managing decline

8/2/2019 Managing Decline

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Leaders Beware:

Some Sure Ways toLose Your Competitive

Advantage

HAO MA RANJAN KARRI

I N T R O D U C T I O N

From In Search of Excellence by Peters andWaterman of the 1980s, and Built to Last byCollins and Porras of the 1990s, to Good toGreat by Collins of the 21st century, businessbestsellers have helped articulate and popu-

larize the varying paths toward the holygrail of competitive advantage. They haveprofiled the success of many leading firmsthat defined the standard of excellence at thetime. Yet merely a decade or so later, quite anumber of those once excellent firms havehad to struggle; competitive advantages forthose strong-built firms did not exactly last.Is a tough, turbulent environment solely toblame for a sort of bad luck? Or is it possiblethat leading firms own actions contribute totheir fall? Simply put, what destroys lea-

ders competitive advantage; how do theyactually lose it? On this question, bestsellersoften remain silent.

In the academic literature, the process ofcreating competitive advantage has beenaddressed from a variety of perspectives.For instance, the market-power approachemphasizes the importance of industry posi-tioning; the resource-based view focuses onunique firm resources and capabilities; thecommitment approach treats irreversible

resource commitment as both necessaryand sufficient for sustainable advantage;and the Schumpeterian perspective centerson the core concept of innovation as sourceof advantage. Although the dominant per-spectives of strategy literature mentionedabove allude to the causes of competitive

disadvantage, it is the omission of concep-tual development on destruction of compe-titive advantage that motivates our research.

Understanding destruction of competi-tive advantage is an important endeavor,especially in the context of explaining firm-level decline during economic downturns.This may help to better explain decline atthe firm level, rather than to simply blamemacro-economic conditions such as lack ofdemand growth, recession, unemployment,tariffs, or the lack of tariffs. While blaming

macro-economic conditions may be tempt-ing and indeed self-serving for managers, itmay also keep them from understandingfirm-level contributors to the decline incompetitive advantage. In this paper, wepropose a framework to elaborate on thedestruction of competitive advantage forleaders in the market. Given the scant atten-tion to this important strategic issue, thiseffort has both theoretical value and prac-tical relevance.

Organizational Dynamics, Vol. 34, No. 1, pp. 6376, 2005 ISSN 0090-2616/$see frontmatter 2005 Elsevier Inc. All rights reserved. doi:10.1016/j.orgdyn.2004.11.002www.organizational-dynamics.com

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F A D I N G G L O R Y O F F A L L E NL E A D E R S

There are several examples of leading firmsthat lost their competitive advantage across awide range of industries. Some of the erst-while leaders closed shop, and some arestruggling to keep afloat in turbulent waters.

For more than a century, EastmanKodak was a successful pioneer in the photo-graphy industry. Kodak was to the photo-graphy industry as Ford Motor Co. was to theautomobile industry, and yet it lost theadvantage it enjoyed. Is that because of

new entrants armed with new technology,or is it because of Kodaks refusal to embracechanging trends in consumer preferences?

United Airlines Inc., the second-lar-gest air carrier in the world, filed for bank-ruptcy protection to restore the company tolong-term financial health. United was suc-cessful in holding on to a differentiationadvantage based on high quality service,by building the Star Alliance network thatmaintained a strong customer base, amongother initiatives. While the entire air carrierindustry was affected by the 9/11 terroristattacks, Uniteds woes are perhaps due to amore fundamental problem of loss of controlover costs. Did Uniteds recent truncationefforts result in the creation of its small aircarrier called Ted, or was it Uniteds eager-ness to jump on the small is beautiful bandwagon to keep abreast of competitorswho are willing to fly customers for a Song(Deltas low fare carrier)?

Sears, Roebuck & Co. is the quintes-sential American retail giant that experi-enced a near-death experience despite its

glorious past. By 1999, Wal-Mart Storesand The Home Depot Inc. had crept intothe list of the thirty Dow Jones IndustrialAverage companies, unseating Sears, whichhad been part of the list since 1924. Thehighly diversified retailer, hurt by severecompetition from the likes of Home Depot,Wal-Mart and Target Corp., got rid of itscredit card operations and made acquisitionsto bolster its quality image. Is Sears not awareof the faltering image that compelled it to

reach out for Lands End, or is the acquisitionreally a well thought-out move to bolster its

failing reputation? Commodity futures traditionally

involved goods such as oil, agricultural pro-ducts, meat and coffee. Who would havethought of trading in energy futures or band-width futures? Brilliant and innovative busi-ness ideas propelled Enron Corp. from adistributor of natural gas and owner of alarge network of gas pipelines to a giganticmarket maker. The story of Enrons col-lapse is now part of folklore. Was it the caseof a few bad apples, or was Enron a victim of

its own meteoric rise? There is a litany offirms such as Enron, Adelphia Communica-tions Corp., Global Crossing, WorldComInc., Parmalat and Vivendi Universaltoname a fewwhere top management squan-dered and ravaged the wealth and competi-tive advantage built over several years.While it is easy to attribute the cause offirmfailure to dishonesty and greed of top man-agement, it is also imperative to understandthe context that allows such disasters tooccur.

W H A T D E S T R O Y SC O M P E T I T I V E A D V A N T A G E ?

We focus on Eastman Kodak to understandwhat triggers the destruction of competitiveadvantage. Kodak is an excellent example ofhow a company lost its advantage and how acompany can attempt to regain its advantage.

Based on the facts illustrated in the caseoutlined in Fig. 1, the key strategic issuesfacing Kodak include: (1) attacks on market

share and global position, (2) the explosion ofdigital infrastructure, including the Internet,(3) rapid advancements in digital technologyapplications in photography, (4) the increasein the number of competitors resulting fromthe use of digital technology, and (5) slowgrowth in the traditional camera industry(Kodaks mainstay segment).

Initially, Kodak ignored the potentialthreat from advances in digital photography.Later Kodak was compelled to pay attention

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to the promise of digital technology in ima-ging. Despite its initial attempt at invest-

ments in research and development (R&D),Kodak neglected the comprehensive natureof digital photography markets. The majorenvironment shift caused by advances intechnology acted out Moores law in thedigital camera market. By 2001, digital cam-eras had become extremely popular, and thetrends suggested that digital photography

was bound to overtake the market for tradi-tional photography. Kodak decided to focus

on the application of digital technology inwholesale and retail photofinishing, and toexpand their presence in emerging film mar-kets. Kodak was arrogant enough to wageron the potential of markets for film photo-graphy in India, China and other Asian coun-tries. Kodak assumed that the consumers indeveloping countries could not afford the

FIGURE 1 KODAK: MOMENT PASSED AWAY . . .. DIDNT GET THE PICTURE?


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high prices of digital cameras. Currently, thetrends suggest that digital photography isslowly becoming the norm in the rapidlygrowing economies of India and China.

Rapid growth in digital technology hadan impact on Kodaks current financial situa-tion and position within the camera and filmindustry. Specifically, digital technologythreatened Kodaks mainstay film-based seg-ment. Dynamics within the market haveKodak on the defensive and reacting aggres-sively by engaging in fierce price-cuttingtactics. Such posture poses the risk of losingprofitability from its film segment and thefurther risk of losing its status as the leadingfilm manufacturer. Thus, Kodaks futurehealth faces a double threat. On one side,competitors such as Fuji are chipping away atKodaks profitable consumer film business.

On the other, the technology revolution isundermining Kodaks conventional cameraand film interests.

Kodaks initial ignorance, followed by itsnegligence and arrogant posture, combinedwith the major shift in the technologicalenvironment caused by the convergence ofseveral industries, attracted a host of newand formidable competitors. Kodak founditself in unfamiliar territories, includingdesktop printing and digital storage. Taking

advantage of Kodaks reluctance to enter thedigital market, rivals like Sony Corp. madeaggressive entry into the market and devel-oped the market by taking a lead in settingstandards. Kodak is now alleging that Sonysinfringement of Kodaks patents is an act ofsabotage.

As seen in the example of Kodak, multi-ple triggers are often at work initiating thedestruction of a leaders competitive advan-tage. These triggers, internal or external tothe firm, spontaneous or purposeful, interactand jointly affect the firm. However, foranalytical purpose and ease of presentation,we examine each one of these triggers indepth. Then we try to make sense of thewhole phenomenon of competitive advan-tage destruction in a more integrative man-ner by exploring the potential linkages and

patterns among the various triggers (Fig. 2).

I N T E R N A L T R I G G E R S O FD E S T R U C T I O N

I g n o r a n c e

Leading firms can lose their advantage dueto their own lack of knowledge of the driversof their success. Firms may notbe aware of the


FIGURE 1. Continued.


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existence or importance of their core compe-tencies. Certain resources are unique andvaluable because they are socially complexand causally ambiguous. Because of suchsubtleties, the owner of unique resources thatprovide sustainable competitive advantagemay not be aware of the cause of competitiveadvantage. Thus, the firms management mayignore their unique resources. For instance,inappropriatehiringofnewpersonnelwhodonot fit in with the existing culture could jeo-pardize a superior organizational culture or

mode of teamwork. A company that thriveson itsdedicated andloyal employeesmay loseits edge if it tries to substitute people withmachines in order to save short-term over-head costs.

Managerial decisions with regard toacquisitions are spontaneous and withoutmuch thought to the potential problems inintegrating organization cultures. AT&TCorp.s acquisition of NCR Corp. in the early1990s yielded negative results, owing to the

disparate nature of the corporate cultures inthe organizations. NCRs strong conservative(hierarchical) culture was at odds with theopen work environment of AT&T. Manage-rial ignorance results in blinding some firmsto external threats that emerge sponta-neously. Actions of the firm arising out ofignorance can lead to shocking unintendedconsequence, such as eliciting strong retalia-tion from competitors, attracting environ-mental lobbyists or legal actions.

Enhanced awareness about the nuances of

each market will prevent firms from beingsurprised. General Motors Corp. got a rudeawakening when they decided to introduceBuick Lacrosse in the Quebec market, as theywere not aware of the colorful meaning ofLacrosse in French Canadian slang.

As proclaimed by Sun Tzu centuries ago,know yourself and know your enemy. Take agood look at your own firm. Do an internalaudit from time to time and assess yourstrengths and weaknesses. Know your com-

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FIGURE 2 TRIGGERS OF DESTRUCTION


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petitive advantage and its underlyingsources, for what you do not know may cost

you.

N e g l i g e n c e

Negligence and the lack of rewards andsupport for a skunk-works in a firm whereinnovation lies at the heart of its competitioncould also cause the firm to lose its advantagevis-a-vis rivals. Xerox Corp.s Palo AltoResearch Center (PARC) pioneered the gra-phic user interface for personal computers.Yet due to the negligence of top management

of the research done at PARC, Xerox failed tobe a leader in the PC industry, giving awayits initial advantage. Similarly, the fall of IBMCorp. and the rise of Microsoft Corp. in thesoftware market illustrates the loss of IBMscompetitive advantage in the software indus-try.

The negligence of the top brass at BaringsBank of U.K. went so far as to let a self-illusioned traders bogus trading practicego unnoticed for so long that the accumulat-ing loss almost rocked the bottom of theprestigious financial institutions. Enrons fallis allegedly due to the negligence of its CEO,Kenneth Lay. If there is any credibility toKenneth Lays I didnt know defense,the destructive impact of negligence is irre-parable to the stakeholders of Enron.

A firms top management might vaguelyknow its competitive advantage and itsunderlying basis; however, they might not be alert enough to match advantageousresource positions with emerging opportu-nity lines and commercial viability. Further-more, failure in detecting accruing errors

and, worse yet, failure in taking correctivemeasures, often give away a firms onceenviable position, destroying its competitiveadvantage.

A r r o g a n c e

Success doesnt beget success. Suc-cess begets failure because the morethat you know a thing works, the lesslikely you are to think that it wont

work When youve had a long stringof victories, its harder to foresee

your own vulnerabilities.

Leslie Wexner, CEO,The Limited, Inc.

Arrogance is not an uncommon traitof successful leaders. Arrogance leads tocomplacency and, as a result, firms develop blind spots to threats in the competitiveenvironment. Blind spots make the firmhighly vulnerable to spontaneous attackfrom competitors. Successful firms have theirown paradigms that make them blind. Shifts

in paradigms are required to bring aboutchange. Mainframe computers are the basisof IBMs dominance; its reluctance to acceptthe advent of personal computers led to theerosion of competitive advantage. The samecore competencies that help firms gain com-petitive advantage become core rigiditiesdue to inflexibility and shortsightedness.Think about the engineering and organiza-tional apparatus Henry Ford set up for themaking of the once perfect Model T.Despite its history of being in the leadershipposition, Ford Motor Co. was unable toembrace the total quality paradigm, therebyyielding its advantage to its Japanese rivals.Destruction of competitive advantage at Fordwas quite apparent as their quality problemsamplified in recent years.

The arrogance of strong incumbents oftenblindfolds their top management teams andcreates illusions that they are invincible.What worked before will always work. Withthis mentality, they unjustly belittle theirrivals, mock their presence, and allow theirsmaller rivals to grow and experiment essen-

tially unchallenged, until the rivals becometoo big to contain and too powerful to defeat.Think about Hondas famous entry intothe U.S. motorcycle market, when HarleyDavidson dismissed the Hondas as toys.Alternatively, think about the Wal-Martencirclement of K-Mart Corp.s strongholdin the cities, or Fox Broadcasting Co.s ascentto an established and successful networkbroadcaster status thanks to the lack of majorthreats from the big three networks. Once



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a world-class engineering firm, Lucent Tech-nologies Inc. was a victim of escalation of

arrogance of company leaders. Arrogance atLucent stems from their elite past, a culturethat does not allow rapid changes in tunewith the technological environment.

O v e r c o n fi d e n c e

A firms competitive advantage can bedestroyed through its own purposeful (in)action. At least two types of action candestroy or terminate competitive advantage:firms either do not appreciate the source of

advantage, or do not want the source ofadvantage. Unlike arrogance, overconfi-dence takes the form of apathy that arisesout of a false sense of security experiencedafter success. Firms therefore see little needfor purposeful strategizing and thus findthemselves in a storm.

A firm may not appreciate a particularcompetitive advantage and easily gives itaway. For instance, a major personal carefirm in Shanghai owned a well-known brandin Maxim. In a joint venture with a foreignfirm, it licensed its brand name to the foreignpartner, allowing the promotion of the for-eign partners brands. Years later, it foundthat the licensed brand was indeed a verypopular one still attracting many loyal cus-tomers. The firm had to recover its brand byterminating the joint venture. However, thehuge cost involved in this process taxed thefirm heavily. Similarly, under-appreciationof a firms brand-image may also be reflectedin a firms choice to over-diversify and loseits distinctiveness. For instance, Liz Clai-borne Inc., by diversifying into essentially

every segment of the clothing business,washed down its distinguished imageamong professional women, its original tar-get customers. Its competitive advantageover other designers in the career segmentfor professional women largely diminished.Advertisements featuring large, muscular,male drinkers gave Milwaukee-based JosephSchlitz Brewing Company a macho image.As early as 1947, Schlitz became the worldstop producer of beer. Schlitz was successful

as a formidable rival to Anheuser Busch untilthe late 1960s. The overconfidence of the firm

led to a reckless expansion into a number ofmarkets, including Hawaii; Shlitz even-tually lost focus on its core message ofhighqualitybeer. Reveling in its success, Schlitzwas far from being humble, as seen by itsforays into diverse industriesrangingfrom fishmeal plants and fishing fleets inChile and Panama, to a glass factory and acitrus concentrate plant in Pakistan. Finally,after an incident of hazy beer, consumerperception of poor quality sent the companyin a downward spiral. Joseph Schlitz Beer

Company was destroyed, and the only cur-rent presence of thebrand is out of nostalgia;it is marketed by Pabst Brewing Co., a sur-vivor of the old bastion of American brew-ing in the Midwest, now based in SanAntonio. Similarly, overconfidence com- bined with arrogance leads firms like Fordinto activities outside their realm, resultingin stinging blows to their bottom line. Forinstance, Ford lost a billion dollars in 2001because of its forays into trading a preciousmetal called palladium (used in the catalyticconverters of SUVs).

S e l f - a g g r a n d i z e m e n t

Highly successful firms are often victimsof their grand success. Chief executives offirms experiencing huge and rapid successare prone to actions that have more to dowith ego fulfillment than with the interests ofthe firm. Vivendis meteoric rise and fall in aspan offive years is a classic example of self-aggrandizement. Spearheaded by Jean-MarieMessier, Vivendi started off as a small group

of diverse companies and rapidly grew into alarge group through acquisitions in the tele-communications, Internet and entertainmentindustries under the pretext of the much-touted convergence phenomenon. Messierscrafty persuasiveness resulted in the acquisi-tion of Seagram (leading music publishingcompany in the U.S.) followed by the take-over of U.S.A. Networks. Messier became thehead of Vivendi Universal, and multiplied itscapitalization by four times. During the later

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part of 2001 (after the September 11 crisis),the shallow nature of the claims about

the promised land made by Vivendiunder the digital convergence phenom-enon destroyed the company. Other notableexamples are Enron, WorldCom and TycoInternational, who lost their advantage dueto their reckless pursuit of greatness fueledby initial success.

The recently beleaguered Walt Disney Co.boss, Michael Eisner, is hailed as one of themost successful CEOs that corporate Amer-ica ever witnessed, in a ranking that is no lessthan that of Jack Welch. Eisner achieved

success through aggressive revamping ofthe Disney theme park business, and thedecisive injection of strong doses of muchneeded creative power in its animation fea-tures. In the last ten years, however, Eisnerssuffocating micro-management style, flatrefusal to name a clear second in command,and super-sized compensation package evenwhen Disneys stock value plummeted, allhelped to contribute to loss of confidence inhim. The once unassailable Disney reputa-tion and its host of competitive advantagesdue to customer goodwill, creative prowess,and service quality are at risk of becomingpast memories.

Mickey Mouse was perhaps a star largerthan life. Eisner turned out to be an evenbigger star than Mickey. In turbulent waters,a visionary and a decisive leader may save afirm from downward spiral and financialdistress. The irony is, however, that the samedecisiveness or tyrannical power that onceworked wonders isnt tolerated when thefirms performance is in perennial distress.When a celebrated CEOs ego has to be mas-

saged at the cost of the firms long-termsuccess and its wealth creation, both theCEO and the firm lose.

T r a d e - o f f s a n d M i s s e dO p p o r t u n i t i e s

Decisions to make trade-offs to pursue orenhance other advantages can result in ter-mination of existing competitive advantage.In the early years of Sam Waltons retailing

experience, he controlled more than a coupleof Ben Franklin franchises. His advantages in

the variety store business abounded; his fran-chises were ranked the best in sales andprofit in the entire chain and among the bestin the region. At that time, discount retailingonly barely showed its potential; Sam Waltonwent against the industrys convention bylaunching Wal-Mart in small towns. How-ever, discounting triumphed. The competi-tive advantage accumulated in Waltonsvariety store business was terminated volun-tarily. Walton was not narrow-minded abouthis success in managing variety stores. He

was decisively shedding-off the variety storementality and embarking on a path thattotally embraced the discounting concept,laying the foundation for the success ofWal-Mart.

Similarly, consider Intel Corp.s exit fromthe memory chip business and entry in to themicroprocessor business. Ted Turner movedaway from the highly profitable billboard business he had inherited, to the televisionbusiness. Currently, Sun Microsystems Inc. isfacing a similar problem. Sun Microsys-temss decline is due to its unwillingnessto shift course from its expensive R&D-inten-sive strategy. Scott McNealy was eventuallycompelled to settle his differences withMicrosoft by entering into an agreement toallow Suns computer servers to run Win-dows programs. Sun also missed severalopportunities; for example, it refused toadopt Intel chips, thereby yielding advantageto Dell Computer Corp. in the low-cost severmarket, and did not take advantage of itsacquisition of Cobalt Networks to developthe market for Linux. It appears that Sun is

now stuck in the middle in Michael Por-ters terms, with its intent to be a contender inboth the low-end server market and the high-end software technology market.

A firm has to know when to forgo anadvantage (often a diminishing or potentiallyobsolete one) to gain a more important onefor the future. As discussed earlier, attempt-ing to hold on to a competitive advantagethat has past its time may be even moreharmful than voluntarily destroying it.



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E X T E R N A L T R I G G E R S O FD E S T R U C T I O N

I m i t a t i o n

Intense competition in domestic mar-ketsdue to small market size, demandingcustomers, and a large number of competi-torskept Japanese automakers on theiredge. Such intense competition helps firmshone their skills and leads to competitiveadvantage as they expand into internationalmarkets. On the other hand, competition iscapable of destroying competitive advantagethrough substitution and imitation.

Imitation by competitors drives down apioneering firms competitive advantage.Imitation often reduces the differentialbetween the pioneering firm and the imita-tors in technological know-how, product dis-tinctiveness, and manufacturing costs, hencedestroying pioneering firms competitiveadvantage. For instance, although Intel pio-neered the PC memory device business, theJapanese firms that quickly imitated Intelsproducts and technology eventually droveIntel to make a deliberate decision to exitthe business.

Apple Computer Inc.s Macintosh derivedits superiority and uniqueness from its gra-phical user interface (GUI), originallyinvented at Xeroxs Palo Alto Research Cen-ter. Graphic icons and the use of a mouserepresented a big difference in ease and con-venience compared with rival PCs runningon Microsofts DOS operating systems.Microsofts ingenuity lies in its ready will-ingness to develop application programs onthe Macintosh platform. The stealthy imita-tion by Microsoft resulted in the eventual

dominance of the Windows operating sys-tem, nullifying the advantage held by Apple.After ignoring Southwest Airlines Co.s low-cost strategy, major airlines such as Delta andUnited began to imitate the low-cost carriersstrategy with their own version of low-costcarriers, Song and Ted, respectively. Wal-Mart, the torchbearer of successful discountretailing, is not beyond the temptation toimitate its competitors. Targets innovativeintroduction of apparel lines by popular

fashion designers prompted Wal-Mart tointroduce the trendy George line of gar-

ments. Such imitation did not meet withsuccess either with the airlines or with lea-ders such as Wal-Mart.

Imitation can be competitive suicide, asthe imitator is trying to play in the leadershome courts, where the leaders possesssuperiority in market and/or resource posi-tions. Imitation with an innovative twist,however, may well turn the table againstthe leaders. Consider the rise of Japaneseand Korean firms against Intel in the memorydevice business. On the other hand, consider

Samsung, a latecomer, against Sony, a widelyacknowledged pioneer. Do not write off ahumble imitator too quickly. Imitation is thesincerest form offlattery. Imitation is also themost deadly sugarcoated bullet that kills.

C o m p e t i t i v e S u b s t i t u t i o n

Competitive substitution can happen atboth the product level and the technologylevel. First, a rival can neutralize a firmsproduct advantage by offering a substituteproduct that matches or surpasses the qualityand/or function of the firms product, or onethat simply downplays the uniqueness of thefirms product. For instance, Compaqs IBMclone effectively neutralized the IBM PCscompetitive advantage by offering a substi-tute product that was cheaper, with the samefunctionality and technology. Second, a firmcan use substitute technology to bypass thetechnological barriers raised by the incumbents. For instance, Canons New Processtechnology in its plain paper copier helpedminimize the technical advantage Xerox had

held for decades.Amazon.com, Inc. succeeded in eroding

the competitive advantage held by leadersBorders Group Inc. and Barnes & Noble, byentering the book retailing industry. Byleveraging the capabilities of conductingcommerce on the Internet, Amazon chal-lenged the conventional mode of book dis-tribution, compelling the incumbents toincur large investments to ensure their sur-vival. While Barnes & Noble survived the

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onslaught of a number of retailers on-line,Borders conceded victory and decided to

collaborate with Amazon.Substitution is often less easy to detect

than direct imitation, which operates in theimmediate domain of the leaders. A substi-tute firm often sails from a neighboringindustry or areas outside the leaders radar.Incumbent leaders may not clearly identifythe substitutors as serious challengers, due tothe rivals seemingly nonthreatening mannerin their initial foray into the leaders compe-titive maps. Direct imitation reduces incum-bent leaders action space and chips away at

their advantageous positions. Substitutorsmove the mountain and sea. They makethe leaders games irrelevant and their cor-responding core competencies obsolete.

E n v i r o n m e n t a l S h i f t

Environmental changes can invalidateadvantages of certain firms. Changes insocial cultural trends, technological develop-ments, and government regulations areamong the major causes that can destroycertain firms competitive advantage.

First, cultural trends change consumersperception of different firms in an asymme-trical fashion, creating competitive advan-tage for some firms while destroyingcompetitive advantage of others. Forinstance, the health craze in America in thepast two decades severely tarnished the brand-image advantage of KFC, whileenhancing the promotional advantages offirms like Nike Inc.

Second, changes in government regula-tion also affect a firms competitive advan-

tage. For instance, increased governmentalregulation diminished the competitiveadvantage of the tobacco industry. Similarly,the deregulation of the commercial bankingindustry brought a huge wave of consolida-tion, making the prior competitive advantageof many regional banks disappear becausethey now have to compete against large-scalenational banks.

Third, advances in technology can alsoaffect firms in an asymmetrical fashion by

redefining the relative position of firms oncertain strategic dimensions. For instance,

Internet-based e-commerce allowed smallerplayers in the encyclopedia business to chal-lenge the dominance of Encyclopedia Brit-annica. On-line offerings of encyclopedia-type products largely changed the intensepersonal selling nature of the business, ren-dering Encyclopedia Britannicas huge salesforce obsolete.

Environmental shifts often redefine therelevance of participating firms resourcesand capabilities. They may threaten the lea-ders positions from places where the leaders

least expect it. General or macro environmen-tal factors such as political upheaval, socio-cultural trends and technological advance-ment may rock the foundations of leadingfirms. Incumbents find it difficult to monitorimitators or substitutors, as they do notexactly initiate the changes in the environ-mental factors. The challenge to incumbentleaders is therefore even more daunting inthis scenario.

B a d L u c k

In imperfect markets, firms can enjoy com-petitive advantage over rivals simply because they are lucky. For instance, theycould have acquired certain valuableresources in certain historical events, pre-cluding other firms from acquiring the sameresource. Just as luck has a role in a firmscompetitive advantage, bad luck or hazar-dous events are capable of destroying theposition held by leaders in industry. Avianflu in Asia poses a great threat to KFCsadvantage, built on its motto We do chicken

right. Similarly, the publics fear of foot-and-mouth disease had severely hurt theentire beef producing and marketing indus-try in North America and beyond.

Crisis management is the key to preventthe loss of competitive advantage due tounforeseen events. Johnson & Johnson nar-rowly escaped its precarious situation fol-lowing the deaths caused by cyanide-lacedTylenol tablets in 1982. Quick response andcreative remedies in tragic situations arising



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out of bad luck should prevent furtherdamage. This should be true especially for

single product line firms, for they havenowhere else to escape to and nothing elseto lean on.

S a b o t a g e

Internal acts of sabotage are not uncom-mon, as evidenced by the recent regularity ofcriminal trials prosecuting top managers.However, our concern is with the acts ofsabotage competitors undertake to under-mine the advantage of leaders and pioneers.

Ensuing legal battles are waged at a greatcost, resulting in the victory of the mightierand loss of the pioneer. Microsoft forced itsway to become the dominant player in theInternet browser market by bundling itsbrowser with its operating system, and byinsisting that PC manufacturers place Inter-net Explorer on the desktop. Knowledge-intensive industries such as pharmaceuticalsand software are constantly under the threatof deliberate patent infringements. While it ispossible for pioneers to protect intellectualproperty rights, there are numerous possibi-lities for acts of sabotage by rivals. Forinstance, Cipla Ltd. a pharmaceutical manu-facturer in India, introduced generic AIDSdrugs at $350 per patient annually, comparedwith $15,000 for patented drugs from thepioneers of AIDS drugs such as Bristol-Myers Squibb and GlaxoSmithKline. AIDSbeing a serious problem in poor developingcountries, the move made by CIPLA is an actof sabotage detrimental to the massiveinvestments of leaders in the industry. Anymove made to protect patent rights, however

legal, is not viewed sympathetically, giventhe acute need for affordable AIDS treatment.Generic drug manufacturers in China dealt adamaging blow to Pfizer Inc. when Chineseauthorities overturned the patent for Viagra.

(Anti) Competitive acts of sabotage are best dealt with proactive measures. Antici-pation of rivals actions and containmentstrategies are the best defense. Containmentstrategies not only involve defensive postur-ing, such as litigation, but also offensive

actions that prevent acts of sabotage by com-petitors. Cooperation and cooption of poten-

tial competitors help create disincentives forany damage-inflicting activity. For instance,multinational pharmaceutical firms now setup shop in India by entering into cooperativeagreements and establishing wholly ownedsubsidiaries.

M A K I N G S E N S E O FA D V A N T A G E D E S T R U C T I O N :P U T T I N G I T T O G E T H E R

A useful approach to understanding firm-level decline would be to identify some ofthe triggers and relate the events that fol-lowed at the firm level. Triggers of destruc-tion originate either at the top managementlevel or due to events in the external envir-onment. The airline industry serves as a goodcontext to understand the triggers. The Sep-tember 11, 2001 terrorist attack is an externaltrigger that was sudden (spontaneous) forthe airline industry. The consequent changein the industry environment was a majorupheaval resulting in a series of managerialactions within airlines aimed at preservingtheir positions.

United Airlines (UAL) suffered a severesetback in the aftermath of September 11events, thus revealing the airlines inefficien-cies. In an effort to imitate the successful andresilient Southwest Airlines, UAL decided totake the deliberate action of launching a newairline called Ted. It is yet to be seenwhether Uniteds actions are indeed effectivein regaining its lost competitive advantage.Therefore, it is imperative to recognize that

sometimes, spontaneous external triggerscan cause a flurry of deliberate internalactions that can lead to the erosion of com-petitive advantage. Similarly, deliberateactions by entities exogenous to the firmcan trigger competitive actions that willresult in loss of competitive advantage. Forinstance, deliberate government regulationsin the auto industry with regard to fuel con-sumption triggered competitive rivalry in thenew hybrid segment. Firms such as Toyota

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Motor Corp. and Honda made a deliberatecommitment to developing new product

lines to take advantage of the regulatoryenvironment. China recently passed legisla-tion that will require automakers to meetmore stringent fuel economy standards.Ford, General Motors and Chrysler ignoredand neglected the regulatory environmentsand as a result are highly vulnerable to Japa-nese rivals in the Chinese auto markets.

R i s i n g f r o m t h e A s h e s : K o d a k sV a l i a n t A t t e m p t s t o R e g a i nD o m i n a n c e

In 1997, advances in digital technologystarted to have an impact on photography-related applications. New competitors beganto emerge. While Kodak had ignored thepotential of digital technology prior to this,Kodak now paid lip service to its commit-ment to digital technologies. Wall Streetreacted favorably, and Kodak stock was atan all-time high of $90 in February 1997. In1998, Kodak formed deals to expand its digi-tal offerings, including collaboration withIntel and Adobe Systems allowing consu-mers to manipulate, print, and send personalphotos from their PCs. Kodak did notembrace the digital route in consumer pro-ducts and as result, its market capitalizationeroded substantially, with a loss of 73% inmarket value over a period of seven years.Kodak realized that it had neglected thepioneering opportunities in the emergingindustry and in the year 2000, it began itsefforts to leverage its competencies in tradi-tional photography to digital applications.

Kodak formed a joint venture with com-

puter giant HewlettPackard Co. to developphotofinishing equipment for digital photo-graphy; extended its push into the on-linephoto business by buying the remainingshares (it already owned 51%) of PictureVi-sion, a digital image storage service; andacquired Lumisys, a maker of digital imagingsystems for the medical industry. In 2001,Kodak acquired Bell & Howells (now Pro-Quest) imaging operations. With the intro-duction of the popular EasyShare digital

camera, Kodak is now the second-largest inthe U.S. digital camera market with 18%

market share (in number of units). Kodakplans to invest $3 billion to leverage digitaltechnologies in the photography market.

In March 2004, Kodak filed a lawsuitagainst Sony for patent infringement. Kodakhopes to recover lost ground in the form oflicense revenues from Sony. Analysts spec-ulate Kodaks return to the top in the digitalcamera segment. However, Kodak is now inthe digital imaging business. Being the lar-gest manufacturer of equipment is notenough. The convergence of personal com-

puters, handheld computing devices, photo-graphy equipment, data storage and printingrequires firms to integrate a number oftechnologies. Competitive advantage isgained by embracing the key technologiesand leveraging them effectively to maintainleadership. Kodaks decision to acquire Nex-press (its joint venture with Heidelberg) andHeidelberg digital, to deliver large-scalecolor printing solutions, appears encoura-ging.

C O N C L U S I O N S

We presented an array of examples fromvarious industries illustrating the numerousways in which leaders lose their advantage.Stakeholders can benefit highly from modelsthat can clearly discriminate between self-serving attributions of managers and themore plausible set of variables outlined inthis paper that lead to erosion of competitiveadvantage. Our framework has importantand practical managerial implications in

understanding destruction of long-held com-petitive advantage for market leaders byproviding clearer explanations of decline atthe firm level.

In the world of business, firms win orlose; leaders come and go. Unlike sports,where one can toil in minor leagues for life,business has no minor leagueyou lose, andyou are out. There is rarely any lasting placefor the mediocre. Unlike a Hollywood actor,who can win an Oscar in his/her 1980s, a



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CEO doesnt enjoy the luxury of multiplefailing roles. CEOs worry about achieving

competitive advantages when they do nothave possession of them. They worry aboutlosing them once they possess them, thirstingfor even more.

While Andy Grove claims that only theparanoid survive, or Ted Turner believesthat perhaps the only way to be secure isto never to feel secure, Ralph Waldo Emer-son long ago remarked, Every hero becomes

a bore;well, some sooner, some not. It isperhaps against human nature to ask leaders

to be always on the alert. Complacency seemsso natural when a leader is showered withsuccess. Yet awareness of various potentialpitfalls, we hope, will help the heroes lastlonger.

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SELECTED BIBLIOGRAPHY

The most influential work on competitiveadvantage by far is Michael Porters Competi-tive Strategy (New York: Free Press, 1980) andCompetitive Advantage (New York: Free Press,1985). While the industrial organization

school of thought influences Porters work,an emerging literary stream is based on theresource-based view, which focuses on theinternal firm capabilities. The resource-basedview was advanced significantly by the workof Jay Barney, Firm Resources and SustainedCompetitive Advantage, Journal of Manage-ment, 1991, 17, 99120.

Amongst a host of books on competitiveadvantage, a few bestsellers are by Jim Col-lins and Jerry I. Porras, Built to Last: Successful Habits of Visionary Companies (New York:Harper Business, 1994), and by Collins, Good

to Great: Why Some Companies Make the Leapand Others Dont (New York: Harper Busi-ness, 2001). Gary Hamel and C. K. Prahladsbook Competing for the Future (Boston, MA:

Harvard Business School Press, 1994) had aprofound impact in understanding the basisof competition. All of the above books pro-vide excellent examples of the decline andsuccess of major corporations.

The dynamics of competition in the fast-paced economy is the subject of a popularbook by Richard DAveni, Hypercompetition(New York: Free Press, 1994). Pankaj Ghe-mawats work Commitment: The Dynamics ofStrategy highlights the importance of com-mitment in strategy formulation (New York:Free Press, 1991).

Schumpeter introduced the notion ofcreative destruction in the seminal work TheTheory of Economic Development (Cambridge,MA: Harvard University Press, 1934). A morerecent work by Richard Foster and Sarah

Kaplan presents the reasons why once suc-cessful firms under-perform, with a rich arrayof contemporary examples: Creative Destruc-tion (New York: Random House, 2001).

Hao Ma is a Professor of Management and EMBA Director of BeijingInternational MBA Program (BiMBA) at China Center for EconomicResearch (CCER), Peking University, Beijing 100871, China. He is also aProfessor of Management at College of Business and Management,University of Illinois at Springfield, Springfield, IL 62703, USA. Heearned his Ph.D. in Strategic Management from The University of Texasat Austin. His current research interests are the nature and causes of

competitive advantage, multiple market competition, managerial deci-sion-making, and the entrepreneurial process (Tel.: +86 10 6275 6573;e-mail: [email protected]).

Ranjan Karri is an Assistant Professor of Management at BryantUniversity, Smithfield, RI 02917, USA. He earned his Ph.D. in StrategicManagement from Washington State University. His research interestsare in the area of strategic flexibility, strategic leadership, entrepreneur-ship, and business ethics (Tel.: +1 401 232 6069; fax: +1 401 232 6319;e-mail: [email protected]).

mailto:[email protected]:[email protected]:[email protected]:[email protected]

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