The Big Squeeze: How Compression Threatens Old Industries

Not all industries have been exposed to the “big bang” changes that are often associated with the spread of new technologies. When we analyzed exits from the S&P 500 between 2000 and 2015, we saw that more than half came from just three industries: consumer products, information technology, and financial services. In other sectors, changes in the rise and fall of companies have been much more gradual.

That may seem like comforting news to many leaders, but the reality is more complex. Our analysis of the performance of more than 1,200 companies in six of the most asset-heavy sectors —telecommunications, utilities, energy, materials, automotive, and industrials — revealed an equally worrying trend. (See “About the Research.”) Incumbents throughout these industries are falling prey to “industry compression”—a form of slow, but dangerous change that results in a prolonged decline of both operating profits and revenues.

A compressed core business, even in a long-established industry, can become altogether obsolete if a company fails to transform in time. To appreciate the intensity of compression, consider the accelerating decline of “voice” as a means of communicating via mobile telephone. From 2013 to 2015, average mobile voice revenue per user declined globally by 19%. A further 26% decline is expected through 2020.1 The business impact of this decline has been the stalling of a decade of growth: Revenues and earnings before interest, taxes, and amortization (EBITA — a measure of operating profits) in the sector have dropped by an average of 8% from 2013 to 2015, down from over 120% growth during the previous decade.

Companies at risk from the dangers of compression may not recognize the extent of the threat to their core businesses, as the life cycle of decline can be as stealthy as it is insidious. In the initial phase, companies experience a period of “empty” growth, as revenues continue to increase despite a stagnation in EBITA growth. In the next phase, companies see a further decay in performance, in which year-on-year EBITA declines at a faster rate than revenue. Then comes a period of brief recovery that provides a false hope that essential, structural challenges within the industry can be managed with business as usual; some companies drop prices in order to prevent a decline in revenue.