Pitfalls in competitor selection

The principles of competitor selection are not always followed. The following pitfalls seem to be among the most common:

Failure to Distinguish Good and Bad Competitors. Many companies do not recognize which of their competitors are good competitors and which are not. This leads them to pursue across-the-board moves, or worse yet, to attack good competitors while leaving the bad ones alone. In the process, industry structure is often severely damaged. Typical is the case of a specialty rubber manufacturer that viewed another major specialty rubber manufacturer as its mortal enemy and behaved accordingly. The view was not surprising, because this competitor’s market share was similar to the firm’s and made it a natural focal point for attention. In fact, this competitor was a nearly ideal competitor that was desperately trying to avoid a battle. The real enemies of the specialty rubber firm were the specialty divisions of the tire companies, who were using specialty markets as a dumping ground for excess capacity. By damaging its good competitor, the specialty rubber firm was helping the tire companies get established in the industry and eroding industry attractiveness.

It is very common for firms to view the competitor that is closest to them in market share or has the most similar strategy as the greatest enemy. This is the competitor that is repeatedly attacked, while other competitors are ignored. In fact, such a competitor is often a good competitor who offers very little threat.

Driving Competitors to Desperation. Companies often fail to think through the consequences of too much success against competitors. Driving competitors to desperation runs the risk of serious consequences that I have described earlier. In soft contact lenses, for example, Bausch and Lomb may have sown the seeds of some of its own problems. It moved very aggressively against other soft lens manufacturers in the late 1970s, slashing prices and behaving like a true believer in the experience curve. What happened was that Bausch and Lomb indeed gained share, but one by one its desperate competitors sold out. Their acquirors included Revlon, Johnson & Johnson, and Schering-Plough, all much larger than Bausch and Lomb and viewing contact lenses as an avenue for growth. With infusions of capital to its competitors, Bausch and Lomb now has a serious fight to contend with. It may have converted good competitors into bad ones.

Having Too Big a Share. Beyond a point, growing invites problems that are best avoided by ceding share to good competitors. Moreover, a large market share may actually lead to lower rates of return. Often the best course of action for a high share firm is to look for growth elsewhere rather than to push for more share in an industry. Similarly, high share firms may be better off finding ways to increase overall industry size or profitability, rather than try to gain share. They will enjoy the biggest piece of an expanding pie, and avoid the risks of destabilizing the industry. It is all too tempting, however, for a firm to push for incremental gains in relative position in an industry where it feels strongest.

Attacking a Good Leader. Followers sometimes commit the fatal error of attacking a good leader. The leader is then forced to retaliate, and what has been a profitable position for the follower turns into a marginal one. Western Company launched a market share attack on Halliburton in oil well completion and stimulation services, for example, despite the fact that Halliburton competed on differentiation and Western had been very profitable. Halliburton’s reaction, no doubt a grudging one, has severely reduced Western’s profits. Halliburton, if anything, has gotten stronger.

Entering an Industry with Too Many Bad Competitors. Entering an industry with too many bad competitors can doom a firm to a protracted siege, even if the firm has a competitive advantage. The cost of converting many bad competitors into good ones may be very great, and nullify the fruits of entry. Faced with an industry with many bad competitors, a firm may be better off finding another industry.

Competitors are both a blessing and a curse. Seeing them only as a curse runs the risk of eroding not only a firm’s competitive advantage but also the structure of the industry as a whole. A firm must compete aggressively but not indiscriminately.

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

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