The concept of the S curve is old news. The S curve illustrates the natural beginning and end of markets when they follow a traditional product / service lifecycle. The traditional lifecycle begins with a gradual incline while the market is still immature and growth is slow. This phase is followed by a steep, accelerating adoption curve as a business achieves a deep level of market penetration, marked by exponential growth. As the market matures, the growth curve begins to flatten out. In the final stage, we see market decline as share starts to disappear. At this point, facing share and / or margin erosion, conversation turns to reinvigoration or transitioning to a new S curve through innovation.

But what happens when that decline phase isn't gradual? There are situations where the decline phase happens on a more amplified and rapid basis, resulting in total elimination of a market space – i.e., a terminal point. Lulled into a belief that they are on a traditional S curve, strong, legacy incumbents fail to act. As they operate under the assumption that they have time and that, while they may continue to see erosion at the boundaries of their business, incremental innovation or price-based competition will save them.

There are situations where the decline phase happens on a more amplified and rapid basis, resulting in total elimination of a market space – i.e., a terminal point.

We’ve seen this happen in a number of markets in more recent years due to the rise of technology / digital distribution channels that made existing business models obsolete (e.g., Blockbuster and even Netflix’s original DVD by mail offering). In the last few years, we’ve seen a new dynamic emerge, one that creates terminal points for a host of new industries – ESG concerns. Specifically, a rise in regulatory requirements, driven by environmental and social concerns threatens to take existing markets to zero by:

• Creating the risk that product and service portfolios become irrelevant rather than just less relevant

• Innovative new substitutes, capable of meeting heightened requirements emerge with a better mousetrap as a means to reinforce and accelerate regulatory policy

• Those new entrants reshape customer preferences, further accelerating market decay for incumbents

That vicious cycle can be hard to escape. Let’s look at an industrial manufacturer and 90-year market leader within Residential and Commercial Heating and Cooling segments as an example. Faced with some decay in their market share and price position, that business switched out top leadership when their old management team couldn’t regain footing in what felt like normal share and profitability declines in a mature market. The new senior leadership team, looking at the data, believed the decay they were experiencing wasn’t normal and that the negative trendlines seemed to be accelerating, representing a potential fundamental shift in their market. Believing they might be headed towards a terminal point, they asked Tower Strategy to help them test their hypothesis and determine if there was a meaningful path to regain their footing. We found that while the entry of European high efficiency options and lower cost alternatives from Asian players into the US market were squeezing their business as per normal industry trends, the real concern was the interrelated and rapidly tightening regulatory environment. We determined that as the US regulatory environment began to take note of European regulatory and policy trends and adapted efficiency standards to reflect those in the EU, our client’s product portfolio would become obsolete within 10 years. Not because someone else had a better mousetrap. But because our client’s existing portfolio would no longer fit with market requirements. By estimating the terminal point of our client’s market in relation to their new product development cycles, the new R&D capabilities they would need to build and how their brand would need to be reframed to fit with emerging regulations and customer preferences, we helped them reposition their business through a series of progressive organic growth and suggested M&A activities.

If you’re experiencing what feels like a normal S curve-driven deterioration in your market, we’d encourage you to ask yourself the following questions: Is the decay normal, as in the traditional market, or are there more substantive regulatory forces at play that will cause your product or service to be irrelevant in the not so distant future? If there are more substantive regulatory forces in play, how quickly will they onset and how rapidly do you need to move now? Are you equipped to adapt or do you need to consider a substantial new capabilities build or M&A to bridge the gap?

Contact us to learn more.