In their heydays, declining industries were probably growth industries.
Today, however, they find that demand for their products has been shrinking for
some time. What strategy alternatives should companies finding themselves in
such predicaments consider?
All too often within the corporate turnaround field, practitioners see resale
values of business’s assets shrink as industry demand declines. Therefore, the
most frequently recommended strategy has been a “harvesting” procedure that
involves reducing investment levels to generate higher cash flows, followed by
Unfortunately, harvesting can often become synonymous with abandonment. As
demonstrated recently in segments of the steel industry, finding buyers can be
difficult, and liquidation is often impractical. One wonders if airlines and
major entertainment destination businesses are also now at risk for such
The biggest challenge for many companies in the next few years will be
managing businesses that compete in stagnant or declining markets. Sticking
around for the long haul requires courage. Running a business in a declining
industry also calls for an entirely new game plan than the one a company relied
upon through a period of market growth.
To stay alive in a declining industry, companies must avoid battling for
market share. They also have to control costs, keep customers coming back with
flawless service and improved products, and maintain employee goodwill.
Generally speaking, companies constantly need to reinvent not only the ways they
do business, but also the services or products they offer to keep pace with
changing expectations and demand.
The nature of competition during a decline and the strategic alternatives for
coping with these changing conditions are complex. The experiences of industries
that have gone through significant declines in sales over periods of time differ
markedly. Some industries, such as salt mining and liquid paper, have aged
gracefully and maintained extremely high profitability. Others, such as rayon
and steel, have declined steadily, experiencing market deterioration
characterized by excess capacity that helped depress prices.
Factors that determine if the environment of a declining industry will become
hostile are demand characteristics and exit barriers.  Demand
decline occurs for several reasons, including technological advances, changes in
lifestyles or tastes, and substitute products. Examples include refrigerators
replacing iceboxes, calculators taking the place of slide rules, and more
recently, handheld electronic organizers replacing traditional paper organizers.
Expectations concerning future demand affect the competitive environment that
develops. How fast an industry declines depends on how quickly companies
Exit barriers are factors that dissuade firms from making easy and timely
departures from industries. The higher the exit barriers, the more hostile the
industry becomes during its decline.
Exit barriers assume a variety of forms. For example, if the assets are
specialized to the business, their diminished liquidation value creates exit
barriers. A significant exit barrier arises when it is difficult to reinvent a
company or the firm lacks the ability to do so. Other potential barriers include
labor settlements, long-term contracts, pension liabilities, and the costs of
dismantling plants and equipment.
Early exits by competitors that have sizable market shares can create a more
favorable environment for firms that remain. Exits by major competitors should
make available new customers who require alternative suppliers. On the other
hand, a hostile environment is likely to materialize if an industry has several
competitors that have diverse goals and face high exit barriers. Because of
declining sales and excess capacity, competitors in a declining industry are
likely to resort to price wars, as demonstrated in the steel industry and more
recently in the catalog print market.
Competitors’ ability or willingness to remain in the industry and fight for a
shrinking number of customers is shaped in large part by the exit barriers they
face. Therefore, it is imperative that they understand competitors’ operating
costs and break-even points. Firms that do not have staying power are more
likely to incite price wars in desperate attempts to retain volume to cover
their fixed overhead expenses. Firms that enjoy low break-even points are less
likely to need pricing as a weapon.
In a declining or stagnant industry, there may be many years left in a
product’s life cycle. But it is essential for managers not to let wishful
thinking color their judgment. Instead, they must survey the competitive
landscape accurately, assess long-range prospects, and face up to the problems
inherent in competing in a stagnant or declining marketplace. Management’s
acceptance of the reality of continued slowing demand is a prerequisite for
developing successful survival strategies.
Obvious strategies in a declining market are to make a fast exit or milk the
business in an attempt to get every last drop of profit without adding
significant amounts of new capital. But these aren’t always the best strategies,
especially if all of the other players are leaving the playing field at the same
Research conducted by Richard G. Hamermesh and Alvin J. Silk of the Harvard
Business School uncovered three common characteristics of strategies that
businesses have used to succeed in stagnant and declining industries.
 These companies:
- Identify growth or niche segments within their industries
- Emphasize product quality
- Consistently improve the efficiency of their manufacturing and
distribution systems, lowering their break-even points
Given these realities, there are a number of approaches that not only can
prevent a company’s extinction but also offer it hope for a reasonable return on
Leadership. A firm might consider adopting a leadership
strategy if it is produces its product cost-efficiently, is clearly identified
as the industry leader, or sells a well-accepted, branded product. A firm
following the leadership strategy tries to achieve profitability by becoming one
of the few companies remaining in the industry.
Firms can achieve leadership positions by building market share through
competitive pricing, or they can reduce competition by acquiring their rivals’
product lines. They can also raise the stakes investing in new, more efficient
processes, thereby forcing competitors to dedicate additional capital to keep
pace. Because leadership strategies may trigger price wars and require
significant investments of capital, this approach should be considered only by
firms that have deep pockets.
Niche. The niche strategy is better suited to firms that are
not in the strongest of competitive positions within their industries. In this
approach, they select a specialized, lucrative group of their customers to
continue serving and sell or shut down other product lines and plants to cut
A niche strategy is appropriate if groups of loyal customers can be served
profitably. For example, Harley-Davidson survived by not trying to be everything
to everybody and instead concentrating on a niche market. It left most of the
motorcycle market to the Japanese and sold high-horsepower “hogs” to a small
segment of motorcycle enthusiasts—and became quite profitable in the process.
At times, managers are too busy trying to divest to spot potential niche
customer bases. For example, computer cards once consumed 450,000 tons of paper
a year. Most card makers vanished after computer chips made the cards obsolete
for programming purposes.
One survivor, however, was JTC Corp. of Union, N.J. The company identified
card customers who used the cards for purposes other than computer programming
and who hadn’t found better substitutes. The company found demand for the cards
from factories that liked the products because they fit easily into boxes of
parts left in inventory. Also, as the last presidential election demonstrated,
cards are still used as ballots by voters in some precincts.
Growth Segments. Perhaps the best way to avoid some of the
unpleasant realities of a stagnant or declining industry is to concentrate on
growth segments within the industry. Although that may not be possible in some
industries, growing markets can be identified in most, despite overall decline
or stagnation. For instance, the technology for making paper has been around for
centuries. However, manufacturers of specialty papers have recently found many
untapped markets for their products.
Identifying growth segments requires considerable insight and creativity and
is often difficult. However, a creative management team willing to view its
declining industry as being composed of smaller segments and willing to take the
time to analyze industry data is much more likely to identify segments with
Improved Manufacturing/Distribution. One of the overriding
characteristics of firms operating successfully in stagnant or declining
industries is their constant attention to cost reduction. The most common way to
lower costs seems to be through improving processes for manufacturing and/or
In many instances, cost reductions are achieved through gradual, day-to-day
improvements and attention to detail rather from big breakthrough investments.
For example, a precision machine manufacturer/supplier to the auto industry was
saved from going out of business by implementing a detailed scheduling system,
performance planning, and product standardization using off-the-shelf software.
Often, more creative and less complicated approaches can provide significant
Although improvements in manufacturing processes are the most common way of
lowering costs, other efficiencies can be achieved. The planned, orderly
consolidation of production facilities can dramatically impact profitability. A
renewed focus on reducing rework and spoilage can improve gross margins
significantly. As more consumers shop on the Internet, web printers with the
lowest make-ready cost and run waste may be the ones to sustain profitability in
the highly competitive catalog printing market.
Divestiture. Divesting entails getting out of a business in
an orderly fashion. For this strategy to succeed, timing is essential.
Companies adopt divestiture as a strategy when management assumes the firm
can recover more of its investment from the business by selling it in the early
stages of decline, when companies can recoup higher values from the sale of
assets. Companies that do not enjoy leadership positions, cannot serve
differentiated groups of customers, or cannot achieve the lowest break-even
points in their industries should consider this alternative.
The objective of this strategy is to sell a business before the value of its
assets shrinks too much. In the early stages of decline, there is more
uncertainty about future demand and thus more likelihood that a buyer can be
found. Divestiture is an appropriate option when more promising uses for a
firm’s resources are available.
In any scenario, a company should choose an appropriate strategy early in the
game rather than react to someone else’s plans later. The strategy selected
should match the industry structure and demand characteristics against a
company’s own strengths and weaknesses.
By recognizing the basic patterns that match strategic alternatives with
these variables, a firm is in a better position to select an optimal strategy in
a declining or stagnant industry. Prudent timing and careful analysis of
industry characteristics can result in improved performance, even in declining
 Willoughby, Jack, “Endgame Strategy,” Forbes, July 14, 1987,
 Hamermesh, Richard G. and Silk, Alvin J., “How to Compete in
Stagnant Industries,” HBR , Sept. – Oct. 1979, 161-168.