work in a world with demanding customers who have fragmenting
needs or in a world of faster change that requires corporate agility.
The “niche” option is not an option;
it is critical for all businesses. The problems are:
The term is overused and misunderstood, so we all should
spend time getting more knowledgeable about how to define, target, and pursue
Niching is difficult. We have to identify overlooked or
emerging needs and address them with leading-edge solutions in a patient,
focused way. Within the product lifecycle diagram, we need "startup
stage" skills, not administrative skills that most managers in mature
The first priority is to determine which customers are in
our core niche- the 20% of the customers who are yielding 120-140% of most
firms's operating profits- and serve them better. Product and volume oriented
firms are already selling to many different types of customers and don't know
The option to “sell” is a real one.
If CEO's of marginal firms can reassess themselves and their ineffective
strategies and do their own turnaround, great. But, if they aren't prepared to
change dramatically starting with themselves, then they will do better to sell
sooner rather than later.
To “harvest” is difficult today,
because the customers, suppliers, investors, and employees are ever quicker to
leave sinking ships. And, the excessive competition, environmental change, and
slow-growth demand can wipe out firms quickly. There is no longer a 30 year
post WWII growth tide to carry up all of the boats including the over-milked
As markets mature, customers can be
more demanding and competition more intense. We must continually sharpen our
strategic thinking and customer segmenting. Simplistic strategies will fail us,
especially the ones that are based on financial optimization, cost-reduction,
and volume with its supposed economies of scale, because standard products and
services have yielded to fragmented and changing demand.
ÓMerrifield Consulting Group, Inc., Article 1.1