Strategy Alternatives for Declining Industries :Conventional strategy recommendations for declining industries are either to divest or to harvest (i.e., to generate the maximum cash flow from existing investments without reinvesting). However, these strategies assume that declining industries are inherently unprofitable. If profit potential exists, then other strategies may be attractive. Harrigan and Porter identify four strategies that can profitably be pursued either individually or sequentially in declining industries:29 ● Leadership: By gaining leadership, a firm is well placed to outstay competitors and play a dominant role in the final stages of an industry’s life cycle. Once leadership is attained, the firm is in a good position to switch to a harvest strategy and enjoy a strong profit stream from its market position. Establishing leadership can be done by acquiring competitors, but a cheaper way is to encourage competitors to exit (and then acquire their plants). Inducements to competitors to exit may include showing commitment to the industry, helping to lower their exit costs, releasing pessimistic forecasts of the industry’s future, and raising the stakes, for example by supporting more stringent environmental controls that make it costly for them to stay in business. ● Niche: Identify a segment that is likely to maintain a stable demand and that other firms are unlikely to invade, then pursue a leadership strategy to establish dominance within the segment. The most attractive niches are those that offer the greatest prospects for stability and where demand is most inelastic. In products facing technological obsolescence, established firms have often been successful in cultivating a lucrative high-price, high-quality segment. For example, Richemont has created a very profitable business based upon mechanical watches (Lange & Söhne, Baume et Mercier, Cartier, Piaget, Vacheron Constantin) and luxury fountain pens (Montblanc). ● Harvest: By harvesting, a firm maximizes its cash flow from existing assets, while avoiding further investment. A harvesting strategy seeks to boost margins wherever possible through raising prices and cutting costs by rationalizing the number of models, number of channels, and number of customers. Note, however, that a harvest strategy can be difficult to implement. In the face of strong competition, harvesting may accelerate decline, particularly if employee morale is adversely affected by a strategy that offers no long-term future for the business. ● Divest: If the future looks bleak, the best strategy may be to divest the business in the early stages of decline before a consensus has developed as to the inevitability of decline. Once industry decline is well established, it may be extremely difficult to find buyers. Self-Study Questions ? 4. Book retailing is in decline. From the strategy options identified in the section “Strategy Alternatives for Declining Industries,” what recommendations would you offer to (a) Barnes & Noble and (b) an independent book retailer located in your vicinity? Explain why do you choose the strategy and give examples.
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