Don't Rock the Boat

By Ramesh Akkineni

Michael Porter on 'Competitive Advantage'

Strategies that change industry structure can be a double-edged sword, because a firm can destroy industry structure and profitability as readily as it can improve it. A new product design that undercuts entry barriers or increases the volatility of rivalry, for example, may undermine the long-run profitability of an industry, though the initiator may enjoy higher profits temporarily. Or a sustained period of price cutting can undermine differentiation. In the tobacco industry, for example, generic cigarettes are a potentially serious threat to industry structure. Generics may enhance the price sensitivity of buyers, trigger price competition, and erode the high advertising barriers that have kept out new entrants. Joint ventures entered into by major aluminum producers to spread risk and lower capital cost may have similarly undermined industry structure. The majors invited a number of potentially dangerous new competitors into the industry and helped them overcome the significant entry barriers to doing so. Joint ventures also can raise exit barriers because all the participants in a plant must agree before it can be closed down.

Often firms make strategic choices without considering the long-term consequences for industry structure. They see a gain in their competitive position if a move is successful, but they fail to anticipate the consequences of competitive reaction. If imitation of a move by major competitors has the effect of wrecking industry structure, then everyone is worse off. Such industry "destroyers" are usually second-tier firms that are searching for ways to overcome major competitive disadvantages, firms that have encountered serious problems and are desperately seeking solutions, or "dumb" competitors that do not know their costs or have unrealistic assumptions about the future. In the tobacco industry, for example, the Liggett Group (a distant follower) has encouraged the trend toward generics.

The ability of firms to shape industry structure places a particular burden on industry leaders. Leaders' actions can have a disproportionate impact on structure, because of their size and influence over buyers, suppliers, and other competitors. At the same time, leaders' large market shares guarantee that anything that changes overall industry structure will affect them as well. A leader, then, must constantly balance its own competitive position against the health of the industry as a whole. Often leaders are better off taking actions to improve or protect industry structure rather than seeking greater competitive advantage for themselves. Such industry leaders as Coca-Cola and Campbell's Soup appear to have followed this principle.

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