Impediments to leader retaliation

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:6

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 reputa­ tion by responding to a challenger’s strategy that makes service unnec­ essary. The leader  may choose instead to   maintain  its   past  strategy and suffer a market share loss. Another case is provided by the intro­ duction of the low-priced, throw-away pen by BIC Corporation, which created mixed motives for Gillette’s   Paperm ate   division.   Papermate had patiently developed a brand image of quality. M atching the BIC strategy would undermine  this   image,   and   Papermate  ultimately   had to introduce an entirely new brand (W rite 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 with­ out  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 retalia­ tion if the challenger’s strategy inflicts high response   costs   on   the leader. A leader’s large market share may inhibit it from costly retalia­ tory actions such as across-the-board price cuts and warranty increases, for example. Response costs can also be high when a leader has inappro­ priate or outdated  facilities, equipment,  or   labor contracts.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 emphasiz­ ing 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  pro­ vides an example of a leader whose different financial priorities invited attack. M aintaining 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 commit­ ment  or attention  is directed to other  industries. Corporate  parents can constrain a business unit’s resources or dictate  its goals. For exam­ ple, 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 pres­ sure. 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 emanat­ ing from W ashington 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 chal­ lenger has gained enough market position to become established.

Blind spots have been im portant to the success of many challeng­ ers. 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. M ultiple 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 autom ated 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.

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