PPT 151

1
Chapter Fifteen
Strategies in Declining and Hostile Markets
2
Declining Markets

• Involve a fall in demand, often caused by an
  external event such as the creation of a
  competing technology, a change in customer needs
  or tastes, or a shift in government policy.
• Are not always to be avoided.

3
Strategic Alternative in Declining Markets

• Create growth by revitalizing industry or by
  focusing on a growth submarket
• Be the profitable survivor
• Milk or harvest
• Exit or liquidate

4
Routes to Revitalizing a Stagnant Market
New Markets
New Products
Revitalized Markets
Super Premium Arena
New Applications
Revitalized Marketing
Governmental-Stimulated Growth
Exploitation of Growth Submarkets
Figure 15.1
5
Be the Profitable Survivor

• Encourage Competitors to Exit
• Be Visible About Commitment to Survive
• Raise the Costs of Competing
• Introduce New Products Cover New Segments
• Reduce Competitors Exit Barriers
• Create a Dominant Brand in Fragmented Declining
  Market
• Purchase a Competitors Market Share or
  Production Capacity

6
Milk or Harvest

• Aim is to generate cash flow by reducing
  investment and operating expenses, even if that
  causes sales and market share to decrease.
• Conditions Favoring a Milking Strategy
• Decline rate is pronounced, but not excessively
  steep.
• Stable price structure is profitable for
  efficient firms.
• Business position is weak, but customer loyalty
  will still produce sales and profit.
• Business is not central to strategic direction.
• A milking strategy can be successfully managed.

7
Milk or Harvest

• Implementation Problems
• Difficult to Place and Motivate Manager
• Employee Morale May Suffer
• Customers May Lose Confidence
• Competitors May Attack More Vigorously
• When the Premises are Wrong a Milking Strategy
  Can Often be Reversed e.g., oatmeal, pocket
  watches
• Flow of Funds from Milking Needs to be Forecasted
  and Managed
• The Hold Strategy variant of milking strategy
  adequate level of investment is employed to
  maintain quality, production facilities, and
  customer loyalty. Can be used long term to
  manage cash cow or as an interim strategy until
  uncertainties of industry are resolved.

8
Divestment or Liquidation

• Rapid and Accelerating Decline Rate
• Extreme Price Pressures
• Business Position is Weak Losing Money
• No Longer Part of Strategic Direction
• Exit Barriers Can be Overcome

9
Divestment or Liquidation

• Potential Exit Barriers
• Specialized Assets
• Long-term Contracts with Suppliers or Labor
• Commitments for Spare Parts Service
• Effect on Reputation and Other Company Operations
• Government Restrictions Prohibit Exit

10
Strategies for Declining or Stagnant Industries
Business Position in Key Segments

• Industry Environment
• Rate of Decline
• Pockets of Demand
• Price Pressure

Figure 15.2
11
The Investment Decision in a Declining Industry

• Some Strategic Uncertainties
• Market Prospects
• 1. Is the rate of decline orderly and
  predictable?
• 2. Are there pockets of enduring demand?
• 3. What are the reasons for the decline is it
  temporary?
• Competitive Intensity
• 4. Are there dominant competitors with unique
  skills or competencies?
• 5. Are there many competitors unwilling to exit
  or contract gracefully?
• 6. Are customers brand loyal? Is there product
  differentiation?
• 7. Are there price pressures?

Figure 15.3
12
The Investment Decision in a Declining Industry

• Some Strategic Uncertainties
• Performance/Strengths
• 8. Is the business profitable? What are its
  future prospects?
• 9. What is the market-share position and trend?
• 10. Does the business have some SCAs with
  respect to key segments?
• 11. Can the business manage costs in the face of
  declining sales?
• Interrelationships with Other Businesses
• 12. Is there synergy with other businesses?
• 13. Is the business compatible with the firms
  current strategic thrust?
• 14. Can the firm support the cash needs of the
  business?
• Implementation barriers
• 15. What are the exit barriers?
• 16. Can the organization manage all the
  investment options?

Figure 15.3
13
Hostile Markets

• Usually associated with
• Overcapacity
• Low Margins
• Intense Competition
• Management in Turmoil
• Most industries are hostile or are becoming
  hostile.

14
Six Phases of Hostility

• Phase 1 - Margin pressure
• Phase 2 - Share shifts 1- 5 annually
• Due to Leaders Trap, Flight to Quality,
  Acquisitions
• Phase 3 - Product proliferation
• Phase 4 - Self-defeating cost reduction
• Phase 5 - Consolidation and shakeout
• 1. Internal Reductions
• 2. Mergers Acquisitions
• 3. Global Players Combining
• Phase 6 - Rescue

Figure 15.4
15
Strategies That Win in Hostile Markets

• Focus on large customers
• Differentiate on reliability
• Cover broad spectrum of price points
• Turn price into a commodity
• Have an effective cost structure

16
Key Learnings

• One strategic option in a declining or stagnant
  industry is to create a growth context,
  revitalizing the industry by seeking new markets,
  technologies, applications-marketing tactics,
  government-stimulated demand, and growth
  submarkets.
• Another option is to be the profitable survivor
  by strengthening a leadership position and
  encouraging others to exit, perhaps by buying
  their assets.
• A milking or harvesting strategy (generating cash
  flow by reducing investment and operation
  expenses) works when the involved business is not
  crucial to the firm financially or
  synergistically. For milking to be feasible,
  though, sales must decline in an orderly way.
• The exit decision can be optimal, even though it
  is psychologically and professionally painful and
  usually must face organizational barriers. A
  proactive divestiture policy will be better than
  waiting until the situation deteriorates to the
  point that the decision is obvious.

17
Key Learnings

• The investment decision in declining markets
  should rely on an analysis of market prospects,
  competitive intensity, business strengths,
  interrelationships with other businesses in the
  firm, and implementation barriers.
• Hostile markets, caused by too many competitors
  as well as declining demand, typically go through
  phases margin pressures, share shifts, product
  proliferation, self-defeating cost reductions,
  consolidation, and rescue.
• Two strategies to gain above-average returns in
  hostile markets are represented by Golds (number
  one or two firms with economies of scale and
  substantial presence) and Silvers (number three
  or lower firms that focus on a smaller segment,
  usually at the high end of the market.