What makes a “good” competitor?

Competitors are not all equally attractive or unattractive. A good competitor is one that can perform the beneficial functions described above without representing too severe a long-term threat. A good competitor  is one that  challenges the firm   not  to be complacent  but is a competitor with which the firm can achieve a stable and profitable industry equilibrium without protracted  warfare. Bad competitors, by and large, have the opposite characteristics.

No competitor ever meets all of the tests of a good competitor. Competitors  usually have some characteristics  of a good competitor and some characteristics of a bad competitor.  Some managers,  as a result, will assert that  there  is no such   thing as a good   competitor. This view ignores the essential point  that some competitors  are a lot better than others, and can have very different effects on a firm’s competitive position.   In   practice, a firm must  understand  where each of its competitors falls on the spectrum from good to bad and behave accordingly.

1. Tests of a Good Competitor

A good competitor has a number of characteristics. Since its goals, strategy, and capabilities are not static, however, the assessment of whether a competitor is good or bad can change.

Credible and  Viable.     A good competitor has sufficient resources and capabilities to be a m otivator to the firm to lower cost or improve differentiation, as well as to be credible with and acceptable to buyers. The competitor cannot serve as a standard of comparison  or aid in market development  unless it has   the   required  resources to be viable in the long term and unless buyers view it as at least a minimally acceptable alternative. The  credibility and  viability of a good competi­ tor are particularly important to its ability to deter  new entry. A competitor m ust have resources sufficient to make  its retaliation a credible threat to new entrants and it must represent aii acceptable alternative to buyers  if they are to forgo looking for new sources. Finally, a competitor must be strong enough to keep the firm from becoming complacent.

Clear, Self-Perceived   Weaknesses.         Though  credible and   viable, a good competitor has clear weaknesses relative to a firm which are recognized. Ideally, the good competitor  believes that  its weaknesses will be difficult to change. The competitor need not be weaker every­ where, but  has some clear weaknesses that  will lead   it   to   conclude that it is futile to attempt  to gain relative   position   against a firm   in the segments  the firm is interested in.

Understands the Rules.   A   good   competitor  understands  and plays by the rules of competition  in an industry,  and  can recognize and read market signals. It aids in m arket development and promotes the existing technology rather than attempting strategies that involve technological or competitive discontinuities in order to gain position.

Realistic Assumptions.    A good competitor has realistic assump­ tions about the industry and its own relative position. It does not overestimate industry growth  potential and therefore overbuild capac­ ity, or underinvest  in capacity   and   in so doing   provide   an   opening for newcomers. A good competitor also does not overrate  its capabili­ ties to the point  of triggering   a battle   by   attempting  to   gain   share, or shy from retaliating against entrants because it underestimates its strengths.

Knowledge o f Costs.    A good competitor  knows what  its costs are, and sets prices accordingly. It does not unwittingly cross-subsidize product lines or underestimate overhead.  As in the areas described above, a “dum b” competitor  is not  a good competitor  in the long run.

A Strategy that Improves Industry Structure.       A good competitor has a strategy that preserves and reinforces the desirable elements of industry structure.  For example, its strategy might elevate entry barri­ ers   into   the   industry,   emphasize  quality   and   differentiation   instead of price cutting,   or mitigate buyer  price sensitivity through  the nature of its selling approach.

An Inherently Limiting Strategic Concept. A good competitor’s strategic concept inherently limits it to a portion  or segment  of the industry that is not  of interest to the firm, but  that  makes strategic sense for the competitor. For example, a competitor following a focus strategy based on premium  quality might  be a good competitor  if it does not want to expand its share.

Moderate Exit  Barriers.    A   good   competitor  has   exit barriers that  are significant enough  to make  its presence in the   industry a viable deterrent to entrants, but yet not so high as to completely lock it into the industry.  High exit barriers create the risk that the competi­ tor will disrupt the industry rather than exit if it encounters strategic difficulty.

Reconcilable Goals. A good competitor has goals that can be reconciled with the firm’s goals. The  good competitor  is satisfied with a market  position for itself which   allows the firm   to simultaneously earn high returns. This often reflects one or more of the following characteristics of a good competitor:

HAS MODERATE STRATEGIC STAKES IN THE INDUSTRY.    A good competitor does not attach high stakes to achieving dominance  or unusually high growth in the industry.  It views the industry  as one where continued participation is desirable and where acceptable profits can be earned, but  not  one where  improving  relative   position has great strategic or emotional  importance.  A bad competitor,  on the other hand, views an industry as pivotal to its broader corporate goals. For example, a foreign competitor entering what it perceives to be a strategic market  is usually a bad competitor.  Its stakes are too high, and it may  also not understand the rules of the game.

HAS    A    COMPARABLE   RETURN-ON-INVESTM ENT   TARGET.   A good competitor seeks to earn an attractive return on investment and does not place greater priority on gaining tax benefits, employing family members, providing jobs, earning foreign exchange (e.g., some govern­ ment-owned competitors),  providing an outlet for upstream  products, or other goals that  translate  into unacceptable  profits in the industry. A competitor with compatible profit objectives is less likely to undercut prices or make heavy investments to attack  a firm’s position. Differ­ ences in goals make  McDonnell-Douglas  a much  better  competitor to Boeing in aircraft than the state-owned Airbus Industries, for ex­ ample.

ACCEPTS ITS CURENT PROFITABILITY.  A   good   competitor, while seeking to earn attractive  profits, is typically satisfied with its current returns and  knows that improving them is not feasible. Ideally the competitor  is satisfied with profitability that  is somewhat  lower than the firm’s in segments that they jointly  serve. In such a situation the competitor is not prone  to upset  the industry  equilibrium in order to improve its relative profitability, and   its modest  returns  may serve to discourage entry by new competitors.

DESIRESCASHGENERATION. A good competitor is interested enough in generating  cash for its stockholders  or corporate  parent that it will not  upset industry  equilibrium  with   m ajor  new capacity or a major product  line overhaul. However,  a good competitor does not harvest its position in the industry because this will threaten  its credibility and viability.

HAS A SHORT TIME HORIZON.  A good competitor does not have so long a time horizon  that  it will fight a protracted  battle to   attack a firm’s position.

Smaller divisions of diversified firms can often be good competitors if they are not  viewed as essential to long-term  corporate  strategy. They are often given tough  profitability targets  and expected to gener­ ate cash flow. Divisions that are slotted for growth may be bad competi­ tors, however. Squibb’s acquisition of Beech-Nut’s baby food business was predicated on the perception  that  Beech-Nut  had  significant growth potential. This led Beech-Nut to take some actions that proved unsuccessful but that undermined the industry.

Even a competitor with considerable strengths can be a good competitor if it has the right goals and strategy. Its goals and strategy create a situation where a firm   and  the   competitor  can   coexist. A clear and self-perceived weakness is thus not a prerequisite for a good competitor. Conversely, however, a competitor with a very long time horizon, little short-run need for cash flow, or a willingness to take substantial  risks is usually a bad com petitor  from the point  of view of achieving a stable industry  equilibrium,  whether or not  it has any real strengths.

Sometimes a competitor can be a good competitor to a firm but the firm is not a good competitor to it. One competitor plays by the rules, but the other attacks it anyway. Industries are most stable when firms are mutually good competitors— the segment  one competitor focuses on is profitable for it but  not  of interest  to the other, for example. M utually  good competitors play to their respective strengths and succeed at doing so given their respective internal standards.

2. “Good” M arket Leaders

These tests of a good competitor  also shed   light on   what  makes a good market  leader from   the perspective of followers.   If a firm is not  in a position to be among  the leaders in   the   industries   it serves, its success may well be highly dependent  on picking industries with good leaders. The  single most  im portant  quality of a good leader from a   follower’s perspective is that  the   leader   has   goals and  a strategy that provide an umbrella under which the follower can live profitably. For  example, a leader with high return-on-investment  goals, concern for the “ health of the industry,”  a strategy built upon  differentiation, and a disinclination to serve certain industry segments  due to mixed motives will offer opportunities  for followers to earn attractive  returns in a relatively stable industry  environment.  Conversely, a leader that fails to understand  the benefits of viable followers,   that  is satisfied with low returns, or whose strategy works  in other  ways to erode industry  structure  is unlikely   to   provide  an   attractive  environment for followers. For  example, a leader  pursuing  a strategy   based on going down the learning curve rapidly through low prices in an industry where buyers are powerful and price-sensitive will often destroy the industry for followers (and perhaps for  itself).

3. Diagnosing Good  Competitors

Diagnosing whether a rival is a good competitor requires a com­ plete competitor analysis. A com petitor’s goals, assumptions, strategy, and capabilities all play a   part  in   determining  whether  it is a good or bad competitor for a particular  firm.9 Since no competitor  ever meets all the   tests   of a   good   competitor  completely,   it   is necessary to decide whether  a competitor’s  desirable characteristics  outweigh those that undermine the industry or a firm’s position.

A number of examples may serve to illustrate the process of weighing and balancing a competitor’s characteristics to reach a net assessment of whether  it is good, bad, or somewhere  in between.   In the computer industry, Cray Research seems to be a good competitor for IBM, while   Fujitsu  is a bad   competitor.  Cray  is a viable rival that plays by   accepted  rules   in a   focused   segment  of the   industry, and does not  appear to misjudge  its ability to take on IBM.  Fujitsu, on the other hand, has high stakes in succeeding against IBM,  low standards  for profitability   in m arkets  it   is attempting  to   penetrate, and a strategy that may worsen industry structure by undermining differentiation.

In the   copier industry,  Kodak  is a   relatively   good   competitor for Xerox. Kodak is concentrating  on the high-volume  end of the market and emphasizing  quality and service.   Though  it   has   taken some profitable market share away from Xerox, Kodak has high rate- of-return standards  and   is playing by   the same   rules   as Xerox. Thus it has pushed  Xerox  to improve  its quality. Moreover,  Kodak  does not appear to view copiers as a linchpin of an office automation strategy that would justify accepting   low   profits,   but  as a profitable business area in its own right.

In fertilizer and chemicals, conversely, oil companies  have proven to be bad competitors. They have had excess cash to invest, and have looked for big markets  in which they could gain   large market  shares so as to have a noticeable impact on their financial  statements. Instead of emphasizing R& D and customer  service, most oil companies have competed on price and accelerated the commoditization  of  the indus­ tries they entered. They  have also had  poor  forecasting ability, and tended to build huge new plants  during  the peaks of the business cycle rather than acquiring facilities during  troughs.  This  has meant that they have created or exacerbated problems of excess capacity.

The competitive situation in CT  scanners  illustrates a case where a follower seems to understand  the benefits of a good market leader. The Israeli company Elscint has gained a number two or three market position. GE  is the leader in the industry,  and Elscint  has publicly disclaimed a desire to overtake GE. Elscint views G E as a good market leader because it maintains  high prices, differentiates based on service and reputation, and has invested heavily to educate  and develop the market. Another historically good m arket leader is Coca-Cola. Coke avoided price competition and vigorous retaliation  against followers’ moves, opting for a statesman’s  role instead. Pepsi Cola, D r Pepper, and Seven-Up enjoyed many  years of stable profits as followers. Per­ haps as a result of Pepsi’s misjudgment  in attempting  to take too much share from Coke combined with the ascendance of new top management, however, Coke is showing signs of becoming much more aggressive. Pepsi’s apparent triggering of Coke’s change of behavior illustrates a pitfall in dealing with good competitors that I will discuss further below.

If competitors are bad enough, even a firm with a significant competitive advantage may find it unattractive to compete in an indus­ try. In mushrooms, for example, Ralston-Purina had some potential advantages but faced many family firms with low return-on-investment standards  as well as imports  from Taiwan  and the People’s Republic of China. Ralston finally exited the industry.

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

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