Darwinian Shakeout – What can we learn?
With today’s piece, we understand Darwanin Shakeout from a more Business perspective. We look at the automobile space, the internet space, the fashion retail space and finally conclude how things will evolve with time in the near future – of course, keeping the Pandemic in mind.
Let’s jump right in!
Darwinian Shakeout is not a well-defined term. It typically means an occurrence that eliminates the weak and empowers the strong – ensuring the survival of the fittest whether they be organisms or organisations.
Shakeouts loom in the landscape of all fast-growing industries. During the boom period, an unsustainable number of competitors is attracted by forecasts of high growth and promises of exceptional returns. Even when the market is already crowded, more entrants keep arriving. These followers are often naïve about the barriers to entry and don’t realize how many others are also poised to enter at the same time. Reality intrudes with a bust that results in the exit of more than 80% of the players through liquidation or acquisition or mere shutdowns.
Our generation has already seen quite a few shakeouts so far, some triggered by intense competition and technological innovation, others by global recession or change in economic regulations. We saw it during the Dotcom Bubble burst in 2000 and The Great Recession in 2008. A flurry of recent events within industries across the world seems to suggest that such a shakeout may currently be underway, largely due to the Pandemic. But let’s keep that for later.
This piece is about looking at how industries have been impacted by shakeouts in the past and how some companies not just survived but came out as long-term winners.
Automobile Industry Shakeout
Only 3,720 cars were produced in the United States during 1899, and the industry was relatively small in 1904 when around 23,000 cars were produced. After 1904 output grew rapidly, from approximately 127,000 to 1.7 million annually. In the following decade, the growth rate slowed to a still impressive 11.5%, with 5.3 million autos produced in 1929.
With that, a large number of firms entered the industry. By some counts, well over a thousand manufacturers had entered the market by 1920. The growth in demand was fuelled by cost reductions and, product improvements contributed by the various makers. Automobiles went from unreliable buggy-like vehicles to streamlined gasoline-powered cars with steering wheels, safety windshields and automatic starters. For some time, they saw profits.
Like today, the Great Depression hit the industry hard; by 1937 annual production plunged below its 1929 levels. Over the years with a decline in entry and continued exists, only seven firms remained in the early 1960s. Over time, the market structure of the automobile industry became increasingly concentrated – with Ford and General Motors coming out as the biggest individual winners largely due to their constant product and process innovations.
Internet Companies Shakeout
The dotcom bubble, also known as the Internet bubble, grew out of a combination of the presence of speculative or fad-based investing, the abundance of venture capital funding for startups, and the failure of dotcoms to turn a profit. Investors poured money into Internet startups during the 1990s hoping they would one day become profitable. Many investors and venture capitalists abandoned a cautious approach for fear of not being able to cash in on the growing use of the Internet.
With capital markets throwing money at the sector, start-ups were in a race to quickly get big. Companies without any proprietary technology abandoned fiscal responsibility. They spent a fortune on marketing to establish brands that would set them apart from the competition. Some start-ups spent as much as 90% of their budget on advertising. The bubble that formed over the next five years was fed by cheap money, easy capital, market overconfidence, and pure speculation.
Related: See the influence of Chinese Investments in Indian startups
The bubble ultimately burst during 2000-2002, leaving many investors facing steep losses and several Internet companies going bust. Companies that famously survived the bubble include Amazon and eBay. In the subsequent years, both companies thrived with their innovation and technological superiority.
Fashion Retail Shakeout
Even before the coronavirus, massive inventory, growing digital commerce, upended supply chains and diminishing consumer demand, fashion industry leaders were not optimistic about 2020. The industry was already on high alert and the coronavirus pandemic is pushing retailers to the brink.
In the USA, Neiman Marcus, J.C. Penney, Neiman Marcus, Gold’s Gym, Muji, Ascena Retail Group and Tailored Brands have now joined the ranks of some of the all-time biggest retail bankruptcies on record — including Sears, Toys R Us and Circuit City. About 60% of the retailers that filed for bankruptcy in 2020 through August listed more than $100 million in assets.
In Britain, Arcadia Group, Century 21, Brooks Brothers, Debenhams, G Star Raw, ALDO Group, John Varvatos, Collected Group and over two dozen others have filed for what’s equivalent to US Chapter 11 bankruptcy quoting the impact of the pandemic on their brick-and-mortar and wholesale businesses. What lies ahead and whether there will be any winners, only time call tell. Although what we can expect is a great deal of consolidation and technology-led transformation in this sector.
Darwinian Shakeout in the Post Pandemic World?
In the Covid Shakeout, every company is working like a startup.
The next two to three years could be the most tumultuous that most people will ever know. Agile, decisive brands can set themselves up to create an advantage in adversity. They will look for M&A opportunities, transform business practices, while focusing on consumers. Of course, these actions will not be easy, and the window for taking them will be brief. But brands that act quickly can give themselves a better chance of not just surviving the chaos but becoming stronger because of it.
The author of this piece is Namrata Kallapur, a Marketing leader with experience across brands like ITC, Aditya Birla fashion & retail, etc. She’s now an independent consultant. We appreciate the time she took to add value to the community. If you’d like to share this piece with your best friend, click here.
References and excerpts: Whitepaper by Steven Klepper and Kenneth L. Simons (Carnegie Mellon University); McKinsey Insights’ Coronavirus Update, Business of Fashion, Dotcom Bubble by Adam Hayes on Investopedia, BCG’s Big Reset.