WHAT ENDS HOSTILITY?
by Donald V. Potter
Market hostility lasts 10 years on average — and sometimes as long as 15 to 20 years. Business leaders can justly wonder:
"Will this ever end?"
Hostility will end eventually. The challenge for business leaders is to recognize the true end when it arrives — and to avoid being deceived by a temporary ending.
False Endings Only Mask Symptoms
"The challenge is to avoid being deceived."
Market hostility is like a bad cold: it is extremely unpleasant and, unfortunately, needs to run its course. As with a cold, though, the sufferer can get apparent relief. Like a cold capsule, a dose of help from outside the industry can make the problem seem to go away.
One form of outside relief can be an unexpected surge in demand. Perhaps the economy comes back stronger than expected, faster than expected. Demand rises, pressure on prices eases — and all participants breathe a sigh of relief.
Outside relief can also take the form of political or economic changes that alter global competition. Trade barriers might be removed (thereby opening up new markets) or added (with the aim of protecting domestic industries.) A crisis might make key components of the production process unavailable or much more expensive for some producers. For example, the oil shock of 1979 was a blessing for some aluminum manufacturers, whose industry is energy intensive. Suddenly, Canadian producers, who relied on hydroelectric power, had a big advantage over U.S. producers whose plants used hydrocarbon-based fuels. Or, change in currency valuations might rearrange global trade flows. For example, when the dollar was devalued in 1987, US-made steel became cheaper relative to imports, helping US producers to recapture domestic market share.
A leader's challenge is to accept these "remedies" for what they are: temporary respites. They may last one, two even three years, but their effectiveness will wear off because they have only eased the symptoms of hostility, not changed the underlying conditions.
Sign of True Health: Simplified Structure
"This simplified market will not have reduced capacity."
Long term market hostility truly ends only when the market structure is simplified. Three, or at most four, major players will once again control 75% or more of the market share. There may be many more players, but they will fill small regional or customer niches.
This is not to say that the market will look just as it did before hostility began. The dominant players who emerge from hostility are often a different group from those who dominated going in. When the airline industry became hostile, for example, the leading U.S. international carriers were Pan Am and TWA; they have long since been eclipsed by American, United, and Delta. In automobiles, Toyota was a minor player before hostility and is a major player today. In color televisions, RCA and Zenith led the pre-hostile market that hostility awarded to the Japanese.
Furthermore, this simplified market will probably not have reduced its capacity. During hostility,
competitors do withdraw, but their
capacity is rearranged or recycled. Unused plants or equipment are available at bargain prices and are bought up by remaining competitors who can justify the acquisition by its potentially positive cash flow. In fact, capacity is usually
added during hostility as the industry overall continued to improve its technology and advances down the learning curve. Even a mature industry can be increasing its capacity by 1-1.5% per year in this indirect way.
The importance of market simplification is that most capacity is controlled by a short list of players who then take a different approach to pricing.
Pricing Behavior Must Also Change
Hostility ends when each remaining supplier realizes it can no longer gain share by price discounting. Prices are now so low, and so uniform across the industry for any customer, that further cutting holds no advantage. Customers, too, are weary of the game. They have seen what each competitor can offer. Proffered discounts come only from weak suppliers unable to meet all these customers' needs. They prefer a buying relationship with proven suppliers who have been serving them well for a period of time. Relative stability returns to the market.
Periods of hostility end with increases in demand, but the condition of hostility ends only with market simplification that ends discounting.
(Note: This Perspective was written in the context of the economy in 1993. While some of the companies may have changed their policies or indeed no longer exist, the patterns they exhibit still hold today.)
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Symptoms and Implications: Symptoms developing in the market that would suggest the need for this analysis.