On Management

Dec. 21, 2004
Industry leadership: a two-edged sword.

Become an industry leader, the gurus say, and your profits will soar. Be No. 1 or No. 2 in your industry is the advice of General Electric CEO Jack Welch. In general, I concur. Usually, the industry leader commands better margins, on larger sales, and generates a better return on assets than the followers. But getting to the top of the heap is not easy. And staying there can be the most difficult task of all. Remember "king of the mountain" -- the game we played as children? Anywhere we found a pile of dirt, up we went. Whoever got to the top first had to defend that position against the others. It was never easy, because of the number and diversity of attacks. Market leaders have the same problem. It is dangerously easy to relax for just a moment. A little complacency and arrogance can lead to a big fall. When new players enter the game with new tactics, things get even more dicey. Once when I was young we never touched the person on top of the dirt hill. We just dug away at one side of the hill until it collapsed under his weight. This is what rule-breaking new entrants do to an entrenched market leader. The market-share leverage that the leader enjoys -- more volume, with a lower relative slice of revenues or people resources devoted to advertising, R&D, and other support activities -- can be a large advantage. The best example of a company reaching the top and then using its leverage to build a fortress is Wal-Mart. No one can match its low operating costs. Even the best niche competitors must choose their targets carefully. If the niche gets too large or too lucrative, Wal-Mart is likely to invade. However, there is another side to the story. The leader is vulnerable to new technologies, rule breakers, better execution, or guerrilla pricing tactics. If a niche player drops prices on a few key items, and the leader drops its prices to match, the leader usually forgoes profits on a much larger amount of its volume. Then, if several guerrilla competitors attack at once, they can cause real problems for the leader, just like a gang of kids storming the hill. AT&T Corp. is one company that has been assaulted by niche competitors in recent years. No single competitor was all that dangerous, but the cumulative impact of a variety of attacks can undermine the strength and profitability of the leader -- making it more vulnerable when a new and bigger player attacks, perhaps with different rules in mind -- MCI WorldCom, for instance. The other cutting edge of the leverage sword is that the leader's bulk and size, once an advantage, slows its reaction time in defending against guerrilla assaults. Also, it is rare that an industry leader discovers and refines the new technology or the new rules that knock it off its lofty perch. It is far too invested in the old ways and old technology that got it to the top of the heap. There is no universal solution, but the one Wal-Mart employed -- keep attacking, growing, and increasing the size of the "leverage sword" -- is effective. In sports, many teams falter when they stop attacking and begin cautiously defending an ever-dwindling lead. The double-edged sword of industry leadership cuts for the best advantage when you are attacking with it. No success sagas better illustrate this principle than those of Intel and Microsoft. The principal challenge -- even for leaders who are on the attack -- is recognizing when a period of "revolution" begins and their old strengths can no longer dominate. A favorite cartoon of mine depicted a colonial soldier pleading with his general on the field of battle. The soldiers all had muskets. On a nearby wagon was a Gatling gun, an early automatic machine gun. The caption conveyed the general's words: "I don't have time for new technology -- I have a battle to fight!" Do you have time for new technology? Which side of the leverage sword will your company choose? John Mariotti, a former manufacturing CEO, is president of The Enterprise Group, a consulting business. He lives in Knoxville. His e-mail address is [email protected].

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