Every so often, we encounter markets that are going through competitor consolidation. Usually, this happens when someone convinces investors that the profitability of several players will be higher if they were one. This approach usually leads to mixed results for the investors. The argument for consolidation usually hinges on the idea that higher market share is correlated with higher profitability. Companies who aren’t in the larger group can feel quite threatened.
How can you defend your market position from competitor consolidation that looks like it will dominate your industry? Here are a few general pointers that may help you think through the issues.
Competitors Consolidating rarely considers specialty and commodity behaviors
Simplified Strategic Planning teaches that targeting specific customer behaviors around price and uniqueness produces considerable profitability. The realities of competitors consolidating in any market often lead to a hodge-podge of companies that have no clear strategic focus. Furthermore, they have little or no consideration of specialty customers (who are willing to pay high prices for perceived value). Similarly, they have little or no consideration of commodity customers (who prioritize low price over added value). The combined company will have no clear strategy built around these powerful concepts. It will almost always be vulnerable in the sub-markets characterized by specialty behaviors.
Most competitor consolidation is a nightmare of tangled strategies
Beyond the mixing of specialty and commodity strategies, the challenge of competitor consolidation is mixing widely different cultures and strategies into one business that is more profitable. For example, if a company that relies on heavy R&D spending is combined with a company that favors building the distribution network, the internal conflicts can ruin any advantage gained.
Market power is one key to competitor consolidation profitability
To gain higher profitability from a competitor consolidation, you must use one of the advantages larger players have in a market. One of those is market power – the enhanced ability to define market practices, pricing and other factors. Sometimes, however, that market power fails to produce better profits. This happens when management fails to exploit the advantage. Often it occurs because market power is only real if it reduces choices for customers. If customers have alternatives that fit their needs and preferences better, it can be very expensive to remove those from the table.
Purchasing power is another key to competitor consolidation profitability
The flip side of market power is purchasing power. This is a very real factor in some industries, but in others, it’s largely ephemeral. For example, I’ve worked in some niche industries where the price of steel has a big impact on profitability. In such industries, you might assume that combined purchasing power can improve your profitability – but you’d be wrong. The problem was almost always that the combined purchases of the entire market are inconsequential to the steel suppliers. When the demands of a powerful, consolidated competitor are significant, it’s important to have a plan for maintaining competitive advantage.
The competitor consolidation strategy rarely preserves strong brand identities
Brand identity is one of the most valuable strategic tools any company has. When companies with wildly different identities merge, the resulting confusion creates an opportunity for the smaller players outside the consolidation. A strategy of matching that new weakness of brand confusion with a strength of clear identity has paid off. It’s usually a fairly easy way to exploit the weakness of consolidated companies.
How have you met the challenges of competing in a consolidating industry? Do you have fears that this may happen to you in the near future? We are always excited to discuss the opportunities to build strong strategic position for your company in times of such market upheaval. Contact me at email@example.com to find out some tools that can help you come out on top. Consider holding a one-day workshop on Simplified Strategic Planning.
M. Dana Baldwin is Senior Strategist with Center for Simplified Strategic Planning, Inc. He can be reached by email at: firstname.lastname@example.org