You can be pretty much assured that, regardless of the industry you are in, there will be overcapacity in the product - and services - you sell. Sure there will be short term spikes in demand and short-lived openings for newly-minted niche products, but do yourself a favor and give short shrift to the quick profits that accrue to these; take a long-term view of your business. All products become commoditized and all markets democratized in time. It is one of the ineluctable, inescapable, immutable laws of nature: in a free market economy, there WILL be overcapacity.
Sooner or later, overcapacity will plunge your company into the maelstrom, the on-going, off-putting madness of a hyper-competitive market. If it is to survive, the organization must continuously rethink its business model and continually update its offerings.
I am reminded of Jack Welch’s parting advice to Jeffrey Immelt when the latter ascended to the GE throne in September, 2001. The man some anointed as one of the greatest CEOs of all time, the hard-nosed head of arguably the most successful company on the planet at the time, told his successor to “blow it up”!
And he did. The GE that we had grown to know, if not necessarily love (unless, of course you owned shares), the GE buoyed by boundarylessness and buttressed by Six Sigma, began to change. The famed management machine moved from the primacy of its promote-from-within policy to looking for the best people – and if that meant going outside, so be it. A tightly-managed organization saw the black belt disciples of Six Sigma and continuous improvement embrace the creative imperative of Imagination Breakthrough. Cash cows in decline were jettisoned in favor of hot prospect biosciences, wind power and entertainment. How is it going? For all the right reasons, GE makes everybody’s list of Most Admired Companies.
In the homogenized, globalized world of overcapacity, even the swiftest corporate leopard must change its strategic spots. It isn’t easy. I know. My previous employer responded to an influx of cheaper imports by moving from a strategy of diversification to one of focus. I was part of the decision making process (which was interesting) and some of the resultant dislocations (which were not).
In the end, though, our willingness to face the issue of capacity head on will enhance our capacity to deal with it.
March 11th, 2008 at 7:14 am
Great article. Would you say that an industry’s level of overcapacity is directly proportional to its overall financial return, or its state of health?
March 16th, 2008 at 4:29 pm
At a macro level, I would say yes to both. Overcapacity is both a cause and an effect, both the instigation and the reflection of an industry’s gradual decline.
On the one hand, the collective failure of corporate initiative to grow an industry’s user base, to focus that base on added value, to carve out sustainable market positions, and to create enduring levels of brand loyalty, opens the door to lower cost, likely offshore competition and rapid commoditization. In what has become a zero sum game, overcapacity and margin decline ensue.
Moreover, the same failures that created this situation in the first place are likely to be those that make the incumbent firms subsequently unable to deal with it.
The point being argued here is that all industries and all markets, without sustained effort and constant vigilance, will tend towards this kind of deterioration. Appropriate levels of investment appropriately applied will be required and Return on Investment becomes a particularly appropriate and very accurate gauge of an industry’s vitality.