As the industry traverses the dynamic phase, the intense competition during this stage leads to a shake-out phase. As consolidation takes place, the industry enters a stable phase characterized by a small number of large companies. And though the stable industry may have some medium and small enterprises, the large companies dictate the competition because they can influence the Porter’s competitive five forces. In fact, these are the companies that developed the most successful generic strategies in the industry. The transition to stable environment is nearly always a critical period for companies in an industry. It is a period during which fundamental changes often take place in companies’ competitive environment, requiring difficult strategic responses. Many firms have trouble perceiving these environmental changes clearly; even when they do, responding to them may require changes in strategy that firms may shy away from. A shift to a more stable or mature industry environment can often bring about a number of important changes in an industry’s competitive environment. These are discussed below.
- With companies unable to maintain past growth rates merely by holding market share, they turn their attention to attacking the shares of the others. This may lead to outbreaks of price, service, and promotional warfare.
- The product is no longer new and buyers are more knowledgeable and experienced, having already purchased the product, sometimes repeatedly. The buyers’ focus shifts from deciding whether to purchase the .product at all to making choices among brands. As a result of slower growth, more knowledgeable buyers, and usually greater technological maturity, competition tends to become more cost- and service oriented.
- As the industry adjusts to slower growth, the rate of capacity addition in the industry slows down. Firms need to monitor competitors’ capacity additions, closely time its capacity additions with precision. This is rarely done and overshooting of industry capacity relative to demand is, therefore, common.
- As a result of technological maturity, often accompanied by product standardization and increasing emphasis on costs, transition to stable environment is often marked by the emergence of significant international competition. International rivals have different cost structures and different goals compared to domestic firms.
- Slowing growth, more sophisticated buyers, more emphasis on market share, and the uncertainties and difficulties of the required changes usually mean that industry profits fall in the short run from the previous levels. Some firms may be more affected than others, the smaller firms generally the most. Falling profits reduce cash flow during a period when they are needed the most.
Rapid growth in the dynamic stage tends to hide errors and allow most companies in the industry to survive and even to prosper financially. Experimentation is high, and a wide variety of strategies can coexist. Carelessness and negligence are, however, generally exposed by stable industry, however. Maturity may force companies to meet head-on the need to choose among the various strategies described in the next section.