The Big Squeeze:

How
Compression
Threatens Old
Industries
Traditional asset-heavy companies may seem safe from
explosive industry change, but there is trouble on the horizon.
To stave off disaster, incumbents must transform their core
operations while also growing into new businesses and
industries.

Omar Abbosh
Paul Nunes
Vedrana Savic
Michael Moore

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The Big Squeeze: How Compression Threatens
Old Industries
OMAR ABBOSH, PAUL NUNES, VEDRANA SAVIC, AND MICHAEL MOORE
Traditional asset-heavy companies may seem safe from explosive industry change,
but there is trouble on the horizon. To stave off disaster, incumbents must transform
their core operations while also growing into new businesses and 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
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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)
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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 Source: Accenture
next phase, companies see a further decay in
These four phases of compression are especially visible
performance, in which year-on-year EBITA declines at a
when the performance of the six industries we analyzed
faster rate than revenue. Then comes a period of brief
from 2004 to 2015 is contrasted with that of the S&P 500.
recovery that provides a false hope that essential,
The two groups of companies followed similar
structural challenges within the industry can be managed
trajectories until 2010. But the S&P 500 maintained the
with business as usual; some companies drop prices in
margins achieved in the post-2008 recession recovery,
order to prevent a decline in revenue. Soon after comes a
while the six industries we examined fell into prolonged
sharp and prolonged decline — well beyond what would
decline.
be expected of simple cyclical change — of both
operating profits and revenues. (See “The Life Cycle of The prolonged decline phase is where operating margins
Compression in Asset-Heavy Industries.”) steadily shrink with no sign of recovery in sight. This
phase is the result of the slow disruption effects that are
weakening the core business, rather than a challenge
Th
Thee L
Lif
ifee C
Cyycle ooff C
Coompres
essio
sion
n in brought by a more predictable cyclical change.
Asset-H
et-Heeavy IIn ndustries
From 2004 to 2015, we observed that the six industries we As an incumbent’s ability to arrest decline in its operating
analyzed experienced four phases of compression. Each profits weakens, expensive, nonliquid assets become more
phase was examined by studying revenue and EBITA of a burden. They restrict cash flow and the ability to
growth year-on-year, as well as the resulting EBITA invest outside the core business, which only accelerates
margin. A period of empty growth, which saw the rate of compression. And the longer a company hesitates to act,
EBITA growth and EBITA margins stall, was followed by the more compression steadily eats away at the existing
a sharp decay, as EBITA and revenue growth both turned business model, eroding the economic headroom to
negative. This was punctuated by a brief post-recession rotate a core business to new growth markets.
recovery that gave incumbents false hope before they
Ironically, when performance begins to decline,
entered a prolonged performance decline.
management teams often believe the only solution is a

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vicious cycle of cost reduction and share buy-backs.
Unable to resist the pressure to deliver short-term results,
they fail to strike the right balance, ultimately sacrificing
long-term potential. This is evident in the
telecommunications, utilities, and energy sectors, where
“future value” — the growth investors embed into the
share price based on expectations for products and
services that have yet to be developed — as a share of
overall enterprise value is less than 1%. In other words,
their total value is tied almost entirely to their core
business, leaving them dangerously exposed if the core
comes under attack.
The substantial decline in the performance of shipping
companies shows how quickly fortunes can change under
myopic management. Despite sluggish growth in the
wake of the 2008 recession, companies continued to
invest in new, ultra-large vessels to boost scale and reduce
slot costs. Executives expected the boom in international
trade that preceded the economic crash to resume— but
the flood of cargo never came. In 2015, for the first time
in history, global GDP grew faster than worldwide
container traffic, signaling a structural rather than
cyclical shift in demand for maritime trade. Eight of the
10 largest listed shipping companies subsequently
reported EBITA losses in the first half of 2016. The third
biggest, Hanjin Shipping Co. Ltd., based in Seoul, South
Korea, filed for bankruptcy protection, leaving 66 ships
carrying $14.5 billion worth of goods stranded at sea in
2016. While this decline in performance has been driven
in part by complex changes to demand and trade patterns
globally, it is also the result of the companies’ inability to
identify the danger of compression and modernize for the
digital age. 2
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As we examined the common patterns of compression in
the core businesses of these six sectors, and the prolonged
decline of these businesses’ EBITA margins, we sought to
understand the common challenges incumbents faced in
responding to compression. We also investigated how
high performers successfully managed to combat
compression in their core business. What can other
companies learn from the mistakes — and at times
valuable foresight — of companies that have gone
through a compression cycle?
The Siren Songs of
Compression
Given compression’s gradual emergence, one would
expect incumbents to accurately predict and respond to
it. But more often than not, incumbents find themselves
lulled into a false sense of security. Confident of the
enduring stability of their industry, they fail to act, even
when their core businesses are heading for the rocks, as if
entranced by a siren song — like the songs of the
tempting sea creatures that lured sailors to their doom in
The Odyssey.
Our review of industries exposed to compression
highlights three siren songs that lull incumbents and
drive them deep into the danger phases of compression.
Siren Song 1: The Seduction
of Perceived Industry
Stability
Executives leading asset-heavy businesses were
susceptible to a false sense of security as they watched
other industries succumb to rapid, radical innovation.
Over half of the companies that exited the S&P 500
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between 2000 and 2015 came from three relatively asset-
light sectors — consumer goods (22% of companies),
information technology (18%), and financial services
(16%). Those industries were much more vulnerable to
turmoil as they were hit much harder by disruption.
In contrast, significant barriers to entry have traditionally
sheltered incumbents in asset-heavy industries from
radical change. Indeed, much smaller percentages of
companies that exited the S&P 500 in the same period
were from asset-heavy industries: telecommunications
(just 4% of the companies), utilities (5%), materials (9%),
energy (9%), health care (9%), and industrials (also 9%,
which includes capital goods, such as machinery, and
commercial and professional services, such as facilities
services and transportation).
The apparent stability of these industries seduced
companies into inaction. Consider how the oil price
shocks of the 1970s did not directly catalyze a meaningful
shift to alternative fuels in the United States — and where
shifts have occurred, they have been slow. In the U.S.,
renewable energy achieved only a 5% share of total
energy consumption over a period of 50 years. Similar
patterns are evident with the slow rates of adoption of
electric vehicles, bioplastics for consumer packaging, and
fiber-optic cable versus copper wire in the
telecommunications sector. Against this historical
backdrop, the siren song of stability in what seems to be a
threat-free calm proves irresistible for many incumbents.
Siren Song 2: The
Intoxicating Appeal of Assets
Companies in the six asset-heavy industries have tended
to compete by owning the assets that matter most to their
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strategies. These assets have been a potent source of
competitive advantage for a long time, with large
incumbents benefiting from the barriers to entry created
by the need for significant capital investments.
But such assets can quickly become a curse. Indeed, given
the types and scale of investments required to sustain the
supporting infrastructure of a successful industry
incumbent, many companies become tied down by
expensive and sometimes underused assets. This problem
is not limited only to physical assets: Incumbents may
also be hobbled by underexploited intangible assets, such
as contractual agreements and legacy brands that no
longer foster growth needs of the core business.
As an example, the economics of the thermal generation
plants that have historically made up the core of
integrated utilities in Europe have been undermined by
changes in the regulatory environment in recent years,
along with advances in energy efficiency and distributed
generation. Even modern plants, some completed as
recently as 2013, had to be temporarily mothballed or
taken out of the market completely. As a result, the
balance sheets of the leading European energy companies
have been weighed down with more than 20 gigawatts of
stranded assets. 3 Profits have taken a significant hit:
Following an almost 200% increase in profits from 2002
to 2010 — which continued even through the global
financial crisis — the 33 European utilities in our sample
saw a 38% decline from 2010 to 2015.
As an industry’s profit-making ability becomes
outweighed by liabilities such as long-term debt,
operating leases, and pension plans, its freedom to move
into new directions is constrained. And as the value of a
company’s assets declines, it becomes even more difficult
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to rationalize overcapacity. Acknowledging this would
require the incumbent to write off the assets underlying
their traditional offerings — a decision that may be
inhibited by both internal costs and external market and
political repercussions. The result is often rapid collapse
in financial performance due to a company’s inability to
sell lethargic assets.
Siren Song 3: The Deceptive
Promise of Old Business
Models
Large incumbents with long track records of success in
their core businesses continue to exploit that core. This
instinct works — until it doesn’t. History leads at-risk
businesses to overestimate the true lifespan of their
business models and to underinvest in building new ones.
BlackBerry, for example, famously failed to anticipate that
consumers — not business customers — would drive the
smartphone revolution. And it failed to quickly capitalize
on the popular BlackBerry Messenger instant-messaging
service, initially keeping it locked down to its own
hardware, while the cross-platform WhatsApp grew into a
business that was acquired for $22 billion.
The digital economy places a premium on analytics,
algorithms, and software, which sit at the core of all
businesses, both asset-light and asset-heavy, that collect
data. Asset-light industries saw much of the first wave of
new business models that take advantage of data and
analytics to create new market opportunities. But
disruptive, data-driven new models are coming to asset-
heavy industries as well. And as hardware becomes more
commoditized, the barriers to entry for new market
entrants are lowered.
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For example, the coupling of accessible hardware, such as
microgrids, with software, like blockchain technology, has
led to the emergence of the “prosumer” — individuals
who produce, sell, and consume their own energy. There
are now an estimated 12 million prosumers in Europe
alone, and a quarter of all investment in new renewable
energy capacity globally in 2015 — more than $67 billion
— went to small-scale projects. 4
Combating Compression
Odysseus’ solution to the dangers of the siren song was to
protect his sailors while still embarking on the journey —
he filled their ears with wax while leaving their eyes wide
open. But what paths should companies follow after
silencing the distractions?
We believe companies today must “rotate to the new,” a
journey we think of as a conscious and deliberate act of
renewing and transforming the core business while also
growing into new businesses and industries. This
perpetual journey requires leaders to make a wise pivot to
get the timing, scale, and direction of investments right,
in both the core and new businesses.
To start the journey, incumbents should address three
questions:
How do I know my company is
entranced by the siren songs of
compression?
When demand for core business begins to weaken, many
incumbents continue in business-as-usual mode, pinning
their hopes on a rebound in the market. For example,
Peabody Energy Corporation and Arch Coal Inc., both
based in St. Louis, Missouri, were among the North
American mining companies that raised a total of $6.4
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billion of debt in 2010 and 2011, betting that prices for
metallurgical coal would continue to rise thanks to
growing demand in China, despite the risk of a hard
landing in the Chinese economy. Both Peabody and Arch
filed for Chapter 11 bankruptcy in 2016. They are just the
latest in a string of U.S. coal producers to collapse, in an
industry that has lost 20,000 jobs and over 94% of its
market value since 2011 from $68.6 billion to just $4.02
billion in 2016. 5
Many companies have a fortress mentality that
fundamentally undermines the adoption of new ideas.
Their information-seeking infrastructure is often
underdeveloped. In an era of information networks and
crowdsourcing, they rely on conventional and often one-
dimensional ways of gathering market intelligence.
Those that are able to recognize the siren songs have a
censoring capability that draws on insights from diverse
and unexpected areas within and outside of the
organization. A robust ecosystem is critical to this
capability. Leading companies have established strong
relationships within their industries, with the venture
community and startups, and with technology providers
and business schools. Internal teams then work to mine
and analyze the information provided by this ecosystem
to guide their decision making.
Take Haier Group Corp., based in Qingdao, China, the
world’s largest maker of white goods. It has created an
open innovation management platform (called the Haier
Open Partnership Ecosystem or HOPE) in which more
than 600,000 users communicate with suppliers and other
customers searching for new business opportunities. 6
The German chemical company BASF’s cocreation
program, “Creator Space,” is another example. Designed
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to encourage collaboration with BASF’s customers and
partners, the program takes on challenges related to
urban living, energy, and food — such as the water supply
in Mumbai, India. Teams test concepts during a period of
rapid experimentation, both in the lab and with
customers, influencers, and potential delivery
partners. 7
And consider how the automotive sector is adapting to
technology-led change. In response to the advent of the
connected car and autonomous vehicles, many carmakers
are shifting their focus from the upfront earnings that
come with vehicle sales toward usage-based revenues
derived from software and passenger-mobility services.
They have recognized the need to form alliances or
participate in ecosystems with technology companies to
drive the next wave of innovation. In 2016, partnerships
to develop self-driving cars were formed between BMW,
Intel, and Mobileye NV, based in Jerusalem, Israel. Other
partnerships between Mercedes-Benz and Uber, and VW
and Uber’s rival Gett Inc., based in New York City, were
formed to develop ride-sharing alliances.
How do I enhance the options for
my core business?
Businesses in all industries need to take a fresh look at
their assets, including customer relationships and
marketing data, and consider whether there are new ways
to monetize them. In doing so, they will create new
options that represent a strong defense against
compression — before profits start to stagnate or
revenues decline.
Already prevalent in the technology sector, this approach
is now expanding into more traditional sectors of the
economy, such as logistics. To prepare itself for the
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impending growth of additive manufacturing, for
instance, UPS is investing in Fast Radius LLC, a 3-D
printing company based in Atlanta, Georgia, with 100
printers located in UPS hubs across the U.S. The Fast
Radius platform lets customers print parts on demand,
which UPS then ships with a response time close to 24
hours. By owning the last mile of fulfillment, UPS has
positioned itself to capture a new market while enhancing
the optionality of its core business.
Robert Bosch GmbH, based in Gerlingen, Germany,
which manufactures automotive components, is also
innovating in intriguing ways, developing “living”
products and services that adapt to consumer demand. Its
iBooster system adjusts the pressure in regular brakes or
in regenerative braking systems, which are commonly
used to convert kinetic energy to power in hybrid or
electric vehicles. In 2016, iBooster was updated with a
new feature that connects via the car’s Wi-Fi to a driver’s
home network and sends diagnostic and braking details
to Bosch. This enables Bosch to rapidly prototype future
versions of iBooster. It can also mine the data for other
autonomous driving applications. Bosch intends to build
on this experience to sell its know-how in logistics, data
processing, and manufacturing. 8
How do I respond when
compression becomes potentially
fatal for my business?
Once an industry hits a prolonged, structural period of
decline in revenues and profitability, a more wholesale
turnaround is required for incumbents whose capabilities
are so closely tied to the old businesses.
Consider BT Group plc (formerly British Telecom): Its
core business was built around selling access to physical
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fixed-line telephone and broadband networks in the U.K.
But the steady penetration of mobile technology, and the
expansion of services, rapidly eroded its primary sources
of revenue and competitive position. Indeed, from 2010
to 2013 the entire fixed-line market saw volumes decline
by 31 billion minutes. 9
In response, BT has worked on a deep transformation of
its core business. In its consumer business, it has focused
on expanding its network services offerings, building on
its long-standing outsourcing relationships with other
telecoms to provide a unified service for voice, mobile,
and data. Strategic partnerships with venture capital
investment companies, which put their own money into
launching spin-off companies, have been critical to BT’s
transformation. These spin-offs produce
telecommunications technologies and services that have
been key components of larger offerings from BT to its
customers. And BT can market these offerings without
shouldering the long-term burden of funding,
developing, and upgrading them.
BT has built content-based broadband offerings around
the lynchpin of BT Sport, which streams live coverage of
British and worldwide football along with rugby, cricket,
and other sports. Launched in 2013 with the aim of
growing its 700,000 customers to compete against the Sky
plc telecommunications company (which at the time had
10 million customers), BT Sport provides three channels
for free to broadband customers, who can access the
content on any of their devices, from set-top boxes to
smartphones. The technology platform that underpins BT
Sport was set up in just 150 days, highlighting BT’s ability
to make significant strategic adjustments at pace. This has
helped drive seven consecutive years of growth in BT’s
broadband market share. 10
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---
While “big bang” disruption has grabbed the headlines
for some time now, compression represents a more
pernicious threat. Rather than blowing up specific
product or service offerings within an industry,
compression gradually, then quickly, renders entire
industry segments irrelevant. Incumbents must learn to
tune out the siren songs — and tune in to the changes
they need to make to successfully sail through the
compression zone.
About tth
he R
Res
eseearch
Our analysis of exits from the S&P 500 over a 15-year
period from 2000 to 2015 highlighted six sectors in which
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change was more gradual: telecommunications, utilities,
energy, materials, automotive, and industrials.
We completed a detailed financial analysis of over 1,200
companies in those sectors, focusing on growth and
profitability trends between 2004 and 2015 (as measured
by revenue and EBITA). Our analysis showed a common
pattern of “compression” in the core businesses of these
sectors, and the manifestation of its effects are visible in
the prolonged decline of EBITA margins, over many
years. To further explore this pattern, we developed
company case studies to understand the common
challenges incumbents faced in responding to
compression, and how high-performers successfully
managed compression in their core business.
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About the Authors
Omar Abbosh is Accenture’s chief
strategy officer and is based in
London. Paul Nunes is global
managing director of thought
leadership with Accenture Research
and is based in Boston. Vedrana
Savic is director of thought
leadership with Accenture Research
and is based in Singapore. Michael
Moore is a senior research fellow
with Accenture Research and is
based in London. The authors thank
Alice MacNeil, Alex Derrick, and
Babak Moussavi for their
contributions to this article.
References
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1.Accenture analysis based on Ovum,
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March 2016.
2.
2.A.P. Moller-Maersk, “Profits overboard,”
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http://www.economist.com.
3.
3.Accenture, “Future Business Models of
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4.
4.European Renewable Energies
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Citizens in the European Union” (2016),
available at http://www.recyclind.com/
(accessed March 9, 2017); UNEP and
Bloomberg New Energy Finance, “Global
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5.
5.Based on the combined market
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mines over a five-year period from Jan. 20,
2011 to Jan. 20, 2016.
6.
6.Haier, “Haier’s Global Open Innovation
Ecosystem,” Nov. 13, 2015,
http://www.haier.net/en/
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(accessed March 9, 2017).
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7.BASF, https://creator-space.basf.com/
content/basf/creatorspace/en.html
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8.R. Juskalian, “Bosch’s Survival Plan,”
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10.
10.G. Spanier, “BT boss aims to score with
football,” The Independent, Feb. 19, 2013,
http://www.independent.co.uk.

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