Competitor interrelationships among business units

Competitor  interrelationships  are   present  when   a firm actually or potentially competes with diversified rivals in more than one business unit. Any action taken against multipoint  competitors  must consider the entire range of jointly contested businesses. In addition, a firm’s competitive advantage vis-a-vis a m ultipoint  competitor  depends  in part on the interrelationships that both have achieved. The competitive position of a multipoint competitor is often more  a function of its overall position in a group  of related industries  than  its market share in any one industry because of interrelationships. While multipoint competitors and interrelationships  do not necessarily occur together, they often do because both  tangible   and  intangible   interrelationships lead firms  to follow parallel diversification paths.

Figure 9 – 4 .    Corporate   Competitor   Matrix

Identifying existing multipoint  competitors  is relatively easy with a diagram such as that shown in Figure 9 -4 . For the firm shown in Figure 9 -4 , competitors A, B, C, D, and E are m ultipoint competitors. The other competitors are single point, but represent potential multi- points.   Analysis   of  the   figure suggests   that  business   units   2 and 3 are   in strongly   related   industries,   because  four  competitors  compete in both industries. The  presence of many  competitors  in two industries is a relatively strong, though  not  perfect, indication  that  they are related. The relatedness of industries is also a clue to predicting which firms are the most likely potential m ultipoint competitors. Given the apparent  relationship  of the industries  in which  business units 2 and 3 compete, competitor H may be the most likely potential multipoint competitor.

Table 9 -6 shows the m ultipoint competitor matrix  for the con­ sumer paper products sector in 1983, along with each firm’s year of entry. It is clear that competitor interrelationships are numerous and that they   have increased   significantly   over time,   particularly  during the 1960s and   1970s.   We would observe a similar pattern  in many other groups of industries. The pattern  of competitor interrelationships in the table will be discussed further below.

Closely analagous  to   the analysis of m ultipoint  competitors  is the analysis of single-point competitors with different patterns o f inter­ relationships from the firm’s. For example, Xerox, Canon, and M atsu­ shita all compete in convenience copiers. However, Xerox draws on interrelationships with its high-volume copiers and office automation equipment. Canon’s interrelationships  have historically been strongest with its   calculator  and   camera  businesses,   while   M atsushita  draws on interrelationships involving its broad  range  of consumer  electronic and other electronic products. Interestingly, both  Canon  and  M atsu­ shita are diversifying into office autom ation to m atch Xerox’s interrela­ tionships there.

Single-point competitors with different patterns  of interrelation­ ships are im portant because they bring differing sources of competitive advantage to an industry.  These may be difficult for a firm to match and may shift the basis of competition. Moreover, as the copier example illustrates, single-point competitors with different patterns of interrela­ tionships are sometimes prime candidates to become multipoint com­ petitors.

1. Multipoint Competitors in Unrelated  Industries

Where  a firm faces a multipoint  competitor  in industries  that are not related,   the   strategic   issues   revolve   around  how   actions   in one business unit can lead to reactions in another and how equilibrium with the competitor can be reached in several contested  industries. Because a firm and a multipoint competitor  meet  each other  in a number of industries rather than  one, a greater  number of variables enter into determining  their  relative position. This  implies that firms need more information about each other to avoid mistaken interpreta­ tions of moves. It also often means that destabilizing events in one industry can spread to others. This added  complexity   of the   game makes peaceful coexistence potentially difficult.

On the other  hand,  competing  in a number  of industries also opens up greater possibilities for signaling, making threats, establishing blocking positions, and taking reciprocal actions. For example, a firm threatened in one industry might retaliate in a different industry, send­ ing a signal of displeasure but  creating  less risk of escalation than  if the response were direct. The threat that a firm can retaliate in several industries (and inflict a higher  cost on   the competitor)  may also tend to deter a competitor  from making  a threatening  move in the first place.

Another  stabilizing factor  in m ultipoint  competition  is the fact that focal points,   or natural  equilibrium  points for competition,  may be more prevalent.18 W here only one industry  is contested, the number of focal points consistent with each competitor’s perception of its rela­ tive strength is likely to be small. W ith equally balanced  competitors, for example, an equal division of m arket shares may be the only focal point. It   may   well be an   unstable  one   because any   temporary  shift in market  shares is likely   to   trigger  a   strong  response   to   preserve the balance. W ith two jointly contested  industries, there  may be a number of additional  focal points that  are more  stable, and one of them will tend to be found sooner.

Table 9 -7   illustrates   this.   Here  focal   points   2 and   3 will   tend to be more stable than focal point 1. In each industry, the high-share competitor will tend to have a clear competitive  advantage,  and hence a small disturbance will be less likely to cause either firm to precipitate a war. Similarly, the asymmetry  of positions reduces the chances that the high-share competitor in one industry  will seek an even greater share, since it remains  vulnerable to retaliation  in the industry  in which it is weak.

Multipoint competitors must be viewed in their  totality for pur­ poses of offensive   and   defensive   strategy.   Most  competitor  analysis is done at the business unit level, however, and looks exclusively at competitors’ positions in a single industry.  Some corporate  or group- level analysis of multipoint  competitors  is essential. Minimally, a broader   perspective   on   multipoint  competitors  needs   to   be   applied to test that business unit actions against them will not have adverse consequences in other  business units.   Ideally a more  comprehensive analysis of existing and potential  m ultipoint  competitors  should be done to uncover opportunities for a coordinated offensive or defensive strategy across business units.

Some additional considerations in developing strategy vis-a-vis multipoint competitors in unrelated businesses are as follows:

Forecast possible retaliation in all jointly contested industries. A multipoint competitor may retaliate against a move in any or all jointly contested industries. It may well choose to respond  in   the industry where its response   will be the   most  cost-effective (see Chapter  14). For example, it may respond  in an industry  in which  it has a small share because it can inflict a large penalty on the firm   at   low cost. Each industry is not a separate battlefield.

Beware of a small position by a multipoint in a key industry. A small position held by a m ultipoint in an industry  in which the firm has a large share (or high cash flow) can give the multipoint  a lever against the firm. Such a position may be an effective blocking position (see Chapter  14).

Look for  opportunities to exploit overall corporate position   vis-a- vis a multipoint. The  overall corporate  position vis-a-vis a multipoint may provide less costly and less risky means of responding to threats. Similarly, coordinated  actions   in   a   number  of industries   may   make it difficult and very costly for a competitor to respond.

Establish blocking positions fo r defensive purposes. A small pres­ ence in one   of a   multipoint  com petitor’s key   industries   can   provide a way to inflict serious penalties on it at relatively low cost.

Strategy toward  a multipoint  competitor  is affected by whether or not the competitor perceives the connections among industries. Per­ ceiving the connection among jointly contested industries cannot be assumed where a multipoint competitor is managed via highly autono­ mous business units. In some cases, a competitor’s ignorance of multi­ industry linkages may allow the firm to gain in relative position. For example, an attack on one business unit may divert competitor atten­ tion and resources from defending its position in a more  important business unit.

2. Multipoint Competition in  Related Industries

When a firm faces m ultipoint  competitors  in related industries, the   strategic   problem   increases   in   complexity.   The  issues   discussed in the previous section still apply and  are often even more  important because relatedness increases the likelihood that a competitor will per­ ceive the linkages among businesses. The presence of tangible interrela­ tionships among industries, however, complicates  the assessment of relative position.

A firm’s competitive advantage  or disadvantage  in any business unit that faces a m ultipoint competitor is a function  of overall position in value activities involving interrelationships. If a firm and the com­ petitor  employ a shared  sales force or  logistical system, for example, the relative cost or differentiation of the sales force or logistical system as a whole   is what  matters.  The  extent  to   which  interrelationships are actually achieved is what determines their effect on competitive advantage, not the potential to share. In addition, the net competitive advantage from an interrelationship for both a firm and a competitor will be influenced by their respective strategies. A competitor  may potentially face higher  or lower costs of coordination  or compromise than  the firm does, making an interrelationship  more or less valuable to it.

A competitor’s group of interrelated business units may not ex­ actly overlap with the firm’s. For example, Procter & Gamble competes in disposable diapers, paper towels, feminine hygiene products, and bathroom tissue, but not in paper napkins and towel wipes. Kimberly Clark, on the other hand, is in all these businesses. When the related industries that are jointly contested do not overlap exactly, the compar­ ison between a firm and a competitor m ust center on the firm’s whole array of interrelationships relative to the com petitor’s. Each  shared activity must be analyzed for the competitor as a whole, and compared to the firm’s cost or differentiation in that activity. The volume provided by all five of Procter & Gamble’s paper-related business units compared to that of Kimberly’s  eight business units will affect their relative position in shared value activities such as the logistical system, for example. Relative position in any business unit is built up by comparing all shared activities as well as value activities that are not shared.

A weak relative position in one related business unit  can be par­ tially or completely offset by superior positions in other related business units. Procter & Gamble is in fewer paper products industries than Kimberly-Clark, for example, but it is the market leader in diapers, toilet tissue, and paper towels. Diapers, particularly, is a very large industry relative to the others. Procter  & Gamble’s  total consumer paper products volume is undoubtedly higher than Kimberly’s. Analyz­ ing a firm’s relative position vis-a-vis m ultipoint competitors  thus re­ quires an examination of the complete portfolios of the two firms.

The most  basic strategic   implication  of m ultipoint  competition in related industries is the same as in unrelated industries— competitor analysis must encompass  the competitor’s entire portfolio of business units instead of examining each business unit in isolation. Competitive advantage in one business unit can   be strongly  affected by   the extent of potential interrelationships with other business units in the competi­ tor’s portfolio and by whether they are achieved.

Balance or superiority in shared value activities relative to a multi­ point competitor  can potentially be achieved in many  ways.   Investing to gain a stronger position in industries where a firm is already strong can offset the advantages a competitor has from being in a broader array of related industries. If the competitive advantage from shared activities is significant and no compensating  advantages  can be found, a firm may be forced to match  a com petitor’s portfolio of related business units. M atching can be im portant  for defensive reasons as well as offensive ones. It may be necessary to match a competitor’s diversification even if the firm has a competitive advantage in its exist­ ing business units, to prevent the competitor from gaining the advan­ tages of interrelationships  without  opposition. Conversely, if a firm can discover new related industries that  competitors  are not  in, it may be able to strengthen position in im portant shared value activities.

In consumer paper products,  for example, there has been a great deal of offensive and  defensive diversification. Table  9 -6 shows the dates of entry of each competitor into the respective industries. Com­ petitors’ portfolios of businesses have broadened since the late 1950s. Procter & Gamble’s actions triggered  this sequence of moves. P& G began in toilet tissue and then moved  into facial tissue, disposable diapers, and paper towels defensively.

3. Competitors with Different Patterns  of Interrelationships

Single-point and multipoint competitors may well pursue different types of interrelationships, involving different shared activities or activ­ ities shared in a different way. A good example  of this situation is again the consumer paper products field (Table 9-6). Competitors have pursued interrelationships in paper products in different ways, reflecting their overall portfolios of business units and the strategies employed in them.  In disposable diapers, for example, Procter & Gam­ ble enjoys joint procurement of common raw materials, shared technol­ ogy development, a shared sales force, and a shared  logistical system among its paper product lines. However, Procter & Gamble has sepa­ rate brand  names  for each paper  product  line. In   contrast,  Johnson & Johnson  (J&J)   competes  in disposable diapers  as well as a wide line of other baby care products, all sold under the Johnson & Johnson brand name. Its interrelationships  include  that  shared brand  name, plus a shared   sales force and   shared  market  research  in   the baby care field. J&J enjoys little sharing in production, logistics, and product or process technology  development.  Each  competitor  in   Table 9-6 has a somewhat different pattern of interrelationships.

A competitor with a different pattern of interrelationships repre­sents both an opportunity and a threat. It is a threat  because the competitive advantage gained through interrelationships cannot  be readily replicated, since a firm   may   not  be in   the appropriate  group of industries, or have the right strategy to allow matching the interrela­ tionships. To   match  J& J’s shared  brand  name,  for example,   Procter & Gamble would have to change its strategy of using a different brand for each product. This would probably fail, however, because of the inappropriateness of using the diaper brand name on other paper prod­ ucts unrelated  to babies. Thus  to m atch  this particular  advantage of J& J’s, Procter  & Gamble  would probably  have to diversify further into baby care, where J&J is dominant.

A smart competitor  with different interrelationships  will attempt to shift the nature  of competition  in each industry  in the direction that makes its interrelationships more strategically valuable than the firm’s.   An   escalation   in advertising   spending  in diapers  would work to the advantage of J&J because of  its shared brand,  for example, holding other things constant. A competitor with different interrela­ tionships might also attem pt to reduce the ability of a firm to achieve its interrelationships. For  example, a move by J& J to   make diapers from   textile-based   materials  would,   if feasible, reduce  P& G’s ability to share value activities because of its broad presence in paper products. Similarly, a competitor  might  shift its strategy   in a way that  raised the cost of compromise for the firm to achieve its type of interrelation­ ships, thereby forcing the firm to damage one business unit in respond­ ing to a threat to another.

Thus the essence of the competitive game between firms pursuing different forms of interrelatedness  is a tug of war  to see which firm can shift the basis of competition to compromise the other’s interrela­ tionships, or to enhance the value of its own. The  disposable diaper industry offers a good   illustration   of how   this   game can   play   itself out. Procter & Gamble has retained leadership in the diaper industry, while J&J was forced to exit from the U.S. market after costly losses. Though J& J’s market interrelationships were strong, advertising is a relatively small proportion  of total  costs in disposable diapers. Sales force and logistical costs, where Procter & Gamble enjoyed comparable if not superior  interrelationships  to J& J, are each as high or higher than advertising. J& J could not m atch Procter & Gam ble’s production, procurement, and   technological interrelationships,  and   this proved fa­ tal since total manufacturing costs for diapers are a very large percent­ age of total cost and the pace of technological change in both  product and process is rapid. W ithout a markedly superior product, therefore, J&J was unable to match  the combination  of Procter  & Gamble’s large market share and its interrelationships.

4. Forecasting Potential  Competitors

Tangible interrelationships, intangible interrelationships, and competitor interrelationships can be used to forecast likely potential competitors. Likely potential  entrants  into   an industry  will be firms for which that industry is:

  • a logical way to create or extend an im portant interrelationship
  • a necessary extension to match the interrelationships of com­ petitors

To forecast potential competitors, all possible interrelationships involving an industry are identified, including competitor interrelation­ ships. Each potential  interrelationship  will typically lead to a number of other industries. The industries in which  existing competitors com­ pete besides the industry  may suggest possible interrelationships  of other types. By identifying related industries, a firm can locate potential competitors for whom entry into the firm’s industries would be logical. Analysis must  assess the probability that  these potential  competitors will actually choose to enter  the industry  rather  than  pursue  their other investment opportunities.

Source: Porter Michael E. (1998), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press; Illustrated edition.

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