This article from Wole Oluyemi is one of the series of writings from the author on strategy, finance, markets and competition, business intelligence, social capital and networks, corporate political behavior, and harnessing disruptive influences for competitive advantage. This series is to complement the SABI podcast series that was recently launched as a platform to share knowledge and some frustrations on entrepreneurship and business leadership.
Declining markets are those that have gone from maturity – where sales stay flat or experience marginal growth, to multiple periods where there are decreasing sales. This drop in sales is the most obvious sign of a declining market that suggests that customers do not require the product or service being offered. In other instances, your market may be declining because your product is obsolete and a simpler, better, more convenient or affordable product may exist, hence, customers easily switch to that product or service.
Blockbuster, a popular video rental business in the 1990s in the US with over 9,000 rental stores, 80,000 employees, ~70 million registered users and previously valued at $3billion with over $800m in late fees alone. In 2010, the company filed for bankruptcy with over $900m in debt. The company was very focused on brick-and-mortar video stores while competitors like Netflix had moved to DVD-by-mail with an option to keep the DVDs as long as possible without any late fee charges, causing customers to switch to Netflix. Shortly after, Netflix launched its revolutionary streaming service while Blockbuster was still focused on DVD. Blockbuster eventually launched its DVD-by-mail service, however, it was too late.
Blockbuster was unable to anticipate the decline in the market for its video rental service as a result of technological innovation, Netflix on the other hand, had imagined streaming as the future of video rentals and innovated along that line. The takeaway from this Blockbuster story is that while innovation is a game changer, the timeliness of such innovation ultimately determines the impact of such innovation.
Business leaders must be able to identify when there is a market segment that continues to produce demand even when the general market is declining. In such instances, the business can focus on meeting the specific demands of that segment without necessarily worrying about other market participants.
Some businesses in a declining market might be able to navigate through the challenges by implementing survival strategies to adapt to the decreasing demand and hoping to grow by gaining market share as other firms leave, even at a cost – with the plan of being the veteran firm once the market bounces. The adaptation strategies may include repurposing capacity, supply chain and inventory optimization, cost optimization to keep profit margins stable, and focusing on not losing current customers.
Downstream integration and unrelated acquisitions are other possible strategies, such as when Amazon acquired Whole Foods to get into the grocery market. Crop farmers acquiring processing plants or delivery companies may also create synergies that could reduce the negative impacts of a declining market. This approach is similar to a “harvesting” strategy, when a firm is implementing a slow exit from a declining market segment by investing its retained earnings in another market segment.
The other alternative for a declining industry is to simply use its cash flow for the benefit of shareholders – accept your business fate, pay dividends, and let the shareholder enjoy “the last supper”. Don’t waste additional funds trying to chase the shadows.
Trusted strategy advisor to the CEOs and senior executives of ambitious and leading companies.
Wole Oluyemi is a strategy advisor, management thinker, author, board member, speaker, writer and thought leader providing valuable insights in the areas of strategy, finance, markets and competition, business intelligence, social capital and networks, corporate political behaviour, and harnessing disruptive influences for competitive advantage. He is a trusted advisor to many senior executives and has delivered keynote speeches and workshops involving executives and employees of leading global companies from industries as diverse as information technology, healthcare, financial services, agriculture, trading and logistics.