Signals of leader vulnerability

The preceding discussion suggests a variety of signals that can indicate that a leader is vulnerable. These fall into two groups—industry signals and signals based on leader traits.

1. Industry Signals

Structural change provides perhaps the strongest signal that an industry leader might be vulnerable. Structural change emanating from outside an industry is a particularly strong indication of leader vulnerability, since entrenched leaders often misinterpret it.

Some important industry signals of leader vulnerability include:

Discontinuous Technological Change. Discontinuous technological change raises the possibility that a leader’s competitive advantage can be circumvented, as discussed in Chapter 5. In tires, for example, the radial tire provided the discontinuity that allowed Michelin to challenge Goodyear and Firestone. In typewriters, electronics proved the undoing of Underwood and is threatening SCM. It is more likely that the leader will be favorably positioned to respond to continuous technological change than the challenger, because of its scale economies or cumulative learning.

Buyer Changes. Any changes in the buyer’s value chain, for whatever reason, may signal new opportunities for differentiation, new channels, unbundling, or other opportunities. An increasing number of women in the workforce, for example, created opportunities to challenge leaders in many industries producing women’s or household products. New buyer segments are also a sign of opportunity because the leader may not be well placed to serve them.

Changing Channels. The emergence of new channels provides a potential opportunity to attack a leader dominant in existing channels. The shift of sales of many consumer goods toward supermarkets, for example, has created the conditions for attacking a number of leaders.

Shifting Input Costs or Quality. Shifts in the quality or cost of significant inputs may signal an opportunity for a challenger to gain a cost advantage through a new production process, locking up new sources of raw materials, or reengineering product designs to reduce or alter material content. The dramatic rise in power costs, for example, is providing opportunities for repositioning in aluminum smelting.

Gentlemen ’s Game.       As discussed earlier, an industry with a long history of stability may signal that a leader has played the role of statesman and may retaliate slowly.

2. Leader Signals

The following traits of industry leaders are signs of possible vulnerability:

Stuck in the Middle. A leader that has become stuck in the middle (lacking cost leadership or differentiation vis-à-vis other incumbents) provides an inviting target. The challenger may find it easy to meet the three conditions outlined at the beginning of this chapter.

Unhappy Buyers. A leader with unhappy buyers is often vulnerable. Unhappy buyers suggest that the leader has exercised its bargaining power or that leader personnel have developed an attitude of arrogance based on past success. Unhappy buyers may actively encourage and support a challenger.

Pioneer of Current Industry Technology. A leader who pioneered the current generation of industry technology may be reluctant to embrace the next one and may also be inflexible because of its investment in the current technology. Ford seems to have suffered from this problem in the early years of the auto industry.

Very High Profitability. A leader making extraordinary profits may provide an umbrella for a challenger, if high profits more than offset the costs of attack. Very profitable leaders can also be reluctant to diminish their profits to retaliate. Moreover, extraordinary returns may also signal that a leader might yield share in less profitable parts of the product line, providing opportunities for focus by challengers.

History of Regulatory Problems. A leader with a history of regulatory problems, such as antitrust, may be actually constrained from vigorous retaliation or believe itself to be.

Weak Performer in the Parent Company Portfolio. A leader perceived as a weak performer by its parent company may well not get the capital to keep up with the latest technological change, or have sufficient discretion over profitability to retaliate vigorously against challengers.

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

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