Survival in a Hostile Environment

In most sectors, the UK is a mature market.  What this means is that businesses sell products and services that have existed over time.  For example, the automobile has been around since the late 19th century; home computers since the early 1980s and mobile phones since the mid-1980s.

What this means is that it is rare for a wholly new product to emerge and for a new market category to exist.  ‘New’ products tend to be improvements of previous technology. For example, an electric car is still a car; it satisfies the same function as a vehicle with an internal combustion engine; it has four wheels and you drive it on the public highway.

So in mature markets, growth tends to be slow (and may be beginning to decline).  Consumers buy a replacement product. Consumers may have developed brand loyalty and have a long term relationship with a particular market player.

As growth is slow, rather than attracting new customers, businesses are focused on taking market share from each other.  In mature markets there are established market leaders who have a focus on retaining that market share and market challengers who are trying to take that market share from them.

In mature markets there are often inflationary pressures at play.  Companies may see increased foreign competition and they compete to obtain the same raw materials.  For example, only this week Elon Musk pleaded for more nickel to be mined as he was struggling to obtain enough of the metal for his car batteries.

Also, in mature markets, firms experience major regulatory upheaval.  his could be new ecological standards or, in the car industry, fuel consumption tests.

Businesses in mature markets can be hit by cultural change.  For example, it is likely that the current pandemic will result not only in temporary cultural changes such as the wearing of face masks, but other effects over the longer term e.g. companies moving staff onto home working contracts reducing the need for office accommodation.

As stated above, the United Kingdom is a mature market.  Therefore it currently faces a hostile environment on three fronts; Direct competition from other market players; an oncoming recession; and massive regulatory turmoil created by Brexit.

You may think operating in such a hostile environment is a lost cause: but it is possible to succeed in a hostile environment.  To succeed your business strategy must have the following factors:

  1.  You must make purposeful moves towards market leadership.  However failure to achieve that leadership position, or an inability to maintain market leadership can lead to major problems.  The UK high street restaurant sector is an example.  Several firms in this sector have failed in recent years after aggressive expansion strategies failed and fixed costs like rent have led to big debts e.g. Pizza Express, Frankie and Benny’s, Café Rouge, Carluccio’s, etc.
  2. If your market position is deteriorating, diversification may not be the best approach.  Look to your market core.
  3. If the whole industry appears to be in trouble, the hostile environment may be the perfect opportunity to grab your competitors market share through acquisition.
  4. You may be able to target specialist sectors.

In a hostile environment, successful strategies have the following common characteristics:

  1. The successful firm achieves a lowest delivered cost position relative to their competition but within acceptable quality and pricing policies.  They aim to look for sales volume not large profit margins; or,
  2. They achieve the highest product/service/quality differentiated position relative to their competitors.  They must maintain an acceptable delivered cost structure and a profit margin which is sufficient to allow reinvestment in their diversification.

Those following the lowest delivered cost often grow slowly as they hold down price increases and keep operating margins down to gain volume, fixed cost reductions and improved asset turnover.

Those following a differentiation strategy tend to grow faster through having higher prices and operating margins which cover increased promotion, research and other costs.

In making purposeful moves towards market leadership means moving to and maintaining a winning position; either lowest cost in market or superior price justified through differentiation

Such strategies require careful strategic analysis.  Simply relying on growth/share matrices such as that of the Boston Consulting Group can be a naïve policy as these models often assume that mature markets should be milked for cash.

Also beware relying on experience curves as these lead to a view that high market share, low cost, vertical integration is the sole route to market success.

Instead, analysis should consider:

  1.  Aggressive restructuring towards your core business rather than diversifying into other sectors.  For example, James Dyson has abandoned his electric car project and this week announced 900 job losses across his business as part of a restructuring.
  2. Reinvest towards an average cost, highly differentiated position.
  3. Do not think that cost-leadership can only be achieved through high market share and accumulated experience.  A focus on modern automated processes may mean cost-leadership can be achieved without high market share.  Again, Brexit may make this difficult for UK manufacturers as it impacts just in time delivery chains.
  4. Vertical integration is not necessary to exploit cost leadership.  Integration should be selective and targeted on value added factors.

In a hostile environment, failure to achieve market leadership can lead to problems such as below average products through lack of differentiation and increased external pressures on your business.

If there is one lesson to succeeding in a hostile environment it is that your core business needs to be cherished and you should not be distracted by searching for new markets.