Influencing the pattern of competitors

The benefits of good competitors  suggest that it may be desirable for a firm to   attack  some   current  competitors  and   not  others,   and to encourage the entry of new   competitors  provided  they   meet the tests of a good competitor. Since it is usually desirable to have more competitors early in an industry’s development  than  during  maturity, it may also make  sense to encourage  the early entry  of competitors that will not be able to succeed in the long run. Nothing  in these statements implies that a firm should be complacent toward competi­ tors, or that a firm should not aggressively seek to increase competitive advantage.   Rather,   the   principles   of competitor  selection   imply   that a firm must adopt a more sophisticated perspective towards its competi­ tors than is commonly done.

Who a firm competes  with is determined  by a wide range of factors, many of which are largely outside a firm’s control. Which competitors  choose to enter  an   industry  is,   to   a considerable extent, a matter  of the luck of the draw,  as will be discussed in Chapter  14 in more detail. W hether or not a particular firm perceives an industry to be attractive   at a particular  time   and   has   the   resources   available to enter is partly a m atter of chance. Once  a few competitors  have entered, however, others may no longer perceive the industry as an opportunity,   particularly  if the   early   entrants  were credible   firms.   If a firm can somehow  influence who enters early, then, the entire pattern of entry into the industry may be changed.

Competitor selection seeks not  only to influence the pattern  of entry, but to influence which competitors gain the market share neces­ sary to be viable and which segments they compete in.10 The following tactics to select competitors are available in many industries:

Technology Licensing.      A   firm   can   license its   technology   early to good competitors under favorable terms (see Chapter  5). If it picks the right competitors, further entry may be effectively deterred.  Given the desire of buyers  for a second or third  source in semiconductors, for example, licensing is relatively common in that industry and careful choice of licenses can have a beneficial effect. In an interesting recent move, Intel has licensed IBM and Commodore to make the 8088 microprocessor. Here the licenses are having the effect of making buyers competitors in a sense, but blocking other more threatening  competi­ tors in the process.

Selective Retaliation. A firm can retaliate vigorously against bad competitors, leaving good competitors to enter  or gain share  unop­ posed. The firm’s choice of products to introduce or geographic m ar­ kets to enter will often impact  one   competitor  more  than  another, for example.

Selective Entry  Deterrence.      A   firm   can   refrain   from   investing in creating entry barriers  to those segments where  the presence of a good competitor  can   improve   the   firm’s position.   The  risk   is that the wrong competitor  chooses   to   occupy   the   undefended  segments, as part of a more ambitious sequenced entry strategy.

Coalitions to  Draw in New Entrants.      A firm can contract with a good potential competitor  to become  a source of supply for some item in the product line, to be sold through a firm’s distribution chan­ nels. This competitor may then logically expand to serve other seg­ments undesirable to the firm. O ther forms of coalitions that  can encourage good competitors include sourcing agreements for compo­ nents, and private label arrangements  where  a competitor  supplies goods sold under a firm’s name. Both can have the effect of lowering barriers to entry for a good competitor.

1. Damaging Good Competitors in Battling Bad Ones

It is often difficult to battle bad  competitors  without  the battle spilling over to harm  good competitors.  An  increase in   advertising, new product introduction, or change in warranty policy designed to thwart a bad competitor, for example, can reduce a good competitor’s market share or even threaten its viability. Weakening the good com­ petitor in turn may erode the attractiveness  of the industry  or invite new entry.

It is important, therefore, to tailor offensive or defensive moves against bad competitors to minimize their impact on good competitors. Sometimes this is impossible, because of the segments a bad competitor is threatening  or the seriousness of the threat.  However,  the challenge is to maintain  the delicate balance between improving a firm’s position and vigorously responding to threats, on the one hand, and preserving good competitors, on the other. It is im portant that good competitors not perceive that  they are the target  of attacks  or they may change their goals in desperation.  Also, a firm must inhibit good competitors from becoming bad ones by continued  rivalry to keep them from revis­ ing their objectives.

2. Changing Bad Competitors  into Good  Ones

Sometimes bad competitors can be transformed into good ones. Ideally, market  signaling to correct  a competitor’s  faulty assumptions is all that is necessary. Alcoa has been attempting to influence overly optimistic demand forecasts of its competitors in the aluminum  indus­ try, for example.   In other  cases, time will convert  a bad competitor into a good one. The futility of the competitor’s strategy will become apparent  to it,   and   it will alter its goals or   strategy   in   ways that make it a better competitor.

A firm must often be prepared to fight battles in order to convert bad competitors  to good   ones,   however.   A   battle   may   be necessary to demonstrate  its relative weakness  to a competitor,  or to   convince it that the firm will not tolerate erosion of position. While battles can be expensive, they are often cheaper than  the cost of a protracted siege. With  bad competitors,  a protracted  siege is often a fact of life in an industry.

Some bad competitors will never become good competitors. With them, a firm must  accept the fact that  continued  challenges to its position will be forthcoming. The full range of offensive and defensive tactics described throughout this book will be necessary to sustain competitive advantage and avoid undermining industry structure.

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

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