A Last Iceman Strategy is an approach for products or industries that come to the end of their lifecycle. The last supplier to survive industry decline has the chance to generate significant profits for a long time.
You probably know that much.
But do you know where this strategy got its name from?
Do you know under what conditions this strategy works best?
Did you know that a successful Last Iceman Strategy may require substantial investment in the beginning?
This article provides the details.
The basic idea of the Last Iceman Strategy
The basic idea of a Last Iceman strategy seems to be contradictory, but simple. You need a declining market or industry at the end of its lifecycle. Most customers and competitors have already moved on to a technologically advanced substitute. Plainly spoken, your product is obsolete.
The straightforward thing to do would be to adapt the new technology and to abandon the obsolete product. However, with a Last Iceman-approach, there is the chance to generate significant profits from such an obsolete product.
This is because there are always customers who are late adopters or even never move on to a new technology. They need a reliable supplier and are willing to pay a good price:
“The last iceman always makes money because customers will pay $20 for the replacement stem of a 1927 shower faucet when their alternative is a $600 replumbing job“
That means that even in an industry that is doomed to extinction, someone is always the last one in business. He may stay there for a long while and remain profitable. By becoming the last company to sell a particular product, businesses can preserve considerable margins.
How did this strategy get its name? Or: What is an Iceman?
The Last Iceman strategy was named after a typical example of a vanishing industry: the business of the Icemen who delivered ice blocks to homes for use in ice boxes.
An ice box was the predecessor of modern refrigerators. In times when there was no electricity in households, they needed a different way to keep perishable foods like milk and eggs cooled:
For those who recall the days before the advent of electricity, the term likely conjures up a very specific image: a large wooden box, zinc or tin-lined, with a compartment for large chunks of ice and an area with shelves for storing perishable food items. This was an important component of most kitchens during the earlier years.
From What is an Ice box, a very interesting essay with lots of photographs of historic ice boxes.
These devices needed a regular supply of fresh ice. Ice delivery seemed to be a crisis-resistant business.
You know the end of the story: Electricity became available to every home and modern refrigerators replaced the ice boxes. The ice men went away with the ice boxes. However, not all families switched to refrigerators quickly. For a period of time, some ice boxes were still in use. The last one to bring ice to those families was still able to make money from that business.
How does a Last Iceman strategy actually work?
Favorable conditions – What are the preconditions for a successful Last Iceman strategy?
As we will see, a Last Iceman strategy requires significant investment. Hence, it is a viable option only when long-term advantages are to be expected. There is a set of preconditions for the successful implementation of such a strategy:
- There will be a stable level of demand which is large enough to operate this business profitably and that will be there long enough to amortize investments.
- Ideally, there are high switching costs for the remaining customers.
- The business is able to operate a cost efficient production process.
- There are no substantial costs for repositioning as the last reliable supplier
- Few or no competitors are willing and able to follow the same strategy.
- Hence, this type of strategy will work best in industries with low exit barriers for other players.
Basic options – How does the Last Iceman bring his products to market?
If you are the last remaining producer of a product, there are three basic options to bring your product to market:
- To sell the product under your own brand to your own customers.
This is the most straightforward and profitable strategy. It should be your main objective.
- To supply the product to competitors who have discontinued manufacturing it, but still supply it to their customers.
These sales are possible under the competitors brand or under your brand.
A positive side effect is that this approach allow your competitor to exit the market as a producer without damaging his customer relationships.
- To supply the product to resellers who market it under their own private brand.
The last two options make utilize other players as your sales agent. These strategies will lower your margins, since there is a middleman in the value chain who will take his share from the products profitability.
The advantage of such an approach is, however, that it allows you to utilize your production capacities at a sustainable and profitable level.
How to do it – How does the Last Iceman make this strategy a success?
There is one thing a business has to get right in order to pursue a successful Last Iceman strategy: It has to make sure that it really is the last one remaining in that market. All other players have to leave the market.
This precondition for success determines the first and most important steps:
Do everything to help competitors exit the market!
As long as there are some suppliers competing in a shrinking market, there is the risk of a serious price competition. Every supplier will try to attract the remaining demand to his business. Thus, they altogether diminish margins and profit potential of this market – in the worst case forever.
In her book Managing Maturing Businesses, Kathryn Rudie Harrigan suggests an Increased Investment Strategy to drive competitors out of business:
- Invest aggressively in cost effectiveness improvements, innovation, quality, extension of product line etc.
This will not only distinguish the business from its competitors. It also is a strong signal of confirmation and commitment to competitors, customers, financial markets and other stakeholders. In order for this message to reach its recipients, additional investments in promotion may be necessary.
- An element of this increased investment strategy is to reduce competitors’ exit barriers by acquiring their production assets and by serving their customers.
The important point here is to physically destroy this production equipment. If you just sell it to a junk dealer, you risk that he sells it to somewhere else in the world, from where new and unexpected competition arises.
- Depending on the industry, horizontal integration may be a reasonable approach. This strategy may aim at buying the competitor, buying the respective business unit from a competitor or just buying his production assets.
- Another investment approach is vertical integration. Thus, you strengthen your own competitive position by reducing the power of your suppliers or your customers (in this context: distributors and other intermediaries)
Besides that, Harrigan strongly suggests avoiding price wars. It might be necessary to slightly lower prices to drive competitors out of business or to maintain sufficient sales volumes to fill production capacities. However, serious price wars will only reduce margins to a level where the profitability of the whole strategy suffers significantly.
Benefits and risks of a Last Iceman Stategy
It is obvious that a Last Iceman Strategy is not a sure-fire success. It can be a very profitable undertaking for a very long time.
The substantial investments needed in most cases make it a risky initiative. These investments will only pay of when:
- No other major player follows this strategy,
- The market volume is large enough and the planning horizon long enough to amortize these investments.
Besides that, there is always the risk that
- regulatory changes force customers to switch to more modern substitutes (e.g. for environmental concern),
- technological innovation or value chain disruption lowers customers’ switching costs to a degree that makes it unattractive for them to stick to the old product, or
- new competitors virtually come out of nowhere and operate on significantly lower costs than the Last Iceman is able (maybe they were able to obtain and modify some old production equipment).
The last two effects are difficult to predict in advance. They may destroy the whole business proposition within a very short time.
To prepare for such an event, businesses are well advised not to rely on the revenue streams from Last Iceman products alone. On possible approach would be to use this product as a cash cow and to dedicate a proportion of cash generated from them to the development of new and promising products.
A stable Last Iceman product can provide the basis for various diversification initiatives. The corporation can afford to make some bets on upcoming technologies and markets, since they still have their core product as a cash generator and fallback solution. This would be a typical strategy derived from a Boston Box analysis.
Case Study: Electron vacuum tubes
An interesting example for a Last Iceman Strategy is Richardson Electronics Ltd. They are still successful in the market for electron vacuum tubes, a technology that had been obsolete for more than 40 years.
CEO Edward Richardson states:
“If you can pick an area where there is a trailing-edge technology and capitalize on it while the rest of the players move off and compete for the leading edge, that can be a wonderful strategy.”
Richardson Electronics is a good example for related diversification around their core product too. They developed several products and services for their vacuum tubes customers. So they are prepared to accompany their customers once they eventually move on to the next technology.
Read the complete story of Richardson Electronics’ strategy in this article on Crain’s Chicago Business.