Competition tends to intensify in a declining industry, and profit rates tend to fall.
Sooner or later many industries enter into a decline stage in which the size of the total market begins to shrink, some examples can be the tobacco and steel industry or the newspaper business. Industries decline for many reasons including technological change, social trends and demographic shifts.
The Severity of decline
Competition tends to intensify in a declining industry, and profit rates tend to fall. The intensity of competition in a declining industry depends on critical factors such as speed of decline, height of exit barriers, level of fixed costs, commodity nature of product. First the intensity of competition is greater in industries in which decline is rapid, as opposed to industries such as tobacco in which decline is slow or gradual.
Second the intensity of competition is greater in declining industries in which exit barriers are high, the result is excess productive capacity and hence a increase probability of fierce competition. Third and related to the previous point, the intensity of competition is greater in declining industries in which fixed costs are high (as in the steel industry) , the reason is that they need to cover such fixed costs as the cost of maintaining productive capacity can drive companies to try to use excess capacity by slashing prices, which can trigger a price war. Finally, the intensity of competition is greater in declining industries in which the product is perceived as a commodity (as in the steel industry). Not all segments of an industry typically decline at the same rate. In some segments demand may remain reasonably strong despite decline elsewhere.
Choosing a Strategy
Companies can adopt four main strategies to deal with decline.
- A leadership strategy by which a company seeks to become a dominant player in a declining industry. The Tactical steps companies might use to achieve leadership position include using aggressive pricing and marketing to build market share; acquiring established competitors to consolidate the industry.
- A Niche strategy, which focuses on pockets of demand that are declining more slowly than the industry as a whole.
- A harvest strategy, which optimizes cash flow.
- A divestment strategy by which a company sells the business to others.
Note that the intensity of competition in the declining industry is measured on the vertical axis and the company’s strength relative to remaining pockets of demand are measured on the horizontal axis.
Post Corona, wars in some parts of the world and heavy competition the scenario of declining industries have become more rampant so the management should choose carefully on the strategic steps to be used in their organization.
About the Author
Dr Suresh Vidyasagar Menon has 31 years plus of overall experience in IT, around 3 Years in Auditing of ISO 27001-Information Security Standard, has executed 25 plus projects in IT and two turnkey projects for eastern railways (Liluah) and has to his credit 14 publications in International Journals of Science, Engineering & Technology.
