At some point, all growth businesses mature and enter the price competition phase.
At some point, all growth businesses mature and enter the price competition phase. Some market leaders have problems during this transition. Their inappropriate responses create opportunities for other competitors, causing decline in the leader's volume, margins, and market share. In essence, market leaders retreat from their positions of strength and abdicate positions of power. However, this retreat can be avoided.
A mature business is typically in the price competition phase, and the danger to a market leader is to shy away from this changing phenomenon. Many retreat into high-margin products, which provides a price and margin umbrella to lesser players in the market. These competitors then fill in the opportunity space vacated by the leader. The former leader is now stuck between two powerful forces:
- Rising tide of more effective competition in the mature markets
- Investments required to develop new high-margin businesses.
Sometimes this retreat causes virtual elimination and extinction of the market leader. Typically, markets transition from a product or device focus during the growth phase to other issues like distribution (providing products "where" customers want them) and later to price competition.
Compaq's transition from the "device" focus to "pricing" focus is well documented. Dell's direct selling model and lower prices signaled the transition and Compaq's failure to respond quickly and its continued focus on high-margin (usually stated as "high quality" focus), created changes in the leadership at the firm. The firm then embarked on a volume strategy that served it well until the urge to expand into "high margin" businesses through acquisitions, caused the next leadership debacle.
Mature markets ideally cannot have more than two or three major players. In cases where numerous competitors exist, the number two or three player will signal that it intends to be one of the top players in the newly defined market. A maximum of only (one or two) of the rest of the players will survive as a separate entity. The rest tend to become acquisition candidates for the market leader and the signaler, or retreat into roles of niche players.
The number two or three player will create a scramble for the leadership position in the business. The competitive dynamics changes significantly, and the leader should act quickly to consolidate its leadership position in this business. Changing rules of the game is key.
At the outset, there should be an organizational focus on the competitive environment. This event just adds fuel to the fire of urgency for the entire organization to work in a unified manner to understand the leader's market and competition, and to come up with the correct, focused responses (strategies) to protect and increase its value to its stakeholders. This development will also highlight the issue that a "single segment" leader will now be competing in two (if not more) distinctly different segments, requiring entirely different competencies and service deliveries.
In the past, the market leader has been successful in one market segment and has great competencies in that business. However, it now needs to change perspectives to growing share in a declining margin business by aggressively pursuing low cost advantage strategies for this business, while pursuing growth strategies in new emerging markets. These multiple thrusts require careful evaluation of business designs and organizational competencies. And, the firm has to learn new tricks to continue its tenure as the market leader.
For example, in a price competitive market, the role of the "product surround" is significant. The "product surround" consists of those intangible issues outside the "device" that are valued by customers to stop from switching to lower priced "devices." For instance, selling hamburgers is a competitive business and competitors focus not on the burger - the "device" - but on the "surround." McDonald's has a "Happy Meal" for kids where the toys keep changing to make it attractive to its customer base. Similarly, flame broiled, and other characteristics (like clean, fun environments) are highlighted to add to the "surround."
In business-to-business (B2B) environments, the product surround is as important, but it is often ignored because engineering firms are so "device" focused. Very little value is placed on any aspect outside of the device. B2B customers usually have a procurement function in the purchasing decision path, but the addition of the "surrounds" makes it difficult for the purchase decision to be based entirely on economics and price. Other aspects and other departments become involved, thereby increasing the potential for other competitive considerations, besides price. Surrounds also increase switching costs, so customers are less likely to move to a competitor.
Some of the "surrounds" that create high competitive barriers are shortest delivery time (high impact), on-site engineering, or support services (high impact), financial terms, and affiliation. The first three are self-explanatory, but the fourth requires some explanation.
Affiliation relates to the creation of a customer community that fosters interaction among customers, and between customers and the vendor. An example is user groups in the computer industry. In many industries, customer communities have saved companies during bad periods (Apple's survival is because of the strong loyalty of its community). Also, Harley-Davidson's phoenix-like rise from the ashes is attributed to a large extent to the loyalty of its riders. The Internet now provides the opportunity to create customer communities. Firms that move first will have advantages that competitors will find difficult and expensive to overcome.
Of course, responses vary by the firm's specific market dynamics. There is no single silver bullet that will put the firm back in the market leadership seat. But, with a little imagination, motivation, and an open mind that overcomes "this is not the way we do business," most firms can protect their market leadership.