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Ideas for Leaders #698

Industry Disruption: Sequence and Timing of Responses Are the Key to Survival

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Key Concept

In the case of major industry disruption, successful companies survive through a well-orchestrated series of strategic moves. New research shows that the sequence and timing of those moves can make the difference between failure and success. 

Idea Summary

In 1980, the U.S. freight railroad industry was deregulated. Railroad companies now had the freedom to abandon unprofitable lines and acquire new ones. They were also no longer banned from owning other modes of transportation, notable road and water transportation; the companies thus gained access to previously inaccessible markets that had been reserved for road and water carriers. 

A team of researchers used the U.S. railroad industry’s post-deregulatory period of 1980 to 2003 (the year the government declared a moratorium on acquisitions in the industry) to explore specifically whether the sequence and timing of a company’s response strategies following a major disruption impacts the success of a company’s strategy. 

In the face of any major industry disruption, companies have four strategic responses to choose from:

  1. A market penetration strategy, which is the status quo: companies try to grow serving the same customers with the same products;
  2. A market development strategy — in other words, selling the same products to new national markets;
  3. A product or international diversification strategy, that is, selling new but related products to current customers or selling current products to international markets;
  4. An unrelated diversification strategy, which is to diversify into new markets unrelated to the company’s current industry with new unrelated products.

Of the 39 U.S. railroad companies in existence before the 1980 deregulation, only nine companies would remain in existence in 2003. What did those nine companies do right? The answer, according to the study, lies not only in the choice of strategy but also in the sequence and the timing of those strategies. The study shows that the nine surviving companies:

  • Switched quickly from a status quo growth strategy to a market development strategy. Deregulation offers the opportunity to eliminate the operational inefficiencies of the regulated era. Through acquisitions in other markets that were not permitted in the regulated era, the surviving companies pooled resources, recalibrated competencies and gained access to markets in different geographic regions. 
  • Moved quickly into a product development strategy once they had acquired the efficiencies and stronger market position of the previous market development strategy. Deregulation has demand-side consequences: customers will be attracted to the companies that offer a broader range of complementary products. Once in a stronger market position as a result of their market development strategy, the U.S. railroad companies diversified into the broader transportation industry, specifically through intermodal transportation in which freight travels on various types of transportation (rail, road, water) before reaching its destination. 
  • Launched an international development strategy only after focusing on their national markets. The complexity of developing a global presence is best undertaken when a company has built up its resources and market position through diversifying into new markets and a broader range of products at the domestic level. 

In all these strategies, timing is as important as sequence. The longer that companies wait to move from one step to the next — whether because of managerial risk aversion perhaps or the mistaken perception that new strategies are not needed — the more likely their efforts will fail. Slow movers will find that competitors will have already acquired the best partner companies, and have established their reputations and loyal customer bases in the new markets. 

Business Application

Different industries will have different requirements for competitive positioning and growth. The argument of the authors of this study is not that the specific step-by-step sequence of strategies they describe applies to all industries. Instead, they argue that competitive strategy involves a series of strategic moves, and the order in which those strategic moves are made can mean the difference between failure and success. Strengthen your core competencies, managerial talents, and market position before tackling markets with greater complexity, but don’t let timidity cause opportunities to be missed. The key is to find the right balance between strengthening your foundation and taking the leap.

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Authors

Institutions

Source

Idea conceived

  • November 2017

Idea posted

  • March 2018

DOI number

10.13007/698

Subject

Real Time Analytics