The forces of consolidation are reshaping industry after industry. Once-stable markets like banking are shedding weaker players and coalescing around a small number of powerful consolidators. Meanwhile, traditionally volatile emerging industries such as software are experiencing faster and more intense shakeouts, even as their overall sales continue to grow. The personal computer industry, which shrank from 832 to 435 companies in the late 1980s, may soon be reduced to as few as 5 long-term winners. Few industries are exempt from the wrenching failures and drastic shrinking of aspirations that accompany a shakeout. Especially ironic is the ongoing shakeout in the outplacement industry. The wave of downsizing that swept through U.S. companies beginning in the late 1980s sent demand for outplacement services skyrocketing. The number of outplacement firms expanded by 35% in three years to exploit annual growth rates of up to 42%. By 1994, growth had slowed abruptly, and many firms began closing their doors or shrinking—leaving outplacement executives themselves in need of outplacement. The shakeout in outplacement has followed a familiar pattern. Demand dropped as a result of fewer layoffs and a diminished sense of guilt on the part of the executives doing the downsizing. Companies no longer routinely provide generous outplacement packages. At the same time, corporate clients squeezed margins by demanding better value—a trend compounded by the entry of Drake Beam Morin (also known as “McOutplacement”), a large, low-cost firm. Meanwhile, indirect competition in the form of “how-to” books, videotapes, and walk-in outlets lessened demand and undercut the industry’s specialized knowledge base. One firm saw its profit margins fall from 24% in 1988 to 4.5% in 1993. A shakeout threatens all companies in a market, but it offers an opportunity to those who see it coming and can anticipate the path it is likely to follow. While all shakeouts remove excess capacity from an industry, there are two very different shakeout syndromes, each with its predictable pattern, each following a different economic logic. Armed with foresight, managers can cope with the paralyzing uncertainties of consolidation better and develop strategies to help companies land on their feet. The Boom-and-Bust SyndromeBoom-and-bust shakeouts typically occur in hot emerging markets or in highly cyclical businesses. During a boom, an unsustainable glut of competitors is attracted to the market at a rate that overshoots the industry’s long-term carrying capacity. As competition intensifies and falling prices put pressure on margins, the number of new entrants drops, and many companies fail. The ultimate winners survive by adapting to a slower-growth market that puts a premium on operational effectiveness instead of entrepreneurial drive. Why do so many companies enter already crowded markets? Consider the conditions that have attracted hundreds of Internet start-up companies to provide products such as Web servers, browsers, or security programs:
A glut of competitors is especially likely when contagious enthusiasm sweeps through an industry, encouraged by investment bankers, venture capitalists, and analysts. The resulting folly is akin to the dysfunctional behavior of real estate developers who tend to start new projects when rents are high and prices are rising, and ignore the consequences of the supply of developments about to come on the market. A glut of competitors is likely when contagious enthusiasm sweeps through an industry. Excess capacity is exacerbated when every entrant tries to get “its share” of the market. Discount audio-video retailers, for example, grew rapidly after videocassette recorders came on the market in 1981. To achieve economies of scale, each chain sought to establish a major presence in the local markets it served. Yet most markets have room for only two “power” retailers. In 1987, the ten largest discounters were expanding store space by 25% while sales growth slowed abruptly to 10%. The resulting overcapacity was good news for consumers, who benefited from the ensuing price competition. But falling margins drove the weaker players out of the business, leaving the field to a few well-run national chains with low-cost distribution systems and tight controls. The boom-and-bust syndrome so characteristic of emerging markets is also common in highly cyclical industries. In housewares, for example, the syndrome is so common that one manufacturer transformed the regular fluctuations into a surprisingly accurate forecasting model. Sales of low-priced single-function housewares, such as electric cooking pots and waffle irons, typically grow quickly in the first three years of a product cycle as companies try to meet the large initial demand. Barriers to entry are low, so dozens of companies can be counted on to enter during this phase. These “rabbits” breed rapidly, saturate the market, and die off quickly. At the end of the holiday gift-buying season, when up to 40% of all sales are made, retailers who might have carried 8 to 12 different brands may decide they need only 3 or 4 brands and drop the rest. Sales then decline rapidly to a stable level of about one-half the peak. What Triggers a Bust?Markets can defy the law of gravity for only so long. Eventually, reality intrudes, bringing companies down to earth in a shakeout. Here are the most common triggers: Disappointing Growth.High rates of growth indicate an attractive market, but the luster quickly fades when growth slows. Losses of market share, which may have been masked when the market was growing quickly, now create anxiety. Utilization of capacity becomes a problem. As companies try to regain market share, they provoke a price war that eventually squeezes out the industry’s weaker participants. Disappointing forecasts are a relative matter. If growth was to have been a torrid 35% per year and unexpectedly drops to a merely robust 20%, the effect is the same as if the growth rate had suddenly dropped from 20% to 5%. At the same time, overly optimistic forecasts are common because entrepreneurs depend on optimism to overcome the many obstacles in their path. One study of entrepreneurs found that 80% judged their chances of success as 70% or better. One-third said they had a sure thing. Emergence of a Dominant Design.A new design that wins customer acceptance can force a number of rivals to exit suddenly. During the boom years of 1953 to 1955, 40 television manufacturers entered the business. The all-glass picture tube introduced by RCA late in 1955 became the dominant design because of its reliability and drove out companies that could not master the technology. There were 74 picture-tube manufacturers at the peak in 1955, but that number fell to 52 in 1959, and only 7 remain today. The emergence of a dominant design also tends to shift the basis of competition. Companies that standardize based on the design attain production economies, making process innovation and integration more important. Rivals unable to make this transition or master the core technology will be forced to exit. In some cases, the trigger is not a radical new design but a new generation of an established design that disrupts market demand. For example, half of the makers of 5.25-inch hard-disk drives for personal computers didn’t offer the emerging 3.5-inch drives, and most of those companies soon exited the entire market. Manufacturing the new size was well within the capabilities of the established companies, but many players weren’t able to make the investments needed to catch up with the pioneers. (See the graphs “The Shakeout in Hard-Disk Drives.”)  The Shakeout in Hard-Disk Drives The graphs are based on data collected by Disk/Trend and analyzed by Jonathan Freeman in “The Determinants of Exit from High Growth, High Technology Markets” (unpublished, Warwick Business School, Coventry, England, 1994). Scarce Resources.Resource shortages can trigger a bust in high-growth markets, depriving companies of the fuel they need to grow. In the 1960s, for example, many discount retail chains failed because they were unable to hire and train qualified people fast enough to develop the systems and structures needed to handle explosive growth. And dozens of makers of financial spreadsheet programs discovered the importance of channel access in 1989, when the major retailers decided to carry only the top two or three programs—a position that also gave the retailers leverage to extract price concessions from suppliers. Risk capital can also run scarce, and withdrawing it is the business equivalent of turning off the life-support system. Venture capitalists may be enthusiastic initially, but money for risky projects can dry up. Consider the continuing cash crunch in biotechnology, a result of multiple forces: rapid entry (the industry grew from 330 companies in 1984 to 1,380 by mid-1995), the overcrowding of some niches, a string of clinical failures by drug prototypes, the threat of price controls, and continuing uncertainty about patent protection. Meanwhile, the overall need for cash—the “burn rate”—is increasing as more drugs move into clinical development at a cost of $250 million or more per drug. Although biotechnology companies will obtain cash by forming partnerships with pharmaceutical companies, this source of funding may not be enough to prevent a wave of mergers or failures. The Seismic-Shift SyndromeWhereas the boom-and-bust syndrome is common in high-growth emerging markets or highly cyclical businesses, the seismic-shift syndrome strikes stable, mature industries. For years, often decades, industries hit by this syndrome will have enjoyed protected prosperity. The forces of rivalry will have been muted, and most of the incumbents will have been supported by relatively high profit levels. Consider the pharmaceutical industry before managed care, banking before deregulation, and military suppliers before the build-down. A seismic shift strikes industries that have enjoyed years of protected prosperity. Protected prosperity is the result of isolating mechanisms—market factors that deter competition. An isolating mechanism can appear in many guises. Patent protection, for example, assures the holder of an extended period without direct competition. Import barriers can limit the number of rivals as well. Isolating mechanisms can also work informally to keep out new entrants. Investment bankers often have close personal relationships with clients. In a pressured, high-stakes environment, clients are willing to work only with advisers they know and trust. Protected niches within a market—stemming, for example, from distinct local tastes or local regulations that limit entry—also signal the presence of isolating mechanisms. In fact, whenever there is stability in market structures, such mechanisms are at work. To incumbents, the removal of an isolating mechanism feels like the disruptive movements of the earth’s crust when the tectonic plates shift. That is why the term seismic shift fits these shakeouts, which force incumbents to adjust to a fundamental change in the rules of their markets. A seismic-shift shakeout forces incumbents to adjust to a fundamental change in their market’s rules. What would disrupt a market that has been able to sustain comfortably a large number of competitors? Most seismic-shift shakeouts are caused by one or more of the following four triggers: Deregulation.Deregulation reduces artificial constraints on competition. Consider the U.S. banking industry, for decades an example of stability. As recently as 1985, there were more than 14,500 commercial banks. By 1995, in the wake of deregulation that permitted limited interstate banking, the number had dropped to 10,000. Now, with more extensive deregulation allowing the formation of powerful national banks, observers expect a further shrinkage to 5,000 by the year 2000—a reduction of two-thirds since 1985. The eight to ten largest institutions, which today account for 25% of all banking business, will likely control 50% to 80% of the market in the United States. The large banks are fueling this consolidation by investing heavily in technology and communications, effectively redefining economic scale in the industry. Small banks without the resources to keep up will be candidates for takeover. Globalization.This trigger broadens the scope of an industry in which competition had been primarily domestic. Appliance makers in North America and Europe began consolidating in the mid-1980s when consumers’ habits in the two regions converged. Global sourcing and product development became much easier as suppliers of compressors and other components set up operations overseas and governments began to adopt common standards and regulations. A Technological Discontinuity.A major change in an industry’s technology makes previous processes and know-how obsolete. For most of the twentieth century, the makers of office information equipment followed a successful strategy of vertical integration to ensure the manufacture of precise machine parts and the presence of an extensive service network. New electronics technology in the 1970s made all that obsolete. Addressograph-Multigraph Corporation, one of the largest companies, failed to make the transition and eventually went out of business, and even survivors such as NCR struggled to adapt. Emergence of a “Competency Predator.”Competency predators are innovators that have developed a new business model that offers the possibility of large economies of scale. Once they have mastered a competency in a given market, often with the help of information technology, they apply the resulting skills and know-how to enter new regions, markets, and industries. They are able to come out of nowhere and grab large shares in markets that welcome the new level of service or sharply reduced costs. AT&T, for example, successfully attacked the credit card business by coupling a core competency—measuring small increments of time and billing for usage on a massive scale—with deep pockets and a mastery of database marketing. Margins for existing credit-card providers dropped sharply as AT&T discovered it could still make money even though it collected no annual fees and charged lower interest rates. In the mutual fund industry, discounter Charles Schwab & Company’s entry into fund merchandising has forced the smaller fund companies to retreat to asset management activities or combine with others who are also at a disadvantage because of Schwab’s superior sales and back-office competencies. Informed AnticipationAlthough no econometric crystal ball can forecast the timing and magnitude of a shakeout, managers can develop antennae that are tuned to sense the shakeout ahead of the competition. The first hurdle to overcome is the belief that it can’t happen to us. It can and it probably will. A company can detect early warning signs by systematically monitoring entry rates, the amount of excess capacity in the industry, and the pressure on margins as prices drop. Advance news of the various shakeout triggers can also give companies a jump on their rivals. More specific leading indicators can be developed based on an intimate understanding of the economics of the industry. For example, some real-estate developers foresaw the glut in the commercial property market by watching broad economic fundamentals such as job-creation statistics rather than by tracking building permits, the common practice. The uncertainties inherent in a turbulent market make it imprudent to rely on any single forecast. It is better to develop a number of plausible scenarios that focus attention on the driving forces for change and compel the management team to imagine operating in markets different from today’s. Each scenario should be an internally consistent picture of the future that addresses four critical questions:
Clearly, scenarios will be derived from forecasts of capacity and market demand. Retrospectively, the extent of excess capacity is easy to see. Prospectively, the picture is always cloudier. Consider the question of whether the pharmaceutical industry in 1997 will continue to consolidate at the pace set by Glaxo and Wellcome, Roche and Syntex, and Sandoz and Ciba-Geigy. The direction of the seismic shift in health care is clear: power has shifted away from producers as buyers have consolidated and become more cost conscious. Instead of ten interchangeable drugs competing to treat a given condition, the big care providers may allow only three or four to compete. What does that do to the definition of economic scale in pharmaceuticals? The answer lies in a careful analysis of how this power shift will affect each stage of the industry’s value chain, from research to manufacturing to sales and distribution. First, there will be excess development capacity, especially the sizable portion of it devoted to “me-too” drugs. And with fewer drugs to sell and increasingly centralized purchasing, companies are likely to have excess capacity in sales and marketing. Both large and small businesses will find consolidation a compelling way to reduce the cost not only of these activities but also of administrative overhead. When the underlying industry dynamics are unclear, managers can look to precursor markets for hints about likely shakeout scenarios. These are markets that resemble the one you are trying to predict—in terms of function, structure, and susceptibility to the same triggers—except that the shakeout events are further along. Industrial-products distributors, for example, can get a picture of their future by studying the shakeout of hospital supply distributors over the past decade. Most wouldn’t like what they would find, for the number of hospital supply distributors shrank from 600 in the late 1970s to fewer than 50 by 1994. That industry had been populated by many small regional companies with average gross margins of more than 20%. Today five distributors have 80% of the market, and margins have fallen below 10%. What happened? Several aggressive companies bought out besieged small distributors and raised the stakes for the rest by investing heavily in logistics. Industrial-products distributors should anticipate a similar pattern; their industry has many regional distributors, a proliferation of customer segments, and an inefficient distribution system. Comparisons with industries in other countries or regions also can be used to assess the prospects for a shakeout. In 1991, as European economic integration gathered momentum, such prospects were a pressing concern of major European appliance manufacturers. During the previous seven years, the market share of the top five companies had increased from 44% to 61%. But where would it stop? One scenario pointed to the U.S. market, in which the top five corporations held 95% of the market. Was that a valid precursor? Those who argued for the U.S. pattern pointed to the convergence of tastes across Europe, the growing concentration of retailers, liberalization of trade policies, untapped economies of scale, and the high price of European appliances. Whereas an American consumer had to work 4.5 days to buy a dishwasher, the average European had to work 8 days to buy a similar machine. European manufacturers were plagued by high costs due to the small scale of many of the smaller brands. Of the 190 brands serving the European market (there are 75 in the United States), 81 had a combined market share of only 4%. The contrary scenario held that consolidation would proceed at a much slower pace. According to this story, the absence of pan-European brands, the differences in perception of brands between countries, and the high barriers to exit imposed by laws that protected jobs and by corporate boards that included labor representatives would drag out any shakeout over many years. Moreover, many of the small companies were family owned and relied on sweat equity, so they would be less likely to exit even as their margins deteriorated. As the European appliance market evolves, it looks as though the U.S. experience is a good precursor. Swedish-based Electrolux and U.S.-based Whirlpool are gaining momentum with their cost advantages. As the trends shaping the European economy continue to weaken the isolating mechanisms that have prevailed for decades, seismic shifts in other industries are also likely. Shakeout Strategies for the StrongFor well-positioned companies, looming shakeouts are opportunities to stabilize the industry and gain market power. Companies that land on their feet after boom-and-bust shakeouts tend to be adaptive survivors. Those that prevail in seismic shifts are often aggressive amalgamators. Adaptive Survivors.The adjustment from the boom era of high growth and buoyant expectations to the bust period of pressure on margins, intensified rivalry, and diminished prospects is too much for most companies to handle. Although bust markets may continue to grow, such growth demands more discipline in operations, greater sensitivity to customers’ needs, and greater responsiveness to competitors’ threats. Adaptive survivors usually must overcome a number of predictable organizational pitfalls in the following areas: Leadership and Management StyleDuring the boom times, companies become much bigger without having the time to develop an aptitude for handling their new size. The founding entrepreneurs, at home with the informality and cohesion of the early days, now struggle with a stream of new faces who don’t know one another and don’t fully share the founders’ original values. The company’s informal and spontaneous managerial style becomes unwieldy and leads to breakdowns in communication and decision making, especially during the pressures of a shakeout. A new working style is needed. Survival often requires hiring strong subordinates with experience in large organizations, even if that means passing over managers who were with the company in the beginning but lack the array of skills needed now. ResourcesAn adaptive strategy won’t succeed if financial restrictions slow critical development programs or if the right people aren’t in place when needed. Companies that continue to grow while margins are being squeezed are chronically cash starved. Even though accounting profits are strong, all the available cash is needed to invest in facilities, working capital, and recruiting and training. At the same time, employees are strained by long hours, and declining morale and high turnover can become problems. ControlsDuring shakeouts, decision making suffers, problems with quality emerge unexpectedly, and logjams in production are likely. A company’s systems and processes often do not provide timely information about complex organizations in an increasingly volatile market. Those controls were designed for smaller, simpler companies and are unable to shed light on such problems as out-of-line costs, excessive inventories, or failures to meet commitments to customers. Adaptive survivors are painfully aware of these pitfalls because they have had to overcome them. Few companies have emerged from shakeout pressures as well as Dell Computer. When Michael Dell founded his company in 1984, he had a clear strategy of selling directly to sophisticated personal-computer buyers, bypassing storefront retailers. Initially, Dell reached this high-end segment with ads in trade magazines, using low prices as the inducement to buy. To keep ahead of price-matching clone makers, Dell raised the stakes by manufacturing computers to order. That kept inventories and financing costs low and enabled Dell to become a master of direct marketing. Dell’s lean, direct approach helped it hold on during the initial industry shakeout in the late 1980s, when an unexpected drop-off in dollar sales, declining margins, and the shift in manufacturing toward preassembled components forced half the industry’s companies to exit. In 1993, however, Dell stumbled, sustaining a $36 million loss owing mostly to an undisciplined pursuit of growth. Dell had departed from its core strategy by selling in retail stores, and it had launched a poorly designed line of notebook computers. Weak control systems left the company with little understanding of the relationship between costs and revenues and no way to track retailers’ activities. When the third-party manufacturers used to produce the notebooks shipped inferior units, service costs jumped. This story had all the signs of a boy wonder finding himself out of his depth in a much bigger company. Dell appeared to be joining other fast-growing computer makers that couldn’t handle the pressures of the new environment. Michael Dell, however, had seen the problems coming and already had begun transforming his company in 1992 by recruiting a cadre of seasoned computer-industry executives. Almost the entire top-management team was new, and its systematic by-the-numbers approach complemented the chief executive’s restless, innovative style. Dell himself delegated day-to-day operations to others while he concentrated on shaping strategic direction and tapping external sources for ideas. The traumas of 1993 persuaded him, he said, “to change the orientation away from growth, growth, growth to liquidity, profitability, and growth—which has become a real mantra for the company.” In short order, the company abandoned retail, shelved the entire line of notebook computers for nine months, and centralized common European operations to cut costs. Greater resources were concentrated on increasing global sales; Dell now sells in 131 countries. Although the company continued to grow—by 1995 it was the fifth-largest maker of PCs, with revenues of $5 billion—it did so not by acquiring failing rivals (whose facilities didn’t fit Dell’s business model) but by building or contracting out new capacity. Finally, Dell is investing heavily in infrastructure to lower costs and expanding direct sales to corporate customers, preparing to be an $8 billion or $9 billion company in an industry dominated by a few large players. Shakeouts do not always follow immediately from imbalances between capacity and demand. Inhibitors that delay the inevitable can be even more powerful than the economic triggers that force industries to consolidate. Consider the situation in magnetic resonance imaging equipment. Fully 20 of the 28 companies that entered the market since 1982 still remained in business in 1993. Yet it was widely believed by then that only two companies were profitable; moreover, sales were slowing in response to a dramatic shift in the health care market. Initially designed for performance-conscious doctors, MRI equipment was now sold primarily to cost-conscious administrators. Why have so many companies chosen to remain in an unprofitable industry? Sometimes a market is too strategically important to abandon. That surely was a factor in Philips Electronics’ decision to persist with magnetic resonance imaging—an exit would have left it without this critical diagnostic technology in its portfolio. Others have stayed because they believe they need to protect profitable service contracts in units already sold. Once an MRI unit is installed, its expense makes it virtually impossible to replace, so continued service revenues are assured. Wherever there is “profitless persistence,” look for powerful inhibitors that deter exit. Often the corporate owners of businesses in such situations are large companies whose executives view their presence as a necessary platform for expansion into other opportunities. They believe the investment provides organizational capabilities, enabling technologies, market access, and market understanding that could not be obtained otherwise. Many manufacturers of fax machines and entrants into wireless communications believed they had to be in these businesses—despite their losses—in order to participate in the continuing convergence of functions in the information industry. Another powerful inhibitor is the pain of exiting the business. Sometimes this pain is financial, requiring the write-off of specialized assets that have little value outside the industry. At other times, contractual arrangements such as labor agreements or supply contracts might impose high exit costs. In other instances, the pain may be psychological or political. Managers may resist making the tough decision because of the threat to their jobs, an unwillingness to concede failure, or simply a strong emotional attachment to the business. Their past successes tempt them into believing that the company is infallible and that current troubles are merely temporary. They may buy time by restating results or reallocating costs to other businesses to make the numbers look better than they are. Aggressive Amalgamators.Companies left standing after seismic shifts are often those with the foresight and the skills to force the shakeout on their own terms by a process of aggressive amalgamation. Aggressive amalgamators develop the right business model for the emerging environment, rapidly acquire and absorb smaller rivals, cut operating costs, and invest in technologies that increase minimum efficient scale. Sometimes the shakeout catalyst is a well-run regional company that acquires a number of small competitors. In other cases, a group of equity investors buys a small company that serves as a platform for many smaller acquisitions in the same industry. Aggressive amalgamators wring out costs by eliminating redundant activities and exploiting economies of scale—usually while improving customer service. NationsBank, for example, has put together 49 acquisitions to become the third-largest bank in the United States. The common thread among the mostly service-sector industries that have been consolidated this way is that they are fragmented and have traditionally lacked strong management and surplus capital. In the funeral home business, for example, Service Corporation International has amassed 700 providers across North America. Aggressive amalgamators eliminate redundant activities and exploit economies of scale. And consider Arrow Electronics, an early aggressive amalgamator and now the largest company in electronic components distribution. This $16 billion distribution sector has grown at an average annual rate of 12%, handling a variety of products that include semiconductors and computer components. In the midst of this growth, the small and midsize distributors have lost substantial market share. Although approximately 1,200 distributors are still left, the two largest companies have 50% of the market. Between 1980 and 1995, Arrow made more than 25 acquisitions, enabling it to expand internationally and cut costs by eliminating overlap in management information systems, warehousing, human resources, finance, and accounting. As a result, Arrow’s operating expense—now the lowest in the industry—declined from 21.7% of sales in 1987 to 11.9% in 1993. Arrow’s aggressive-amalgamation strategy will almost certainly be repeated in other wholesale-distribution sectors. Key elements of Arrow’s strategy have been: Fast Integration to Achieve Economies of ScaleWhen Arrow acquired Kierulff Electronics in 1988, the company was able to integrate 350,000 inventory records, 35,000 customer records, 50,000 customer orders, and 25,000 supplier orders in only 48 hours. Arrow has assembled a management team that can size up the operations of a new acquisition accurately and move quickly to absorb most activities without disrupting customer relationships. Cost Reduction Through Information TechnologyArrow was the first in its business to centralize inventory management, build a fully automated warehouse, and achieve ISO 9002 certification. In each case, competitors followed, but Arrow was able to leverage its lower costs by dropping prices to compete for large customers. Arrow has also been able to pay higher prices for its acquisitions than some of its less-efficient competitors, who cannot achieve the same economies as Arrow and thus cannot justify the same acquisition premium. Aggressive Debt FinancingAmalgamation strategies require infusions of capital. In the early 1980s, Arrow financed its growth with junk bonds. By 1982, its debt load had peaked at a staggering 78% of total capitalization. Its chief rival, Avnet, which once was three times Arrow’s size, grew much more slowly, partly because its long-term debt never rose above 25% of total capitalization. Leadership in Offering Value-Added ServicesTo attract and retain customers, the aggressive amalgamator often leads its industry in offering value-added services. In Arrow’s case, value-added services such as turnkey board assembly, computer systems integration, in-plant terminals, and just-in-time delivery represent a growing percentage of sales. Arrow also recently added a PC-based inventory system to enable customers to reorder frequently used electronic components automatically. Arrow claims that the system can cut customers’ inventory-processing time by 60% to 70%. Strategies for Also-RansWhen an industry consolidates, most companies get squeezed out. The losers fit a familiar profile. Their scale is usually small relative to the leaders, and that means higher costs and greater pressure on margins. Over time, these profit-starved companies lack the resources to keep up with the pace of innovation or the investments needed to meet customers’ demands for product coverage. They are thus all the more vulnerable when people, channels, or capital become scarce. It is enormously difficult for executives to accept the implications of also-ran status. But when the loser profile fits, it’s better to choose a viable strategy than to let market forces drive your fate. When the loser profile fits, it’s better to choose a viable strategy than to let market forces drive your fate. Market niches can serve as buffer zones where competitive pressures are muted and growth prospects remain satisfactory. Retreating to these positions does require a difficult shrinking of aspirations and pruning of operations. But smaller players can succeed by exploiting the costs of compromise that the larger companies in the market incur as they expand their reach. Inevitably, the need of big players to span numerous segments leads to over-performing for some customers and underperforming for others. For example, when hospital supply distributors consolidated and margins plummeted, the big players could no longer afford to distribute products from the small manufacturers that lacked sales forces. Some of the smaller distributors survived by stepping in to fill the gap. Similarly, some community banks have found a buffer zone within their rapidly consolidating industry by offering local, personalized service and by leveraging their ties to the community. The appeal of the niche strategy also explains the paradox of small companies proliferating as large ones expand in markets such as book publishing, wine making, and music recording. Between 1974 and 1991, when Anheuser-Busch was expanding its share of the beer market from 23% to 45%, the number of breweries actually increased from 59 to almost 300. The growth was due to the proliferation of microbreweries and brew pubs that offered specialty beers made with hand-crafted methods. Small and vulnerable companies may also buffer themselves by joining alliances, pooling their resources with other companies to gain access to expensive capabilities or assets. This solution looks increasingly appealing to small travel agencies that are being squeezed by huge agencies such as American Express, which recently acquired the Thomas Cook Group’s travel agency business, and the Carlson Travel Network, which merged with Paris-based Wagonlit Travel. These giants have bargaining power with the airlines because of their volume and can afford major investments in computer networks, which allows them to charge corporations for analyzing travel patterns. Those capabilities make a mutual-services alliance such as Woodside Travel Trust, with 160 member agencies, an appealing buffer zone. In the absence of a clear buffer strategy, companies with poor long-run prospects can still come out ahead if they have the courage to face the future honestly. In most cases, that will lead to a decision to sell the company—but foresight about the likely course of a shakeout will improve the timing of a sale. If prospective buyers have an optimistic view of the future or underestimate the severity of impending profit pressures, sellers may extract a higher price. But managers facing seismic-shift shakeouts should also be careful not to sell out too early. In some recent shakeouts, companies that put themselves on the block at the earliest stage attracted relatively low prices. Those that waited a little longer, when the amalgamators had gained full confidence in their consolidation strategy, were able to bargain for much better prices. Such patience still leads to an exit, but it is a more profitable one and allows a company to avoid the stigma of having missed the opportunity to sell out. With resources in hand, early movers can find attractive growth opportunities where their skills can be used. A version of this article appeared in the March–April 1997 issue of Harvard Business Review. In which stage of the industry life cycle does competition become more intense forcing weaker firms out of the industry?The decline phase marks the end of an industry's ability to support growth. Obsolescence and evolving end markets negatively impact demand, leading to declining revenues. This creates margin pressure, forcing weaker competitors out of the industry.
In which stage of the industry life cycle will competition between firms become more intense?Porter's five economic forces change as an industry matures. For example, rivalry is most intense between companies in a sector during the growth stage.
What are the 5 stages of industry life cycle?An industry life cycle typically consists of five stages — startup, growth, shakeout, maturity, and decline. These stages can last for different amounts of time – some can be months, some can be years.
At which stage of the industry life cycle does the size of the market expand rapidly?Market Growth. Demand begins to accelerate and the size of the total market expands rapidly. It might also be called the “Takeoff Stage.”
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In which stage of the industry life cycle does competition become more intense forcing weaker?
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