Strategy over time
This is the fifth in a compilation of stories drawn from my learnings on the Fundamentals of Business Strategy from the University of Virginia’s course.
In the last 4 stories, I mentioned how to analyze and define a business strategy. That's important, but it's not forever. The dynamics of competition means that we should be actively looking for ways to adapt our business to the changes in the industry. There are 4 famous examples of companies that were successful while ago, but the industry drastically changed, and they couldn't adapt their strategies, going into bankruptcy, or losing a good portion of the marketshare:
- Studebaker Brothers
- Remington Typewriters
Success in the past does not guarantee success in the future
An industry life cycle depicts the various stages where businesses operate, progress, and slump within an industry. 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 the startup stage, customer demand is limited due to unfamiliarity with the new product’s features and performance. Distribution channels are still underdeveloped. There is also a lack of complementary products that add value for the customers, limiting the profitability of the new product.
Companies at the startup stage are likely to generate zero or very low revenue and experience negative cash flows and profits, due to the large amount of capital initially invested in technology, equipment, and other fixed costs.
As the product slowly attracts attention from a bigger market segment, the industry moves on to the growth stage where profitability starts to rise. Improvement in product features increases the value to customers. Complementary products also start to become available in the market, so people have greater benefits from purchasing the product and its complements. As demand increases, product price goes down, which further increases customer demand.
At the growth stage, revenue continues to rise and companies start generating positive cash flows and profits as product revenue and costs surpass break-even.
Shakeout usually refers to the consolidation of an industry. Some businesses are naturally eliminated because they are unable to grow along with the industry or are still generating negative cash flows. Some companies merge with competitors or are acquired by those who were able to obtain bigger market shares at the growth stage.
At the shakeout stage, the growth rate of revenue, cash flows, and profit start slowing down as the industry approaches maturity.
At the maturity stage, the majority of the companies in the industry are well-established and the industry reaches its saturation point. These companies collectively attempt to moderate the intensity of industry competition to protect themselves, and to maintain profitability by adopting strategies to deter the entry of new competitors into the industry. They also develop strategies to become a dominant player and reduce rivalry.
At this stage, companies realize maximum revenue, profits, and cash flows because customer demand is fairly high and consistent. Products become more commonplace and popular among the general public, and the prices are fairly reasonable, as compared to new products.
The decline stage is the last stage of an industry life cycle. The intensity of competition in a declining industry depends on several factors: speed of decline, the height of exit barriers, and the level of fixed costs. To deal with the decline, some companies might choose to focus on their most profitable product lines or services in order to maximize profits and stay in the industry. Some larger companies will attempt to acquire smaller or failing competitors to become the dominant player. For those who are facing huge losses and that do not believe there are opportunities to survive, divestment will be their optimal choice.