An industry is said to be a declining industry where demand for products of the firms in the industry grows more slowly than the economy-wide, average.
In a declining industry, the demand continues to go down.
Examples of the declining industry in the USA include;
- 6. DVD, game & video rental.
- Computer manufacturing.
- Recordable media manufacturing.
- Online mortgage brokers.
- Database & directory publishing.
Situations That Prevail in a Declining Industry
in declining industry growth in demand and profitability goes down continuously. There are many reasons for the continuous declining tendency in demand for products.
Major reasons are changes in the tastes and preferences of customers, the emergence of sophisticated technology in the industry that has ushered in new uses of products, or customers have become tired of using the same types of products for a long time, or substitute products have entered into the market with high success, or technological substitution has taken place (such as people are preferring bus travel than train travel), social changes have occurred (such as people are less using cigarettes due to more health consciousness), or foreign competition (such as low-cost Chinese and Indian ball pens are pushing our ballpen industry into decline).
Profitability goes down mainly due to slackened demand for products and very high competition among the producers.
Strategy Options in a Declining Industry
In a declining industry, several strategy options are available to the managers. We discuss them below:
A firm in a declining industry may choose to employ a harvesting strategy to earn the maximum possible amount of cash from the business.
This strategy involves sacrificing market position in return for bigger near-term cash flows or current profitability. When a firm adopts a harvesting strategy, it cuts down the budget substantially.
Also, reinvestment is rarely made, new equipment is not purchased (rather old ones are used as long as possible), and priority is given on the extensive use of existing facilities of the firm.
To obtain greater cash flows, advertising expenses are cut down, quality is. Reduced carefully and less-essential customer services are curtailed.
Another strategic option for a firm in a declining industry is to sell it out. The firm may divest or sell off a portion of its assets like equipment, land, stock of materials, etc.
The cash proceeds can be used for improving the core business. Or, the firm may dispose of the business entirely.
Niche or Focus Strategy
A focus strategy concerns itself with the identification of a niche market. Any industry, whether emerging or maturing or declining, may have several niches (a small segment of a market that generally remains unserved or inadequately served by competitors).
A firm in a declining industry can look for niche markets where it can operate a business profitably. Some of these niche markets may be growing despite stagnation in the industry as a whole.
A firm can place more emphasis on the differentiation strategy of products based on quality improvement and innovation.
Differentiation can rejuvenate demand through alluring customers to the firm’s products innovation-based differentiation is also helpful for a firm in a stagnant/declining industry to survive easy imitation by the competitors.
If the costs can be reduced continuously in an innovative way, it can help the firm improve its profit margin arid return-on-investment.
Cost reductions may take the form of dropping less essential business-activities, outsourcing some functions to outside companies who can perform those activities cheaply but in a better way, redesigning internal business processes, consolidating unutilized production facilities, closing down high-cost retail outlets, and pruning marginal products.