The industry life cycle refers to the stages of introduction, growth, maturity, and decline that occur over the life of an industry. In considering the industry life cycle, it is useful to think in terms of broad product lines such as personal computers, photocopiers, or long-distance telephone service. Yet the industry life-cycle concept can be explored from several levels, from the life cycle of an entire industry to the life cycle of a single variation or model of a specific product or service. Why are industry life cycles important?58 The emphasis on various generic strategies, functional areas, value-creating activities, and overall objectives varies over the course of an industry life cycle. Managers must become even more aware of their firm’s strengths and weaknesses in many areas to attain competitive advantages. For example, firms depend on their research and development (R&D) activities in the introductory stage. R&D is the source of new products and features that everyone hopes will appeal to customers. Firms develop products and services to stimulate consumer demand. Later, during the maturity phase, the functions of the product have been defined, more competitors have entered the market, and competition is intense. Managers then place greater emphasis on production efficiencies and process (as opposed to the product) engineering in order to lower manufacturing costs. This helps to protect the firm’s market position and to extend the product life cycle because the firm’s lower costs can be passed on to consumers in the form of lower prices, and price-sensitive customers will find the product more appealing.
Strategies in the Introduction Stage
In the introduction stage, products are unfamiliar to consumers.61 Market segments are not well defined, and product features are not clearly specified. The early development of an industry typically involves low sales growth, rapid technological change, operating losses, and the need for strong sources of cash to finance operations. Since there are few players and not much growth, competition tends to be limited. Success requires an emphasis on research and development and marketing activities to enhance awareness. The challenge becomes one of (1) developing the product and finding a way to get users to try it and (2) generating enough exposure so the product emerges as the “standard” by which all other rivals’ products are evaluated. There’s an advantage to being the “first mover” in a market.62 It led to Coca-Cola’s success in becoming the first soft-drink company to build a recognizable global brand and enabled Caterpillar to get a lock on overseas sales channels and service capabilities. However, there can also be a benefit to being a “late mover.” Target carefully considered its decision to delay its Internet strategy. Compared to its competitors Walmart and Kmart, Target was definitely an industry laggard. But things certainly turned out well.
Strategies in the Growth Stage
The growth stage is characterized by strong increases in sales. Such potential attracts other rivals. In the growth stage, the primary key to success is to build consumer preferences for specific brands. This requires strong brand recognition, differentiated products, and the financial resources to support a variety of value-chain activities such as marketing and sales, and research and development. Whereas marketing and sales initiatives were mainly directed at spurring aggregate demand—that is, demand for all such products in the introduction stage—efforts in the growth stage are directed toward stimulating selective demand, in which a firm’s product offerings are chosen instead of a rival’s. Revenues increase at an accelerating rate because (1) new consumers are trying the product and (2) a growing proportion of satisfied consumers are making repeat purchases.64 In general, as a product moves through its life cycle, the proportion of repeat buyers to new purchasers increases. Conversely, new products and services often fail if there are relatively few repeat purchases. For example, Alberto-Culver introduced Mr. Culver’s Sparklers, which were solid air fresheners that looked like stained glass. Although the product quickly went from the introductory to the growth stage, sales collapsed. Why? Unfortunately, there were few repeat purchasers because buyers treated them as inexpensive window decorations, left them there, and felt little need to purchase new ones. Examples of products currently in the growth stage include cloud computing data storage services and ultra-high-definition television (UHD TV).
Strategies in the Maturity Stage
In the maturity stage aggregate industry demand softens. As markets become saturated, there are few new adopters. It’s no longer possible to “grow around” the competition, so direct competition becomes predominant.65 With few attractive prospects, marginal competitors exit the market. At the same time, rivalry among existing rivals intensifies because of fierce price competition at the same time that expenses associated with attracting new buyers are rising. Advantages based on efficient manufacturing operations and process engineering become more important for keeping costs low as customers become more price-sensitive. It also becomes more difficult for firms to differentiate their offerings, because users have a greater understanding of products and services. An article in Fortune magazine that addressed the intensity of rivalry in mature markets was aptly titled “A Game of Inches.” It stated, “Battling for market share in a slowing industry can be a mighty dirty business. Just ask laundry soap archrivals Unilever and Procter & Gamble.”66 These two firms have been locked in a battle for market share since 1965. Why is the competition so intense? There is not much territory to gain and industry sales were flat. An analyst noted, “People aren’t getting any dirtier.” Thus, the only way to win is to take market share from the competition. To increase its share, Procter & Gamble (P&G) spends $100 million a year promoting its Tide brand on television, billboards, buses, magazines, and the Internet. But Unilever isn’t standing still. Armed with an $80 million budget, it launched a soap tablet product named Wisk Dual Action Tablets. For example, it delivered samples of this product to 24 million U.S. homes in Sunday newspapers, followed by a series of TV ads. P&G launched a counteroffensive with Tide Rapid Action Tablets ads showed in sideby-side comparisons of the two products dropped into beakers of water. In the promotion, P&G claimed that its product is superior because it dissolves faster than Unilever’s product. Although this is only one example, many product classes and industries, including consumer products such as beer, automobiles, and athletic shoes, are in maturity.
Two positioning strategies that managers can use to affect consumers’ mental shifts are reverse positioning, which strips away “sacred” product attributes while adding new ones, and breakaway positioning, which associates the product with a radically different category.
Reverse Positioning This strategy assumes that although customers may desire more than the baseline product, they don’t necessarily want an endless list of features. With reverse positioning, companies make the creative decision to step off the augmentation treadmill and shed product attributes that the rest of the industry considers sacred. Then, once a product is returned to its baseline state, the stripped-down product adds one or more carefully selected attributes that would usually be found only in a highly augmented product. Such an unconventional combination of attributes allows the product to assume a new competitive position within the category and move backward from maturity into a growth position on the life-cycle curve.
Breakaway Positioning As noted above, with reverse positioning, a product establishes a unique position in its category but retains a clear category membership. However, with breakaway positioning, a product escapes its category by deliberately associating with a different one. Thus, managers leverage the new category’s conventions to change both how products are consumed and with whom they compete. Instead of merely seeing the breakaway product as simply an alternative to others in its category, consumers perceive it as altogether different.
Strategies in the Decline Stage
Although all decisions in the phases of an industry life cycle are important, they become particularly difficult in the decline stage. Firms must face up to the fundamental strategic choices of either exiting or staying and attempting to consolidate their position in the industry.68 The decline stage occurs when industry sales and profits begin to fall. Typically, changes in the business environment are at the root of an industry or product group entering this stage.69 Changes in consumer tastes or a technological innovation can push a product into decline. For example, the advent of online news services pushed the print newspaper and news magazine businesses into a rapid decline. Products in the decline stage often consume a large share of management time and financial resources relative to their potential worth. Sales and profits decline. Also, competitors may start drastically cutting their prices to raise cash and remain solvent. The situation is further aggravated by the liquidation of assets, including inventory, of some of the competitors that have failed. This further intensifies price competition. In the decline stage, a firm’s strategic options become dependent on the actions of rivals. If many competitors leave the market, sales and profit opportunities increase. On the other hand, prospects are limited if all competitors remain.70 If some competitors merge, their increased market power may erode the opportunities for the remaining players. Managers must carefully monitor the actions and intentions of competitors before deciding on a course of action.
Four basic strategies are available in the decline phase: maintaining, harvesting, exiting, and consolidating.
• Maintaining refers to keeping a product going without significantly reducing
marketing support, technological development, or other investments, in the hope
that competitors will eventually exit the market. For example, even though most
documents are sent digitally, there is still a significant market for fax machines since
many legal and investment documents must still be signed and sent using a fax. This
mode of transmission is still seen as more secure than other means of transmission.
Thus, there may still be the potential for revenues and profits.
• Harvesting involves obtaining as much profit as possible and requires that costs
be reduced quickly. Managers should consider the firm’s value-creating activities
and cut associated budgets. Value-chain activities to consider are primary
(e.g., operations, sales and marketing) and support (e.g., procurement, technology
development). The objective is to wring out as much profit as possible.
• Exiting the market involves dropping the product from a firm’s portfolio. Since a
residual core of consumers exist, eliminating it should be carefully considered. If
the firm’s exit involves product markets that affect important relationships with
other product markets in the corporation’s overall portfolio, an exit could have
repercussions for the whole corporation. For example, it may involve the loss of
valuable brand names or human capital with a broad variety of expertise in many
value-creating activities such as marketing, technology, and operations.
• Consolidation involves one firm acquiring at a reasonable price the best of the
surviving firms in an industry. This enables firms to enhance market power and
acquire valuable assets. One example of a consolidation strategy took place in the
defense industry in the early 1990s. As the cliché suggests, “peace broke out” at the
end of the Cold War and overall U.S. defense spending levels plummeted.72 Many
companies that make up the defense industry saw more than 50 percent of their
market disappear. Only one-quarter of the 120,000 companies that once supplied
the Department of Defense still serve in that capacity; the others have shut down
their defense business or dissolved altogether. But one key player, Lockheed Martin,
became a dominant rival by pursuing an aggressive strategy of consolidation. During
the 1990s, it purchased 17 independent entities, including General Dynamics’.
Turnaround Strategies
A turnaround strategy involves reversing performance decline and reinvigorating growth
toward profitability.74 A need for turnaround may occur at any stage in the life cycle but is
more likely to occur during maturity or decline.
Most turnarounds require a firm to carefully analyze the external and internal environments.75 The external analysis leads to identification of market segments or customer
groups that may still find the product attractive.76 Internal analysis results in actions aimed
at reduced costs and higher efficiency. A firm needs to undertake a mix of both internally
and externally oriented actions to effect a turnaround.77 In effect, the cliché “You can’t
shrink yourself to greatness” applies.
A study of 260 mature businesses in need of a turnaround identified three strategies used
by successful companies.78
• Asset and cost surgery. Very often, mature firms tend to have assets that do not
produce any returns. These include real estate, buildings, and so on. Outright sales
or sale and leaseback free up considerable cash and improve returns. Investment in
new plants and equipment can be deferred. Firms in turnaround situations try to
aggressively cut administrative expenses and inventories and speed up collection of
receivables. Costs also can be reduced by outsourcing production of various inputs
for which market prices may be cheaper than in-house production costs.
• Selective product and market pruning. Most mature or declining firms have many
product lines that are losing money or are only marginally profitable. One strategy
is to discontinue such product lines and focus all resources on a few core profitable
areas. For example, in 2014, Procter & Gamble announced that it would sell off or
close down up to 100 of its brands, allowing the firm to improve its efficiency and
its innovativeness as it focused on its core brands. The remaining 70 to 80 “core”
brands accounted for 90 percent of the firm’s sales.
• Piecemeal productivity improvements. There are many ways in which a firm can
eliminate costs and improve productivity. Although individually these are small
gains, they cumulate over a period of time to substantial gains. Improving business
processes by reengineering them, benchmarking specific activities against industry
leaders, encouraging employee input to identify excess costs, increasing capacity
utilization, and improving employee productivity lead to a significant overall gain.
SUMMARY REVIEW QUESTIONS
- Explain why the concept of competitive advantage is
central to the study of strategic management. - Briefly describe the three generic strategies—overall
cost leadership, differentiation, and focus. - Explain the relationship between the three generic
strategies and the five forces that determine the
average profitability within an industry. - What are some of the ways in which a firm can attain
a successful turnaround strategy? - Describe some of the pitfalls associated with each of
the three generic strategies. - Can firms combine the generic strategies of overall
cost leadership and differentiation? Why or why not? - Explain why the industry life-cycle concept is an
important factor in determining a firm’s businesslevel strategy.
APPLICATION QUESTIONS & EXERCISES
- Research Amazon. How has this firm been able to
combine overall cost leadership and differentiation
strategies? - Choose a firm with which you are familiar in your
local business community. Is the firm successful
in following one (or more) generic strategies? Why
or why not? What do you think are some of the
challenges it faces in implementing these strategies in
an effective manner? - Think of a firm that has attained a differentiation
focus or cost focus strategy. Are its advantages
sustainable? Why? Why not? (Hint: Consider its
position vis-à-vis Porter’s five forces.) - Think of a firm that successfully achieved
a combination overall cost leadership and
differentiation strategy. What can be learned from
this example? Are the advantages sustainable? Why?
Why not? (Hint: Consider its competitive position visà-vis Porter’s five forces.)
