Concept of Industry Shakeout

Industry Shakeout marks a discontinuity or turning point, as the industry goes through a major upheaval. Some of the greatest risks which companies face are during times when the industry is witnessing a shake-out.

An industry shakeout occurs when the rate of industry growth slows down as demand approaches saturation levels. A saturated market is one where there are few first-time buyers left. Most of the demand is limited to replacement demand.

  1. As an industry enters the shakeout stage, rivalry between companies becomes intense, with excess productive capacity and severe price discounting. Many firms exit the industry at this point.
  2. Industry shakeout provides an opportunity for those firms that are dedicated to success in this particular industry to consolidate their power, often by acquiring the assets of firms exiting the industry.

At the growth stage of industry life cycle, a company should try to grow in pace with the growth of the market, in order to consolidate its position and survive the coming shakeout. If an industry shakeout occurs, companies in strong competitive positions are increasing their market share by attracting customers from exiting companies. Cost leaders invest in cost control. Differentiators enter more market segments and offer more products. Weak companies choose a focus strategy, or if very weak, a harvest or liquidation strategy.

George S Day in his article – “Strategies for surviving a shakeout,” Harvard Business Review, March-April 1997, pp. 92-102. – has provided some useful insights on industry shakeouts. Day refers to two kinds of industry shakeout: the boom-and-bust syndrome and the seismic-shift syndrome.

  1. The boom-and-bust syndrome typically applies to emerging markets and cyclical businesses. The dot com industry in the late 1990s is a good example. During the boom, many companies entered the industry leading to excess capacity. As competition intensified and prices fell, many players found the going tough. The successful companies focused on operational excellence and cut costs ruthlessly.
  2. The seismic-shift syndrome is more applicable to mature industries. Such industries enjoy prosperity for years together in a protected environment, with minimal competition and decent margins. A seismic shift takes place when these factors disappear. Deregulation, globalization and technological discontinuities are some of the factors that can cause a seismic shift.

Managers need to develop antennae that can sense a shakeout before their competitors do so. Scenario planning can focus attention on change drivers and force the management team to imagine operating in markets which may bear little resemblance to the present ones. Studying other markets which have already seen a shakeout, which are similar in terms of structure and are susceptible to the same triggers can also be of great help. Examining how the same industry is evolving in other countries and regions can also provide useful insights.

Day refers to survivors from a boom and bust shakeout as adaptive survivors and those from a seismic shift syndrome as aggressive amalgamators. Adaptive survivors impose discipline in operations and respond efficiently to customer needs and competitor threats. Dell is a good example of an adaptive survivor. During the initial shakeout in the PC industry in the 1980s, Dell survived due to its lean build-to-order direct selling model. In the early 1990s, Dell stumbled when it entered the retail segment and its notebook computers failed to get customer acceptance. Founder, Michael Dell did not hesitate to make sweeping changes in the organization. He put in place a team of senior industry executives to complement his intuitive and entrepreneurial style of management. Dell became the largest manufacturer of PCs in the world, emerging as an adaptive survivor in an industry, which saw the exit of several players.

Aggressive amalgamators show an uncanny ability to develop the right business model for an evolving industry. They usually make one or more of the following moves: rapidly acquire and absorb smaller rivals, cut operating costs and invest in technologies that increase the minimum scale required for efficient operations. Mittal Steel is a good example. The company’s appetite for acquisitions and global consolidation is legendary.

For companies which find it difficult to become adaptive survivors or aggressive amalgamators, there are alternative strategies to survive a shakeout. These include becoming niche players, joining hands with other small players through strategic alliances and finally selling out and getting the best price possible.

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