When is a competitor not a competitor?

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In 2003, Krispy Kreme, the donut-making purveyor of all that is sweet and gooey, adopted an expansion strategy not unlike that of the Confederate Army. It dared expand into the Northeastern United States from its southern base, right into the sacred home turf of Dunkin Donuts, headquarters: Randolph, Massachusetts.

Business pundits salivated, not over Krispy Kreme's signature glazed donut, but over the potential Krispy Kreme's move carried for an all out, bare knuckled competitive fight. Publicly, though, neither company was girding for such a battle.

Dunkin Donuts' adopted the position that the bulk of its sales were coffee, not donuts, and that Krispy Kreme was not known for, nor did it promote as strongly, its coffee drinks. Similarly, Krispy Kreme claimed that Dunkin was, in fact, not a donut company, but a company that provided a much wider variety of food products, including muffins and bagels. The implication, of course that each was not as serious as the other when it came to each firm's definition of its core product - coffee for Dunkin Donuts and donuts for Krispy Kreme. Any confusion caused by Dunkin Donut's very moniker was conveniently "glazed" over.

The reality, of course, was quite different. Krispy Kreme smelled blood when it started its northward march, seeing Dunkin Donuts as a complacent number one ready to be knocked off its perch. For a time, pundits were placing their bets on Krispy Kreme, citing its rapid expansion, image at the time as a "hot" brand, and it's superior growth trajectory over Dunkin Donuts. Same-store sale growth was 11 percent for Krispy Kreme in 2002 versus only 6 percent for Dunkin Donuts, according to Business Week.

However, in face of the northward invasion of Krispy Kreme, Dunkin Donuts remodeled stores, introduced new food and beverage lines, and changed its pricing structure so as to thwart Krispy Kreme before it barely advanced above the 42nd parallel cutting south of Boston. Krispy Kreme raised the white flag and retreated. Krispy Kreme is now a distant memory among New Englanders.

Despite its public stature, Dunkin Donuts overcame its complacency and responded to Krispy Kreme's incursion aggressively. However, this seems to be the exception, not the rule. Interestingly, it's often the market leaders - the companies who should have the keenest eyes for competitive threats and the most to lose if a direct rival guns for their customers - who are most likely to turn a blind eye toward competitors.

Companies that discount obvious competitors do so at their peril. To be sure, every company wants to be unique, and is therefore quick to discount direct competitive challenges to its market position. Instead of acknowledging such challenges, many market leaders look the other way, finding excuses and reasons why a rival that looks, acts and talks just like them is not to be taken seriously.

Conversely, it's the challenger - the scrappy No. 2 who has the goliath in sight - that is quick to acknowledge and take on the dominant competitor. Avis "tried harder" than Hertz for years, leveling the rental car playing field. The "I'm a PC, I'm a Mac" ads are a classic illustration of Apple's newfound chutzpah toward the computer industry's 800-pound gorilla. For the second-fiddle players, there is almost all to gain and little to lose. America loves the underdog, and companies that can successfully make a case for their right to challenge an entrenched competitor usually make some inroads in terms of market share, or at least customer awareness.

Given the history of successful challenges to dominant competitors, then, what makes market leaders so quick to ignore obvious, direct, and - in many cases - damaging competition? In other words, when is a competitor not a competitor? Three factors seem to be at work.

One is complacency. It takes hard work, market smarts and a little bit of luck to rise to a dominant number-one position in most markets. Market leaders show intensity for competition and can be ruthless on their way to the top. Once there, however, a new mindset seems to take hold. Call it a combination of entitlement, arrogance and just plain exhaustion; these market leaders go from driven competitors to stagnant behemoths, unable to see competitive threats even when they are staring them in the face.

Case in point: when Will Kussell joined Dunkin Donuts in 1994 as senior vice president of marketing, he found a company that had grown lazy. At the time, there was no obvious rival to Dunkin Donuts, which Mr. Kussell admits had led to complacency. During the 1990s, driven in part by the expansion of Starbucks and, later, Krispy Kreme, Dunkin Donuts transformed itself.

The second factor is strategic confusion. Having reached the apex, companies become fearful about losing their perch and try to diversify into new products and markets to maintain their leadership position. Sometimes, such efforts work. Google has gone from search engine to information organizer to ad agency, deftly redefining its markets and outpacing would-be competitors. The market has responded with a better than five-fold increase in its share price since its IPO in 2004.

Oftentimes, however, companies can easily lose sight of what got them to the top in the first place, and become so confused about their strategy and market objectives, not to mention industry dynamics, that they become confused and blind to fundamental industry shifts. When this happens, seeing the advances of upstart competitors can be difficult.

For example, Oracle has grown to become a leading business applications software company, at or near the top of the market for enterprise resource planning, customer relationship management and other business software applications. However, its rapid growth and expansion into multiple segments may have caused it to miss a fundamental shift in industry dynamics. "Hosted applications," software that resides on the developers' servers and that is delivered to users over the web as a service, is quickly challenging the old model of companies buying, installing and maintaining software on their own corporate networks.

Driving this shift is Salesforce.com, a Web-based CRM software provider. Salesforce.com currently claims 25,000 customers and more than a half million individual subscribers. The company's approach is to sell corporate applications as a service over the Web, not as a licensed piece of software that buyers must install and integrate themselves (or with the help of a software integration consultant).

Oracle for years discounted the threat from hosted applications like Salesforce.com, claiming, as evidenced by the companies' vastly different messages to the market. While Oracle urges its customers to "retire" custom-built programs so they can migrate more smoothly to next-generation software releases, Salesforce.com encourages customers to build custom programs on top of its own Web-based software. Indeed, Salesforce.com's latest service is an online marketplace where customers can distribute and sell their own applications that they developed in-house.

One Oracle executive indicated his personal interest in "crushing" Salesforce.com at a speech in late 2005, according to Britain's The Register. However, the company's bombast seems to be too little too late.

The third factor that obfuscates the rise of competitive challengers is inaction or poor action. As companies grow, seeing and effectively responding to market shifts becomes harder. Even after acknowledging the need to respond to competitive challenges, market leaders often do one of two things. They either become paralyzed when it is time to act and fail to link competitive insights to action, or they act inappropriately, attempting to thwart competition by unfair means. By the time the leader has embarked on a new strategy, the competitive pressures that prompted the new strategy in the first place have often passed them by.

Take the plight of chip giant Intel. Though it said that it shipped a record number of microprocessors during the fourth quarter of 2006, it's quarterly net income of $1.5 billion was down 39 percent from a year earlier. The reason? Many analysts believe it was Advanced Micro Devices emergence from an ankle-biting No. 2 player to a credible and formidable rival. According to Business Week, AMD is not letting up the pressure on Intel, especially for its gross margins, despite taking knocks of its own after an all-out price war.

Persistent competition from AMD may not be the only fight Intel has to face. Analysts familiar with the European Union's potential anti-competition case against the chip-maker say that investigators have recommended to Antitrust Commissioner Neelie Kroes that she formally charge Intel with unfairly stifling competition. The case, initiated with an AMD complaint six years ago, is now at the point where the EU must either act against Intel or drop the matter. It's significance? That Intel, unable to respond appropriately to competition from AMD, behaves in such a way so as to draw the ire of antitrust regulators.

Like with any bad habit, the first step to recovery is admitting you have a problem. Market leaders should avoid ignoring obvious competitors, and instead confront the challenge head on. Why? Chiefly, the leaders' efforts to dismiss away the competition are usually ineffective: market participants and observers rarely put stock in corporate statements that fail to acknowledge an obvious competitor. Instead, market leaders should freely admit that competition exists, and point to it as a good thing. What better way is there to reinforce a company's position as a market leader than to point out all the other rivals who aspire to its position?

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