Managing Maturing Businesses - Hardcover

Harrigan, Kathryn Rudie

Hardcover

ISBN 10: 0669170828 ISBN 13: 9780669170825

Publisher: Free Press, 1988

Synopsis

While fully two-thirds of all businesses in the United States, Western Europe, and Japan are experiencing stagnant or slowing demand, most companies in these categories are either unaware of their true situation or do not dare to confront it. Blind to alternatives beyond complete divestiture or milking the investment, they dread the coming of the "endgame" -- the latter half of a product's life cycle or an industry's evolution. This critically important new book shows managers how to play the endgame to win -- how to guide their firms to prosperity in the face of slowing demand. Divesting or milking may be the best answer in some cases; however, alternative strategies may actually produce healthy cash flows and high return on investment in industries that appeared to be hopeless. Harrigan's strategies include increasing the investment to dominate or gain competitive advantage in a field; employing a "holding pattern" until specific uncertainties (for example, pending legislation, real-world success of new technologies) are resolved; and shrinking selectively to capture the most promising customers (who will provide the most enduring and lucrative demand). An acknowledged expert on mature and declining businesses, Harrigan shows how to analyze the key factors that will affect a firm's success in the endgame: the industry structure, the reasons for plateaued sales, the expectations for future demand, and the strength of competitors. She indicates what is unavoidable in a declining industry (excess capacity) and what is scrupulously to be avoided (price wars). And she suggests the kinds of managerial skills required to operate a mature business successfully. Using the mainframe-computer industry as a chapter-long extended example, Managing Maturing Businesses advises managers on how to assess profit potential, how to restructure mature industries to maximize profits, and how to match management systems to the mature business. The result is an invaluable playbook for managers who want to score big in the high-stakes endgame.

About this title

About the Author

Kathryn Rudie Harrigan consults internationally for companies seeking help on strategic alliances, internal ventures, synergies for make-or-buy decisions (or interbusiness unit relationships), and mature (or declining) industries. She is also professor of strategic management and director of the Strategy Research Center at Columbia University. Dr. Harrigan has taught in several executive development programs for Columbia Business School, Management Centre Europe, Frost & Sullivan, and Business Week Executive Programs. Her publications include Strategies for Vertical Integration, Strategies for Declining Businesses, Strategic Flexibility, Strategies for Joint Ventures, and Managing for Joint Venture Success, all published by Lexington Books.

Excerpt. © Reprinted by permission. All rights reserved.

Chapter 1

The Problem -- Widespread Industry Maturity

Over two-thirds of the industries within mature economies -- in Western Europe, Japan, and the United States -- are experiencing slow growth, no growth, or negative growth in demand for their products. Many managers responsible for these mature businesses fail to notice that demand is stagnant because they keep score in revenues, rather than unit volumes. These managers also do not compare their firms' unit shipments against industry patterns. Consequently, they fail to foresee the coming of the endgame -- the last half of a product's life cycle or an industry's evolution -- and the impending death struggles that often accompany endgame.

The Endgame

The endgame is the second half of a business's life. As figure 1-1 indicates, it begins when industrywide sales plateau and continues indefinitely -- sometimes for decades (or longer). The pressures of excess productive capacity can squeeze profit margins during endgame. But slowing (or declining) sales growth does not have to result in declining profits if remedial steps are taken. More than one-third of the companies I surveyed in a sample of declining industries were averaging pretax returns on capital deployed in excess of 35 percent because they learned to cope with the special challenges of endgame competition.

Need for a New Competitive Approach

The onset of endgame means that more than half of all businesses have to run hard today just to stay in place in terms of return on investment, profit margins, and market share. Endgame means that there are now a great many managers who must find ways to run a troubled business successfully. For some, the problem is short run -- the result of a tough and lingering recession that has increased competition and slowed sales. For many other companies, however, recession only heightens a long-term fact of life for their businesses: there will be slow (or no) growth because of foreign competition, technological changes, or resource scarcities. Demand for the products of these firms will never revitalize, a competitive fact that too few managers are willing to acknowledge. Indeed, for many managers, even talking about the problems of flat or declining demand is taboo -- like talking about growing old and dying in polite company. Reward systems in these managers' firms are skewed toward glamour businesses rather than cash-generating businesses, and the erosion of their firms' competitiveness reflects their unwillingness to bite the bullet by helping to restructure the troubled industries where they participate. Because the ability to adjust strategy and operations to changing market conditions is crucial to sustaining hard-won competitive successes, these firms are less likely to be among the "last icemen" -- the firms that always make money in the endgame.

Managers must decide how their firms can cope with the adverse and inevitable competitive environment of endgame -- a setting where stagnant growth and poor prospects for revitalized demand make excess capacity a competitive fact. Few firms can afford the grit of Dow Chemical, which shut in its newly completed Oyster Bay (Louisiana) refinery in 1982 to avoid the price wars it would have created by bringing excess capacity onstream. Yet many firms need a new strategic approach to face this competitive challenge.

The Competitive Environment of Endgame

Competition is more challenging in the endgame because sales growth is slowing, price wars are incited by overhanging excess capacity, and global competitors enter the industry even as overwhelmed domestic firms are exiting. Not only do government policies of income maintenance prevent inefficient plants from being shut down in some endgames, but they may also keep such plants running full tilt because it is cheaper to subsidize a money-losing plant than to support unemployed workers.

Slowing sales growth. Industrywide sales plateau in the endgame due to (1) demographics, like the end of the baby boom, or (2) technological change, like transistors replacing electronic receiving tubes. But occasionally the slow demand growth of endgame is due to (3) import competition that is created as the economies of newly industrializing countries vend their products in the global marketplace. Demand growth slows also due to (4) lifestyle changes, (5) conservation policies, (6) cheaper raw materials that use alternative technological and processing routes, (7) technological and styling obsolescence, (8) more attractive substitute products, or other reasons.

Being in the endgame does not mean that demand will be gone in five years. In the case of baby foods, the number of babies born per thousand fertile women peaked in the United States in 1957. It took firms ten years to recognize the problem of declining demand and another ten years to act. By the 1980s, these same firms were enjoying a temporary baby boom and hoping that babies would remain in fashion. Demand for cigars has been declining for decades, yet cigar manufacturers prosper. (Ownership of cigar firms has changed, but consumers continue to smoke.) Endgame looms now over the internal-combustion engine and mainframe-computer industries, yet firms continue to invest in them. Investing in endgame industries is riskier now, but many firms regard doing so to be well worth the added risk. Although there is no guarantee that a hundredyear-old business that has plateaued in industrywide sales growth will have another hundred years for its endgame, competition in many mature industries goes on and on.

Overhanging excess capacity. Regardless of the reasons for slowing shipments, when industries enter the endgame, the problem of excess capacity (and threat of bitter price wars) looms over them. Table 1-1 lists United States industries that have been experiencing declining demand growth. In many of these industries, otherwise well-managed firms have not been phasing out their nolonger-profitable product lines and closing redundant plants -- a sure recipe for a disastrous endgame. The problem of excess capacity is inevitable in mature industries because of the long lead times associated with firms' commitments to new generations of costly and durable assets. (These are often investments made in anticipation of market growth that is forecast but never materializes.) Disbelief in (or failure to recognize) the endgame retards firms from making the necessary, subsequent reductions in productive capacity -- especially among the smaller, inefficient producers that are most likely to pursue "maverick" a strategies to the detriment of other firms. A variety of other forces ("exit barriers;' discussed in chapter 4) prevent larger, efficient producers from closing old facilities.

As demand shrinks during the endgame, only a few competitors' plants are needed to satisfy remaining demand. Higher profits could be enjoyed by all survivors if firms could make orderly changes in working practices early. Through preemptive investments, committed firms can prevent competitors from occupying the most desirable market niches -- the niches where firms intend to fight bitterly to retain their competitive advantage. Through unambiguous signaling of their commitments, firms can even avert bloodshed -- if industrywide consensus recognizes the importance of mutual profitability to remaining participants. Too often, however, endgame competition is not that rational.

Some firms hang on stubbornly because they expect others to exit first. Firms with deep pockets (or a long-term commitment to their industry) find ways to survive and become the last icemen. Unfortunately, as I explain in chapter 2, this cannot be a strategy option for every firm. There can be but one last iceman.

Global endgame. The difficulties of managing the endgame successfully are exacerbated by th

Edition details

• Publisher: Free Press
• Publication date: 1988
• Language: English
• ISBN 10: 0669170828
• ISBN 13: 9780669170825
• Binding: Hardcover
• Number of pages: 170