Conditions for attacking an industry leader

The cardinal rule in offensive strategy  is not  to attack  head-on with an imitative strategy, regardless of  the challenger’s resources or staying power. The built-in advantages  inherent  in a leader’s position will usually overcome such a challenge and the leader will in all likeli­ hood retaliate vigorously. The ensuing  battle  ill almost  inevitably exhaust the challenger’s resources before those of the leader.

Procter & Gamble (P& G) has violated this rule in the coffee industry in challenging General Foods’ Maxwell House brand. In cof­ fee, unlike many  of its other  products,  P& G ’s Folger’s has little or no product superiority over Maxwell House. P& G also produces and markets Folger’s using the same value chain  as General  Foods. Max­ well House has retaliated vigorously with a broad  array  of defensive tactics, benefitting from its large m arket share and  favorable cost posi­ tion. Folger’s has gained some share, prim arily at the expense of smaller competitors, but has yet to achieve acceptable  profitability. Maxwell House, conversely, has maintained  its profitability and  continues  to resist Folger’s attem pt to gain share successfully.

Coca-Cola’s sale of its wine operations, called the Wine Spectrum, to Seagrams is still another manifestation of violating the rules for attacking leaders.   While   Coke   gained   m arket  share   against   second- tier competitors in the wine industry, it faced a substantial cost disad­ vantage to Gallo (see Chapter 3) and had no innovative approach  in product or marketing to counteract  it, only heavy spending. Gallo’s strong resistance to Coke meant  that  Coke  never earned acceptable profits in wine. IBM has faced similar  difficulties in copiers. It has achieved little differentiation or cost advantage and faces stiff resistance from Xerox and Kodak in medium- and high-volume copiers.

Successfully attacking  a leader requires that  a challenger  meet three basic conditions:

  1. A sustainable competitive A challenger  must possess a clear and sustainable competitive advantage over the leader, in either cost or differentiation. If the advantage  is low cost, the firm can cut price to gain position against a leader, or earn higher margins at indus­ try average prices to allow reinvestment in marketing or technology development.   Both will allow a challenger  to gain share.   Alternatively, if the firm achieves differentiation,   it will allow premium  prices an d / or minimize the cost of marketing  or gaining trial against the leader. Either  source of competitive advantage  the challenger  possesses must be sustainable, using the criteria for sustainability in Chapters  3 and 4. Sustainability ensures that the challenger  will have   a sufficiently long period to  close the market share gap before the leader can imitate.
  2. Proximity in other A challenger  must  have some way of partly or wholly neutralizing the leader’s other inherent advan­ tages. If the challenger employs a differentiation strategy, it must also partially offset the leader’s natural  cost advantage  due to scale, first mover advantages, or other causes. Unless a challenger maintains cost proximity, the leader will use its cost advantage to neutralize (or leap­ frog) the challenger’s differentiation.   Similarly,   if the challenger  bases its attack   on a cost advantage,  it must  create  an   acceptable amount of value   for   the   buyer.   Otherwise,   the   leader   will be able   to   sustain a price premium  over the challenger, yielding the leader the   gross margin needed to retaliate vigorously.
  3. Some impediment to leader retaliation. A challenger must also possess some means for blunting  the leader’s The  leader must  be disinclined or constrained  from protracted  retaliation against the challenger, either because of the leader’s own circumstances  or because of the strategy chosen by the challenger. W ithout some impedi-ment  to retaliation,   an   attack  will trigger  a response by the   leader that  can   overwhelm   a   challenger   despite   its   competitive   advantage. A committed leader with resources and an entrenched  position can, through aggressive retaliation, force a challenger to bear unacceptable economic and organizational costs.

The three conditions for successfully attacking a leader flow di­ rectly from the principles of competitive  advantage  described in Chap­ ter 1. The odds of success in gaining position increase with the challenger’s ability to meet each condition.  P& G’s Folger’s coffee, Coca Cola’s Wine Spectrum,  and IBM  copiers did not  decisively meet any of the conditions, and this explains their disappointing experiences.

The difficulty of meeting the three  conditions  hinges largely on a leader’s strategy and its aggressiveness. If a leader is “ stuck in the middle”  with no competitive advantage,  a challenger can often achieve a competitive advantage  in either   cost   or   differentiation   quite   easily. In these instances, a challenger need only recognize the leader’s vulner­ ability and implement a strategy that exploits it. On the other hand, attacking a leader that is aggressively pursuing a cost leadership or differentiation strategy will usually   require  that  a challenger  conceive of a m ajor  strategic innovation,  such as developing a new value chain, if it is to mount a successful challenge.

An example of an industry in which challengers met  all three conditions was corn wet milling. Cargill and Archer-Daniels-M idland (ADM) successfully entered against CPC  International,  A. E. Staley, and Standard  Brands, the traditional  industry  leaders. Cargill and ADM entered the industry with new continuous process plants that embodied recent changes in process technology. They also restricted themselves to a narrow product line, consisting only of higher-volume items, and reduced overhead through streamlined sales forces. These choices allowed Cargill and AD M to gain a significant cost advantage over traditional  producers.  At  the same time, Cargill and ADM achieved parity or proximity in differentiation, despite the efforts at differentiation by the industry leaders. The product itself is a commod­ ity and many buyers did not value extensive service. In addition, several factors impeded retaliation by the traditional industry  leaders. They preferred not  to retaliate against the   challengers   for   fear   of upsetting the industry equilibrium, where rivalry in the industry  had traditionally been characterized  as a gentlemen’s club.   At  the   same   time,   CPC (the number one firm) and Standard Brands had embarked on diversifi­ cation programs, diverting attention and  resources from corn milling. While the corn milling example illustrates a situation where chal­lengers met all three conditions, meeting one condition  very well can offset a challenger’s   inability   to   meet  another.   The  successful   entry of  “ no frills” airlines such as People Express  and   Southwest  provides a case where challengers met two conditions strongly enough to offset barely meeting the third. Chapter  3 has described how the no-frills carriers achieved a significant cost advantage over the trunks by em­ ploying a different value chain. A t the same time, many  passengers perceived the no-frills carriers’ product as similar to that  offered by trunks, since differentiation in airline transportation  is difficult. How­ ever, the no-frills carriers faced a m ajor threat  of retaliation  by the trunks  as the trunks  sought  to defend their  market  share.   Though the trunks  hesitated to retaliate because of the   high   cost of cutting prices and the   fear of eroding   their  quality   images,   the threat  posed by the no-frills carriers was so great  that  retliation  eventually oc­ curred. Though the no-frills carriers  enjoyed  only a relatively short period free of retaliation, their significant cost advantage  greatly in­ creased the cost of retaliation for the trunks. Many trunks  never at­ tempted to match the prices of the no-frills carriers.

Federal Express’s successful entry against Emery Air Freight pro­ vides another  illustration  of a challenger  using   a   strong  advantage in one area to offset a leader’s lingering strengths.  Federal  Express’s unique delivery system, utilizing its own planes and a Memphis  hub, quickly gave it differentiation   in   overnight  delivery of small packages. It achieved higher reliability as well as other forms of differentiation, described in Chapter  4. While Federal  Express  would  ultimately achieve cost parity  or even a cost advantage,  however,   the   greater scale sensitivity of its value chain  meant  that  its initial cost position was high relative to Emery’s. This  cost disadvantage  and Federal’s heavy debt load made it initially very vulnerable to retaliation. Emery, however, did not take Federal  Express seriously. It chose not to retali­ ate until Federal Express had gained enough share to establish cost proximity. As the   Federal  Express example  illustrates, slow retaliation by the leader buys a challenger time (and resources) to overcome disadvantages in cost or differentiation. The  principle of responding quickly, described in Chapter 14, proves once again im portant in deter­ mining a leader’s ability to defend position.

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

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