This model of the deep-pocket advantage is static, however. It assumes that battles can be won or lost by tallying up the level of resources of each player at a given moment in time. But sometimes a small competitor can neutralize the advantage of the deep-pocketed company. Superior resources can sometimes actually be an obstacle to success. By relying on superior forces rather than strategic maneuverability and flexibility, the player with deep pockets sometimes loses its advantage. It is actions and maneuverability that create advantage. Through dynamic maneuvering, a relatively small company can defeat a large one and in the process become a large firm with its own deep pockets. In addition, alliances can be built to add to the resources of small players.
NationsBank’s rise illustrates how deep-pocket advantages are unstable in dynamic markets. The expansion of NationsBank was driven in no small part by its intense rivalry with its crosstown competitor in Charlotte, First Union Corporation. Both NationsBank (the fifth-largest bank in the United States in 1993) and First Union Corporation (the ninth largest) started as small local banks. At that time the largest bank in their region was Wachovia Corporation—but not for long. NationsBank’s Hugh McColl says, “We always thought we were competing against Wachovia until we got so much bigger and looked back.”5 Wachovia’s deep pockets were no match for the aggressive maneuvering of its two smaller rivals.
Both NationsBank and First Union pursued a policy of resource escalation. First Union made thirty-five acquisitions between 1985 and 1993. NationsBank expanded into Florida in 1982. First Union followed. In fact, it was First Union’s pursuit of the high-profile Southeast Bank in Miami that led NationsBank to purchase C&S/Sovran. The two large banks have fought a fierce battle on building deep pockets as well as fighting for dominance in the other arenas of competition.
But their relatively large resources were no match for the huge threat that appeared on the horizon. While banks were battling for dominance, giants from other industries were lumbering into banking, undermining the deep- pocket advantages of the two banks. Large securities firms such as Merrill Lynch and Company entered traditional banking areas (e.g., making loans)6 Mutual funds have siphoned off deposits. Companies as diverse as General Motors and AT&T moved into the credit card business. As Edward E. Crutchfield, chairman and CEO of First Union Corporation, commented, “We bankers are throwing snowballs [at each other] and there’s someone out there with an Uzi.”7
The competition between NationsBank and First Union shows how when one competitor builds resources, it may lead to a cycle in which competitors match or exceed ever-higher levels of resources. Wachovia saw how quickly its deep-pocket advantage over local rivals could be eroded by aggressive competitors intent on building their own positions. Then NationsBank and First Union found that even a relatively secure deep- pocket advantage in one industry is no protection from entry by giants from another industry. Deep pockets are a key part of competitive maneuvering, but like all the other traditional advantages, they do not ensure long-term sustainable advantage for companies.
As can be seen from the example of NationsBank and First Union, leveraging the deep-pocket advantage to create competitive advantage in the marketplace is a much greater challenge than it appears. Largeness is not always as sustainable as some might think. Looking at the long-term maneuvering of large and small firms may add to our understanding of deep pockets, leading us to the first dynamic strategic interaction—attempts to use deep pockets to gain advantage.
Although most of our discussions here focus on small and large companies, with the large one considered to have deep pockets, similar interactions can occur between two large rivals. The two large companies compete to gain deeper pockets than the other.
1. The First Dynamic Strategic Interaction: Drive ’Em Out
Although they may not admit it for reasons of antitrust law, deep-pocketed firms occasionally throw their weight around. In the first dynamic strategic interaction, the large firm uses its superior force (deep financial pockets) to drive its competitors into bankruptcy, to seize market share, and to create highly concentrated industries. By using very competitive or even predatory pricing, the deep-pocketed firm can use more force than is needed to win, thereby overwhelming the competitor. Since the true costs of a product are often hard to determine, predatory pricing can be difficult to prove. Thus, the deep-pocketed firm can drive smaller competitors out of the market and then keep the spoils for itself.
But this approach is tricky. To protect the gains in new customers that are made using this strategy, there must be barriers to firms returning to the market or entering it after the price war ends. Otherwise, the advantage the large firm gains from the costly price war will be short-lived. The deep-pocketed firm would have no time to recapture the losses from its low-price strategy if reentry is easy and swift.
A&p found this out the hard way. It kicked off one of the most bitter and damaging price wars in the supermarket industry with its WEO campaign (Where Economy Originates) in the early 1970s.8 Using deep pockets that it had amassed over several years, A&p started a price war that forced a few large chains into the red and drove smaller ones into bankruptcy.9 A&p may have won the battle, but It lost the war. Its sales increased by $800 million,10 but it posted a $51 million loss in the 1973 fiscal year,11 and buyers became even more price sensitive. This sensitivity actually made it harder for A&p to hold onto its newfound customers. These shoppers, drawn to A&p by bargain prices, were just as easily wooed back to competitors when A&P’s prices went up again and competitors cut their prices in response to A&P’s reductions.
After driving back a competitor, the deep-pocketed firm needs to be able to build a wall to protect its gains, using the entry barriers discussed in Chapter 3. One way companies do this is to create switching costs for customers who are using their products or services. In industries such as retailing and consumer goods, where switching costs are generally very low, the drive ’em out strategy may be difficult to pull off successfully, as A&P apparently found out. In industries such as durable goods and heavy equipment, where the switching costs are much higher or purchase frequency is low, this strategy may be a bit more successful. Although, as we showed in Chapter 3, switching costs are not as substantial a barrier as they are thought to be. With switching costs and incentives to trade up within the company’s line of products, the deep-pocketed firm can hold on to some of the stolen customers. Using deep pockets to initiate a price war can make it more difficult for companies to create switching costs. If customers come for lower prices, they are just as likely to leave for lower prices later, unless the company can offer other incentives for the customers to stay. A&P wasn’t able to do this.
One of the most challenging aspects of a large company dropping prices is dealing with the fallout of public perceptions. No one likes a bully. While this approach is effective, it can be highly inflammatory. After American Airlines announced it was restructuring its fares in April 1992, rival carriers, including Continental and American West, filed suits accusing American of predatory pricing,12 although a federal court cleared American in August 1993.13 And a headline in Business Week asked, uThe Airline Mess: American’s Bob Crandall: Is he part of the problem? Or is he the solution?” The public may tend to side with the underdog, and the smaller player who wishes to fight back has several options. The aggressive deep-pocket firm is not immune from counterattack, as we can see in the next dynamic strategic interaction.
2. The Second Dynamic Strategic Interaction: Smaller Competitors
Use Courts or Congress to Derail the Deep’Pocketed Firm
The biggest opponents of an aggressive firm with deep pockets, at least in the United States, are the courts and legislative bodies. As we saw in the case of American’s aggressive pricing strategy, one of the first responses of its competitors was to file a suit alleging predatory pricing. This can discipline the large firm and keep it from fully using its deep pockets against smaller competitors.
A tiny manufacturer of Party Animals snack crackers, Owen Ryan and Associates, successfully fought off an alleged attempt to crush its name by Anheuser-Busch, which was concerned the cracker would be confused with the beermaker’s mascot, Spuds Mackenzie, The Original Party Animal, according to Marketing News. The Trademark Trial and Appeals Board ruled in Ryan’s favor in June 1989. When Anheuser-Busch kept up the battle, Party Animals responded by planning a public relations campaign focused on a one-day boycott of Bud Light and a slogan of “free the party animals!”14
The Manhattan Toy Company, with twenty-two employees, successfully fought off Gerber’s Toy Division, part of the one billion dollar multinational, when Gerber allegedly copied one of the toy company’s stuffed dinosaurs. The toy manufacturer went to court and gained a temporary restraining order against its deep-pocketed rival. Success magazine reports that Gerber pulled the dinosaur from its catalog and settled out of court.15
When Haagen-Dazs allegedly used its substantial clout (through parent Pillsbury) to try to squeeze Ben & Jerry’s off the supermarket shelves, according to Success magazine, the smaller Vermont ice cream maker responded with a public relations campaign that painted Pillsbury as an oversized bully. Using the slogan “What’s the Doughboy Afraid Of?” they set up an 800 number and a Ben & Jerry’s Defense Fund. They encouraged callers to send letters to Pillsbury. Ben & Jerry’s also filed a suit under federal antitrust laws, which Pillsbury settled out of court.16
In some industries where national security is an issue, the government can sometimes provide direct subsidies or aid that gives the small firm access to deeper pockets. Governments provide protection and resources to industries that are considered vital to national interests such as defense, agriculture, aerospace, railroads, and supercomputers.
In order to balance the scales against deep-pocketed Boeing, a $29 billion company that is number one in airplane manufacturing, Airbus Industrie has received European government subsidies for over twenty years, and McDonnell Douglas Corporation will most likely be receiving Taiwanese aid toward the $4 billion development costs associated with developing the next generation of planes.
If these lawsuits or government subsidies are effective, the deep-pocketed firm may be forced to back down. But large firms do not sit idly by as these small firms file lawsuits or seek government support. The deep-pocketed firms take measures to defend themselves against antitrust suits, which is the focus of the next dynamic strategic interaction.
3. The Third Dynamic Strategic Interaction: Large Firm Thwarts Antitrust Suit
Several large U.S. firms, such as American Airlines and IBM, have been sued but managed to escape from the antitrust vise without serious damage (except perhaps for the long-term dampening effect of the actions on corporate aggressiveness). It is to be expected that smaller competitors will file a suit against almost any aggressive move from a larger competitor. So these suits sometimes have little ground to stand on. Even when there are grounds for the suit, the large firm may try to bury the smaller firm in an avalanche of documents during the discovery process that precedes going to court. When trucks and trucks of memos arrive at the plaintiff s lawyer’s office, it may take years and millions of dollars in legal fees to read, catalogue, and find the documents that incriminate the firm. This can exhaust the resources of smaller plaintiffs or at least delay the proceedings long enough for circumstances to change, allowing a favorable negotiated settlement. So large firms can sometimes successfully battle these challenges in court.
Also, government support for vital industries is just as likely to go to large competitors as to smaller ones. If the large competitor can demonstrate its ability to meet the needs of national security, it can cut off the smaller company’s efforts to gain protection or support.
More interestingly, Japanese firms avoid U.S. government meddling by locating their operations outside the influence of the U.S. government and financial systems. Japanese keiretsu are not easily made susceptible to these government controls and therefore can operate much more freely than their U.S. counterparts. The United States has a hard time identifying the costs of Japanese competitors, making it difficult to prove predatory pricing in the United States. These firms may also be able to use monopolistic practices in Japan that would not be allowed under U.S. law. They not only avoid U.S. laws, but they also benefit from the support of their own government through subsidies and beneficial regulations. However, many Japanese firms have opened plants in the United States for reasons partially outlined in the previous chapter. This is making many Japanese competitors subject to U.S. laws.
Consider De Beers, the South African diamond-mining concern that controls an estimated 85 percent of the world’s gem-diamond sales through its Lon- don-based Central Selling Office. De Beers must be careful where it does business to avoid becoming subject to U.S. antitrust regulation. Since the U.S. Supreme Court in the mid-1940s dismissed a U.S. antitrust action against the company, De Beers has been very careful to do nothing that would give it a presence in the United States because it is widely seen to exercise near-cartel control over the natural diamond gemstone business.17
Even when antitrust suits are successful, competitors can work around them with price and quality positioning. For example, Polaroid successfully used antitrust suits to drive Kodak out of the instant-film market, but Kodak used the availability of one-hour processing to cut into Polaroid’s instant market. Kodak also introduced disposable cameras to counter the convenience of instants, and Polaroid responded with a peewee camera to counter the portability of the disposables. In this case the antitrust suit did little to dampen the pace of competition.
The difficulty of carrying out the threat of antitrust action against many deep-pocketed firms means that small companies have to resort to other tactics to counter the deep-pocketed aggressor. This is the subject of the next dynamic strategic interaction.
4. The Fourth Dynamic Strategic Interaction: Small Firms Neutralize the Advantage of the Deep Pocket
Even without resorting to antitrust laws, the small firm has a variety of defenses against the deep-pocketed firm that is using its brute power to drive the small competitor out of business. Small firms can sometimes outmaneuver larger firms, drawing on alliances or focusing on niche markets. These resource-scarce, but nevertheless resourceful, small firms can sometimes turn the deep-pocket advantage of their larger rivals into a liability. We observed five options that were used successfully to counter the deep- pocket advantage.
OPTION 1: RESOURCE ESCALATION
Probably the most common response to an aggressive large opponent is that the smaller firm starts to develop its own deep pockets through mergers or alliances. Relaxed enforcement of antitrust rules allows for mergers with other companies in the same industry. For example, Seagram, a small player in the wine industry, bought a number of smaller wineries so it could compete with Gallo. Smaller law firms in the United Kingdom and Denmark merged to create larger companies that can compete against the large U.S. law firms.18 These combinations can create a force that rivals that of the deep-pocketed competitor.
Besides traditional mergers with competitors in the same industry, firms build up their own deep pockets through nontraditional partnerships. There are a variety of alliances that can build the small firm’s resources.
- Alliances based on ownership of banks and other financial institutions Sears and General Electric have both benefited from owning an investment bank, not only through the business it produces but also because having relationships with loyal bankers provides access to markets that can generate a substantial war chest in the event of a hostile takeover or a serious competitive challenge in their customer or product markets. Although both companies often use outside partners for their own banking, the potential to draw upon these alliances creates a deterrent effect for smaller competitors. It could also be a mistake to own these resources when these services could be rented whenever needed.
- Alliance with employees and suppliers The support of employees and suppliers provides some firms with deeper pockets than they would otherwise be able to develop. These constituents sometimes invest in the firm and add to resources that fund efforts to counter the attack of a larger competitor. Employees and suppliers are sometimes willing to join with a firm to fight for its market since doing so is tied to their own self-interests.
- Franchising Some businesses, such as fast-food chains, clone themselves quickly into a larger organization through franchises. This method gives the firm the power of a much larger organization by giving it access to the funds of franchisees. Even the large soft drink and car manufacturers use franchised dealerships/distributors to extend their deep pockets.
- Other Alliances Alliances with other companies in the industry can draw together the scale and power to dominate an industry. For example, Matsushita successfully beat back Sony’s Beta system by sharing its VHS technology with other firms. More recently, Sony has turned this strategy back against Matsushita by sharing Sony’s new 8 mm camcorder technology with its competitors to increase penetration and standardization of the format. The strategy helped the 8 mm format capture at least half of the world camcorder market in 1991. Research alliances such as the U.S. Sematech consortium can help companies overcome the monumental costs of R&D for new high-tech products and fight the deep pockets of subsidized overseas competitors.19 Sematech combined the expertise and resources of fourteen U.S. electronics companies, as well as more than half a billion dollars in federal assistance. Among its early successes was the development of a new, faster, and more precise chip-making tool that is expected to surpass Japanese technology.20
Another approach to building resources through alliances can be seen by looking at the structures of alliances surrounding AT&T and IBM. Although these are both deep-pocketed firms, they challenged one another with an escalating level of resources. This process of escalation led each side to establish ever-widening networks of alliances, as shown in Figure 4-1. At each stage of their development, the two giants added alliances to deepen their resources and expertise in diverse areas. Smaller firms sought the protection of joining up with each alliance. AT&T moved into computers and data networks through alliances with Lucky Gold, NCR, Star, Wang, and Sun Microsystems. IBM complemented its computing power through alliances with Intel, Rohm, Siemens, MCI Communications, and Bell Atlantic.
FIGURE 4-1
COMPETING GLOBAL NETWORKS: IBM AND AT&T
To fit into an alliance of the type in Figure 4-1, smaller firms often focus their resources on a smaller mission. Firms sometimes conserve their resources by focusing on being specialized on one component of the product or in one aspect of the value chain where they can be the ubest in the world.” This decreases the firm’s vulnerability to a broad-based attack by a deep-pocketed rival and invests more resources in that component or stage of the value-added chain than the deep-pocketed firm has. Thus the deep-pocketed firm is likely to want to ally with the smaller firm to gain access to its greater expertise.
Of course, it is not always possible to escalate the depth of a firm’s resources through mergers and alliances. Moreover, trying to do so can be difficult. During the 1980s, for example, many of the megabanks that were bom of huge mergers stumbled, including the ill-fated merger between C&S and Sovran before the creation of NationsBank by NCNB. Statistics on bank mergers show that acquisitions are very rarely successful. They usually depress earnings, returns, and share price of the acquirer. The New York consulting firm FMCG found that on average the shares of an acquirer fall 40 percent lower than competitors’ six years after the acquisition. Other studies show that bigger banks are less profitable than medium-sized ones.21
Besides the poorly structured deals that are entered in the rush to grow, the bigger bank faces several other obstacles. While, in theory, a larger bank can reorganize to cut costs and achieve economies of scale, it is often difficult to reorganize the resources of a sprawling organization to achieve savings. This is the lesson that C&S and Sovran learned during their merger in 1989 that preceded the merger with NCNB. Euromoney comments that the combined bank ended up running itself as two separate banks, making it difficult to capitalize on the synergies between the two operations.22
Thus, smaller firms sometimes use some of the following alternatives for dealing with deep-pocketed rivals: taking out the aggressor, swarming, cooperative strategies, and avoiding direct competition.
OPTION 2: TAKING OUT THE AGGRESSOR-DAVID BUYS GOLIATH
When a small firm can’t beat its deep-pocketed opponent in the custo- mer/product marketplace, some resort to winning in the stock market by launching a takeover. The resources of the deep-pocketed aggressor are sometimes stretched through fierce price competition in several markets, making it susceptible to a hostile takeover. When using their deep pockets to fight price wars, these aggressors are leaving money on the table by charging less than the price the market will bear for their product. They are growing for the sake of growing, often sacrificing shareholder value in pursuit of market share. This can sometimes be an excellent environment in which to successfully launch a takeover, especially if the smaller firm can gain access to the resources needed for the takeover. The smaller firm might be able to fund the takeover through junk bond financing, through bootstrapping by selling off the slack assets of the acquired deep-pocketed firm, or by entering a consortium or alliance to buy the larger firm. Although hostile takeovers have been less common in the early 1990s, this can still be a viable means for a small firm to overcome a deep-pocket advantage.
In 1988 Ames Department Stores purchased the Zayre Corporation, which more than doubled Ames’ sales, according to Business Week. The purchase was described by one analyst as “a small company swallowing the whale.”23 The move allowed Ames to swallow a large competitor as well as to expand its geographic reach. But the risk of such moves, as Ames found, was a 56 percent debt-to-equity ratio (according to Business Week) that eventually led to financial troubles.24
While this strategy can be effective in the United States, it is nearly impossible to use in other parts of the world. In Japan, for example, as T. Boone Pickens discovered during his attempt to buy an auto-parts supplier, hostile takeovers are not a viable option, especially if the bidder is a foreigner.
Even if the takeover attempt is not successful, this still is an effective defense against an assault by a deep-pocketed opponent. By defending itself against the takeover, the large company may be so depleted that it could find its own pockets are much more shallow. It could also be so distracted that it loses its momentum in seizing market share. Nevertheless, this is not a frequently used option because smaller firms often can’t muster the financial resources to launch the hostile takeover, especially since the collapse of the junk bond market.
OPTION 3: SWARMING
Even without formal mergers and alliances, small firms sometimes tacitly work together to respond to an aggressor. Under this scenario, groups of small firms attack the large aggressor simultaneously from different directions, like a swarm of killer bees attacking a cow. This forces the aggressor to respond on several different fronts, making it difficult to sustain its response. While U.S. antitrust laws prohibit explicit collusion, tacit alignments sometimes occur naturally in the course of business when firms are just independently following good strategies that only appear to complement one another. This type of “swarming” by small companies can provide a substantial sting to a large company. Sometimes laws can actually help the small “swarming” competitors by preventing action by the large company, as in the case of pay phones in the United States.
The 1984 Federal Communications Commission’s breakup of the Bell System forbad the Baby Bells from manufacturing or selling pay phones, although they could install and operate them. This opened the doors to many small entrepreneurs in the private pay-phone business. These companies with high-tech phone systems have forged agreements with convenience store chains by offering higher cuts to businesses providing space for the phones. These small pay-phone companies, in alliances with retail chains leasing, owning, or operating a small number of pay phones, are stinging the Baby Bells with thousands of small bites in the pay-phone marketplace. Just five years after the FCC ruling, an estimated 175,000 of the nation’s two million pay phones had been replaced by privately owned telephones.25
To take another example, specialty retailers and family-owned retailers who compete with large department stores, such as Sears, have successfully attacked by offering improved selection or pricing tailored to beat each department in the large stores. Each specialty retailer focuses on a narrow product segment offered by the large store. The cumulative effect of several competitors offering better selection or prices than Sears in several product areas has been to force Sears to respond across all its product lines, a considerable investment. In contrast, the smaller retailers make countering changes with more speed and less expense, given their lack of bureaucracy.
An attack by small firms against a deep-pocketed opponent can be risky. If one small firm acts before the others, the deep-pocketed firm may beat it back to “set an example” for the others. Thus, a simultaneous attack is required. Because firms cannot explicitly collude by sitting down at a table, many firms communicate through announcements and published fares or prices. This allows them to signal their intentions and tacitly coordinate their activities.
OPTION 4: COOPERATIVE STRATEGIES
Small firms sometimes try to avoid the costly competitive battles inherent in -the first three options by means of sharing their profits with the deep- pocketed firm by forming joint ventures or through licensing arrangements with the deep-pocketed aggressor. The large firm may agree to distribute the small firm’s products in Asia, for example, in exchange for mutual sharing of technology for use elsewhere in the world. Besides the financial benefits of a joint venture, the small firm may also be able to learn the large firm’s methods of doing business, including manufacturing techniques and strategies of marketing and product design.
Joint ventures between “Davids” and “Goliaths” frequently offer the large company access to new products and technology while the small companies gain the resources needed for R&D. One such joint venture was a deal between Gilead Sciences and Glaxo, Incorporated, a subsidiary of Glaxo Holdings, the world’s second-largest maker of prescription drugs. Gilead received about twenty million dollars for research while Glaxo gained an equity stake in the company and its anticancer drugs.26
It almost goes without saying that such a shotgun marriage is not always comfortable. These joint arrangements have sometimes proven very costly, especially in U.S. ventures with foreign firms, where many joint ventures have failed. Sometimes the larger joint venture partner doesn’t deliver on its half of the bargain. The smaller firm may give the large competitor access to its markets, which could undercut the small firm’s control of its own niche. The information the small firm obtains may be about old manufacturing methods rather than state-of-the-art technology and processes, and the small firm may end up a captive of the larger firm. In any event, the small firm simply ends up as part of an alliance with a deep- pocketed firm that is facing an opposing alliance composed of a second deep-pocketed firm and its numerous smaller allies. Thus, this option does not eliminate competition between deep-pocketed firms. It merely creates alliances of balanced strength to neutralize the advantage of deep pockets on the other side.
OPTION 5: AVOID COMPETING DIRECTLY WITH THE DEEP POCKET
Because deep-pocketed firms are so large, small competitors may be able to squeeze into product/market niches that large firms can’t or won’t enter. By finding new niches outside the primary niches of the large aggressor, small firms often avoid direct competition. Niching strategies can carve out safe places that are too small to be of much interest to the big company. Rolls Royce, for example, was able to move into the U.S. auto market at the high end of GM’s market. By choosing a position that was well above the Cadillac range, it avoided attracting a strong response from the automotive giant.
Niching can be done by concentrating on a small geographic region, specializing the product, and segmenting the market by focusing on a small pocket of customers. It can be aided by the application of new manufacturing technology or through increased output flexibility.
Small companies often use technologies such as computer-aided design and flexible manufacturing to develop niches and escape from price competition with larger firms. For example, Peerless Saw Company, a small Ohio manufacturer of saw blades, was rapidly losing market share to large foreign competitors that offered mass-produced standard blades at lower prices. By developing a computerized laser system to cut its blades, Peerless could offer customized saw blades in smaller batches and still provide fast turnaround. The technology allowed Peerless to focus on the high-margin, premium market for custom blades rather than the low-margin, mass- produced standard-blade market. By creating this niche, it was able to out- maneuver the deep-pocket advantage of its competitors.27
The small firm’s lack of bureaucracy and its more flexible cost structure (since it often avoids a lot of fixed assets and overhead) give it greater flexibility than its larger rivals. This flexibility allows smaller firms to vary their output more easily in response to changing market conditions. The large firm, on the other hand, has to maintain a fairly constant output. A study of more than three thousand firms in eighty-three industries found that output flexibility provided a significant competitive advantage for small firms, especially in volatile and capital-intensive industries.28
Thus, it is clear that deep pockets can be outmaneuvered by smaller firms. Small companies have numerous options to obsolete or neutralize the deep-pocketed firm’s ability to use brute force.
SUMMARY: WHO WINS-BRAINS OR BRAWN?
Brawn, then, is not a replacement for brains. Even the deepest pockets can be tapped dry. They provide a margin of safety, but not absolute safety. General Motors, for example, once seemed invincible because its pockets were so deep and its markets so secure. Its large size, due to earlier successes in the marketplace, made it able to sustain individual product failures without going under. It could launch a few duds without worrying about losing the war. Because it was so big, it could take a hit in one division by subsidizing the losses from other parts of the corporation. Its size also gave it significant economies of scale and scope.
But all these tremendous resources were not adequately rallied to meet the threat of the upstart Japanese automakers. With declining market share GM’s large size suddenly became its greatest liability. Its pockets became so depleted by years of losses that it finally led to the decision by ex-CEO Robert Stempel to reorganize, shuttering twenty-one plants and scaling back its workforce by seventy-four thousand people, including twenty thousand white-collar workers. Moreover, the GM board has replaced Stempel with new management, which is now under orders to tum GM around quickly or be held accountable.
On the other hand, a company such as Honda would not have been voted most likely to succeed in U.S. markets several decades ago. It was small. It had little presence or reputation and a much smaller resource base to devote to the car business. But this may have made it more aggressive and creative in using the resources it had. In the end, its product and process innovation was more valuable than deep pockets.
Similarly, NCR’s rise to seize control of the automatic teller machine (ATM) market in 1987 was helped by deep-pocketed IBM’s misstep in new product development. IBM introduced a flashy ATM in 1985 that could read the magnetic coding on checks and cash them on the spot. Although this was a revolutionary machine, customers were looking for incremental improvements in a lower-cost machine. NCR provided it, along with a relentless commitment to high quality, reliability, and customer service. Operating out of a single plant in Scotland, NCR rose from being the ninth-largest producer of ATMs in 1980 to surpassing market leaders IBM and Diebold in 1987.
IBM essentially gave up on the ATM business, becoming the minority partner in a joint venture with Diebold (Diebold owns 70 percent of the venture and its president is head of it). NCR’s single plant continued to expand its sales.29
Thus, the smart move can beat the big move, and brains can beat brawn. To do so, however, requires the small firm to outmaneuver the large one by using the hypercompetitive techniques discussed in Chapters l, 2, and 3. This, interestingly, restarts the other cycles all over again, each time pushing the conflict level even higher.
Sometimes brains can’t beat brawn, and the small firm has exhausted all the options in the fourth dynamic strategic interaction—resource escalation, taking out the aggressor, swarming, cooperative strategies, and avoiding direct competition. But even in this case, deep-pocketed firms often meet a countervailing force from outside their industry that restrains their behavior. This is the next dynamic strategic interaction.
5. The Fifth Dynamic Strategic Interaction: The Rise of a Countervailing Power
When a deep-pocketed firm comes to dominate its industry so much that it develops excessive power over its competitors, it also develops power over suppliers and customers. Suppliers and customers may try to recapture power by building themselves up into a countervailing force. They may merge or develop consortia (such as buying cooperatives or supplier councils) that put pressure on the deep-pocketed firm.
When CBS announced plans to begin charging its network affiliate stations for programming and marketing services it used to provide for free, the affiliates (buyers of the network’s programs) acted together as a countervailing power against the powerful network. The affiliates began replacing network news programs with outside news suppliers. In response to this countervailing power of the affiliates, CBS increased the amount of time affiliates have for local news broadcasts during CBS This Morning.30
Customers sometimes integrate backwards into the deep-pocketed firm’s industry. Suppliers sometimes integrate forward into the deep- pocketed firm’s industry. And labor can form a countervailing force against the deep-pocketed firm.
The Belgian company Food Lion drove prices down, mostly by offering employees substantially lower wages and fewer benefits according to Business & Society Review. This, in turn, forced its surrounding competitors to obtain similar labor concessions to be able to match Food Lion’s prices.31 Labor unions, however, formed a countervailing force, attacking on several fronts. Local 400 of the United Food and Commercial Workers International Union counterattacked with coordinated job actions in the United States and Belgium and filed a grievance with an international trade organization.32
Thus, even if the competitors don’t destroy the deep-pockets advantage, the customers or suppliers will eventually try to do so.
Source: D’aveni Richard A. (1994), Hypercompetition, Free Press.