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:
- 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.
- 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.
- 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.