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USE SUBTLE STRATEGY IN TOUGH MARKETS

by Donald V. Potter

Since 1985, we have researched and worked in many hostile markets – markets in which too many competitors are pursuing too little customer volume, resulting in a long period of competitive intensity and ending with the demise of many players, including some former industry leaders. This experience has led us to two convictions. First, hostile markets operate differently than most markets. These markets are far more challenging for a management team than are “normal” competitive markets because they offer less in new volume pay-off despite their demand for more strenuous management efforts. Second, these markets can mean opportunity for a company. However, to prosper, the company must be subtler in its strategy.

Hostile Markets are Different

A hostile market operates differently than a market with “normal” competitive conditions. A hostile market is more demanding and less rewarding.

New customer volume is harder, not easier, to gain.

Conventional wisdom would suggest that, when excess capacity is chasing customer volume, customers would be changing suppliers readily to gain advantage. In fact, the opposite is true. In a hostile market, the volume changing suppliers, that is, volatile volume, is less than half of what it is during “normal” times. In addition, the volatile volume is usually with smaller customers in less attractive segments. This occurs because customers do not need to change suppliers to get what they want. They can make demands of their current suppliers, and need to change only if their incumbent supplier “fails” them by not offering what they want at the price they want. In a hostile market, the majority of volatility happens only after an incumbent supplier “failure”.

Customers change their demands.

Customers do more than just insist on the best terms for their current purchases. They also become more challenging to serve because they change their demands. Customers may purchase at product price points either above or below the standard product. This means that a supplier must either have or develop a broader line of price formats to avoid “failing” the customer. And, customers tend to value new product features less and better services more, which is dire news for any supplier who has not made the long-term investment to offer good service and purchase convenience.

Price is less effective for gaining share or increasing profitability.

In tough markets, the pricing tool loses much of its power. Once competitors become aggressive on price, prices become transparent across the industry. It becomes very difficult either to price below peers to gain volume or to price above them to increase margins. In hostility, price can cost a company volume and profits but will not earn it much of either.

Cost advantage becomes difficult to gain.

Tough markets also make it more difficult to reduce costs below those of competitors. A company may find new approaches to managing its costs, only to find that other leading companies copy these approaches. Scale economies are more difficult to gain because share is so challenging to build. A substantial majority of industry share leaders in hostile markets fail to lead their industries in returns on investment.

Hostility Can Mean Opportunity

Difficult as a hostile market may be, our research has also shown that it can present unusual opportunities. Hostile markets develop and evolve in predictable patterns. While each industry is indeed unique, the economic forces bearing down upon it are universal. And the responses of any company to those forces are limited in number.

To confront successfully a developing hostile market, a company should make its strategy subtler and less directly obvious to both competitors and customers alike. More specifically, it should:

  • Redirect its marketing and sales efforts to avoid a rapid increase in the cost of new business
    • segment for volatility before segmenting on customer need
    • set a priority on expanding relationships with current customers
    • change marketing and sales programs to exploit competitor weakness
    • separate core from non-core customer segments
  • Improve current product/service performance with the primary objectives of competing for more of the volatile customer volume and of protecting more effectively its own customer relationships
    • cover only price points with core segment value
    • correct hidden, as well as visible, causes of volume losses
    • craft differentiators that have high odds of remaining unique
  • Raise prices in ways that are not obvious to customers
    • change the performance package
    • modify the components of price
    • allow more complexity in the pricing process
  • Create and exploit cost advantages that competition can not readily match

Many management groups take some time to recognize the onset of hostility in their markets and to adapt themselves, as they must. Some management groups have not seen hostility before and do not know how to evaluate the developing condition. Others are reluctant to alter, in any way, a course that has worked well in more forgiving times. This delay carries risk.

In contrast, a company that does recognize developing hostility has an opportunity to steal a march on its competition. If a management group knows what to do about hostility, it can adapt its approaches before competition does. These adaptations can increase both revenues and profits at the expense of competition.

(Note: This Perspective was written in the context of the economy in 1999. While some of the companies may have changed their policies or indeed no longer exist, the patterns they exhibit still hold today.)

Recommended Reading
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Analyses:

Symptoms and Implications: Symptoms developing in the market that would suggest the need for this analysis.