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.