Nature, industries, and companies go through stages of evolution. Many of these stages are captured in life cycles, natural processes in business development, or the increasingly agile stages of development.
This post examines an interesting framework for stages of industry development, and it was built upon a mountain of empirical data.
Consolidation Endgame Curve Basics
The Consolidation Endgame Curve is a phenomenon identified by A. T. Kearney through extensive analysis of thousands of companies across industries. Through this research, they identified patterns that are common across virtually all industries, as illustrated at right.
The industry consolidation that occurs when an industry advances from left to right along the curve is measured by the market share of the three (3) largest competitors in the industry.
The curve notably shows various industries at different points along the curve – and thus at varying industry development stages.
Let’s start with this generalized Consolidation Endgame Curve, and then take a look at the characteristics of each of the four stages:
- Opening – This first stage is where companies and a beginning order get established. This is for new industries, freshly deregulated industries, or spin-offs from well-established industries. Usually the stage starts with a first competitor that has a commanding 100% share for a short time, but as other competitors enter, the share commanded by the top three falls to roughly 10-30%. Firms emphasize sales and race to establish a target footprint.
- Scale – Competitors seek to gain competitive advantage by growing faster than others. They do this in two ways: organic growth and acquisition. Often organic growth is not enough. Since acquisitions will often be needed, companies that develop a strong skill set at acquisition and integration are at a great advantage and will win at this stage. During Stage 2, the top three competitors will enjoy a market share of 15-45%.
- Focus – In this stage, the remaining competitors concentrate or focus on the core business and work to build a dominating position, emphasizing profitability. While this stage typically includes 5-12 competitors, with the top three commanding 35-70% of the market share, that number will decrease to the dominant few by the end of the stage. This happens through strong execution for continued growth and marketplace success, by beating out some failing competitors, or by acquiring other competitors. Acquisitions at this stage are usually large and thus take a lot of integration skill to maintain and enhance the culture of the organization.
- Balance and Alliance – Companies that reach this stage are the winners and survivors of the prior stages. They have reached a dominant and sustainable position, and the industry is relatively stable. The top three companies at this stage command 70-90% of the market share. This typically will remain stable unless there is some sort of disruptive force. The posture of the firms is generally defensive, as they enjoy a stable and commanding position.
Making it through the stages is primarily a game of speed; the fastest wins. While navigating through the stages, companies need to determine if they are in a position to be a leader and survivor, or if the wiser course is to be acquired, or even opt out.
Variations in Consolidation: A Bumpy Ride
The above basic consolidation endgame model is basic…but in practice occurs in less predictable ways. The following diagram is from “The Merger Endgame Revisited” by A.T. Kearney, where they reassessed their original theories and framework based on increased experience and growth of their database.
While they are proposing some modifications to the original four stages, I think the important thing to note is that it is not a smooth ride through the stages, and for some good reasons:
- Regulations change
- New technologies develop
- Scale economies are not clear
- Economic development opens up in new regions around the world
- Industries get disrupted
The idea is that, once the industry reaches a stage, events (i.e. such as those listed above) can and do happen that push the industry back to a prior stage. This is sometimes even a bump back to the beginning – a ‘Reopening’.
I think this is a more realistic view. An industry does not develop in a serial process and then simply coast along and eventually disappear. Industries sometimes disappear, but more often they retrench and restructure themselves into a new order in the face of change. Therefore, it makes sense to consider shifting among phases, and often even starting anew, but with an existing order in place.
Strategic Factors to Consider
One key strategic variable to consider is known as ‘share of fixed costs’. That means that, of all business costs or expenses, what portion is fixed, and what is variable. When fixed costs make up a high proportion of costs, there is a greater opportunity for economies of scale.
Another factor is the degree to which information content adds value to the product. The Internet of Things (IoT) evolution has resulted in the transformation of physical-only products into similar products but with a high information content. This can totally change the share of fixed costs, as the information portion is often primarily a fixed cost, with a minimum variable cost. However, with digital technology evolving so fast, the life cycle of that IoT product is short.
Yet another factor is the growth of network effects. This can result in completely different manifestations of scale economies. An example is the effect of building or joining a network-based ecosystem to create competitive advantage.
All of these things can result in transitioning of industries among consolidation, stagnation, and deconsolidation. This leads to four broad options for courses of action, illustrated at right.
- First-mover advantage – effective when there are good opportunities to achieve economies of scale
- Be faster – economies of scale can be achieved more rapidly by acquisition focused competitors
- Defense – being acquired, or awaiting developments and then reacting may be the best approach
- Change the game – good where innovation is core to your business’s culture and the organization is adaptable
Implications for Project Managers
Project managers are charged with implementing. In all cases, the consolidation endgame requires strong execution.
I recommend these PM templates (paid link):
Here are some key areas of concern for PMs when thinking about the consolidation endgame framework:
- Risks – In identifying risks, project managers can benefit from a clear understanding of the consolidation endgame stages. What stage are we in? How is the company positioned in that stage versus other competitors? What does that mean for our path to success? What events might happen that could force a shift to a different stage, causing disruption, and new opportunities with new risks?
- Speed – How fast must projects be executed? Is that possible? What could improve the speed of execution? What is the impact if we fail to execute fast enough?
- Integration of acquisitions – Is the company capable of effectively integrating acquisitions? What are our strengths, and what are our vulnerabilities or shortcomings? What types of acquisitions might look attractive, and which are to be avoided?
The key things from a project perspective to think about include:
- project execution capabilities and capacity
- areas of strength
- areas of weakness
- potential macro industry environment developments and impacts
All of these considerations relate in some way to risk.
Success in the consolidation endgame realm is highly dependent on clear liking of strategy to projects and solid project execution.
Pros and Cons of Using the Consolidation Endgame Curve
The work of A.T. Kearney in identifying and developing the analysis and theory around the consolidation endgame is based in exhaustive and thorough research. It undoubtedly is helpful to understand these effects and implications for the strategies that your company chooses.
However, I think it may be less applicable to more fragmented industries, where there are large numbers of established and stable competitors. The emphasis on scale applies more to larger, more consolidated – or consolidating – industries.
Nonetheless, fragmented industries, or even parts of them, can and do change and can consolidate. It is well worth understanding the effects of the consolidation endgame curve.
- “The Consolidation Curve” in the Dec 2002 Harvard Business Review
- “Mastering Industry Consolidation: Strategies for Winning the Merger” by Graeme Deans in the Ivy Business Journal
- “Consolidation-Endgame Curve Framework” by LearnPPT on Flevy
I recommend these strategy resources (paid link):