Chapter 11: The Transition to Industry Maturity
Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
Chapter 11: The Transition to Industry Maturity p. 237
As indicated in Chapter 8, industries evolve in many different ways. In some cases an industry may go through the transition to maturity more than once, or never mature at all. However, when transition occurs it creates a number of problems for firms in the industry that require strategic adjustments, and in some cases changes in organizational structure. The purpose of this chapter is to examine the issues facing firms in an industry as it transitions to maturity.
Industry Change During Transition p. 238
Many changes occur as an industry transitions to maturity. Some of the changes include the following:
1. Slowing growth means more competition for market share - Competitor analysis should be repeated as building market share becomes more difficult. Competition turns to outbreaks of price, service, and marketing warfare.
2. Firms in the industry increasingly are selling to experienced repeat buyers - The buyer's focus shifts to choosing among brands.
3. Competition often shifts towards a greater emphasis on cost and service - As an industry matures, the greater emphasis on lower cost and customer service may require capital investments in the latest equipment and facilities.
4. There is a topping-out problem in adding industry capacity and personnel - Building overcapacity is common and becomes more difficult to cover as industry growth slows. This toping-out adds to the motivation for price wars.
5. Manufacturing, marketing, distribution, selling, and research methods are often undergoing change - Changes may require new skills, and new methods in manufacturing, marketing, and distribution as described in Chapter 8.
6. New products and applications are harder to come by - As product innovations become more difficult, the orientation shifts to research and new product development.
7. International competition increases - Product standardization and more emphasis on cost leads to international competition. This is the focus of Chapter 13.
8. Industry profits often fall during the transition period, sometimes temporarily and sometimes permanently - Lower profits reduces cash flow, lowers the firms stock price, and makes it more difficult to obtain debt financing.
9. Dealers' margins fall, but their power increases - As some dealers drop out, the ones that are left become more powerful.
Some Strategic Implications of Transition p. 241
There are a number of strategic issues that firms need to examine as industries mature. Generalizations are difficult since industries mature in different ways. The following includes various issues, approaches and questions that firms need to consider.
Overall Cost Leadership vs. Differentiation vs. Focus - The Strategic Dilemma made acute by Maturity
As an industry matures and competition increases, it becomes more important for firms to choose one of the generic strategies discussed in Chapter 2.
Sophisticated Cost Analysis
As an industry matures, cost analysis becomes more important to rationalize the product line, and provide accurate pricing. Rationalizing the product line refers to pruning the line of unprofitable items. Accurate pricing, as opposed to average-cost pricing avoids cross-subsidization within the product line. Porter refers to the general idea as an enhanced level of financial consciousness that is needed as firms face changes in a maturing industry.
Process Innovation and Design for Manufacture
Process innovations and product design to facilitate lower-cost manufacturing become more important as the industry matures.
Increasing Scope of Purchases
Firms may find that increasing the purchases of existing customers (by added more service, widening the product line, providing peripheral equipment, etc.) is less costly than finding new customers.
Buy Cheap Assets
Acquiring distressed companies or purchasing liquidated assets can help create a low-cost strategy if the rate of technological change is relatively low.
Identifying "good" buyers can become a key to profitability. Good buyers are those that are not price sensitive, or those who are willing to pay more for a product's performance characteristics. See Chapter 6.
Different Cost Curves p. 245
The illustration below shows how a firm could use the generic focus strategy to compete with the cost leader in an industry. The firm designs its manufacturing process for flexibility, rapid setups, and short lots and is focused on the customers who want a low volume, custom designed product, i.e., competes in the circle.
Completing Internationally p. 246
Another approach that may postpone the effects of a maturing industry is to compete in international markets where buyers are less sophisticated, obsolete products are still marketable, and competition is less severe.
Should Transition be Attempted at All?
As an industry transitions to maturity some firms may be better off by disinvesting rather than choosing any of the approaches mentioned above. The decision to stay or leave the industry should be based on an analysis of the number of firms that have the capability to stay, and the expected future turmoil and prospects for the industry. Smaller firms may be more flexible than larger ones, and some new entrants not tied to the past structure may have an advantage in the changing environment.
Strategic Pitfalls in Transition p. 247
As an industry moves towards maturity, firms face other hazards as follows:
1. A company's self-perceptions and its perception of the industry - Firms makes assumptions about their own image, customers, competitors, buyers, and suppliers that may no longer be valid as the industry matures.
2. Caught in the middle - Firms that fail to compete using one of the three generic strategies are even more vulnerable as the transition squeezes out the slack in the industry.
3. The cash trap - Investments to build market share in a mature market are perhaps tempting, but risky. As the industry matures the emphasis needs to be on profitability rather than revenue.
4. Giving up market share too easily in favor of short-run profits - There needs to be a balance, since an over emphasis on short-run profits can hurt the firm's future market position.
5. Resentment and irrational reaction to price competition - Price competition might be necessary even when a manager thinks its beneath their dignity.
6. Resentment and irrational reaction to changes in industry practices - Resistance to changes in an industry (e.g., more aggressive marketing, production methods), can cause a firm to fall behind as the industry matures.
7. Overemphasis on creative, new products rather than improving and aggressively selling existing products - Standardization becomes more important than innovation.
8. Clinging to higher quality as an excuse for not meeting aggressive pricing and marketing moves by competitors - Quality differences erode as an industry matures, and knowledgeable buyers may be willing to accept lower quality for lower prices.
9. Overhanging excess capacity - Excess capacity can cause a firm to undermine its strategy and in some cases the excess should be sold or scrapped.
Organizational Implications of Maturity p. 249
As an industry transitions to maturity adjustments must be made in a firm's organization structure. A more competitive environment means less growth, less excitement, and glamour and requires more emphasis on budgeting, tighter control, and new motivational systems.
1. Scaled down expectations for financial performance - The standards for growth and profits must be reduced, but this will be difficult for managers to accept.
2. More discipline from the organization - Less organizational slack will require more discipline at all levels of the organization.
3. Scaled-down expectations for advancement - Past rates of personnel advancement will no longer be possible. As a result new approaches to motivate and reward employees will be needed.
4. More attention on the human dimension - Building company identification and loyalty will require more subtle motivational devices.
5. Recentralization - The need for more central control and lower overhead may require a reversal of previous moves towards decentralization.
Industry Transition and the General Manager p. 252
The strategic and administrative skills needed by the general manager change as the firm faces the various problems brought on by a maturing industry. Some general managers will not recognize or accept the needed changes. Others will not have the needed skills and may relinquish control. The skills and orientation of unit managers need to change as well. Thus, a company's leaders must pay close attention to the managerial changes that are needed in a maturing industry.
Christensen, C. M. 1997. Making strategy: Learning by doing. Harvard Business Review (November-December): 141-142, 144, 146, 148, 150-154, 156. (Summary).
Clinton, B. D. and A. H. Graves. 1999. Product value analysis: Strategic analysis over the entire product life cycle. Journal of Cost Management (May/June): 22-29. (Summary).
De Geus, A. 1999. The living company. Harvard Business Review (March-April): 51-59. (Summary).
Fonvielle, W. and L. P. Carr. 2001. Gaining strategic alignment: Making scorecards work. Management Accounting Quarterly (Fall): 4-14. (Summary).
Gosselin, M. 1997. The effect of strategy and organizational structure on the adoption and implementation of activity-based costing. Accounting, Organizations and Society 22(2): 105-122. (Summary).
Iansiti, M. and R. Levien. 2004. Strategy as ecology. Harvard Business Review (March): 68-78. (Summary).
Kaplan, R. S. and D. P. Norton. 1996. Using the balanced scorecard as a strategic management system. Harvard Business Review (January-February): 75-85. (Summary).
Kaplan, R. S. and D. P. Norton. 2000. Having trouble with your strategy? Then map it. Harvard Business Review (September-October): 167-176. (Summary).
Kaplan, R. S. and D. P. Norton. 2001. Transforming the balanced scorecard from performance measurement to strategic management: Part I. Accounting Horizons (March): 87-104. (Summary).
Kaplan, R. S. and D. P. Norton. 2001. Transforming the balanced scorecard from performance measurement to strategic management: Part II. Accounting Horizons (June): 147-160. (Summary).
Kaplan, R. S. and D. P. Norton. 2004. Measuring the strategic readiness of intangible assets. Harvard Business Review (February): 52-63. (Summary).
Kim, W. C. and R. Mauborgne. 1997. Value innovation: The strategic logic of high growth. Harvard Business Review (January-February): 103-112. (Summary).
Kim, W. C. and R. Mauborgne. 1999. Creating new market space: A systematic approach to value innovation can help companies break free from the competitive pack. Harvard Business Review (January-February): 83-93. (Summary).
Kim, W. C. and R. Mauborgne. 2002. Charting your company's future. Harvard Business Review (June): 77-83. (Summary).
Langfield-Smith, K. 1997. Management control systems and strategy: A critical review. Accounting, Organizations and Society 22(2): 207-232. (Summary).
Luehrman, T. A. 1998. Strategy as a portfolio of real options. Harvard Business Review (September-October): 89-99. (Summary).
Malone, D. and M. Mouritsen. 2014. Change management: Risk, transition, and strategy. Cost Management (May/June): 6-13. (Summary).
Martin, J. R. Not dated. What is a learning curve? Management And Accounting Web. http://maaw.info/LearningCurveSummary.htm
O'Clock, P. and K. Devine. 2003. The role of strategy and culture in the performance evaluation of international strategic business units. Management Accounting Quarterly (Winter): 18-26. (Summary).
O'Reilly, C. A. III. and M. L. Tushman. 2004. The ambidextrous organization. Harvard Business Review (April): 74-81. (Summary).
Porter, M. E. 1996. What is a strategy? Harvard Business Review (November-December): 61-78. (Summary).
Porter, M. E. 2001. Strategy and the internet. Harvard Business Review (March): 63-78. (Summary).
Reeves, M., C. Love and P. Tillmanns. 2012. Your strategy needs a strategy. Harvard Business Review (September): 76-83. (Note).
Simons, R. 1995. Control in an age of empowerment. Harvard Business Review (March-April): 80-88. (Summary).