A successful challenger must also discover or create impediments to leader retaliation. This serves to blunt the natural advantages of the leader and reduces the cost of mounting an attack. A variety of factors can inhibit a leader’s retaliation to a challenger:
Mixed Motives. If a challenger’s strategy creates mixed motives for a leader, it will inhibit the leader’s ability to retaliate. A leader that must undermine its past strategy to match or respond to the challenger faces mixed motives. A leader that has built its competitive advantage on service, for example, will invalidate its hard-won reputation by responding to a challenger’s strategy that makes service unnecessary. The leader may choose instead to maintain its past strategy and suffer a market share loss. Another case is provided by the introduction of the low-priced, throw-away pen by BIC Corporation, which created mixed motives for Gillette’s Papermate division. Papermate had patiently developed a brand image of quality. Matching the BIC strategy would undermine this image, and Papermate ultimately had to introduce an entirely new brand (Write Brothers) to counter BIC.
Any interrelationships between the leader and other business units in its parent company may also serve as the basis for mixed motives, because interrelationships can involve a cost of inflexibility (Chapter 9). Interrelationships can constrain the way a leader can respond without hurting its sister business units. Mixed motives can also arise when a leader is employing a bundled strategy, as described in Chapter 12. A leader may allow a challenger to gain a modest share rather than unbundle and thereby cause the entire industry to unbundle.
High Leader Response Costs. A leader may refrain from retaliation if the challenger’s strategy inflicts high response costs on the leader. A leader’s large market share may inhibit it from costly retaliatory actions such as across-the- board price cuts and warranty increases, for example. Response costs can also be high when a leader has inappropriate or outdated facilities, equipment, or labor contracts. Chapter 14 has discussed how the cost of defensive tactics can be assessed.
Different Financial Priorities. A leader with different financial priorities may not respond to a challenger’s attack. A leader emphasizing short-term profits, for example, will give up share to a challenger willing to forgo them. Similarly, a leader desiring high cash flow may not retaliate if retaliation demands heavy reinvestment. Tampax provides an example of a leader whose different financial priorities invited attack. Maintaining extraordinary returns in feminine hygiene products seems to have become a preoccupation inside Tampax, and caused it to respond very little to repeated attacks until recently. Differences in financial priorities also underlie the success of many foreign firms against U.S. leaders.
Portfolio Constraints. A leader may not retaliate if its commitment or attention is directed to other industries. Corporate parents can constrain a business unit’s resources or dictate its goals. For example, a leader treated as a cash generator by its parent company may not get the resources to fend off a challenger’s attack. Similarly, a leader actively pursuing diversification may be diverted from closely monitoring and defending its core industry. Crown Cork and Seal’s success against American Can and Continental Can, for example, is partly due to these two leaders’ attempts to diversify into other forms of packaging.
Regulatory Pressure. A leader may not retaliate if it believes itself to be constrained from taking actions because of regulatory pressure. Antitrust scrutiny, safety standards, pollution regulations, and many other types of regulation can constrain leader responses. Some observers believe that pressures on the franchise bottler system emanating from Washington distracted Coca- Cola from responding to Pepsi’s challenge, and that regulatory fears are inhibiting ATT as it faces new competition today.
Blind Spots. A leader can suffer from faulty assumptions, or blind spots, in interpreting industry conditions. If a leader has false perceptions of the true needs of buyers or the significance of an industry change, for example, a challenger may gain position by moving before the leader does. Moreover, the leader may well perceive the actions of the challenger as inappropriate and nonthreatening, until the challenger has gained enough market position to become established.
Blind spots have been important to the success of many challengers. Harley Davidson misperceived the need for a small motorcycle and watched while Honda became established. Xerox seems to have misunderstood the importance of small copiers, and Zenith clung to handcrafted TV sets despite improvements in design and automated production technology. Careful analysis of competitor assumptions can reveal such blind spots.
Incorrect Pricing. A leader may set prices based on average cost, rather than on the cost of delivering a given product to a given buyer.
If a challenger targets the overpriced products/buyers and offers lower prices, the leader may well be slow to recognize its true costs and be unwilling to reduce its gross margins. Leaders often respond to such strategies by retreating from one segment after another until the challenger emerges as the leader.
Part of a Gentlemen’s Game. A leader may respond slowly if rivalry in its industry has been a gentlemen’s game. A leader in such industries often feels constrained from retaliating against a challenger for fear of upsetting its relationship with other rivals. Coca-Cola’s long history as a statesman in the soft drink industry, where firms followed established rules, seems to have contributed to its less-than- vigorous retaliation against Pepsi until recently.
The impediments to leader retaliation result from a variety of different underlying causes. Some impediments rest on tangible factors such as mixed motives or resource allocation priorities, while others rest on perceptual errors by the leader, as in the case of blind spots and incorrect pricing. A challenger’s odds of success are greatest when tangible impediments to leader retaliation exist. Multiple impediments compound the leader’s problem. In responding to Timex, for example, Swiss watch firms had a blind spot about the saleability of Timex’s disposable, everyday watch. They also had high response costs in matching Timex’s automated facilities given the labor intensity of Swiss watch factories, as well as mixed motives in alienating jewelers if they followed Timex into the drug store channel.
Reconfiguration and redefinition strategies frequently exploit impediments to leader retaliation. They often create mixed motives, high response costs, or are incorrectly perceived by leaders. One of the difficulties with the pure spending strategy, however, is that it is less likely to be associated with impediments to leader retaliation than the other two avenues of attack. Pure spending works best where a leader has different financial priorities and is unwilling to match the challenger’s investment.
Source: Porter Michael E. (1998), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press; Illustrated edition.