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Articles & White Papers Surviving Foreign Competition in Declining Industries: This report has been prepared for Anderson Bauman Tourtellot Vos & Company (“ABTV”) by William J. Burpitt, an associate professor of management at Elon University’s Love School of Business. He is a teacher and researcher in the areas of strategy and international business, with an emphasis on the problems facing small firms as they confront global competition. He is the author of more than two dozen publications. He received his Ph.D. from the Kenan-Flagler Business School, University of North Carolina-Chapel Hill. In presenting this report, our intent is to describe the problems and issues facing declining industries in the existing and future global environment. HIGHLIGHTS
BACKGROUND The impact of globalization on the U.S. furniture industry is stark. Between 2000 and 2004 the
U. S. furniture industry lost more than 75,000 jobs, resulting largely from the growth in imports
and offshore production. The U.S. International Trade Administration reports that imports of
furniture and fixtures increased from $10.8 billion in 1998 to $21.3 billion in 2004. Imports now
account for almost fifty percent of U.S. furniture consumption. Furniture parts imports increased
from $84.7 million in 1996 to $2.7 billion in 2004. In North Carolina, where the industry has
long been an economic mainstay, a report issued by the state Department of Commerce
concludes that the state’s furniture industry “is contracting fast with no bottom in sight” and
short of decisive action “will soon be history.” Yet not all firms fail. As the following vignettes
suggest, there are alternatives to industry decline, alternatives that allow firms to adapt and
prosper.
Vignette 1: Vignette 2: A study of seventeen declining firms was undertaken to determine awareness of competitive threats within the industry and responsive strategies, if any, that were undertaken. This paper sought to answer several questions: 1) How do furniture industry suppliers respond to industry decline? 2) What types of strategies and actions do they perceive as most effective? 3) What strategies do they actually select? 4) What factors influence which strategies are selected? 5) What are the performance implications of these selections? This paper also illustrates strategies among small furniture supply firms and identifies those that have helped some firms survive and grow despite industry decline. It describes how firms create the capabilities needed for the implementation of successful strategies, outlines performance outcomes associated with alternative strategies, and explores impediments that can prevent firms from taking the actions needed for a successful response. STRATEGIES IN DECLINING INDUSTRIES Businesses in declining industries respond in many ways, through commonality with some variation of two basic strategies. They may opt for a retrenchment strategy of cost savings or they may pursue diversification or rejuvenation strategies that often lead to new products, new markets, and the development of new organizational capabilities. Efforts to reduce cost is the most common response to industry decline. This can entail a variety of actions, for example cutting waste, a reduction in head counts, product elimination, even liquidation of assets. All of these steps are intended to stabilize if not improve declining performance. Retrenchment and cost control strategies often involves narrowing a firm’s products or customers to segments that appear to have the greatest likelihood of continued cash flow, profitability, and survival. For some firms retrenchment may involve consolidation oriented acquisitions. This occurs when firms acquire rival firms with overlapping assets with the goal of increasing efficiencies and hopefully market share as well. As researchers Anand and Singh note, however, “At some point in the evolution of an industry the opportunities for further consolidation may not exist.” At such a point, a strategy of rejuvenation and diversification may become much more attractive. Compared to strategies that focus on cost reduction and increasing efficiency with existing markets and product, firms may choose to diversify, hoping to leverage their capabilities to develop new products and new markets. Diversification may offer the most favorable long term solution for firms in declining industries. These efforts move beyond retrenchment and involve rejuvenation of the organization, a process that can entail specialization, innovation, and the development of new systems and capabilities. Rejuvenation strategies seek advantage through qualitative distinctiveness. This distinction in strategy types is reflected in two types of learning: a) learning that leads to increasingly efficient and reliable routines, or b) learning that adds new knowledge and increases adaptability. One is learning to improve what one can already do while the other is learning to do new things. The steady refinement of existing routine leads to efficiency rather than adaptive flexibility. Reliance on familiar knowledge and skills can inhibit the ability to perceive, acquire, and utilize new knowledge and skills. The pattern is self-reinforcing. As an organization focuses on familiar routine and avoids new experiences, its capacity to adapt to change and to acquire new knowledge deteriorates leading to what is termed a competency trap. What is needed is regular opportunity for experiences that result in the learning of new skills alongside the continual improvements in current routines. Such experiences can enable the firm to learn, adapt, change, renew over time. New learning is acquired through the extension and expansion of existing knowledge into new areas, allowing high change potential firms to acquire new skills, not only in familiar areas, but in new domains that complement existing skills. Regular experience with change results in the development of dynamic capabilities that allow a firm to renew, adapt, and add competencies over time. The main impediments to such a capability are routine and the lack of new experiences. Firms in a declining industry may employ retrenchment or rejuvenation strategies, or both, in sequence or simultaneously. An initial emphasis on cost containment and efficiency is often seen as a necessary first step in any response to industry decline. Even if a firm moves beyond retrenchment to rejuvenation and diversification, many managers argue that successful turnarounds are rare without an initial regimen of stringent cost containment. Cost control and retrenchment can be seen as a “first and necessary” prelude to any effort to create the systems and capabilities that will be needed to fuel growth, rejuvenation, and long term competitiveness. RESPONSES TO FOREIGN COMPETITION Perceptions of the Threat. It was clear that all firms were well aware of the seriousness of the threat facing their industry and their firms and also clear that low cost foreign competition and the offshoring of furniture manufacturing were perceived as the main source of the threat. A striking divergence in opinion appeared among the firms, however, with respect to their perceptions of where the solutions to this threat might reside. These two views can be labeled as external and internal. Six of the firms exhibited what may be termed an external orientation. Seven exhibited internal orientations. Four displayed a mix of the two. The owners of the six ‘external’ firms felt that any effective long term solution to the decline that was impacting their businesses would arise from government and regulatory relief. Such relief, they felt, would primarily take the form of tariffs and other trade restrictions, with the desirable addition of tax relief and other financial incentives for the upgrading of plant, equipment and training. For these external firms the source and the solution to their problem lay outside the firm and, absent such intervention, remained outside their ability to control or manage. As one owner remarked, “There is just no way we can deal with this by ourselves. If we can’t get some kind of protection from the government, I don’t know how much longer we can survive.” Another observed, “The government got us into this (with free trade policies) and it’s up to the government to get us out.” The characteristic view among firms with an internal orientation saw the most promising solutions to the threats of offshoring and low-cost foreign competition in the development of capabilities and resources within the firms themselves. Not surprisingly, each of these firms had embarked on efforts to upgrade skills and acquire the resources and capabilities they felt would be needed to identify and develop new markets and new products. These internal firms expressed less surprise in the growth of foreign competition. As one firm owner observed, “All we had to do was look at what was happening in textile. I never doubted that we wouldn’t be faced with the same issues. Why wouldn’t we be?” And perhaps because more of these firms saw the threat as it emerged, more of these firms had taken early action to position themselves to respond. One owner remarked, “All you had to do was read the paper and you could see it coming (growth in offshoring). It was pretty clear that the best way to protect ourselves was to diversify into areas where pure low cost wouldn’t trump.” While all of the firms would welcome government assistance, the perspective among the internal firms was that the primary and immediate responsibility was theirs. As one such owner stated, “We never did believe the government would bail us out of this. We had to do it ourselves.” Response Strategies. Five strategies capture the range of responses to the growth of offshoring and foreign competition. These strategies, described in Table 1, are not necessarily mutually exclusive. It is possible for a firm to focus on finding new markets for their existing products while also attempting to increase the efficiency of existing operations. All of the firms stressed the importance of improving efficiency, regardless of any additional strategies that might be pursued. “We cannot afford not to devote a substantial amount of effort at getting better serving the customers we have right now. The future may be someplace else but for now taking care of what we’ve got is paramount,” was a comment echoed in several firms.
The managers in six of the firms indicated that improvements in operational efficiencies with their existing products and markets was their primary strategy. The owner of one such firm stated: “Our goal? Wring out the waste and be one of the survivors.” The firms relying on improvements in efficiency tended to see a move beyond their existing product and market mix as beyond their individual capacity and, absent external support, futile and dangerous. As one owner remarked, “It’s a hard choice, staying put, but unless the feds (federal government) or the state provides some kind of assistance, we don’t have the resources to go it on our own. We know this business. I am afraid we’d go broke trying to learn another.” Other firms expressed greater confidence in the need to pursue new markets and new products and in their ability to undertake such action. While they agreed that improving efficiency was essential for near term survival, management in these firms saw this as a necessary but insufficient step to long term growth and profitability. “I don’t care how we slash cost - we cannot compete with Chinese firms paying pennies a day for labor. We need products that will compete on something other than low cost,” one owner remarked. Table 2 shows how respondents ranked the five strategies in terms of their probable effectiveness in confronting the threats of global competition and industry decline. For example, the strategy ranked likely to provide the most effective response to foreign competition was one that focused on new applications and refinements of existing products for new and existing markets. Ranked least effective was a strategy of maintaining the status quo with respect to products and markets. How the managers ranked the five possible strategies does not necessarily correspond to what the firms were actually doing, however. The third column (Primary Strategy) reports on the number of firms that were employing each of the strategies as their primary strategy. Hence, while a strategy of focusing on new applications and refinements of existing products for new and existing markets was ranked as the most effective strategy, only four firms reported that this was their primary strategy. The strategy most commonly employed, improving efficiency with the existing strategy (6 firms), was ranked fourth in terms of effectiveness. Table 2 also reports on the firms’ internal or external perceptions or orientations regarding the source of solutions to the threat of foreign competition and industry decline. The orientation numbers refer to the number of firms whose managers and owners expressed an external, internal, or mixed orientation. 
These numbers suggest a pattern. Firms that adopted the strategies ranked most effective were also the firms that expressed an internal orientation. Firms that had adopted strategies ranked lower in terms of their probable success were also the firms that expressed either an external orientation (6 firms), or firms whose orientation was a mix of the two (4 firms). This suggests an interesting and troubling pattern. Firms whose management hold to the view that the solution to their problem lay outside the firm, chiefly in governmental interventions, appear far more likely to avoid taking the kinds of strategic moves that managers themselves judge more likely to lead to a successful outcome. Impediments to Strategy Implementation. Why the disparity between the ranking of the strategies and their actual deployment? Possible explanations may be found in a listing of the impediments that could prevent their firms from taking steps that they themselves might view as optimal. Table 3 shows the overall ranking from the greatest to the least critical impediment to implementation. The item ranked as the most significant impediment is inadequate knowledge to develop new products. Comments across several of the firms illustrate a preference for existing operations. “I know it’s hard to defend but it’s just so darn hard to give up what you know,” one respondent pointed out. Still others expressed frustration with the realization of a need to shift direction but little in the way of solid information exactly where. “We know we need to rethink everything. That’s not hard. What we don’t know is where we go from here?” 
Performance. Disparities between ideal and actual strategies would be immaterial if there were no differences in performance among the firms. This seems not to be the case. Table 4 indicates that firms which employed more active new entry strategies demonstrated superior financial performance in the five years leading up to the date of the study. The difference is particularly striking in reported changes in revenue over the five year period.
  The performance of the firms is less clear with respect to profits. Profits lag behind gains in revenue across all categories.
There may be several explanations for the relatively clear and positive relationship between new entry activity and revenue growth and a more ambiguous pattern with respect to profits. It may not be surprising that the firms in Levels 3 and 4 reported greater increases in revenue as these firms were most active in the development of new markets and products, and thus new areas for sales. But while cost control will not lead to an increase in revenue (unless the lower cost is passed along to customers who respond with increased spending) it can certainly lead to an increase in profits, even where sales are flat or possibly even declining. The profits of the new entry firms, Levels 3 and 4, trailed revenue growth, perhaps because of the time it can take to recoup investments that ordinarily accompanies the development of new markets or products. CONCLUSION This study illustrates how firms in a declining industry respond to growing international competition and foreign sourcing and describes the performance implications of those responses. It points out how strong the temptation is within small firms to remain focused on familiar routines even when those routines serve markets and customers migrating to low wage countries. In addition to descriptions of the dilemmas firms often face when balancing cost and efficiency with adaptability and flexibility, this study identifies some of the impediments that prevent managers from considering or pursuing new strategies. Five different strategies to deal with industry decline were suggested in the interviews. The least attractive of these, a focus on the status quo with no effort to refine or reposition the firm, was not in evidence among the seventeen firms that were studied. The four remaining strategies comprise two distinct sets, one with an emphasis on cost control within an existing product and market domain, and the other stressing adaptability and flexibility and entry into new products and markets. The firms in the study were split between these two. The active new entry firms, using a strategy of rejuvenation, saw it as their responsibility to identify new opportunities and to develop the internal capabilities that would be needed to pursue them. The firms pushing cost control and a retrenchment strategy generally felt the main responsibility for the solution to their common problem would come with government intervention. Strategies based on organizational rejuvenation appear to offer a much greater chance of success. The seven firms pursuing new entry had been rewarded with a steady increase in revenue as compared to the firms pursuing cost control. And while the returns to profit were not as great, the new entry firms still outperformed their cost control peers. The evidence from this study strongly suggests that retrenchment, at least for small firms in a fragmented market, offers scant promise of long term survival, let alone continued prosperity. Particularly when faced with foreign competition, enjoying cost advantages that are unattainable for a U.S. firm, the development of new products and markets offers the greatest potential. Yet over half of the firms had elected to remain exactly where they were. Why, if the managers themselves saw the advantages of new entry, did less than half the firms take action to achieve it? Habit, uncertainty, and inadequate resources offer a summary of the explanations given for not pursuing opportunities outside their customary operations. |
