InnoVal Consulting Group

Articles - Les Echos


French version / Next article

Competition: How to break industry rulesLes Echos English Pete Yoo

Les Echos n 17839 du 17/02/99 p. 48


In the 1980s, IBM, Kodak and Canon entered the photocopier industry, then under Xerox' global domination. IBM and Kodak launched frontal attacks and tried to match Xerox' full range of fast copiers and thousands of highly-trained salespeople and service technicians.

Canon took a different approach. Having identified three implicit rules of competition that Xerox had followed to reach its dominant position (make the fastest machines; offer the most reliable service; make money on the service contracts), Canon discovered that these implicit rules were based on two assumptions about the customers: companies' centralized copying departments were the key customers; they wanted the fastest machines and the best service.

Canon questioned the validity of these assumptions and drew two conclusions: home office users and individual business units of companies represent potentially huge pools of new customers; these customers would care about low price and small size more than speed.

The new assumptions led to new rules of competition: make the smallest and the cheapest machines; build reliability into the components; and make money on repeat sales of disposable toner cartridges.

Instead of trying to match Xerox' full product line, Canon focused on developing the competencies required to make reliable components cheaply. Instead of recruiting and training an army of salespeople and service technicians, it reached out to the existing network of office equipment retailers.

IBM and Kodak paid dearly for their attempts to beat Xerox at its game. Eventually, IBM quit the market and Kodak settled for a corner of the large copier segment. In contrast, Canon became the leader of a greatly expanded market by turning Xerox' key strength into its barrier to retaliation; its highly-trained army of salespeople and service technicians impeded the development of a copier which would have made them obsolete.

In every industry, there are two types of competitors: those who respect and follow their industry's rules of competition ("rule followers"), and those who break them ("rule breakers").

Rule followers learn and fall in line with the industry's customer segmentation, technology choice, pricing structure and other implicit but powerful rules governing competition. They often benchmark the lead competitor or each other and try to catch up or beat one another.

Those who target the industry leader's performances levels eventually reach them but fail to catch the leader: while they strive toward the benchmarks, the leader is busy setting even higher performance levels. As IBM and Kodak paid dearly to learn, following the rules set by someone else seldom benefits the followers.

Those who benchmark and try to out-compete each other in the absence of an industry leader often end up in trench warfare. Without a clear competitive advantage, they try to outpour resources and people into a series of costly but fruitless battles. As exemplified by the current plight of the semiconductor industry, the result is too often commoditized offerings, wiped out margins, and billions of dollars of destroyed shareholder value.

Rule breakers also learn their industry's rules of competition, but go a step further and question the assumptions underlying such rules. They probe for assumptions that have become obsolete over the years and try to exploit them to change the rules of competition in their favor, as Canon did.

But all rule breakers are not the same. Microsoft and Netscape both broke the rules in the information industry in different era. One went on to create the world's richest man, while the other enjoyed euphoric success for only 6 months. Why?

Two decades ago, Microsoft correctly identified the operating system, not proprietary hardware, as the PC industry's "control point" - the pivotal link or activity in the value chain from which to exert dominance over the entire value chain. It took its time to seduce the industry to adopt its proprietary system. Only when adoption was irreversible and barriers to desertion prohibitively high, did it commence harvesting. And what a harvest it has been!

Netscape, in contrast, targeted market share rather than the control point. Having gained 95% share of the internet browser market overnight, it began harvesting instead of establishing and solidifying the browser as the control point of the internet. Netscape still controls 40% of the browser market, but doesn't earn a dime from it.

Some believe the portals such as Yahoo! and Lycos will become the Internet's control point. Craig Barrett of Intel recently speculated that the ability to "package" access and value added applications could emerge as the Internet's control point. Whoever gets it right may be in line to succeed the world's richest man.

Pete YOO is the Managing Director of INNOVAL, an international strategy consulting company.

French version / Next article