Strategy Dynamics Briefing 35: Undermining a competitor

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Appraising competitors often involves assessing their strengths and weaknesses in some way, comparable to parts of the SWOT approach that management might use to assess their own business. But such approaches are qualitative and high-level, and quite inadequate for designing and implementing specific competitive campaigns. A more rigorous approach builds on two principles:

  1. A competitor operating in our own industry will likely have both a similar set of resources and a similar architecture for organizing them to ourselves. Competitors may differ in exactly which segments they serve, what products and services they offer, and so on, but the elements will be largely the same. Even where they differ (e.g. outsourcing certain activities that we do ourselves) many of the remaining parts of their resource system will be similar to our own.
  2. Like us, a competitor will have a range of “quality” for each of its resources—larger and smaller customers, products that perform well and not so well, stronger and weaker sales people, and so on.

If we can understand how our own business performs, we should be able to evaluate the performance of any competitor — and therein lies the opportunity to damage that performance at little risk to ourselves.

To illustrate how this can be done, consider the real case of a mid-scale, mid-market restaurant chain, developing fast in a promising market, but number two to a long-established market leader. Although operating only 120 restaurants compared with the leader’s 300+, it was generating nearly as much profit, due to a recent history of finding great locations and developing better products than the leader. With a good understanding of the profit profile of its own restaurants, it was able to estimate the equivalent profile for the competitor (see figure 1).

Making this estimation of the competitor’s performance was especially easy in this case — without resorting to illegal espionage! The profit of a restaurant is simply given by the revenue that comes from customer numbers and prices, minus its costs, which are dominated by numbers of staff and the ownership cost of the real estate. Prices are on the menu, customers can be counted, and their typical meal purchases can be observed. Staff numbers can be counted, and the costs of real estate are in the public domain. The resulting estimation was not exact, but close enough to know roughly how much profit was coming from each of the competitor’s units.

Figure 1: Comparable profit curves for two mid-market restaurant chains.

Comparable profit curves for two mid-market restaurant chains.

Armed with this information, selecting the point of attack was simple. Trying to damage their most profitable units would be hard – they were popular with their local consumers, were well run, and received plenty of attention from headquarters’ management. Any attack on these would certainly have been noticed, and vigorously defended.

Attacking unprofitable units was pointless, as the competitor would not be concerned or damaged by their loss. The appropriate targets were the restaurants contributing profits in the mid-range. These moderately profitable units were geographically dispersed and supervised by different regional managers. Consequently, attacks on a random selection of this list were not noticed, provided that the tactics were subtle. So what should those tactics be, bearing in mind that they are local; that is, conducted by specific units in our business against neighboring units of the competitor?

  • The tactics were not led by price cuts. Reductions significant enough for customers to notice would have hit profit margins hard.
  • Promotions offering extra value for customers were less costly, and more difficult to retaliate against. Those promotions were selectively targeted at specific neighborhoods from which the competing restaurant drew its customers.
  • The next principle is to address every item on consumers’ value curve – service quality, the environment and product quality. Local tactics therefore included ensuring that restaurants were oversupplied with staff and fitted out to give the best possible customer experience.
  • Finally, the units leading the attack were allocated the best unit managers – those most skilled at motivating staff, at ensuring high quality of product and service, and at befriending customers.

Taken together, these tactics took hit badly the revenue from the competitor’s units that were targeted, at which point their own policies started to act against them. With lower revenue, management tried to sustain profits by cutting costs, especially staffing, which then damaged consumers’ experience. With the targeted restaurants becoming rather quiet, they became increasingly unappealing and lost still more consumers. Eventually, the targeted units became so unprofitable that they were neglected by management until they were closed.

Repeating these tactics across a selection of mid-profit outlets inflicted disproportionate damage to the competitor’s overall profits. In Figure 2, eliminating the profits of just 11 units hits the competitor’s profits by 12%, a process that could be accomplished in as little as six months. Repeating this principle over two to three years, dealing in all with 70–80 of the competitor’s units did such damage that they started to experience further problems.

Figure 2: Targeting selected units does disproportionate damage to a restaurant competitor’s profits.

Diagram: Targeting selective units does disproportionate damage to a restaurant competitor's profits.

  • The pressure to sustain profits drove them into system-wide policies that did further damage, such as price discounting and cuts in staffing, marketing, product development and maintenance, all of which undermined critical resources in their strategic architecture.
  • The competitor’s central management started to lose motivation and commitment, and many left for better opportunities—often with the attacker!
  • The confidence of investors was damaged—in this particular case, the business was one of several similar operations operated by the competitor’s corporate owners—so requests for capital were turned down, making it impossible for the rival to match the high quality new units that were being added to the aggressor’s business.

In this case, the competitor left the industry after just a few years of the competitive strategy being implemented, selling most of its remaining viable restaurants to the one-time number two, who was left with a dominant position.

Not all situations make it so simple for management to develop focused competitive tactics. More commonly, it is necessary to learn about the competitor’s source of profitability from customers, rather than from distribution outlets as in the restaurant case.

The business banking division of a major bank did not know which competitors were making how much profit from which customers. However, the bank knew from its own experience the likely value of the banking services for any customer of any size in any sector. It could then make a reasonable estimate of the profit a competitor might be receiving from a similar customer of a similar size in the same sector. From this initial estimate, management could make adjustments if they had reason to believe for example that the competitor made better margins or had some cost disadvantage. The bank’s customer – relationship managers were also able, over a period, to approach customers with whom they did not deal and find out which bank provided its services.

Until next time…

 

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Strategic Management Dynamics book cover Issues to consider

Briefing 34 already discussed the need to pick a specific competitor to target, rather than spread competitive efforts widely, and how to make that choice. Two other key questions arise:

Whether to be open or covert about the attack.
In the restaurant case, secrecy was important because, had the competitor been aware of the plan, it could have looked out for those units that were under attack and responded. In both these cases, the strength of the competitor made it important to be covert. In other cases, it can be appropriate to be open about the attack if it helps the competitor decide early on to admit defeat and withdraw.

Choosing which resources to use as the basis for a competitive attack.
The quality curve can sometimes be constructed, for example, for the profit a competitor makes from individual items in its product range. The attack can then focus on products that are weak, even though they contribute significantly to the competitor’s performance – perhaps a product that is becoming obsolete or is poorly supported. US car makers, for example have repeatedly been picked off by European and Japanese rivals offering superior models in product segments seen as secondary, such as compact cars, performance saloons and hybrid vehicles. The result was, as pundit Tom Peters remarked, that the US auto industry was not defeated by overwhelming force, but was instead “nibbled to death,” piece by piece, over four decades.

This briefing summarises material from chapter 5 of Strategic Management Dynamics, pages 203-308.

Read more about the book on the Strategy Dynamics website

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