The Industrial Evolution
Mar 1, 2003 12:00 PM, MARK MAYFIELD
As I head to Dallas for the annual NSCA Expo, I keep thinking about how our industry, like almost every other in the world, is undergoing another phase of development. If you read our “20 Years Ago in the Industry” interview with JBL's Mark Gander (January 2003), you'll recall his astute observations about the development of the audio industry from the large “full-line single-source suppliers” to the smaller, specialized manufacturers. It seems we're hurtling back to the world of a handful of large full-line suppliers, be they under a single brand or under multiple brands.
One difference today is the order of magnitude; because of the trend of globalization and the availability of capital, the industry giants play in the $100 million — and — beyond ballpark. The largest company — Yamaha — may well be close to $1 billion (and that's U.S. activity only). Compared with other industries, we're still small, but the consolidation trend is clear. A recent book — Winning the Merger Endgame: A Playbook for Profiting from Industry Consolidation, by global management consulting firm A. T. Kearney — states that merger and acquisition activity in an industry follows a predictable pattern that plays out over about 25 years. If so, our cottage industry may fit the profile, give or take several years. The authors propose four stages of consolidation, each with its implications for corporate strategy.
Stage 1, opening, has many industry players and little or no market concentration. In the next stage, scale, size begins to matter. Major players emerge and take the lead in consolidation. Stage 3, focus, sees successful players extending their core businesses, exchanging or eliminating secondary units, and growing faster than the competition as consolidation rates approach 65 percent. Finally, stage 4 is balance and alliance, when industries are dominated by a few players with consolidation rates as high as 90 percent. Companies seek alliances as ways to grow in mature industries.
On the supplier side of the business, there are two (possibly three) industries with which we need to be concerned. Audio products manufacturers have been the traditional suppliers and are the most visible players in the marketing media, such as trade shows and publications. But increasingly, our businesses, installations, and end-user needs emphasize video and presentation technology. (The third may well be the IT industry). Both industries are probably somewhere around stage 3, with perhaps the video/presentation/display industry, a bit ahead of the audio side.
Consolidation and sheer size aren't necessarily a bad thing. It can be, however, if a company prioritizes short-term profitability and market share over R&D, product innovation, and delivering value to the customer. In the former case, we see trends toward product commodification, decreasing profits as you go through the distribution channel, and ultimately, a weaker industry segment. Sound familiar? On the other side, the suppliers who take a long-term view, invest in and maintain vibrant R&D programs, leverage their internal core strengths, and create real value for their customers are the ones who build strong distribution. They satisfy their customers and help keep our industry stable and healthy.
The latter type of companies is out there. They may be small startups, but they are on the fast-growth track and may even be in the sights of the stage 3 and 4 companies as acquisition targets. These companies are in it for the long haul, driven by passion for the business. They are the ones you want to do business with — and they'll be there. Look for them in Dallas.