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— indus­ try 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 vulnera­ bility, since entrenched leaders often misinterpret it.

Some im portant  industry  signals of leader vulnerability include:

Discontinuous Technological Change.        Discontinuous technologi­ cal 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 chan­ nels. 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 dram atic 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 vulner­ ability:

Stuck  in the Middle. A leader that  has become  stuck  in the middle (lacking cost leadership or differentiation vis-a-vis other incum­ bents)   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 vulnera­ ble. 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 o f 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 invest­ ment  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 o f Regulatory Problems. A leader with a history of regu­ latory 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 per­ ceived 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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