- Email: [email protected]
Competing against low cost cutlery imports
Long Range Planning, Vol. 22, No. 5, pp. 59 to 68, 1989 Printed in Great Britain
0024-6301/89 S3.00 + .OO Pergamon Press plc
59
Competing Against Low Cost Cutlery Imports Robert M. Grant
Low cost import competition is increasingly threatening the profitability and survival of many mature manufacturing industries in Western Europe and North America. This study of U.K. cutlery firms shows that even when firms’ room for manoeuvre is severely constrained by limited resources and an overwhelming cost disadvantage, appropriate strategies can promote profitability. Superior performance was associated with parsimony in investment, location within comparatively shelteredmarket segments, and exploiting locational factors to achieve effective differentiation. The study also pointed to the need for firms to break awav from the climate of failure that envelops a closely-knit, declining industry.
PIMS data points to the effectiveness of cost reduction strategies in mature industries. Hambrick and Schecter2 identified three successful turnaround strategies adopted by mature businesses, all of which were directed at cost reduction. Anderson and Zeitham3 found cost efficiency was strongly associated with profitability among businesses in their mature and declining phases. While using a sample of large, mature, U.S. manufacturing corporations, Hall4 identified high returns to firms which simultaneously pursued low delivered cost and high differentiation.
Decline in the mature manufacturing industries of the United States and United Kingdom has stimulated interest in the potential for business strategy to improve the competitive performance of firms operating in such inhospitable environments. Some of the results of recent research have offered encouragement to managers in these industries. For example, Harrigan’ observed surprisingly high profit rates in several declining manufacturing industries, and pointed to the effectiveness of strategies which encouraged the orderly exit of capacity in moderating price competition and boosting industry margins.
To what extent are strategies of capacity rationalization and cost reduction likely to be generally effective in mature manufacturing industries? One limitation of prior research is that it deals with industries that may not be typical of mature manufacturing industry in general. The industries investigated by Harrigan were primarily those subject to declining demand due either to shifting consumer preferences (e.g. cigars and baby foods) or to technological obsolescence (e.g. rayon, coffee percolators, electronic receiving tubes). However, across most manufacturing industries, both in the United States and Western Europe, the major source of decline has not been contracting demand but the declining market shares of domestic firms, as high cost domestic production is displaced by lowcost overseas production. Thus, across a range of manufacturing industries, from textiles, clothing and footwear to metal goods and mechanical engineering, production has shifted from the advanced industrialized countries (AICs) to the lower wage, newly industrializing countries (NICs). This distinction between different sources of decline is important for strategy formulation. Where decline is due to waning international competitiveness, strategies aimed at capacity adjustment and cost reduction may be of limited value. Capacity reduction does little to restore profitability in an industry being undercut by imports, similarIy cost reduction strategies will be of limited effective-
Other researchers have shown that satisfactory performance in mature manufacturing industries can be achieved through strategies which create competitive advantage. Despite the conventional view that the opportunities for creating competitive advantage in mature industries are limited by welldiffused technology and well-informed buyers, This paper is part of a wider study of Regeneration in Mature Industries led by Charles Baden Fuller and John M. Stopford at the Centre for Business Strategy at London Business School. The author has benefited from the research assistance of Stephen Downing and the comments of Charles Baden Fuller. The research was financed by the Centre for Business Strategy and the Economic and Social Research Council. Robert M. Grant is Visiting Professor of Business Policy at the University of British Columbia.
60
Long Range
ness when overseas advantage.
Planning
suppliers
Vol. 22
October
have a substantial
cost
A second feature of prior research is its focus upon concentrated industries where firms are relatively large. For example, Hall’s study included steel, trucks, beer and cigarettes. Bias towards large corporations is also true of the PIMS-based studies: the businesses that make up the PIMS database tend to be units of relatively large firms. Large firms have a wider range of strategy choices than small firms because of their greater access to resources. Moreover, because competition is less intense in concentrated than in fragmented industries, concentrated industries provide a more favourable environment for strategic investment. On the basis of these two characteristics: source of decline and degree of concentration, we can identify four categories of declining manufacturing industry (see Figure 1). Research in strategic management has given scant regard to industries in the lower right quadrant. Yet these industries provide potentially fertile ground for the study ofbusiness strategy because of the sheer inhospitality of their environments: firms face the acute problem posed by lower cost manufacture overseas, together with the lack of
1989 resources for investing in strategic adjustment. These industries therefore represent a limiting case in strategic management. The central question which this paper addresses is the following: In fragmented industries subject to low-cost import competition, does business strategy have any potential for yielding satisfactory performance, or are these industries doomed by economic forces to eventual extinction?
To shed light upon this question, I report the findings of a study of strategy and firm performance in a fragmented manufacturing industry severely pressured by low-cost import competition-the U.K. cutlery industry. The objective of the research was to investigate performance differences between firms and to determine whether any, strategies were associated with superior performance.
The Cutlery
Industry
The U.K. cutlery industry is an extreme example of a problem industry: highly fragmented and devastated by low-cost import competition. The industry comprised about 50 firms, only a few of which had ever employed more than 100 employees and most employed less than 20. The largest firm in the
Source of Decline
Low-cost Foreign Declining Demand
I $ s ._ 3 E
tij z 5 : s
z
Tyres Steel
Competition
l
l
Domestic Appliances’
Cigarettes*
Construction
Rayon?
Consumer Electronics
Babyfoods?
Shipbuilding
Equipment’
Synthetic Soda Ash?
Textiles Clothing
cetylene t
Footwear
Electric Coffee Percolatorst
Fasteners
Cigars?
Hand Tools Cutlery
‘Industries studied by Hall.& tlndustries studied by Harrigan.’
Figure
1. Classification
of mature
industry
strategic
environments
Low Cost Import industry during the study period (1974-1982) was Viners Ltd, which in 1980 (2 years before going into liquidation) had 530 employees and sales of Ll2m. Most firms in the industry were owned and managed by a single family, in several instances family ownership extended back over a century. The products of the industry comprise table cutlery, which can be subdivided into stainless steel and the more expensive silver-plate, kitchen knives, pocket knives, and holloware (jugs, serving dishes, trays etc.). The firms were mainly specialized by product segment, though over the period firms tended to broaden their product ranges in an attempt to counteract declining sales. Firms were also specialized by process: a few specialist firms produced semi-finished cutlery (‘blanks’) and some specialized in silver-plating and finishing. The larger firms tended to be more vertically integrated. The major feature of the industry’s recent history is its decline. Between 1973 and 1983 output and employment in the industry approximately halved. The primary reason for this was the growth of import penetration, particularly from the Far East. Because the manufacture of cutlery requires little technological expertise and is labour intensive, it is well-suited to countries in early stages of industrial development. Since the early 196Os, the U.K. market was increasingly penetrated by cheap imports, first from Japan, then from Hong Kong, and, since 1970, from South Korea and Taiwan. The extent of the U.K.‘s cost disadvantage relative to the Far Eastern NICs is indicated by the observation that ‘during the first half of 1978, the average CIF value per hundred of South Korean spoons and forks imported into the U.K. was only 8.25 per cent higher than the net U.K. cost of chrome ferritic stainless steel to make equivalent products’.5 As a result, nearly all the firms in the British cutlery industry experienced declining real sales since 1974 and many left the industry, some voluntarily but most through receivership followed by liquidation or acquisition. Between 1980 and 1983, the problems of import competition were exacerbated by the pressures of recession, high interest rates and the instability of exchange rates and the price of silver. During this period three out of the four largest firms in the industry went into receivership.
The Research To investigate the impact of business strategy on performance I assembled a sample of the 33 largest cutlery firms in 1974 and tracked their strategies and financial performance over the ensuing 9 years. My first observation was that there were sharp and sustained differences in profitability between firms in the industry. While average profitability of firms was low, and fell sharply over the study period, there was no tendency for competition to cause firms’ rates of return to converge towards the competitive level. Some firms made consistent
Competition
losses for most of the period, surprisingly high profitability.
others
61 maintained
The next stage of the research was to explain differences in financial performance. Here I looked at two sets of factors: (1) the intensity of competition in the market segments within which the firm was located; (2) the strategy of the firm whose strategy was measured in terms of the firm’s observed behaviour particularly with regard to
(4
cost ejiciency as indicated by investment in plant and equipment and indicators of operational efficiency, particularly rate of stock turnover; and
(W di$erentiation
with regard to quality, advertising, the introduction of new product designs and product innovations, and operation of retail outlets.
Data were assembled from published sources, notably company accounts, product and price lists, overseas trade statistics, and from interviews both with the companies and with a sample of retailers. Two types ofanalysis were used to detect association between strategy and performance: (a) Comparisons between successful and unsuccessjrl firms. An overall performance ranking of firms was obtained by combining rankings of firms by three financial criteria: pre-tax return on capital employed, rate of sales growth and sales margin. Two groups were selected: the eight firms with the highest overall performance over 1974-1982 and the eight firms with the lowest performance over this period. Table 1 shows the composition of the groups. (b) Multiple regression of firm performance upon a number of strategy variables. A discussion of this analysis is available elsewhere,6 this paper presents the key findings and discusses their relvance for management practice.
The Findings The main empirical findings are summarized in Tables 2 and 3. Table 2 shows the results of multiple regressions of return on capital on both the levels of the changes in several strategy variables. Table 3 summarizes the principal characteristics of the high performing and low performing groups of companies. These statistical findings only take us so far, in the discussion of my findings I also draw heavily upon the insights which were gained through my interviews with senior managers. The key findings
can be summarized
as follows:
(1) The Impact of Low-cost Import Competition in the Firm’s Product Segments Despite the propensity for managers of cutlery
62
Long Range Planning Vol. 22 Table 1. High and low performing
October
cutlery firms by profitability
Return on capital employed’ (%)
1989
Sales Margin2
Average annual growth rate of real sales3
(%)
(%)
and growth 1974-1982
Main
products
High performers Beatson Drake George Butler Gee & Holmes Nickel Blanks Westall Richardson Roberts & Belk Slack & Barlow Surmanco
38.8 10.5 38.5 42.9 18.9 17.3 32.8 24.4
25.2 13.4 24.8 23.9 10.2 15.1 9.0 14.7
+6 -4 -8 +2 +11 +2 +11 -4
Knife handles SP cutlery Blanks Kitchen knives and blades SP cutlery and holloware SP cutlery SP cutlery Scissors
Low performers Cooper Brothers Hawker Marris Old Hall Parkin Silversmiths Arthur Price Richards of Sheffield Turners Viners
4.7 8.9 -6.4 9.2 13.3 5.6 3.1 0.7
5.5 10.5 6.2 9.8 9.7 9.4 11.3 9.2
-10 -9 -10
Cutlery (SS and SP) SS holloware SS holloware SP cutlery and holloware SP cutlery and holloware Pocket knives Blanks Cutlery (SS and SP)
-
-8 -3 -5 -2 -10
‘Profits before tax and after interest divided by capital employed and short-term borrowings. *Profits before tax and before interest plus depreciation and directors emoluments divided by sales revenue. 3Average annual growth of sales revenue at trend rate less average annual increase of the GDP deflator. SP=silver-plated. SS=stainless steel.
Table 2. Results of regressions of return on capital on strategy variables for 32 cutlery firms, 1974-1982
Full
Firms facing above median low-cost import
Firms facing below median low-cost import
sample
penetration
penetration
Negative Negative
Negative’
Positive
Product differentiation Product differentiation2
Negative’ Positive
Positive
Quality Quality*
Positive’ Negative’
Negative
Investment/sales Investment/sales
ratio ratio2
Negative
.
Negative
‘Indicates that the regression coefficient was significantly different from zero at the 90% level of confidence (or above). *Denotes the change in the value of the variable over the period. Investment/sales ratio measures expenditure on plant, machinery and tools as percentage of sales revenue. Product differentiation is a compositevariable which combines advertising expenditure per annum, number of retail outlets operated, the introduction of new designs, and the introduction of product innovations.
companies to attribute all the industry’s problems to competition from the Far East, segment by segment analysis showed that imports from low-cost producing countries were concentrated into a few product areas. Figure 2 shows that import penetration from the NICs and LDCs was greatest in stainless steel table cutlery and scissors, it was also severe in stainless steel and chromium-plated holloware. In silver-plated cutlery and holloware, import penetration was very low, while in other sectors, e.g. kitchen knives and folding knives, import penertration was primarily from other Western European countries. The analysis revealed that imports from the low-
cost producing countries, rather than overall import penetration, was primarily responsible for depressing profitability. Among the companies specializing in stainless steel cutlery and holloware, performance was almost uniformly poor. Indeed, of the 33 companies sampled, by 1982 only one firm still specialized in the production of stainless steel table cutlery. Among the low performers, six out of the eight firms had an average low-cost import penetration ratio above the median for the full sample. Moreover, the firms which failed (Viners, Hawker Marris, Richards of Sheffield and Old Hall) were all subject to above average levels of low-cost import penetration. Conversely, the high performers were concentrated into segments with low levels of low-
Low Cost Import Table 3. The characteristics
of high and low performing
Competition
companies
High performers
Low performers
Average sales revenue (f ,000)
1078 (749)
2945 (3628)
Penetrating low-cost imports (%)
12.3 (7.2)
24.8 (14.3)
Investment sales ratio (%)
1.99 (1.22)
2.01 (1.87)
Stock turnover (times per year)
7.27 (9.32)
3.16 (1.83)
6.25 (12.11)
22.25 (37.98)
0.75 (1.98)
16.94 (43.57)
Advertising expenditure (f,OOOs per annum) Operation of retail outlets (average number per firm)
20.2 (28.6)
Export/sales ratio (%)
63
28.3 (39.2)
The table shows the mean value for each group with the standard deviations in parentheses.
r-
Domestic Sales by U.K Manufacturers Imports From Low-cost Producing Countries * Imports From other Countries
1974
1982
1974
1982
1974
1982
Stainless Steel
Silver Plated
Kitchen
Flatwear
Flatwear
Knives
1974
1982
Scissors
1974
1982
Folding Knives
‘LDSs, NlCs and Japan.
Figure 2. Import
penetration
of the U.K.
cutlery
market
cost import penetration: Butler, Gee & Holmes, Roberts & Belk, and Slack & Barlow specialized in silver-plate; Beatson Drake manufactured handles; Nickel Blanks manufactured unfinished nickelsilver table cutlery for silver-plating by other firms, Westall Richardson manufactured kitchen knives and blades. Of the successful firms, only Surmanco faced above average low-cost competition. Clearly then, the presence of overseas competitors with a substantial cost advantage had an enormous impact on profitability, it also severely constrained
by product
segment,
1974 and 1982
the strategy options available to domestic producers. The superior profitability and survival prospects of those firms located in segments where overseas competition was weak, might suggest that the best strategy for firms in the industry was to relocate to these segments. However, the experiences of those firms which abandoned stainless steel cutlery and tableware and moved into silver-plating were not always favourable. The problem with the sheltered segments was that they were generally small and their profitability was vulnerable to entry. The major direction of adjustment was up-market
64
Long Range
Planning
Vol. 22
October
into silver-plated cutlery and holloware. In these markets, firms which were well-established specialists (such as Robert & Belk and George Butler) outperformed firms that moved up-market to escape competitive pressures in their own segments (e.g. Cooper Brothers, Arthur Price and Viners). (2) The Inefictiveness of Strategic Investments The most striking finding of the study was the ineffectiveness of most forms of strategic investment. Table 2 shows that investment both in capital and in product differentiation was negatively associated with profitability. While differentiation through quality was positively associated with profitability, firms which attempted to reposition themselves by increasing quality suffered deteriorating profitability. Table 3 confirms these findings. The poorly performing firms, on average, spent more on capital investment and differentiation (advertising and forward integration into retailing) than the better performers. These findings are a striking rebuff to those that have argued for industrial regeneration through investment in capital-intensive production processes and product and market differentiation. The unproductiveness of strategic investments may partly reflect the difficulties of establishing competitive advantage in mature industries, more importantly, it is evidence of the risks associated with investing in an industry facing declining demand and intense competition. Several of the larger firms in our sample, most notably Viners and Hawker Marris, embarked upon ambitious expansion plans during the 197Os, involving modernizing production and developing stronger brands and distribution. The returns from these investments were meagre and the financing charges incurred made the firms highly vulnerable to any fall in sales or rise in interest rates. Both firms failed during the 1980-l 982 recession. Conversely, the successful firms include several which pursued a strategy of retrenchment with little or no investment in production or marketing. Beatson Drake, Gee & Homes, and Slack & Barlow had extremely low rates of investment in plant and equipment and no spending on advertising or forward integration, but both earned very high rates of return on capital, in part reflecting the fact that they occupied niches away from import competition. However, retrenchment was not a general feature of superior performance. At least two of the successful firms, Westall Richardson and George Butler, adopted relatively ambitious and expansionary strategies. But although both firms pursued longterm strategies of capital investment and market development, in both instances their approach was gradual, cautious and rigorously cost-conscious. The
contrast
between
Westall
Richardson
(now
1989 Richardson Sheffield) and Viners illuminates the importance of a parsimonious approach to investment and growth. Viners spent heavily between 1970 and 1976 on strengthening itself as the U.K. market leader and establishing its presence elsewhere in the world. It installed an automated electro-plating unit, an automated polishing machine, two new presses and a DEC computer which was used for stock control, order processing and wages. It established subsidiaries in Germany, Australia and Hong Kong and acquired cutlery manufacturers in Ireland and France. New cutlery ranges (such as ‘Love Story’ in 1971) incurred expenditure on design consultants and advertising that was unprecedented in the industry. Viners regularly employed leading firms of management consultants and was an early enthusiast for ‘management-by-objectives’. During the later 1970s sales stagnated and the debt/equity ratio steadily increased. Financial deterioration led to a takeover in 1981, but by 1982 the combination of high interest rates, depressed demand, a high price of silver, and an overvalued sterling exchange rate, forced the company into liquidation. Westall Richardson, on the other hand, established itself as the largest, and fastest growing firm in the industry without massive investment outlays and without incurring any debt. Close attention to costs and outgoings has been a guiding theme of the company’s operation. Machines have been designed and built in-house, frequently at a fraction of what similar machines would cost from an independent supplier. All equipment is fully utilized: Richardson purchased Viners’ Seipmens automatic polishing machine when the latter company went into liquidation. At Viners the machine was barely utilized for 10 hours a week, at Richardson’s it was used continuously. Similar parsimony is apparent in other activities: the launch of Richardson’s highly successful ‘Laser’ knives was achieved without any than employ advertising expenditure--rather expensive firms of design and public relations consultants, Richardson utilized the part-time services of talented freelancers.
of
(3) The Efictioeness Di$erent Dl@v-ent Market Segments
Strategies
in
Despite the predominantly negative impact of the strategy variables on performance, further investigation showed that the industry-wide patterns masked some interesting differences in strategy/performance relationships between market segments. These differences are summarized in Table 2 which shows the profit impact of strategic change variables, first, on those firms facing relatively high levels of low-cost import competition and, second, on those firms facing relatively low levels of import competition. The main findings were the following : (a) Cost machinery
reduction.
Increase in expenditure on and equipment as a proportion of sales
Low Cost Import was used to indicate investment in cost efficiency. Splitting the sample of firms into two on the basis of intensity of import competition showed that the negative relationship between capital investment and profitability (which had been observed for the full sample) was only apparent for firms facing relatively high levels of low-cost import penetration. For firms facing relatively low levels of lowcost import penetration, increases in capital investment were positively (if insignificantly) related to increases in profitability. This was confirmed by inspection of the high and low performing samples. Among the poor performers, Richards, Hawker Marris and Viners all invested heavily in plant and equipment and attempted to establish themselves as low-cost suppliers to the mass market. However, the enormous cost advantage of Far Eastern suppliers in these market segments meant that these ultimately proved unproductive. investments Other approaches to cost reduction were also unsuccessful in the face of intense Far Eastern competition: Viners (and also Oneida) attempted to compete in the stainless steel table cutlery market by overseas sourcing. However, because retailers and distributors could buy direct from the Far East, often more flexibly and in greater volumes, this strategy was unsuccessful. In segments which were less pressured by low-cost imports, cost reduction strategies have been much more successful. The best example is Westall Richardson’s success in the market for kitchen knives and blades. In this segment overseas competition was mainly from the French, Germans and Swiss in the high quality bracket. By a programme of continuous cost reduction through automation, design for manufacture and improved organization of production, Richardson established itself as one of the lowest cost manufacturers of kitchen knives in Western Europe and, by the end of the period exported over half of its production (a significant proportion of it to Japan). Gee & Holmes and Slack & Barlow in the silver-plated cutlery segment were also successful in developing and exploiting a low-cost position based upon volume maufacture of a limited number of designs, primarily for sale under distributors’ own brands. (b) Differentiation. With regard to investment in differentation, the converse was true: for the full sample there was a negative association between product differentiation and profitability. However, among firms facing above average levels oflow-cost import penetration, increased differentiation had a positive impact on profitability. Despite the apparent effectiveness of product differentiation in creating competitive advantage in relation to low-cost overseas producers, there was a distinct lack of cutlery firms that had pursued an effective differentiation strategy. For example, in the table cutlery market, no British firm had committed itself to supplying fashionably-styled, moderately-priced cutlery appealing to contempory tastes, despite the
Competition
65
successful introduction by Italian firms of colourful, plastic-handled table cutlery to the British market. (4) The Link Resources
Between
Strategy
and Company
A surprising result of the study was a negative association between firm size and performance. Among the poorly performing firms were three of the four largest firms in the industry in 1974: two of which (Viners and Hawker Marris) went into receivership before the end of 1982, the other (Richards) followed them into bankruptcy in 1984. Given my initial premise that a key problem of the industry was fragmentation and small firm size, how can the dismal performance of the larger firms be explained? Further investigation indicated that the poor performance of the large firms was not a consequence of any disadvantage in size, but was due, first, to the location of the largest firms in the most vulnerable segments of the market and, second, to the propensity of the largest firms to undertake investments that were excessive in relation to their financial resources and revenue generating capability. This was a particular problem for companies such as Viners, Hawker Marris and Arthur Price which attempted to differentiate themselves in the retail market through brand advertising, promotion and the operation of retail concession stores, all of which involved substantial indivisible costs which were a heavy burden for firms of such modest size. Even more important than financial capacity was the quality of resources available to firms. The most important item here was the quality of managerial resources available to cutlery firms. Family ownerand concentration of the ship, long traditions industry in Sheffield has developed managers with substantial experience in the industry who possessed limited flexibility in relation to new production technology, product design and marketing. These in-bred, inward-looking characteristics of management in the cutlery industry, together with the unattractiveness of the industry for well-trained younger managers, acted as a major barrier to change in the industry. Most successful innovation had its origin in managers whose backgrounds lay outside the cutlery industry. The best example of this is Westall Richardson, whose outstanding record of sales growth was due to continuous improvement of production processes, together with product innovation (e.g. the ‘Laser’ knife with the blade that never needed sharpening and was guaranteed for 25 years). None of the management team of Richardson had previous experience in the cutlery industry. The narrow experience base of management in the industry may also explain the inability of several firms to successfully implement adjustment strategies. In the case of Viners, the inputs of various types of consultant meant that there was no shortage of analysis and ideas, the great weakness was the inability of Viners’ management
66
Long Range
to effectively strategies.
Planning
and efficiently
Vol. 22
implement
October
the desired
The benefits of outside managerial experience was also evident at Terence Mason Investments, the company which acquired George Butler and the remnants of Hawker Marris’s business. The establishment of a profitable business with annual sales of over 44.5rn by 1983 was a result of a marketingorientated strategy which emphasized brand advertising, packaging, reorientation of selling effort towards the department stores, and developing the giftware market. The success of this strategy is attributable to the marketing skills and experience of the CEO, Terence Mason-another ‘outsider’.
Lessons for Managers My findings regarding the determinants of success and the effectiveness of different strategy instruments in the U.K. cutlery industry only partly support strategy recommendations arising from prior studies of mature industries. In common with the PIMS-based studies of Anderson and Zeithaml and Hammermesh and Silk,’ I confirm that, in a manufacturing competitive mature industry, advantage is difficult to establish, and the returns to all forms of strategic investment were meagre. However, in contrast to prior studies, I found that increased product quality and cost reduction, capacity reduction were ineffective in generating superior profitability. The discrepancies between my findings and those of prior studies can be explained by the competitive structure of the cutlery industry compared with the mature industries studied in other research. The key features of the cutlery industry are intense low-cost import competition and fragmentation. Prior research has been mainly concerned with large corporations, concentrated industries and industries facing product obsolescence. On the basis of the evidence of the cutlery industry, the implications for strategic management in fragmented industries subject to severe low-cost overseas competition are the following: (1) Low-cost Import Competition Severely Constrains Both the Projitability and the Strategy Options of Domestic Manufacturers In mature manufacturing industries where technology is well-diffused and customer brand preferences are weak, producers in low wage countries frequently have an unassailable cost advantage over firms in the advanced countries. Under these conditions the prospects for survival, let alone a satisfactory return on capital, are likely to be poor. The first issue which managers must address is whether it is possible to remain competitive over the longer term and, if so, whether the investment needed to remain competitive is justified by the
1989 likely return. If the answer to either of these questions is no, management must choose between timely exit and a slow death, seeking to reap returns from existing investments. With regard to the latter several cutlery firms (even in the most option, competitive segments) were able to remain viable by a defensive strategy of sticking to traditional methods and minimizing outgoings while accepting dwindling sales and profits. (2) Market
Segments Sheltered From Low-cost Competition Can O_Rer Attractive Returns, but Mobility is Risky
In the cutlery industry, low-cost Far Eastern producers tended to focus on large volume, middle and low-price market segments. In several product segments, most notably the manufacture of silverplated cutlery and tableware, low-cost overseas competition was unimportant and average rates of return on capital were close to the average for manufacturing industry as a whole. At the same time, these comparatively favourable competitive conditions did not necessarily benefit firms relocating in these segments. The market for silver-plated cutlery was small and shrinking, hence the migration of firms from stainless steel into silver-plate created serious excess capacity in the latter segment. Also, barriers to mobility meant that firms established in the attractive segments tended to earn higher profits than firms relocating in them. (3) Select Strategies Advantages
Which
Exploit
Locational
Establishing advantage in an internationally competitive market necessitates matching strategy to the comparative advantages of the country in which the firm is located. Thus, South Korea with a relative abundance of unskilled but adaptable labour had a comparative advantage in products which required a heavy input of unskilled labour. South Korean cutlery producers exploited this availability of cheap, unskilled labour (and cheap supplies of Japanese steel) by following a cost leadership strategy and by focusing on those market segments which were most price sensitive, such as the massmarket for medium and low quality stainless steel table cutlery. By contrast, the United Kingdom offered no obvious opportunities for cost advantage in cutlery manufacture, but did offer potential differentiation advantages, such as proximity to the availability of experienced domestic market, workers, and an established reputation for quality. These factors point to differentiation in the form of rapid responses to changing consumer tastes (e.g. focusing on fashion-conscious segments), speed and flexibility of supply, and concentrating on quality products where highly skilled labour can be used to effect. These locational advantages are relative; they depend upon the position of the United Kingdom vis-ci-vis other producing countries in particular Thus, in the table cutlery product segments.
Low Cost Import segment the United Kingdom is a relatively high cost producer and United Kingdom producers must exploit differentiation opportunities that arise from proximity to the domestic market. In the kitchen knife sector where some of the main competing countries are France, Germany and Switzerland, the United Kingdom is a relatively low cost producer and it is the overseas producers which hold the advantages of strong brand differentiation. Hence in the kitchen knife sector there is scope for a cost leadership strategy that exploits comparatively low British wage costs. (4) In a Fragmented, Intensely Competitive Industry, Strategy Must be.Closely Tailored to the Resources of the Firm Where firm size is small, to the individual firm Moreover, where profit ment increases the firm’s profit squeezes. Two from this:
the availability of rcsourccs is severely constrained. margins arc slim, investvulnerability to short-term recommendations follow
(a) The needfor parsimony. A characteristic of many failed firms in the cutlery industry was that they incurred large expenditures on strategic invcstments and were unable to take the strain of cyclical downturns such as 1980-1982. Conversely, the few firms which successfully managed ambitious strategic adjustments adopted a careful, cost-conscious approach to investment. The importance of low outgoings, low overheads and an unremitting quest for sources of cost saving has been indicated by several other studies of strategy/performance relations in mature and fragmented industries. For example, Hambrick and Schectefl found successful mature business turnarounds were characterized by low levels of marketing and R & D spending, low levels of receivables and inventories and high levels of capacity utilization. Hammermesh and Silk’ found that: ‘characteristic of successful stagnant industry businesses was their constant attention to cost reduction’. (b) The need to match strategy lo the capabilities and experience of the CEO. Where firm size is small, technology is diffused and brand strengths are weak, the distinctive competences of the firm are closely associated with the capabilities of the CEO. Among the better performing firms in the cutlery industry were two where the match between strategy and the competence of the CEO were especially close. Westall Richardson’s strategy of cost leadership and product innovation in kitchen knives can be seen as an extension of the engineering and entrepreneurial talents of the CEO, Bryan Upton. The market-led differentiation strategy of Terence Mason Investments was built securely on the marketing expertise of the CEO, Terry Mason.
Competition
(5) The Perils of an Industry-wide
Culture
67 of Failure
One of the difficulties of managing in a declining industry is that expectations of failure become selffulfilling through paralysis of initiatives and lack of commitment. A key feature of the cutlery industr) was a widespread belief that decline would continue, that the overriding problem was the external threat of unfair competition from overseas, and that the only effective source of action \vas governmentimposed import restictions. The tendency for common perceptions to develop across industries concerning the nature of the competitive environment and the appropriate strategy responses is well Grinyer and Spender”’ identify documented. industry-wide shared beliefs about effective stratcgies which they term ‘strategic recipes’. Huff” points to the propensity for ‘group-think’ to emerge across firms within an industry. In an industrx which is in long-term, near continuous decline and is as geographically concentrated as cutlery, such .I convergence of attitudes can create a culture of failure where opportunities are not perceived and initiatives perish because of a consensus of opinion that they cannot succeed. In such circumstances, success may require that J firm seeks external sources of inspiration and that it distances itself from the rest of the industry. Among the group of better performing firms, it is interesring that two were U.S. owned (Westall Richardson and Surmanco) and two others were owned by parent companies based outside Sheffield (George Butler and Roberts and Belk). Some of the more progressive and innovative companies have fc\\ Sheffield connections and some have sought to deliberately distance themselves from the rest of the industry. At Westall Richardson not a single member of the expanding management team \vas previously employed by another cutlery cornpan! and the firm was not a member of the induscr) association. Other innovative companies also tend not to be Sheffield-based. The only companies which regularly introduced new designs are Oneida, which was U.S. owned and is located in Northern Ireland, and David Mellor Designs kvhich was London based (although it later began manufacture in Sheffield). Direct mail order selling of cutler) was not introduced by any of the traditional Sheffield firms but by new companies such as Hugh Foulerton Ltd. The post-war history of the Sheffield cutler) industry is a depressing tale of contraction, redundancy and company failure. My study shows that, while decline was inevitable given the cost advantages of Far Eastern producers, the extent of the decline owes much to deficiencies in strategic management among the firms in the industry. Continued growth in world trade and industrialization in low wage countries will place more and more mature manufacturing industries in the advanced countries under intense competitive pressure. The study of success and failure in industries
68
Long
Range
Planning
Vol. 22
October
such as cutlery which were the early victims of lowcost imports can help managers in other industries to anticipate and respond to similar competitive conditions.
1989 (4)
W. K. Hall, Survival strategies in a hostile environment, Harvard Business Review, pp. 75-85. September-October (1980).
(5)
Department of Industry, Report of fhe Working Party on the Cutlery and Flatware Industry, p. 10, HMSO, London (1980).
(6)
R. M. Grant, Business strategy and strategy change in a hostile environment: failure and success among British cutlery producers, in A. Pettigrew (Ed.), The Management of Strategic Change, Oxford University Press, Oxford (1987).
(7)
R. Hammermesh and S. Silk, How to compete in stagnant businesses, Harvard Business Review, pp. 161-l 68, September-October (1979).
References (1) (2)
(3)
K. R. Harrigan, Strategies for Declining Businesses. Lexington Books, Lexington, MA (1980).
(8)
See footnote 3.
(9)
See note 6.
D. C. Hambrick and S. M. Schecter, Turnaround strategies for mature industrial product business units, Academy of Management Journal. 26,231-248 (1983).
(10)
C. R. Anderson and C. P. Zeitham, Stages of the product life cycle, business strategy and business performance, Academy of Management Journal, 27, 5-24 (1984).
P. H. Grinyer and J. C. Spender, Recipes, crises and adaptation in mature businesses, International Studies of Management and Organization, 9 (3). 113-l 23 (1979).
(11)
A. S. Huff, Industry influences on strategy reformulation, Strategic Management Journal, 3, 119-l 31 (1982).
0024-6301/89 S3.00 + .OO Pergamon Press plc
59
Competing Against Low Cost Cutlery Imports Robert M. Grant
Low cost import competition is increasingly threatening the profitability and survival of many mature manufacturing industries in Western Europe and North America. This study of U.K. cutlery firms shows that even when firms’ room for manoeuvre is severely constrained by limited resources and an overwhelming cost disadvantage, appropriate strategies can promote profitability. Superior performance was associated with parsimony in investment, location within comparatively shelteredmarket segments, and exploiting locational factors to achieve effective differentiation. The study also pointed to the need for firms to break awav from the climate of failure that envelops a closely-knit, declining industry.
PIMS data points to the effectiveness of cost reduction strategies in mature industries. Hambrick and Schecter2 identified three successful turnaround strategies adopted by mature businesses, all of which were directed at cost reduction. Anderson and Zeitham3 found cost efficiency was strongly associated with profitability among businesses in their mature and declining phases. While using a sample of large, mature, U.S. manufacturing corporations, Hall4 identified high returns to firms which simultaneously pursued low delivered cost and high differentiation.
Decline in the mature manufacturing industries of the United States and United Kingdom has stimulated interest in the potential for business strategy to improve the competitive performance of firms operating in such inhospitable environments. Some of the results of recent research have offered encouragement to managers in these industries. For example, Harrigan’ observed surprisingly high profit rates in several declining manufacturing industries, and pointed to the effectiveness of strategies which encouraged the orderly exit of capacity in moderating price competition and boosting industry margins.
To what extent are strategies of capacity rationalization and cost reduction likely to be generally effective in mature manufacturing industries? One limitation of prior research is that it deals with industries that may not be typical of mature manufacturing industry in general. The industries investigated by Harrigan were primarily those subject to declining demand due either to shifting consumer preferences (e.g. cigars and baby foods) or to technological obsolescence (e.g. rayon, coffee percolators, electronic receiving tubes). However, across most manufacturing industries, both in the United States and Western Europe, the major source of decline has not been contracting demand but the declining market shares of domestic firms, as high cost domestic production is displaced by lowcost overseas production. Thus, across a range of manufacturing industries, from textiles, clothing and footwear to metal goods and mechanical engineering, production has shifted from the advanced industrialized countries (AICs) to the lower wage, newly industrializing countries (NICs). This distinction between different sources of decline is important for strategy formulation. Where decline is due to waning international competitiveness, strategies aimed at capacity adjustment and cost reduction may be of limited value. Capacity reduction does little to restore profitability in an industry being undercut by imports, similarIy cost reduction strategies will be of limited effective-
Other researchers have shown that satisfactory performance in mature manufacturing industries can be achieved through strategies which create competitive advantage. Despite the conventional view that the opportunities for creating competitive advantage in mature industries are limited by welldiffused technology and well-informed buyers, This paper is part of a wider study of Regeneration in Mature Industries led by Charles Baden Fuller and John M. Stopford at the Centre for Business Strategy at London Business School. The author has benefited from the research assistance of Stephen Downing and the comments of Charles Baden Fuller. The research was financed by the Centre for Business Strategy and the Economic and Social Research Council. Robert M. Grant is Visiting Professor of Business Policy at the University of British Columbia.
60
Long Range
ness when overseas advantage.
Planning
suppliers
Vol. 22
October
have a substantial
cost
A second feature of prior research is its focus upon concentrated industries where firms are relatively large. For example, Hall’s study included steel, trucks, beer and cigarettes. Bias towards large corporations is also true of the PIMS-based studies: the businesses that make up the PIMS database tend to be units of relatively large firms. Large firms have a wider range of strategy choices than small firms because of their greater access to resources. Moreover, because competition is less intense in concentrated than in fragmented industries, concentrated industries provide a more favourable environment for strategic investment. On the basis of these two characteristics: source of decline and degree of concentration, we can identify four categories of declining manufacturing industry (see Figure 1). Research in strategic management has given scant regard to industries in the lower right quadrant. Yet these industries provide potentially fertile ground for the study ofbusiness strategy because of the sheer inhospitality of their environments: firms face the acute problem posed by lower cost manufacture overseas, together with the lack of
1989 resources for investing in strategic adjustment. These industries therefore represent a limiting case in strategic management. The central question which this paper addresses is the following: In fragmented industries subject to low-cost import competition, does business strategy have any potential for yielding satisfactory performance, or are these industries doomed by economic forces to eventual extinction?
To shed light upon this question, I report the findings of a study of strategy and firm performance in a fragmented manufacturing industry severely pressured by low-cost import competition-the U.K. cutlery industry. The objective of the research was to investigate performance differences between firms and to determine whether any, strategies were associated with superior performance.
The Cutlery
Industry
The U.K. cutlery industry is an extreme example of a problem industry: highly fragmented and devastated by low-cost import competition. The industry comprised about 50 firms, only a few of which had ever employed more than 100 employees and most employed less than 20. The largest firm in the
Source of Decline
Low-cost Foreign Declining Demand
I $ s ._ 3 E
tij z 5 : s
z
Tyres Steel
Competition
l
l
Domestic Appliances’
Cigarettes*
Construction
Rayon?
Consumer Electronics
Babyfoods?
Shipbuilding
Equipment’
Synthetic Soda Ash?
Textiles Clothing
cetylene t
Footwear
Electric Coffee Percolatorst
Fasteners
Cigars?
Hand Tools Cutlery
‘Industries studied by Hall.& tlndustries studied by Harrigan.’
Figure
1. Classification
of mature
industry
strategic
environments
Low Cost Import industry during the study period (1974-1982) was Viners Ltd, which in 1980 (2 years before going into liquidation) had 530 employees and sales of Ll2m. Most firms in the industry were owned and managed by a single family, in several instances family ownership extended back over a century. The products of the industry comprise table cutlery, which can be subdivided into stainless steel and the more expensive silver-plate, kitchen knives, pocket knives, and holloware (jugs, serving dishes, trays etc.). The firms were mainly specialized by product segment, though over the period firms tended to broaden their product ranges in an attempt to counteract declining sales. Firms were also specialized by process: a few specialist firms produced semi-finished cutlery (‘blanks’) and some specialized in silver-plating and finishing. The larger firms tended to be more vertically integrated. The major feature of the industry’s recent history is its decline. Between 1973 and 1983 output and employment in the industry approximately halved. The primary reason for this was the growth of import penetration, particularly from the Far East. Because the manufacture of cutlery requires little technological expertise and is labour intensive, it is well-suited to countries in early stages of industrial development. Since the early 196Os, the U.K. market was increasingly penetrated by cheap imports, first from Japan, then from Hong Kong, and, since 1970, from South Korea and Taiwan. The extent of the U.K.‘s cost disadvantage relative to the Far Eastern NICs is indicated by the observation that ‘during the first half of 1978, the average CIF value per hundred of South Korean spoons and forks imported into the U.K. was only 8.25 per cent higher than the net U.K. cost of chrome ferritic stainless steel to make equivalent products’.5 As a result, nearly all the firms in the British cutlery industry experienced declining real sales since 1974 and many left the industry, some voluntarily but most through receivership followed by liquidation or acquisition. Between 1980 and 1983, the problems of import competition were exacerbated by the pressures of recession, high interest rates and the instability of exchange rates and the price of silver. During this period three out of the four largest firms in the industry went into receivership.
The Research To investigate the impact of business strategy on performance I assembled a sample of the 33 largest cutlery firms in 1974 and tracked their strategies and financial performance over the ensuing 9 years. My first observation was that there were sharp and sustained differences in profitability between firms in the industry. While average profitability of firms was low, and fell sharply over the study period, there was no tendency for competition to cause firms’ rates of return to converge towards the competitive level. Some firms made consistent
Competition
losses for most of the period, surprisingly high profitability.
others
61 maintained
The next stage of the research was to explain differences in financial performance. Here I looked at two sets of factors: (1) the intensity of competition in the market segments within which the firm was located; (2) the strategy of the firm whose strategy was measured in terms of the firm’s observed behaviour particularly with regard to
(4
cost ejiciency as indicated by investment in plant and equipment and indicators of operational efficiency, particularly rate of stock turnover; and
(W di$erentiation
with regard to quality, advertising, the introduction of new product designs and product innovations, and operation of retail outlets.
Data were assembled from published sources, notably company accounts, product and price lists, overseas trade statistics, and from interviews both with the companies and with a sample of retailers. Two types ofanalysis were used to detect association between strategy and performance: (a) Comparisons between successful and unsuccessjrl firms. An overall performance ranking of firms was obtained by combining rankings of firms by three financial criteria: pre-tax return on capital employed, rate of sales growth and sales margin. Two groups were selected: the eight firms with the highest overall performance over 1974-1982 and the eight firms with the lowest performance over this period. Table 1 shows the composition of the groups. (b) Multiple regression of firm performance upon a number of strategy variables. A discussion of this analysis is available elsewhere,6 this paper presents the key findings and discusses their relvance for management practice.
The Findings The main empirical findings are summarized in Tables 2 and 3. Table 2 shows the results of multiple regressions of return on capital on both the levels of the changes in several strategy variables. Table 3 summarizes the principal characteristics of the high performing and low performing groups of companies. These statistical findings only take us so far, in the discussion of my findings I also draw heavily upon the insights which were gained through my interviews with senior managers. The key findings
can be summarized
as follows:
(1) The Impact of Low-cost Import Competition in the Firm’s Product Segments Despite the propensity for managers of cutlery
62
Long Range Planning Vol. 22 Table 1. High and low performing
October
cutlery firms by profitability
Return on capital employed’ (%)
1989
Sales Margin2
Average annual growth rate of real sales3
(%)
(%)
and growth 1974-1982
Main
products
High performers Beatson Drake George Butler Gee & Holmes Nickel Blanks Westall Richardson Roberts & Belk Slack & Barlow Surmanco
38.8 10.5 38.5 42.9 18.9 17.3 32.8 24.4
25.2 13.4 24.8 23.9 10.2 15.1 9.0 14.7
+6 -4 -8 +2 +11 +2 +11 -4
Knife handles SP cutlery Blanks Kitchen knives and blades SP cutlery and holloware SP cutlery SP cutlery Scissors
Low performers Cooper Brothers Hawker Marris Old Hall Parkin Silversmiths Arthur Price Richards of Sheffield Turners Viners
4.7 8.9 -6.4 9.2 13.3 5.6 3.1 0.7
5.5 10.5 6.2 9.8 9.7 9.4 11.3 9.2
-10 -9 -10
Cutlery (SS and SP) SS holloware SS holloware SP cutlery and holloware SP cutlery and holloware Pocket knives Blanks Cutlery (SS and SP)
-
-8 -3 -5 -2 -10
‘Profits before tax and after interest divided by capital employed and short-term borrowings. *Profits before tax and before interest plus depreciation and directors emoluments divided by sales revenue. 3Average annual growth of sales revenue at trend rate less average annual increase of the GDP deflator. SP=silver-plated. SS=stainless steel.
Table 2. Results of regressions of return on capital on strategy variables for 32 cutlery firms, 1974-1982
Full
Firms facing above median low-cost import
Firms facing below median low-cost import
sample
penetration
penetration
Negative Negative
Negative’
Positive
Product differentiation Product differentiation2
Negative’ Positive
Positive
Quality Quality*
Positive’ Negative’
Negative
Investment/sales Investment/sales
ratio ratio2
Negative
.
Negative
‘Indicates that the regression coefficient was significantly different from zero at the 90% level of confidence (or above). *Denotes the change in the value of the variable over the period. Investment/sales ratio measures expenditure on plant, machinery and tools as percentage of sales revenue. Product differentiation is a compositevariable which combines advertising expenditure per annum, number of retail outlets operated, the introduction of new designs, and the introduction of product innovations.
companies to attribute all the industry’s problems to competition from the Far East, segment by segment analysis showed that imports from low-cost producing countries were concentrated into a few product areas. Figure 2 shows that import penetration from the NICs and LDCs was greatest in stainless steel table cutlery and scissors, it was also severe in stainless steel and chromium-plated holloware. In silver-plated cutlery and holloware, import penetration was very low, while in other sectors, e.g. kitchen knives and folding knives, import penertration was primarily from other Western European countries. The analysis revealed that imports from the low-
cost producing countries, rather than overall import penetration, was primarily responsible for depressing profitability. Among the companies specializing in stainless steel cutlery and holloware, performance was almost uniformly poor. Indeed, of the 33 companies sampled, by 1982 only one firm still specialized in the production of stainless steel table cutlery. Among the low performers, six out of the eight firms had an average low-cost import penetration ratio above the median for the full sample. Moreover, the firms which failed (Viners, Hawker Marris, Richards of Sheffield and Old Hall) were all subject to above average levels of low-cost import penetration. Conversely, the high performers were concentrated into segments with low levels of low-
Low Cost Import Table 3. The characteristics
of high and low performing
Competition
companies
High performers
Low performers
Average sales revenue (f ,000)
1078 (749)
2945 (3628)
Penetrating low-cost imports (%)
12.3 (7.2)
24.8 (14.3)
Investment sales ratio (%)
1.99 (1.22)
2.01 (1.87)
Stock turnover (times per year)
7.27 (9.32)
3.16 (1.83)
6.25 (12.11)
22.25 (37.98)
0.75 (1.98)
16.94 (43.57)
Advertising expenditure (f,OOOs per annum) Operation of retail outlets (average number per firm)
20.2 (28.6)
Export/sales ratio (%)
63
28.3 (39.2)
The table shows the mean value for each group with the standard deviations in parentheses.
r-
Domestic Sales by U.K Manufacturers Imports From Low-cost Producing Countries * Imports From other Countries
1974
1982
1974
1982
1974
1982
Stainless Steel
Silver Plated
Kitchen
Flatwear
Flatwear
Knives
1974
1982
Scissors
1974
1982
Folding Knives
‘LDSs, NlCs and Japan.
Figure 2. Import
penetration
of the U.K.
cutlery
market
cost import penetration: Butler, Gee & Holmes, Roberts & Belk, and Slack & Barlow specialized in silver-plate; Beatson Drake manufactured handles; Nickel Blanks manufactured unfinished nickelsilver table cutlery for silver-plating by other firms, Westall Richardson manufactured kitchen knives and blades. Of the successful firms, only Surmanco faced above average low-cost competition. Clearly then, the presence of overseas competitors with a substantial cost advantage had an enormous impact on profitability, it also severely constrained
by product
segment,
1974 and 1982
the strategy options available to domestic producers. The superior profitability and survival prospects of those firms located in segments where overseas competition was weak, might suggest that the best strategy for firms in the industry was to relocate to these segments. However, the experiences of those firms which abandoned stainless steel cutlery and tableware and moved into silver-plating were not always favourable. The problem with the sheltered segments was that they were generally small and their profitability was vulnerable to entry. The major direction of adjustment was up-market
64
Long Range
Planning
Vol. 22
October
into silver-plated cutlery and holloware. In these markets, firms which were well-established specialists (such as Robert & Belk and George Butler) outperformed firms that moved up-market to escape competitive pressures in their own segments (e.g. Cooper Brothers, Arthur Price and Viners). (2) The Inefictiveness of Strategic Investments The most striking finding of the study was the ineffectiveness of most forms of strategic investment. Table 2 shows that investment both in capital and in product differentiation was negatively associated with profitability. While differentiation through quality was positively associated with profitability, firms which attempted to reposition themselves by increasing quality suffered deteriorating profitability. Table 3 confirms these findings. The poorly performing firms, on average, spent more on capital investment and differentiation (advertising and forward integration into retailing) than the better performers. These findings are a striking rebuff to those that have argued for industrial regeneration through investment in capital-intensive production processes and product and market differentiation. The unproductiveness of strategic investments may partly reflect the difficulties of establishing competitive advantage in mature industries, more importantly, it is evidence of the risks associated with investing in an industry facing declining demand and intense competition. Several of the larger firms in our sample, most notably Viners and Hawker Marris, embarked upon ambitious expansion plans during the 197Os, involving modernizing production and developing stronger brands and distribution. The returns from these investments were meagre and the financing charges incurred made the firms highly vulnerable to any fall in sales or rise in interest rates. Both firms failed during the 1980-l 982 recession. Conversely, the successful firms include several which pursued a strategy of retrenchment with little or no investment in production or marketing. Beatson Drake, Gee & Homes, and Slack & Barlow had extremely low rates of investment in plant and equipment and no spending on advertising or forward integration, but both earned very high rates of return on capital, in part reflecting the fact that they occupied niches away from import competition. However, retrenchment was not a general feature of superior performance. At least two of the successful firms, Westall Richardson and George Butler, adopted relatively ambitious and expansionary strategies. But although both firms pursued longterm strategies of capital investment and market development, in both instances their approach was gradual, cautious and rigorously cost-conscious. The
contrast
between
Westall
Richardson
(now
1989 Richardson Sheffield) and Viners illuminates the importance of a parsimonious approach to investment and growth. Viners spent heavily between 1970 and 1976 on strengthening itself as the U.K. market leader and establishing its presence elsewhere in the world. It installed an automated electro-plating unit, an automated polishing machine, two new presses and a DEC computer which was used for stock control, order processing and wages. It established subsidiaries in Germany, Australia and Hong Kong and acquired cutlery manufacturers in Ireland and France. New cutlery ranges (such as ‘Love Story’ in 1971) incurred expenditure on design consultants and advertising that was unprecedented in the industry. Viners regularly employed leading firms of management consultants and was an early enthusiast for ‘management-by-objectives’. During the later 1970s sales stagnated and the debt/equity ratio steadily increased. Financial deterioration led to a takeover in 1981, but by 1982 the combination of high interest rates, depressed demand, a high price of silver, and an overvalued sterling exchange rate, forced the company into liquidation. Westall Richardson, on the other hand, established itself as the largest, and fastest growing firm in the industry without massive investment outlays and without incurring any debt. Close attention to costs and outgoings has been a guiding theme of the company’s operation. Machines have been designed and built in-house, frequently at a fraction of what similar machines would cost from an independent supplier. All equipment is fully utilized: Richardson purchased Viners’ Seipmens automatic polishing machine when the latter company went into liquidation. At Viners the machine was barely utilized for 10 hours a week, at Richardson’s it was used continuously. Similar parsimony is apparent in other activities: the launch of Richardson’s highly successful ‘Laser’ knives was achieved without any than employ advertising expenditure--rather expensive firms of design and public relations consultants, Richardson utilized the part-time services of talented freelancers.
of
(3) The Efictioeness Di$erent Dl@v-ent Market Segments
Strategies
in
Despite the predominantly negative impact of the strategy variables on performance, further investigation showed that the industry-wide patterns masked some interesting differences in strategy/performance relationships between market segments. These differences are summarized in Table 2 which shows the profit impact of strategic change variables, first, on those firms facing relatively high levels of low-cost import competition and, second, on those firms facing relatively low levels of import competition. The main findings were the following : (a) Cost machinery
reduction.
Increase in expenditure on and equipment as a proportion of sales
Low Cost Import was used to indicate investment in cost efficiency. Splitting the sample of firms into two on the basis of intensity of import competition showed that the negative relationship between capital investment and profitability (which had been observed for the full sample) was only apparent for firms facing relatively high levels of low-cost import penetration. For firms facing relatively low levels of lowcost import penetration, increases in capital investment were positively (if insignificantly) related to increases in profitability. This was confirmed by inspection of the high and low performing samples. Among the poor performers, Richards, Hawker Marris and Viners all invested heavily in plant and equipment and attempted to establish themselves as low-cost suppliers to the mass market. However, the enormous cost advantage of Far Eastern suppliers in these market segments meant that these ultimately proved unproductive. investments Other approaches to cost reduction were also unsuccessful in the face of intense Far Eastern competition: Viners (and also Oneida) attempted to compete in the stainless steel table cutlery market by overseas sourcing. However, because retailers and distributors could buy direct from the Far East, often more flexibly and in greater volumes, this strategy was unsuccessful. In segments which were less pressured by low-cost imports, cost reduction strategies have been much more successful. The best example is Westall Richardson’s success in the market for kitchen knives and blades. In this segment overseas competition was mainly from the French, Germans and Swiss in the high quality bracket. By a programme of continuous cost reduction through automation, design for manufacture and improved organization of production, Richardson established itself as one of the lowest cost manufacturers of kitchen knives in Western Europe and, by the end of the period exported over half of its production (a significant proportion of it to Japan). Gee & Holmes and Slack & Barlow in the silver-plated cutlery segment were also successful in developing and exploiting a low-cost position based upon volume maufacture of a limited number of designs, primarily for sale under distributors’ own brands. (b) Differentiation. With regard to investment in differentation, the converse was true: for the full sample there was a negative association between product differentiation and profitability. However, among firms facing above average levels oflow-cost import penetration, increased differentiation had a positive impact on profitability. Despite the apparent effectiveness of product differentiation in creating competitive advantage in relation to low-cost overseas producers, there was a distinct lack of cutlery firms that had pursued an effective differentiation strategy. For example, in the table cutlery market, no British firm had committed itself to supplying fashionably-styled, moderately-priced cutlery appealing to contempory tastes, despite the
Competition
65
successful introduction by Italian firms of colourful, plastic-handled table cutlery to the British market. (4) The Link Resources
Between
Strategy
and Company
A surprising result of the study was a negative association between firm size and performance. Among the poorly performing firms were three of the four largest firms in the industry in 1974: two of which (Viners and Hawker Marris) went into receivership before the end of 1982, the other (Richards) followed them into bankruptcy in 1984. Given my initial premise that a key problem of the industry was fragmentation and small firm size, how can the dismal performance of the larger firms be explained? Further investigation indicated that the poor performance of the large firms was not a consequence of any disadvantage in size, but was due, first, to the location of the largest firms in the most vulnerable segments of the market and, second, to the propensity of the largest firms to undertake investments that were excessive in relation to their financial resources and revenue generating capability. This was a particular problem for companies such as Viners, Hawker Marris and Arthur Price which attempted to differentiate themselves in the retail market through brand advertising, promotion and the operation of retail concession stores, all of which involved substantial indivisible costs which were a heavy burden for firms of such modest size. Even more important than financial capacity was the quality of resources available to firms. The most important item here was the quality of managerial resources available to cutlery firms. Family ownerand concentration of the ship, long traditions industry in Sheffield has developed managers with substantial experience in the industry who possessed limited flexibility in relation to new production technology, product design and marketing. These in-bred, inward-looking characteristics of management in the cutlery industry, together with the unattractiveness of the industry for well-trained younger managers, acted as a major barrier to change in the industry. Most successful innovation had its origin in managers whose backgrounds lay outside the cutlery industry. The best example of this is Westall Richardson, whose outstanding record of sales growth was due to continuous improvement of production processes, together with product innovation (e.g. the ‘Laser’ knife with the blade that never needed sharpening and was guaranteed for 25 years). None of the management team of Richardson had previous experience in the cutlery industry. The narrow experience base of management in the industry may also explain the inability of several firms to successfully implement adjustment strategies. In the case of Viners, the inputs of various types of consultant meant that there was no shortage of analysis and ideas, the great weakness was the inability of Viners’ management
66
Long Range
to effectively strategies.
Planning
and efficiently
Vol. 22
implement
October
the desired
The benefits of outside managerial experience was also evident at Terence Mason Investments, the company which acquired George Butler and the remnants of Hawker Marris’s business. The establishment of a profitable business with annual sales of over 44.5rn by 1983 was a result of a marketingorientated strategy which emphasized brand advertising, packaging, reorientation of selling effort towards the department stores, and developing the giftware market. The success of this strategy is attributable to the marketing skills and experience of the CEO, Terence Mason-another ‘outsider’.
Lessons for Managers My findings regarding the determinants of success and the effectiveness of different strategy instruments in the U.K. cutlery industry only partly support strategy recommendations arising from prior studies of mature industries. In common with the PIMS-based studies of Anderson and Zeithaml and Hammermesh and Silk,’ I confirm that, in a manufacturing competitive mature industry, advantage is difficult to establish, and the returns to all forms of strategic investment were meagre. However, in contrast to prior studies, I found that increased product quality and cost reduction, capacity reduction were ineffective in generating superior profitability. The discrepancies between my findings and those of prior studies can be explained by the competitive structure of the cutlery industry compared with the mature industries studied in other research. The key features of the cutlery industry are intense low-cost import competition and fragmentation. Prior research has been mainly concerned with large corporations, concentrated industries and industries facing product obsolescence. On the basis of the evidence of the cutlery industry, the implications for strategic management in fragmented industries subject to severe low-cost overseas competition are the following: (1) Low-cost Import Competition Severely Constrains Both the Projitability and the Strategy Options of Domestic Manufacturers In mature manufacturing industries where technology is well-diffused and customer brand preferences are weak, producers in low wage countries frequently have an unassailable cost advantage over firms in the advanced countries. Under these conditions the prospects for survival, let alone a satisfactory return on capital, are likely to be poor. The first issue which managers must address is whether it is possible to remain competitive over the longer term and, if so, whether the investment needed to remain competitive is justified by the
1989 likely return. If the answer to either of these questions is no, management must choose between timely exit and a slow death, seeking to reap returns from existing investments. With regard to the latter several cutlery firms (even in the most option, competitive segments) were able to remain viable by a defensive strategy of sticking to traditional methods and minimizing outgoings while accepting dwindling sales and profits. (2) Market
Segments Sheltered From Low-cost Competition Can O_Rer Attractive Returns, but Mobility is Risky
In the cutlery industry, low-cost Far Eastern producers tended to focus on large volume, middle and low-price market segments. In several product segments, most notably the manufacture of silverplated cutlery and tableware, low-cost overseas competition was unimportant and average rates of return on capital were close to the average for manufacturing industry as a whole. At the same time, these comparatively favourable competitive conditions did not necessarily benefit firms relocating in these segments. The market for silver-plated cutlery was small and shrinking, hence the migration of firms from stainless steel into silver-plate created serious excess capacity in the latter segment. Also, barriers to mobility meant that firms established in the attractive segments tended to earn higher profits than firms relocating in them. (3) Select Strategies Advantages
Which
Exploit
Locational
Establishing advantage in an internationally competitive market necessitates matching strategy to the comparative advantages of the country in which the firm is located. Thus, South Korea with a relative abundance of unskilled but adaptable labour had a comparative advantage in products which required a heavy input of unskilled labour. South Korean cutlery producers exploited this availability of cheap, unskilled labour (and cheap supplies of Japanese steel) by following a cost leadership strategy and by focusing on those market segments which were most price sensitive, such as the massmarket for medium and low quality stainless steel table cutlery. By contrast, the United Kingdom offered no obvious opportunities for cost advantage in cutlery manufacture, but did offer potential differentiation advantages, such as proximity to the availability of experienced domestic market, workers, and an established reputation for quality. These factors point to differentiation in the form of rapid responses to changing consumer tastes (e.g. focusing on fashion-conscious segments), speed and flexibility of supply, and concentrating on quality products where highly skilled labour can be used to effect. These locational advantages are relative; they depend upon the position of the United Kingdom vis-ci-vis other producing countries in particular Thus, in the table cutlery product segments.
Low Cost Import segment the United Kingdom is a relatively high cost producer and United Kingdom producers must exploit differentiation opportunities that arise from proximity to the domestic market. In the kitchen knife sector where some of the main competing countries are France, Germany and Switzerland, the United Kingdom is a relatively low cost producer and it is the overseas producers which hold the advantages of strong brand differentiation. Hence in the kitchen knife sector there is scope for a cost leadership strategy that exploits comparatively low British wage costs. (4) In a Fragmented, Intensely Competitive Industry, Strategy Must be.Closely Tailored to the Resources of the Firm Where firm size is small, to the individual firm Moreover, where profit ment increases the firm’s profit squeezes. Two from this:
the availability of rcsourccs is severely constrained. margins arc slim, investvulnerability to short-term recommendations follow
(a) The needfor parsimony. A characteristic of many failed firms in the cutlery industry was that they incurred large expenditures on strategic invcstments and were unable to take the strain of cyclical downturns such as 1980-1982. Conversely, the few firms which successfully managed ambitious strategic adjustments adopted a careful, cost-conscious approach to investment. The importance of low outgoings, low overheads and an unremitting quest for sources of cost saving has been indicated by several other studies of strategy/performance relations in mature and fragmented industries. For example, Hambrick and Schectefl found successful mature business turnarounds were characterized by low levels of marketing and R & D spending, low levels of receivables and inventories and high levels of capacity utilization. Hammermesh and Silk’ found that: ‘characteristic of successful stagnant industry businesses was their constant attention to cost reduction’. (b) The need to match strategy lo the capabilities and experience of the CEO. Where firm size is small, technology is diffused and brand strengths are weak, the distinctive competences of the firm are closely associated with the capabilities of the CEO. Among the better performing firms in the cutlery industry were two where the match between strategy and the competence of the CEO were especially close. Westall Richardson’s strategy of cost leadership and product innovation in kitchen knives can be seen as an extension of the engineering and entrepreneurial talents of the CEO, Bryan Upton. The market-led differentiation strategy of Terence Mason Investments was built securely on the marketing expertise of the CEO, Terry Mason.
Competition
(5) The Perils of an Industry-wide
Culture
67 of Failure
One of the difficulties of managing in a declining industry is that expectations of failure become selffulfilling through paralysis of initiatives and lack of commitment. A key feature of the cutlery industr) was a widespread belief that decline would continue, that the overriding problem was the external threat of unfair competition from overseas, and that the only effective source of action \vas governmentimposed import restictions. The tendency for common perceptions to develop across industries concerning the nature of the competitive environment and the appropriate strategy responses is well Grinyer and Spender”’ identify documented. industry-wide shared beliefs about effective stratcgies which they term ‘strategic recipes’. Huff” points to the propensity for ‘group-think’ to emerge across firms within an industry. In an industrx which is in long-term, near continuous decline and is as geographically concentrated as cutlery, such .I convergence of attitudes can create a culture of failure where opportunities are not perceived and initiatives perish because of a consensus of opinion that they cannot succeed. In such circumstances, success may require that J firm seeks external sources of inspiration and that it distances itself from the rest of the industry. Among the group of better performing firms, it is interesring that two were U.S. owned (Westall Richardson and Surmanco) and two others were owned by parent companies based outside Sheffield (George Butler and Roberts and Belk). Some of the more progressive and innovative companies have fc\\ Sheffield connections and some have sought to deliberately distance themselves from the rest of the industry. At Westall Richardson not a single member of the expanding management team \vas previously employed by another cutlery cornpan! and the firm was not a member of the induscr) association. Other innovative companies also tend not to be Sheffield-based. The only companies which regularly introduced new designs are Oneida, which was U.S. owned and is located in Northern Ireland, and David Mellor Designs kvhich was London based (although it later began manufacture in Sheffield). Direct mail order selling of cutler) was not introduced by any of the traditional Sheffield firms but by new companies such as Hugh Foulerton Ltd. The post-war history of the Sheffield cutler) industry is a depressing tale of contraction, redundancy and company failure. My study shows that, while decline was inevitable given the cost advantages of Far Eastern producers, the extent of the decline owes much to deficiencies in strategic management among the firms in the industry. Continued growth in world trade and industrialization in low wage countries will place more and more mature manufacturing industries in the advanced countries under intense competitive pressure. The study of success and failure in industries
68
Long
Range
Planning
Vol. 22
October
such as cutlery which were the early victims of lowcost imports can help managers in other industries to anticipate and respond to similar competitive conditions.
1989 (4)
W. K. Hall, Survival strategies in a hostile environment, Harvard Business Review, pp. 75-85. September-October (1980).
(5)
Department of Industry, Report of fhe Working Party on the Cutlery and Flatware Industry, p. 10, HMSO, London (1980).
(6)
R. M. Grant, Business strategy and strategy change in a hostile environment: failure and success among British cutlery producers, in A. Pettigrew (Ed.), The Management of Strategic Change, Oxford University Press, Oxford (1987).
(7)
R. Hammermesh and S. Silk, How to compete in stagnant businesses, Harvard Business Review, pp. 161-l 68, September-October (1979).
References (1) (2)
(3)
K. R. Harrigan, Strategies for Declining Businesses. Lexington Books, Lexington, MA (1980).
(8)
See footnote 3.
(9)
See note 6.
D. C. Hambrick and S. M. Schecter, Turnaround strategies for mature industrial product business units, Academy of Management Journal. 26,231-248 (1983).
(10)
C. R. Anderson and C. P. Zeitham, Stages of the product life cycle, business strategy and business performance, Academy of Management Journal, 27, 5-24 (1984).
P. H. Grinyer and J. C. Spender, Recipes, crises and adaptation in mature businesses, International Studies of Management and Organization, 9 (3). 113-l 23 (1979).
(11)
A. S. Huff, Industry influences on strategy reformulation, Strategic Management Journal, 3, 119-l 31 (1982).