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16-1 Industry Analysis: Forces Influencing Competition

16-1 Identify the forces that shape competition in an industry, and illustrate each force with a specific company or industry example.

A useful way of gaining insight into competitors is through industry analysis. As a ­working definition, an industry can be defined as a group of firms that produce products that are close substitutes for each other. In any industry, competition works to drive down the rate of return on invested capital toward the rate that would be earned in the economist’s “perfectly ­competitive” industry. Rates of return that are greater than this “competitive” rate will stimulate an inflow of capital either from new entrants or from existing competitors making additional investments. The global smartphone industry is a case in point: Apple’s success with the iPhone prompted Samsung and other companies to enter this market. Rates of return below the competitive rate will result in withdrawal from the industry and a decline in the levels of activity and competition.

Harvard University’s Michael E. Porter, a leading authority on competitive strategy, has developed a five forces model that explains competition in an industry. The five forces comprise the threat of new entrants, the threat of substitute products or services, the bargaining power of buyers, the bargaining power of suppliers, and the competitive rivalry among current members of the industry. In industries such as soft drinks, pharmaceuticals, and cosmetics, the favorable nature of the five forces has resulted in attractive returns for competitors. However, pressure from any of the forces can limit profitability, as evidenced by the recent fortunes of some competitors in the PC and semiconductor industries. A discussion of each of the five forces follows.

Threat of New Entrants

New entrants to an industry bring new capacity; a desire to gain market share and position; and, quite often, new approaches to serving customer needs. The decision to become a new entrant in an industry is often accompanied by a major commitment of resources. New players mean prices will be pushed downward and margins squeezed, resulting in reduced industry profitability in the long run. Porter describes eight major sources of barriers to entry, whose presence or absence determines the extent of threat by new industry entrants.1

The first barrier, economies of scale, refers to the decline in per-unit product costs as the absolute volume of production per period increases. Although the concept of scale economies is frequently associated with manufacturing, it is also applicable to research and development (R&D), general administration, marketing, and other business functions. Honda’s efficiency at engine R&D, for example, results from the wide range of products it produces that feature ­gasoline-powered engines. When existing firms in an industry achieve significant economies of scale, it becomes difficult for potential new entrants to be competitive.

Product differentiation, the second major entry barrier, is the extent of a product’s ­perceived uniqueness—in other words, whether it is a commodity. Differentiation can be achieved as a result of unique product attributes or effective marketing communications, or both. Product ­differentiation and brand loyalty “raise the bar” for would-be industry entrants who are required to make substantial investments in R&D or advertising. For example, Intel achieved differentiation and erected a barrier in the microprocessor industry with its “Intel Inside” advertising campaign and logo that appears on many brands of PCs.

A third entry barrier relates to capital requirements. Capital is required not only for manufacturing facilities (fixed capital), but also for financing R&D, advertising, field sales and service, customer credit, and inventories (working capital). The enormous capital requirements in such industries as pharmaceuticals, mainframe computers, chemicals, and mineral extraction present formidable entry barriers.

Threat of Substitute Products

A second force influencing competition in an industry is the threat of substitute products. The availability of substitute products places limits on the prices that market leaders can charge in an industry; high prices may induce buyers to switch to the substitute.

Once again, the digital revolution is dramatically altering industry structures in regard to substitute products. In addition to lowering entry barriers, the digital movement means that ­certain types of products can be converted to bits and distributed in pure digital form. For example, the development of the MP3 file format for music was accompanied by the increased popularity of peer-to-peer (p-to-p or P2P) file swapping among music fans. Napster and other online music ­services offered a substitute to consumers who were tired of paying $15 or more for a CD. Although a U.S. court severely curtailed Napster’s activities, other services—including several outside the United States—sprang up in its place. The top players in the music industry were taken by surprise, and today, Sony Music Entertainment, Warner Music Group, and Universal Music Group are still struggling to develop new strategies in response to the changing business environment.

16-2 Competitive Advantage

16-2 Define competitive ­advantage and identify the key conceptual frameworks that guide decision makers in the strategic planning process.

Competitive advantage exists when there is a match between a firm’s distinctive competencies and the factors critical for success within its industry. Any superior match between a company’s competencies and customers’ needs permits the firm to outperform its competitors. Competitive advantage can be achieved in two ways. First, a firm can pursue a low-cost strategy that enables it to offer products at lower prices compared to competitors’ products. Second, competitive advantage may be gained by differentiating products so that customers perceive them as having unique benefits, and perhaps as warranting a premium price. Note that both strategies have the same effect: They contribute to the firm’s overall value proposition. Porter explored these issues in two landmark books, Competitive Strategy (1985) and Competitive Advantage (1990); the latter is widely considered to be one of the most influential management books in recent years.

Ultimately, customer perception decides the quality of a firm’s strategy. Operating results such as sales and profits are measures that depend on the level of psychological value created for customers: The greater the perceived consumer value, the better the strategy. A firm may market a better mousetrap, but the ultimate success of the product depends on customers deciding for themselves whether to buy it. Value is like beauty: It’s in the eye of the beholder. In sum, creating more value than the competition does achieves competitive advantage, and customer perception defines value.

Two different models of competitive advantage have received considerable attention. The first model offers “generic strategies,” four routes or paths through which organizations choose to offer superior value and achieve competitive advantage. Critics of this model insist that generic strategies alone did not account for the astonishing success of many Japanese companies in the 1980s and 1990s. Thus, the second, more recent model, which is based on the concept of “strategic intent,” proposes four different sources of competitive advantage. Both models are discussed in the following paragraphs.

Generic Strategies for Creating Competitive Advantage

In addition to the five forces model of industry competition, Porter has developed a framework of so-called generic business strategies based on the two types or sources of competitive advantage mentioned previously: low cost and differentiation. The relationship of these two sources with the scope of the target market served (narrow or broad) or product mix width (narrow or wide) yields four generic strategies: cost leadership, product differentiation, cost focus, and focused differentiation.

Generic strategies aiming at the achievement of competitive advantage or superior marketing strategy demand that a firm make choices. These choices concern the type of competitive advantage the firm seeks to attain (based on cost or differentiation) and the market scope or product mix width within which competitive advantage will be attained.7 The nature of the choice between types of advantage and market scope is a gamble, and it is the nature of every gamble that it entails risk: By choosing a given generic strategy, a firm always risks making the wrong choice.

Broad Market Strategies: Cost Leadership and Differentiation

Cost leadership is competitive advantage based on a firm’s position as the industry’s low-cost producer, in broadly defined markets or across a wide mix of products. This strategy has achieved widespread appeal in recent years as a result of the popularization of the experience curve concept. In general, a firm that bases its competitive strategy on overall cost leadership must construct the most efficient facilities (in terms of scale or technology) and obtain the largest share of market so that its cost per unit is the lowest in the industry. These advantages, in turn, give the producer a substantial lead in terms of experience with building the product. Experience then leads to more refinements of the entire process of production, delivery, and service, which lead to further cost reductions.

Whatever its source, a cost leadership advantage can be the basis for offering lower prices (and more value) to customers in the late, more-competitive stages of the product life cycle. In Japan, companies in a range of industries—photography and imaging, consumer electronics and entertainment equipment, motorcycles, and automobiles—have achieved cost leadership on a worldwide basis.

Nevertheless, cost leadership will be a sustainable source of competitive advantage only if barriers exist that prevent competitors from achieving the same low costs. In an era of increasing technological improvements in manufacturing, manufacturers constantly leapfrog over one another in pursuit of lower costs. At one time, for example, IBM enjoyed the low-cost advantage in the production of computer printers. Then its Japanese rivals adopted the same technology and, after reducing production costs and improving product reliability, gained the low-cost advantage in the printer market. IBM fought back by constructing a highly automated printer plant in North Carolina, where the number of component parts was slashed by more than 50 percent and robots were used to snap many components into place. Despite these changes, IBM ultimately chose to exit the business.

“We’re living in a very polarized world now. You’re either an absolute price leader—you’re a Ryanair, a Southwest Airlines, a Walmart, and you’re just hugely efficient and you will not be touched on price or cost. Or you’re over on the quality end of the market with the Guccis and the Pradas and you’re a quality leader.”8

Steve Ridgway, CEO of Virgin Atlantic Airways

Bargaining Power of Buyers

In Porter’s model, the term “buyers” refers to manufacturers (e.g., General Motors [GM]) and retailers (e.g., Walmart and Amazon) rather than consumers. The ultimate aim of such buyers is to pay the lowest possible price to obtain the products or services that they require. To achieve this goal, buyers try to drive down profitability in the supplier industry. First, however, the buyers have to gain leverage over their vendors.

One way they can do this is to purchase goods and services in such large quantities that supplier firms become highly dependent on the buyers’ business. For example, Amazon has ­tremendous bargaining power over delivery companies. The reason is simple: In the United States alone, ­Amazon has roughly 44 percent of all Internet retail business. Second, when the ­suppliers’ products are viewed as commodities—that is, as standard or undifferentiated—buyers are likely to bargain hard for low prices because many firms can meet their needs. Buyers will also bargain hard when the supplier industry’s products or services represent a significant portion of the buying firm’s costs. A fourth source of buyer power is the willingness and ability to achieve backward integration.

For example, because it purchases massive quantities of goods for resale, Walmart is in a position to dictate terms to any vendor wishing to distribute its products through the retail giant’s stores. Walmart’s influence also extends to the recorded music industry; the company refuses to stock CDs bearing parental advisory stickers for explicit lyrics or violent imagery. Recording artists who want their recordings to be sold by Walmart have the option of altering lyrics and song titles or deleting offending tracks. Likewise, artists are sometimes asked to change album cover art if Walmart deems it offensive. For example, the retailer wouldn’t stock Green Day’s 21st Century Breakdown CD in 2009 after the band refused to alter some lyrics so the CD wouldn’t carry a parental advisory sticker (see Exhibit 16-2). In 2017, Green Day changed its tune and released a “clean” version of its ¡Uno! ¡Dos! ¡Tres! trilogy so that fans could purchase it at Walmart.3

Exhibit 16-2

Walmart refused to stock Green Day’s politically charged CD 21st Century Breakdown. More recently, the band has complied with Walmart’s requirements, so that its newer releases are now carried by the retail giant. Slipknot, a Grammy-winning metal band from Des Moines, Iowa, has had a similar experience with Walmart.

Bargaining Power of Suppliers

Supplier power in an industry is the converse of buyer power. If suppliers have enough leverage over industry firms, they can raise prices high enough to significantly influence the profitability of their organizational customers. Several factors determine suppliers’ ability to gain leverage over industry firms. First, suppliers will have the advantage if they are large and relatively few in number. Second, when the suppliers’ products or services are important inputs to user firms, are highly differentiated, or carry switching costs, the suppliers will have considerable leverage over buyers. Suppliers will also enjoy bargaining power if alternative products do not threaten their business. A fourth source of supplier power is these companies’ willingness and ability to develop their own products and brand names if they are unable to get satisfactory terms from industry buyers.

In the tech world, Microsoft and Intel are two companies with substantial supplier power. Because about 90 percent of the world’s more than 1 billion PCs run on Microsoft’s operating systems and 80 percent use Intel’s microprocessors, the two companies enjoy a great deal of leverage relative to Dell, Hewlett-Packard, and other computer manufacturers. Microsoft’s industry dominance prompted both the U.S. government and the European Union to launch separate antitrust investigations of its business practices. Today, the tech world’s focus is shifting to new electronic devices such as smartphones, netbooks, and tablets. Many of these new products use the Apple, Android, or Linux operating systems instead of Windows; the chips come from competitors such as Qualcomm and Texas Instruments. As these trends take hold, Microsoft and Intel will find their supplier power diminishing.5

Rivalry among Competitors

Rivalry among firms refers to all the actions taken by firms in an industry to improve their positions and gain advantage over each other. Rivalry manifests itself in price competition, advertising battles, product positioning, and attempts at differentiation. To the extent that rivalry among firms forces companies to rationalize costs, it is a positive force. To the extent that it drives down prices (and therefore profitability) and creates instability in the industry, it is a negative factor.

Several factors can create intense rivalry. First, once an industry becomes mature, firms focus on market share and how it can be gained at the expense of other firms. Second, industries characterized by high fixed costs are always under pressure to keep production at full capacity to cover those costs. Once the industry accumulates excess capacity, the drive to fill capacity will push prices—and profitability—down. A third factor affecting rivalry is lack of differentiation or an absence of switching costs, which encourages buyers to treat the products or services as commodities and shop for the best prices. Again, this factor places downward pressure on prices and profitability. Fourth, firms with high strategic stakes in achieving success in an industry generally are destabilizing forces because they may be willing to accept below-average profit margins to establish themselves, hold their positions, or expand their operations.

When a firm’s product has an actual or perceived uniqueness in a broad market, it is said to have achieved competitive advantage by differentiation. This can be an extremely effective strategy for defending market position and obtaining superior financial returns; unique products often command premium prices (see Exhibit 16-3). Examples of successful differentiation include Maytag in large home appliances, Caterpillar in construction equipment, and almost any successful branded consumer product. IBM traditionally has differentiated itself with a strong sales/service organization and the security of the IBM standard in a world of rapid obsolescence. Among athletic shoe manufacturers, Nike has positioned itself as the technological leader thanks to unique product features found in a wide array of shoes.

Narrow Target Strategies: Cost Focus and Focused Differentiation

The preceding discussion of cost leadership and differentiation considered only the impact on broad markets. By contrast, strategies to achieve a narrow-focus advantage target a narrowly defined market or customer. This advantage is based on an ability to create more customer value for a narrowly targeted segment and results from a better understanding of customer needs and wants. A narrow-focus strategy can be combined with either cost- or differentiation-advantage strategies. In other words, whereas a cost focus means offering low prices to a narrow target market, a firm pursuing focused differentiation will offer a narrow target market the perception of product uniqueness at a premium price.

Germany’s Mittelstand companies (small and medium-sized firms) have been extremely successful in pursuing focused differentiation strategies backed by a strong export effort. The world of “high-end” audio equipment offers another example of focused differentiation. A few hundred small companies design speakers, amplifiers, and related hi-fi gear that cost thousands of dollars per component. While audio components represent a $21 billion market worldwide, annual sales in the high-end segment are only about $1.1 billion. American companies such as Audio Research, Conrad-Johnson, Krell, Mark Levinson, Martin-Logan, and Thiel dominate the segment, which also includes hundreds of smaller enterprises with annual sales of less than $10 million (see Exhibit 16-4). The state-of-the-art equipment that these companies offer is distinguished by superior craftsmanship and performance and is highly sought after by audiophiles in Asia (especially Japan and Hong Kong) and Europe. Even so, market growth has slowed in recent years, as technological advances have enabled makers of inexpensive gear to offer improved sound quality in their products. Also, many audiophiles are turning their attention to other components such as flat-screen televisions and multi-room wireless speaker systems.

The final strategy is cost focus, in which a firm’s lower-cost position enables it to focus on a narrow target market and offer lower prices than the competition (see Exhibit 16-5). In the shipbuilding industry, for example, Polish and Chinese shipyards offer simple, standard vessel types at low prices that reflect low production costs.9 Germany’s Aldi, a no-frills “hard discounter” with grocery store operations in numerous countries, offers a very limited selection of household goods at extremely low prices. In 1976, Aldi opened its first U.S. stores in southeastern Iowa. It expanded slowly, opening a handful of stores each year. Private-label products help keep costs and prices down, allowing Aldi to expand in the key U.S. markets despite the recent poor economic climate. Recently, Aldi opened its first store in New York City.10

IKEA, the Swedish furniture company, has grown into a successful global company by using the cost-focus strategy (see Case 16-1). As George Bradley, president of Levitz Furniture in Boca Raton, Florida, noted a quarter century ago, “[IKEA] has really made a splash. They’re going to capture their niche in every city they go into.” Such a strategy can be risky. As Bradley explained, “Their market is finite because it is so narrow. If you don’t want contemporary, knock-down furniture, it’s not for you. So it takes a certain customer to buy it. And remember, fashions change.”11

The issue of sustainability is central to this strategy concept. As noted, cost leadership is a sustainable source of competitive advantage only if barriers exist that prevent competitors from achieving the same low costs. Sustained differentiation depends on continued perceived value and the absence of imitation by competitors.12 Several factors determine whether focus can be ­sustained as a source of competitive advantage. First, a cost focus is sustainable if a firm’s ­competitors are defining their target markets more broadly. A company with a cost focus doesn’t try to be all things to all people. Thus, competitors may diminish their advantage by trying to satisfy the needs of a broader market segment—a strategy that, by definition, means a blunter focus. Second, a firm’s differentiation focus advantage is sustainable only if competitors cannot define the segment even more narrowly. Also, focus can be sustained if competitors cannot overcome barriers that prevent imitation of the focus strategy, and if consumers in the target segment do not migrate to other segments that the more focused company doesn’t serve.

Creating Competitive Advantage via Strategic Intent

An alternative framework for understanding competitive advantage focuses on competitiveness as a function of the pace at which a company implants new advantages deep within its organization. This framework identifies strategic intent, growing out of ambition and obsession with winning, as the means for achieving competitive advantage. Writing in the Harvard Business Review, Gary Hamel and C. K. Prahalad note:

Few competitive advantages are long lasting. Keeping score of existing advantages is not the same as building new advantages. The essence of strategy lies in creating tomorrow’s competitive advantages faster than competitors mimic the ones you possess today. An organization’s capacity to improve existing skills and learn new ones is the most defensible competitive advantage of all.13

This approach is founded on the principles espoused by W. Edwards Deming, who stressed that a company must commit itself to continuing improvement if it expects to be a winner in a competitive struggle. For years, Deming’s message fell on deaf ears in the United States, while the ­Japanese heeded his message and benefited tremendously. Japan’s most prestigious business award is named after Deming. Eventually, however, U.S. auto manufacturers responded, and Detroit’s current resurgence is evidence that those automakers have made much progress.

The significance of Hamel and Prahalad’s framework becomes evident when comparing Caterpillar and Komatsu. As noted earlier, Caterpillar is a classic example of differentiation: The company became the largest manufacturer of earthmoving equipment in the world because it was fanatical about quality and service. Caterpillar’s success as a global marketer has enabled it to achieve a 40 percent share of the worldwide market for earthmoving equipment, more than half of which represents sales to developing countries. The differentiation advantage was achieved with product durability, global spare parts service (including guaranteed parts delivery anywhere in the world within 48 hours), and a strong network of loyal dealers.

Over the last several decades, Caterpillar has faced a very challenging set of environmental pressures. Many of Caterpillar’s plants were closed by a lengthy strike in the early 1980s; a worldwide recession at the same time caused a downturn in the construction industry. This hurt companies that were Caterpillar customers. In addition, the strong dollar gave a cost advantage to foreign rivals.

Compounding Caterpillar’s problems was a new competitive threat from Japan. Komatsu was the world’s number 2 construction equipment company and had been competing with ­Caterpillar in the Japanese market for years. Komatsu’s products were generally acknowledged to offer a lower level of quality. The rivalry took on a new dimension after Komatsu adopted the slogan “Maru-c,” meaning “encircle Caterpillar.” Emphasizing quality and taking advantage of low labor costs and the strong dollar, Komatsu surpassed Caterpillar to become number 1 in earthmoving equipment in Japan and made serious inroads in the United States and other markets. Even after it achieved world-class quality, Komatsu continued to develop new sources of competitive advantage. For example, new-product development cycles were shortened and manufacturing was rationalized. Caterpillar struggled to sustain its competitive advantage because many customers found that Komatsu’s combination of quality, durability, and lower price created compelling value. Yet even as the recession and a strong yen put new pressure on Komatsu, the company sought new opportunities by diversifying into machine tools and robots.14

The Komatsu/Caterpillar saga illustrates the fact that global competitive battles can be shaped by factors other than the pursuit of generic strategies. Many firms have gained competitive advantage by disadvantaging rivals through “competitive innovation.” Hamel and Prahalad define competitive innovation as “the art of containing competitive risks within manageable proportions” and identify four successful approaches used by Japanese competitors: building layers of advantage, searching for loose bricks, changing the rules of engagement, and collaborating.

Layers of Advantage

A company faces less risk in competitive encounters if it has a wide portfolio of advantages. Successful companies steadily build such portfolios by establishing layers of advantage on top of one another. Komatsu is an excellent example of this approach. Another is the TV industry in Japan. By 1970, Japan was not only the world’s largest producer of ­black-and-white TV sets, but also well on its way to becoming the leader in producing color sets. The main competitive advantage for such companies as Matsushita at that time was low labor costs.

Because they realized that their cost advantage might be temporary, Japanese companies added another layer of quality and reliability advantages by building plants large enough to serve world markets. Much of this output did not carry the manufacturer’s brand name. For example, Matsushita Electric sold products to other companies such as RCA, which then marketed them under their own brand names. Matsushita was pursuing a simple idea: A product sold was a product sold, no matter whose label it carried.15

To build the next layer of advantage, Japanese firms spent the 1970s investing heavily in marketing channels and Japanese brand names to gain recognition. This strategy added yet another layer of competitive advantage: the global brand franchise—that is, a global customer base. By the late 1970s, channels and brand awareness were established well enough to support the introduction of new products that could benefit from global marketing—VCRs and photocopy machines, for example. Finally, many companies have invested in regional manufacturing so their products can be differentiated and better adapted to customer needs in individual markets.

The process of building layers illustrates how a company can move along the value chain to strengthen its competitive advantage. The Japanese companies began with manufacturing (an upstream value activity) and moved on to marketing (a downstream value activity) and then back upstream to basic R&D. All of these sources of competitive advantage represent mutually ­reinforcing layers that accumulate over time.

Loose Bricks

A second approach takes advantage of the “loose bricks” left in the defensive walls of competitors whose attention is narrowly focused on a market segment or a geographic area to the exclusion of others. For example, Caterpillar’s attention was focused elsewhere when Komatsu made its first foray into the Eastern Europe market. Similarly, Taiwan’s Acer ­prospered by following founder Stan Shih’s strategy of approaching the world computer market from the periphery. Shih’s inspiration was the Asian board game Go, in which the winning player ­successfully surrounds opponents. Shih gained experience and built market share in countries overlooked by competitors such as IBM and Compaq. By the time Acer was ready to target the United States in earnest, it was already the number 1 PC brand in key countries in Latin America, Southeast Asia, and the Middle East.

Intel’s loose brick was its narrow focus on complex microprocessors for PCs. The world’s biggest chip maker in terms of sales, it currently commands approximately 80 percent of the global market for PC processors. However, even as it built its core business, demand for ­non-PC ­consumer electronics products began to explode. The new non-PC products, such as set-top boxes for televisions, digital cameras, smartphones, and tablets, require chips that are cheaper and use less power than those produced by Intel. Competitors such as LSI Logic and Arm Holdings ­recognized the opportunity and beat Intel into an important new market. Intel has responded by developing new chips incorporating 3D technology that use half as much power as current designs.16

Changing the Rules

A third approach involves changing the rules of engagement and ­refusing to play by the rules set by industry leaders. For example, in the copier market, IBM and Kodak imitated the marketing strategies used by market leader Xerox. Meanwhile, Canon, a Japanese challenger, wrote a new rulebook.

While Xerox built a wide range of copiers, Canon built standardized machines and ­components, reducing manufacturing costs. While Xerox employed a huge direct-sales force, Canon chose to distribute its copiers through office-product dealers. Canon also designed serviceability and reliability into its products, so that it could rely on dealers when service was needed rather than incurring the expense required to create a national service network. In addition, the company decided to sell rather than lease its machines, freeing the company from the burden of financing the lease base. In another major departure, Canon targeted its copiers at secretaries and department managers rather than at the heads of corporate duplicating operations.17

Canon introduced the first full-color copiers and the first copiers with “connectivity”—the ability to print images from such sources as video camcorders and computers. The Canon example shows how an innovative marketing strategy—with fresh approaches to the product, pricing, distribution, and selling—can lead to overall competitive advantage in the marketplace. Canon is not invulnerable, however: In 1991, Tektronix, a U.S. company, leapfrogged past Canon in the color copier market by introducing a plain-paper color copier that offered sharper copies at a much lower price.18

Collaborating

A final source of competitive advantage is using know-how developed by other companies. Such collaboration may take the form of licensing agreements, joint ventures, or partnerships. History has shown that Japanese firms have excelled at using the collaborating strategy to achieve industry leadership. One of the legendary licensing agreements of modern ­business history is Sony’s licensing of transistor technology from AT&T’s Bell Labs subsidiary in the 1950s for $25,000. This agreement gave Sony access to the transistor and allowed the company to become a world leader. Building on its initial successes in the manufacturing and marketing of portable radios, Sony has grown into a superb global marketer whose name is synonymous with a wide assortment of high-quality consumer electronics products.

More recent examples of Japanese collaboration are found in the aircraft industry. Today, Mitsubishi Heavy Industries and other Japanese companies manufacture airplanes under license to U.S. firms and also work as subcontractors for aircraft parts and systems. Many observers fear that the future of the American aircraft industry may be jeopardized as the Japanese gain ­technological expertise. The next section discusses various examples of “collaborative advantage.”19

Hypercompetitive Industries

In a book published in the mid-1990s, Dartmouth College professor Richard D’Aveni suggested that the Porter strategy frameworks fail to adequately address the dynamics of competition in the 1990s and the new millennium.26 D’Aveni took a different approach in analyzing issues related to competitive advantage. He noted that the business environment at the time was characterized by short product life cycles, short product design cycles, new technologies, and globalization. All of these factors and forces interacted to undermine market stability. The result? An escalation and acceleration of competitive forces.

In light of these changes, D’Aveni believed the goal of strategy was shifting from sustaining advantages to disrupting advantages. The limitation of the Porter models, D’Aveni argued, is that they are static; that is, they provide a snapshot of competition at a given point in time. Acknowledging that Hamel and Prahalad broke new ground in recognizing that few advantages are sustainable, D’Aveni aimed to build upon their work to shape “a truly dynamic approach to the creation and destruction of traditional advantages.” D’Aveni used the term hypercompetition to describe a dynamic competitive world in which no action or advantage can be sustained for long. In such a world, D’Aveni argued, “everything changes” because of the dynamic maneuvering and strategic interactions by hypercompetitive firms such as Microsoft and Gillette.

According to D’Aveni’s model, competition unfolds in a series of dynamic strategic interactions in four areas: cost and quality, timing and know-how, entry barriers, and deep pockets. Each of these arenas is “continuously destroyed and recreated by the dynamic maneuvering of hypercompetitive firms.” Also, according to D’Aveni, the only source of a truly sustainable competitive advantage is a company’s ability to manage its dynamic strategic interactions with competitors by means of frequent movements and counter-movements that maintain a relative position of strength in each of the four arenas (see Table 16-2).

Entrepreneurial Leadership, Creative Thinking, and the Global Startup

Italian Entrepreneurs Combine Fashion and Function, Part 2 Diego Della Valle, Tod’s; Mario Moretti Polegato, Geox

Diego Della Valle is an entrepreneur. He developed an innovative approach to an existing product and then leveraged his family’s business to manufacture and market it. By applying the basic tools and principles of modern marketing, Della Valle and his family have achieved remarkable success.

As is true with many entrepreneurs, Della Valle’s idea was based on his recognition that “there had to be a better way.” While visiting the United States as a young man, he spotted “these strange, very badly made shoes from Portugal” at a flea market in New York. They were marketed as a driving accessory. Diego brought a pair back to Italy and showed his father, Dorino. The elder Della Valle thought they were “horrible” and told his son to throw them away. Dorino Della Valle then reconsidered. His son says, “He changed the way we think about shoes. In the past, expensive shoes were rigid, heavy. So he had the idea of making them soft, to fit like a glove, using the best quality leather.”

Today, Tod’s S.p.A., the family business that was started in the 1920s, is closely identified with its iconic driving shoe. Called the Gommino, each pair requires 35 pieces of leather and 100 steps to fabricate. Integral to the design is the Leo Clamp, a decorative band across the front of the shoe. Prices start at about $350 per pair. The company’s strategic focus extends to handbags as well; total annual sales are $1 billion. CEO Diego Della Valle says, “We want to guarantee our customers we’re giving them the best.” The CEO continues, “Pure Italian style is identifiable anywhere in the world. When I am walking in Central Park, I recognize the Italians because an Italian, even when he jogs, he’s dressed perfect.”

One of the company’s most recent endeavors was a collaboration with five young designers whose backgrounds include art and architecture. Each designer created a limited-edition version of the Gommino. The project, called Looking at Tod’s Leo, was headed by Italian architect Giulio Cappellini. One group created a shoe with leather that had been treated to give the impression it was marble; other teams incorporated unusual materials including ceramics and wood.

The need to maintain a quality image is one reason that all Tod’s production—including six sewing factories—takes place in Italy. Analyst Davide Vimercati notes, “Tod’s is proof that if you manage your brand consistently and you build brand equity over the years, you reach a stage where demand remains strong, even in tough times.”

Della Valle is keenly aware that the world of luxury fashion is being impacted by the digital revolution. For many consumers—especially younger ones—brand loyalty is being replaced by the urge to buy “the next big thing” online. Even as Tod’s embraces classic designs, Della Valle is leveraging social media. Streams of its catwalk shows attract millions of viewers.

Another Italian entrepreneur, Mario Moretti Polegato, is targeting a very different aspect of the shoe market—the mass-market footwear segment. Polegato’s strategic insight was simple: Shoes with conventional rubber soles are bad for your feet! While on a business trip to Las Vegas, Polegato went for a run in the Nevada desert. When he got back to his hotel, his feet were bruised and sweaty. It occurred to him that holes in the soles would allow feet to breathe. As Polegato recalls, “I went looking for breathable soles in sports shops all around Italy, and I couldn’t find them. I thought, ‘Is it possible that nobody has thought of this yet?’ And nobody had.”

Of course, it hardly makes sense to walk around with holes in one’s shoes, because they let in dirt and water. So Polegato was faced with a technological challenge: how to make a waterproof shoe with holes in the soles. Polegato persevered, and today the Geox brand’s signature product is mid-price casual shoes with perforations in the soles that allow feet to “breathe.” How? A special membrane based on Japanese technology makes each shoe waterproof but allows sweat to evaporate (see Exhibit 16-8. In short, “The shoe that breathes!” To keep prices competitive, much of the production is outsourced to low-wage countries such as Romania. Polegato has clearly hit upon a successful strategy: Today there are more than 30,000 Geox employees worldwide, and the company has more than 1,000 stores.