A hostile market can be defined as ‘one which is associated with over capacity, low margin, intense competition and management in turmoil’ irrespective of industry type these finding have been found to be true.
Hostile Market
Don Potter’s (and not Michael E. Porter of Porter’s Five Forces fame) report suggests that outbreak of hostilities is triggered by two major factors:
· Fall in demand – Caused by external event/s that affects the industry’s customers; consequently there is sudden over capacity of supply
· Competitive expansion – competitive expansion occurs because new opportunities prop up providing high margins and profits or because competitors undercut each other’s competitive advantage due to fall in demand
Below I will discuss the six phases of a hostile market identified in the Windemere study following which I will, in next few paragraphs, show you how this definition fits in the context of X.
The six phases of hostility that an industry experiences is mentioned below and they may or may not necessarily occur in the order mentioned:
1. Margin pressure – Low profit margins resulting from predatory pricing. This situation leads to asymmetric power shift towards customer, giving large customers extra bargaining power. Eventually competitors start looking for niche areas that comes from higher-margin smaller customers.
2. Share shifts – Three factors account for this shift a. Industry leader or leading firms in industry hold on to premium pricing under false assumption that superior offering and customer loyalty will sustain premium pricing only to loose market share and spoil brand reputation over time. b. Flight to quality. c. Acquisition driven by desperation to achieve economies of scale.
3. Product/Service Proliferation – Competitors compete for market share by attempting to generate value for the customer through product/service proliferation. Firms resort to bundling or unbundling of their offerings in an attempt to find niche. Bundling is achieved by adding features or functions to existing service or product while keep the price constant. Unbundling removes some of the features or benefits from the product or service and are then offered at lower price.
4. Self-defeating cost reduction: In an effort to maintain margin firms resort to cost cutting measures that scuttles investment in product/service or quality improvements thereby giving unintended lead to competitors.
5. Consolidation and shakeout: As a consequence of these externalities industry is forced to separate chaff from the grain. Consolidation happens in three waves: first, firms work hard towards reducing overhead by right-sizing the workforce, closing and consolidating facilities and pruning businesses. Second, Strong firms take over weaker firms in the markets thereby reducing the competition. Third, larger firms begin to collaborate to beat the heat.
6. Rescue: This is a long drawn and arduous process which leads to few players controlling large chunks of market share. And typically is based on shift in industries entry and/or exit barrier arising through industry innovation or external intervention reigniting demand.
X in a Hostile Market
A Cursory look at Mechanical & Electrical (M&E) industry in UK will reveal that it is highly fragmented. The following table, table 1, from a well respected market intelligence company Mintel indicates the number of VAT registered companies that operate within the segment of M&E in UK as of early 2009.
Table 1.
Table 1.
Table 1 shows that the sheer number of firms operating within M&E sector erode any competitive edge that any single firm may try to bring to the market; also given that these firms are of different sizes any differentiation strategy adopted will be hard to sustain.
As indicated in market fragmentation definition the tables below, table 2 and table 3, proves the point that profitability is unrelated to size. Table 2 drawn from Plimsoll Portfolio Analysis for M& E contractor shows that the industry has firms spread across a broad spectrum of sales growth; some firms are experiencing high growth while others are experiencing severe negative pressure. Table 3 shows that the Top 50 companies in terms of sales growth range in their annual sales figure of over GBP 500 million through firm with just over a million in their annual sales.
Table 2.
Table 2.
Table 3.
Given the above hard facts combined with ‘not-so-bright’ macro-economic conditions, and the internal situation of the company it is pertinent that X look at multiple dimensions to sustain itself in this hostile market environment; and may be decide to embark upon growth strategy based on market penetration, service market expansion and if possible, based on X’s ability to manage risk and make long term resource commitment, also look at vertical integration and diversification. The final recommendations made to X will be discussed in later articles.
The business strategy presented here is an opportunity for X to bring together its holding companies and device a common marketing strategy accommodating them all. Implementation of this strategy will demand commitment from all stake holders - existing private owners, current management team, employees and sub-contractors, to see it through the end. The greatest pressure on resource will come in the form of pressure on time and motivation to manage this change.
Internal changes triggered by adopting customer centric strategic market management will not and cannot happen in isolation. Similarly any business strategy change cannot be oblivious to its perils of present in the hope that a great plan for the future will somehow make the current problems vanish. This is why managing cash flow is as important for a firm’s survival today as its plan to grow market share or sales turnover or net profit or profit margins in the mid to long term; a marked improvement in a firm’s overall performance. A structured growth strategy will prepare an organisation and give it the confidence it needs to undertake broader reform in its business strategy.
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