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 compa­ nies 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  m anufacturer  that  viewed another m ajor specialty rubber m anufacturer as its mortal enemy and behaved accordingly. The view was not surprising, because this com­ petitor’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 competi­ tors. Driving competitors to desperation runs the risk of serious conse­ quences 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 manu­ facturers in the late 1970s, slashing prices and behaving  like a true believer in   the   experience curve.   W hat  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.  W ith   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 prob­ lems that are best avoided by ceding share to good competitors.  M ore­ over, 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.  I t   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. W estern Company launched a m arket share attack on Halliburton in oil well completion and stimulation  services, for exam­ ple, 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 W estern’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 indus­ try.

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 advan­ tage 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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