Successfully attacking a leader always requires some kind of strategic insight. A challenger must usually find a different strategy in order to neutralize the leader’s natural advantages, and recognize or create impediments to leader retaliation. While the strategies that have succeeded against leaders differ widely from industry to industry, three avenues of attack emerge as possible:
- Reconfiguration. A challenger innovates in the way it performs activities in the value chain or in the configuration of the entire chain.
- Redefinition. A challenger redefines its competitive scope compared to the leader.
- Pure spending. A challenger buys market position through superior resources or greater willingness to invest, out of which competitive advantage grows.
Each of the three avenues changes the rules of competition in an industry to offset a leader’s advantages and allow the challenger to gain a cost or differentiation advantage of its own. The three avenues are not mutually exclusive and have been successfully pursued in tandem. Redefinition of scope usually requires parallel reconfiguration of the value chain, for example. Employing more than one of these avenues of attack generally raises the odds of success in attacking a leader. The three avenues are displayed in Figure 15-1.
The avenues of attacking a leader differ along two important dimensions that are represented in Figure 15-1: the configuration of the challenger’s value chain compared to the leader and the competitive scope of the challenger compared to the leader’s. A challenger can employ the same value chain or one in which it has reconfigured individual activities or the entire chain. At the same time, a challenger may compete with the same scope of activities as the leader or for a wider or narrower scope. As described in Chapter 2, scope encompasses segment scope within the industry, degree of integration, geographic scope and industry scope, or the range of industries in which the firm competes with a coordinated strategy.
Figure 15-1. Avenues for Attacking Leaders
Pure reconfiguration involves reconfigured activities or ultimately a significantly different value chain, though with the same scope as the leader. Pure redefinition involves a different scope but the same basic value chain for competing. Reconfiguration and redefinition combines both a new chain and a different scope. Pure spending neither reconfigures the value chain nor redefines scope, but relies on greater investment by the challenger to lead to competitive advantage.
Reconfiguration allows a challenger to compete differently though it is competing with the same scope of activities as the leader. The challenger performs individual value activities differently or reconfigures the entire chain to either lower cost or enhance differentiation. Reconfiguration of the value chain must be sustainable against imitation if it is to serve as the basis for attacking leaders. Sustainability comes from first-mover advantages and the other sources described in Chapters 3 and 4.1
The ways in which reconfiguration leads to competitive advantage have been discussed throughout this book, and can involve any activity in the value chain. Chapters 3 and 4 described in detail how reconfiguring the value chain can lead to cost advantage or differentiation. In wine, for example, Chapter 3 described how Gallo was able to achieve a significant cost advantage through reconfiguring value activities in procurement, blending, bottling, logistics and marketing compared to competitors. In frozen entrees, similarly, Chapter 4 described how Stouffer’s reconfigured marketing, technology developments, procurements, and broker relations to achieve and sustain differentiation.
The more value activities that can be reconfigured, the greater the possibility will usually be that the challenger’s competitive advantage over the leader is sustainable. Reconfiguring the entire chain, as in the no-frills airline and Iowa Beef examples described earlier in the book, is usually the most potent source of advantage against leaders who are often highly committed to the traditional industry value chain.
Some illustrative examples of reconfigurations that have been the basis of successful attacks on leaders are the following:
Product Changes. A challenger can attack a leader through changing the product.
SUPERIOR PRODUCT PERFORMANCE OR FEATURES. Products with attributes that are valuable to buyers grow out of an understanding of the buyer’s value chain (Chapter 4). P&G’s Charmin bathroom tissue was softer and more absorbent than Scott Paper’s product, which allowed P&G to emerge as a leader. Similarly, CooperVision’s and Barnes-Hind/Hydrocurve’s (a Revlon division) extended-wear soft contact lenses provided the vehicle for attacking Bausch and Lomb.
LOW-COST PRODUCT DESIGN. Chapter 3 describes how product design can affect relative cost position. Canon’s NP200 copier, using toner projection development technology, required many fewer parts than competitors’ machines. This low-cost design allowed Canon to improve position significantly in small plain paper copiers.
Outbound Logistics and Service Changes. A challenger can attack a leader through changing such things as product support, aftersale service, order processing, or physical distribution.
MORE EFFICIENT LOGISTICAL SYSTEM. Chapter 3 described how opportunities to improve relative cost position in the logistical system can be analyzed. Relative cost position can sometimes be significantly reduced by reconfiguring its value activities as Federal Express did.
MORE RESPONSIVE AFTER-SALE SUPPORT. Chapter 4 showed how to assess the parameters of service that are most valuable to buyers. A challenger can create differentiation if it reconfigures the value chain to make it more responsive in terms of response to buyer inquiries, documentation, etc. Vetco, for example, a division of Com-bustion Engineering that sells offshore oil drilling equipment, has gained position significantly through providing excellent training materials and other after-sale support to help its buyers master the complex underwater drilling task.
ENHANCED ORDER PROCESSING. Chapter 4 described how possible enhancements to the delivery system can be identified and evaluated, and create differentiation. Enhancements include such things as performing new functions like controlling buyer inventory—this, in effect, takes over activities in the buyer’s value chain. Several wholesaling firms, for example, have created differentiation by allowing online ordering to take over inventory management for their retail customers. McKesson, for example, has substantially improved its position through its 3PM order processing system for distributing pharmaceuti- cals. The system allows pharmacists to order directly and provides them other valuable information.
Marketing Changes. Challengers have employed innovations in marketing value activities to launch successful attacks against leaders in many industries. Some of the most common innovations include:
INCREASED SPENDING IN AN UNDERMARKETED INDUSTRY. Challengers can attack a leader by escalating marketing spending. In mustard, frozen entrees, and frozen potatoes, for example, Grey Poupon, Stouffer’s, and Ore-Ida respectively have succeeded or are now undertaking to raise the traditional rates of advertising spending. Higher spending levels allow firms to signal value better, gaining high levels of brand recognition and premium prices.
NEW POSITIONING. A challenger can conceive of a new way to position a product in order to attack a leader. Stouffer’s repositioning of frozen entrees as a gourmet item was one of the key elements of its ascendancy, as discussed in Chapter 4.
NEW TYPE OF SALES ORGANIZATION. A new type of sales organization, perhaps with a different type of salesperson, can sometimes be the basis of a successful attack on a leader. Crown Cork and Seal’s technically proficient sales force, reorganized to sell the complete line of Crown’s cans, bottle caps, and packaging machinery to canners, was one of the reasons for Crown’s success against American Can and Continental Can.
Operations Changes. Changes in operation’s value activities that lower costs or enhance differentiation have provided the basis for many successful attacks on leaders. As was discussed in Chapter 3, Iowa Beef pioneered an entirely new value chain in meat packing. Cargill and ADM employed new continuous process plants to enter corn wet milling. A modified production process that enhanced quality also contributed to Ore-Ida’s success in frozen potatoes. Sometimes entirely new technologies emerge that change the process, or a subtechnology changes that allows an old process technology to be re- invigorated (Chapter 5).
Downstream Reconfiguration. Employing channels neglected by the leader or preemptively concentrating on emerging channels have served as avenues of attack against industry leaders. Some examples of downstream innovations include:
PIONEER A NEW CHANNEL. Timex opened up the drug store and mass merchandisers as channels for watches in the 1950s, allowing it to gain a leadership position in the industry despite the entrenched position of Bulova and the Swiss watchmakers. The traditional leaders had employed the jewelry store channel.
PREEMPT AN EMERGING CHANNEL. Richardson-Vicks pioneered the sale of quality skin care products in supermarkets with its Oil of Olay product line. Supermarkets were an emerging channel for this type of product, and Richardson-Vicks gained substantial firstmover advantages that have allowed Oil of Olay to remain a leader.
GO DIRECT. YKK, the Japanese zipper company, took on Talon successfully by bypassing wholesalers and selling directly to apparel companies.
The most successful attacks on leaders often involve more than one innovation in the value chain. Stouffer’s combined a product change with several significant marketing innovations. Cargill and ADM combined a process change with product line and marketing changes. Timex combined a new channel with low-cost manufacturing technology and unprecedented TV advertising. Competitive advantage that is sustainable usually stems from multiple sources, as Chapters 3 and 4 have illustrated.
Structural changes often create the opportunity for reconfiguring of the value chain. Timex’s attack on the Swiss exploited the emergence of TV and mass distribution channels, in addition to wartime improvements in manufacturing technology. At the same time, growth in buyer income and shifting attitudes made a watch a product purchased for everyday use. In many industries, however, reconfiguration hinges on rethinking what has been done rather than exploiting external changes. Ultimately, however, reconfiguring the value chain is a creative act that is difficult to achieve routinely or predictably. Industry analysis, value chain analysis, technology analysis, industry scenarios, and other concepts in this book can help identify possibilities for reconfigura- tion.
The second broad avenue for attacking a leader rests on redefining the scope of competition. Broadening scope may allow the achievement of interrelationships or the benefits of integration, while narrowing scope can allow the tailoring of the value chain to a particular target. As I have discussed extensively in earlier chapters, particularly Chapters 2, 7, 9, and 12, the scope of a firm’s activities can greatly influence competitive advantage. A challenger can change competitive scope in four ways which reflect the four types of scope. These four modes of redefinition are not mutually exclusive:
- Focus within the Industry. Narrowing the basis of competition to a segment rather than across the board.
- Integration or De-integration. Widening or narrowing the range of activities performed in-house.
- Geographic Redefinition. Broadening the basis of competition from a region or country to worldwide, or vice versa.
- Horizontal Strategy. Broadening the basis of competition from a single industry to related industries.
Successful focus strategies against leaders have taken all the forms described in Chapter 7:
- Buyer focus. Motel firms such as La Quinta have focused on middle- level business travellers and created a new low-cost value chain to meet their particular needs
- Product focus. Canon, Ricoh, and Savin focused on small, plain paper copiers to challenge Xerox.
- Channel focus. Stihl focused on serving buyers only through servicing dealers to succeed against Homelite and McCulloch in chain saws.
A focus strategy often has the advantage of being difficult for a leader to retaliate against without compromising its own strategy. This delays leader retaliation until the challenger has gained a secure foothold in the industry. In addition, focus strategies to attack leaders can serve as part of sequencing strategies.104 In a sequencing strategy, the challenger initially attacks a leader through focus, and then broadens its scope over time to compete across-the- board with the leader. Japanese producers have employed this strategy in such industries as TV sets and motorcycles. In each instance, they began at the low end of the product range and gradually broadened their lines. NIKE also used this approach against ADIDAS in running shoes, beginning with a focus on the premium segment and then leveraging the reputation gained there to broaden its line downward. Sequencing strategies rest on the presence of segment interrelationships (Chapter 7) that allow a firm in one segment to gain competitive advantages in others. Sequencing has the added advantage of not provoking the leader to retaliate early in the process.
INTEGRATION OR DE-INTEGRATION
A challenger may employ integration or deintegration as a means of attacking a leader. Backward or forward integration can sometimes lower cost or enhance differentiation.105 In the wine industry, for example, Gallo’s integration in bottles is an important part of its cost advantage. Migros, the leading Swiss food retailer, owes a part of its dramatic ascendancy in its industry to backward integration into products and packaging. Changing circumstances may also make deintegration a means of gaining competitive advantage against a leader who is integrated.
A leader operating in one or a few countries may sometimes be attacked successfully with a regional or global strategy.106 The challenger widens the geographic boundaries of the market to gain cost or differentiation advantages through geographic interrelationships. A global strategy, that integrates and coordinates value activities in many countries, may allow economies of scale in production or product development, create the ability to serve worldwide buyers better, and other advantages I have described elsewhere. Globalization of an industry has been an important part of successful strategies of challengers in such industries as autos (Toyota and Nissan versus General Motors), motorcycles, lift trucks, TV sets, and various types of medical equipment.
Where an industry is multidomestic, however, local country differences imply that a global strategy is counterproductive. Here a leader with a global strategy is vulnerable to a challenger who tailors its strategy on a country-by- country basis. Castrol has been successful in automotive motor oil with such an approach. Even within global industries there may also be segments where a country-centered strategy can be sustainable though other segments require a global strategy. In both cases, de-globalization can be the route to attacking a leader.
In many industries, firms have concentrated on a particular city or area of a country to succeed against national or even global competitors. Where competitors are local, however, competitive advantage may come from taking a national approach. Gannett’s USA Today is attempting this in newspapers.
Challengers may exploit interrelationships among business units as another means of broadening the scope of competition. As Chapters 9 and 10 discussed in detail, interrelationships may lead to a competitive advantage for a firm operating in related industries. A challenger with a horizontal strategy encompassing related industries may successfully attack a leader operating in a narrower or different range of industries. In personal computers, for example, IBM exploited interrelationships with its other business units to overwhelm early leaders such as Apple and Tandy. Interrelationships also serve as a possible substitute for market share in any one industry and neutralize a leader’s competitive advantage.
A particular form of interrelationship, complementary products, has been discussed in Chapter 12. Bundling can create competitive advantage in some industries, while unbundling can do so in others. Merrill Lynch’s CMA, a bundled product combining previously separate financial services, allowed Merrill to gain significantly vis-à-vis other broad line financial services firms.
The four modes of redefinition are not mutually exclusive. A challenger can globalize its strategy and pursue interrelationships at the same time, as Matsushita has done in consumer electronics. Matsushita employs shared manufacturing, distribution channels, and other value activities across its many consumer electronics products. It also integrates and coordinates its strategy worldwide. The strategy has overwhelmed single-product, single-country competitors.
A challenger can also combine narrow scope in one dimension with broad scope in another. A challenger can attack a leader by focusing on a segment (scope within an industry) at the same time as it competes globally (geographic scope). A firm may also focus within an industry but exploit interrelationships with related industries, another example of combining broad and narrow scope. Redefining competitive scope simultaneously in several ways has proven to be a powerful source of competitive advantage, because the competitive advantage from each redefinition cumulates.
The scope diagrams in Figure 15-2 illustrate several dimensions of scope schematically. They suggest how challengers should examine each dimension of scope to see if it might be a means of attacking a leader. A leader’s scope is plotted, and then alternative redefinitions (narrower or broader or both) are probed to see if they might create a significant competitive advantage for a challenger. The top diagram, for example, represents the situation in automobiles in the 1970’s. General Motors (GM) competed with a broadly targeted strategy involving a full range of models. While GM competed internationally as well as in the U.S., its strategy was essentially country-centered and global coordination was minimal. Toyota and Nissan chose to focus instead on small cars, and employed coordinated global strategies. They gained a substantial competitive advantage over GM in the process.
Figure 15-2. Alternate Scope of Leader and Challenger Strategies
Figure 15-3 uses the scope diagram to illustrate the pattern of competition in the U.S. newspaper industry. The traditional strategy in the industry has been to serve a single city with a broad range of news, even though a number of city papers might be part of the same chain. The Wall Street Journal and to a lesser extent the New York Times have adopted national strategies aimed at segments of the market. The Wall Street Journal has recently embarked on a partial global strategy involving European and Asian editions. At the same time, USA Today is an attempt to sell a broad-based daily newspaper nationwide, appealing to national advertisers. Both USA Today and the Wall Street Journal’s strategies have been made possible by modern communications and computer typesetting and printing technology. In the newspaper industry, then, redefining scope has been a vital element in gaining competitive position.
Figure 15-3. Alternative Scope in Newspapers
Many of the examples of redefinition that have been described illustrate how redefinition and reconfiguration usually go together. The Wall Street Journal would not have been so successful if it had not adapted its value chain to a national and then global strategy. Thus a firm must view redefinition and reconfiguration as complementary ways to attack an industry leader.
3. Pure Spending
The final and riskiest way to attack a leader is through pure spending, without reconfiguration or redefinition. Pure spending involves investment to buy market share, cumulative volume, or brand identification through low pricing, heavy advertising, and so on. By making sufficient investment, a challenger seeks to gain enough market share, volume, or reputation to take the lead in relative cost position or differentiation. The challenger does not do anything differently or better than the leader, but simply overwhelms the leader with resources or with a greater willingness to invest.
This approach to offsetting a leader’s advantage is often costly and frequently fails. Leaders typically have sufficient financial resources to counteract such a strategy, when coupled with their advantages in cost or differentiation. Leaders also are usually commited enough to be willing to spend heavily to defend position. A particularly vivid example of the risks of pure spending is the diversification of oil companies into fertilizer and chemicals. Despite enormous financial resources, their lack of a competitive advantage gained through reconfiguration or redefinition has led to a generally dismal track record.
The success of pure spending rests on superior access to financial resources by the challenger, or on unwillingness by the leader to invest in the industry. Even a well-financed leader may be complacent, have a higher hurdle rate, have other priorities, or be under corporate pressure to generate cash. Pure spending has proven most successful in industries where leaders are small and undercapitalized. These leaders may not be able to afford to mount sufficient retaliation to discourage the challenger, despite possessing a competitive advantage.
Pure spending, by itself, remains the least preferred approach for attacking leaders. However, superior willingness to invest is often an important supplement to strategies based on reconfiguration or redefinition. In cans, for example, Crown Cork invested heavily while American and Continental were harvesting, accelerating the process by which Crown gained a cost advantage through having more modern equipment.
4. Alliances To Attack Leaders
A challenger may need to form an alliance to obtain the necessary resources, technology, market access, or other strengths to attack an industry leader. Alliances can be a means of achieving reconfiguration, redefinition or pure spending, though in-and-of-themselves they are no guarantee of success. Alliances of various types have played important roles in many successful attacks against leaders. The two broad forms of alliances are the following:
- A firm either acquires another firm (or firms) or is itself acquired.
- A firm joins forces with another firm without out-right merger, through such means as licensing, joint ventures, and supply agreements.
Acquisitions provide a way to broaden a firm’s scope through adding positions in new segments, positions in new geographic areas, greater integration, or a beachhead in a new related industry. IVECO, which merged a number of European truck builders, has produced a greatly strengthened competitor. Acquisitions can also play a key role in reconfiguration or pure spending strategies. Acquisitions can allow two organizations to combine resources and skills in such a way that reconfiguration or pure spending is possible.
Coalitions also bring together skills and resources of firms in ways that may allow reconfiguration, redefinition, or pure spending. Japanese TV set producers licensed RCA’s color TV technology, providing an important starting point for their own product and process innovations, for example. Similarly, the coalition that led to Airbus Industries has made a world-class competitor out of a group of struggling national firms. Coalitions are also frequently pursued in tandem with a firm’s own activities to broaden scope. In the valve industry, for example, WKM sells only in the U.S. and uses licensees elsewhere in the world.
Coalitions can also play a more subtle role in attacking leaders. Challengers sometimes form coalitions with leaders that later provide the basis for attacking the leader, as discussed in Chapter 5. Licensing technology from a leader, or joint ventures in marketing or manufacturing, may allow a challenger to learn a leader’s strengths, making it possible to leapfrog. A number of Japanese firms have licensed foreign technology from leaders which they later improved.
Acquisitions and coalitions are not without their problems, however. Acquisitions are difficult to integrate, and coordination among coalition partners can prove troublesome. In copiers, for example, Canon has benefitted from the problems Xerox has had in coordinating with its joint venture partners Rank Xerox and, through Rank Xerox, Fuji Xerox. Canon’s greater global coordination leads to some of its competitive advantages.
Source: Porter Michael E. (1998), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press; Illustrated edition.