The Strategy Of Leverage
by
Jerry W. Thomas
The use of high levels of debt (leverage) to fund buyouts, finance acquisitions,
or defend against corporate raiders can make a company vulnerable to
competitive attack. If your major competitor has just taken on a heavy burden
of unproductive debt (i.e., ownership-related debt, as opposed to debt which
finances investments in plant and equipment, advertising, etc.), then your
company might have a strategic opportunity of great potential. Each industry
and competitive situation is different, of course, but the basic strategic
principles you should follow are:
- Seize the initiative. Attack your competitor
while he is weak.
- Trade off short-term profitability for long-term market position.
Your leveraged (and weakened) competitors should not be exploited for short-term
profitability (a great temptation). Rather, you should go for the long-term
and focus upon building your market share and building your consumer (or customer)
franchise at the expense of short-term profitability. This strategy will keep
your leveraged competitors “on their backs” for years to come.
- Be relentless. Keep up the attack until the leveraged
competitor is so weak that his potential as a strategic adversary is beyond
repair.
- Focus the attack upon your leveraged competitors.
The mechanics of this focusing will vary by industry and by competitor, naturally.
For example, you might concentrate advertising and promotional spending in
markets where leveraged competitors are strongest, or target your advertising
and promotions to the users of leveraged competitive brands. All other things
being equal, it'll be easier to take market share away from your leveraged
competitors.
- Attack in ways leveraged competitors cannot counterattack.
For example: Outspend the leveraged competitor in advertising. Cut prices
on your products which are most competitive to the leveraged rival's most
profitable product lines. Build new retail outlets near leveraged competitor's
outlets. Use the competitor's weakened condition as rationale to solicit his
best distributors/dealers/accounts. Recruit the leveraged competitor's best
employees. These key employees will probably be more receptive to outside
offers because of salary constraints within the leveraged company.
- Streamline your organization. Cut waste and fat.
Improve productivity and efficiency. Your leveraged competitors will be forced
to make these kinds of cuts and improvements. Therefore, to maintain your
relative advantage, you must become as lean and tough as your leveraged rivals.
There are many other ways to attack leveraged competitors, but these ideas are
sufficient, perhaps, to stimulate your creative thinking about how your company
might mount an attack. But what if the shoe is on the other foot?
Let's suppose you are the leveraged underdog (or just a plain underdog or small
company) instead of the cash-rich, nonleveraged company. What strategy should
you pursue? The underdog must become entrepreneurial
in its thinking, organization and decision making. Why entrepreneurial?
Many small companies compete effectively with larger ones every day, even though
the small companies are debt-laden, cash poor, inadequately staffed, lacking in
equipment, and with little or no reputation or image. These small companies
survive and thrive by adhering to the following principles:
- Simplify and speed up decision making. If it
takes more than a few days to make key decisions, then you are not entrepreneurial.
You must move faster than your ponderous dinosaur rivals.
- Work hard. Some large companies (and all small
ones) forget this. If your employees work 50 hours a week, and your competitor's
employees work only 35, you have achieved a productivity advantage of more
than 40%, all other things being equal.
- Listen to your customers/consumers. Talk to your
customers. Survey your customers. Read customer letters and comment cards.
Respond to your customers' needs and requests. Ignore your competitors; they
are just as dumb about customer needs as you are. Too many businessmen spend
too much time and energy watching (and copying) their competitors, and forget
about their customers.
- Be tactical. Be opportunistic. Don't worry too
much about grand strategy. Focus upon survival. Leap from rock to rock.
- Be unorthodox. Be creative. Shake up your industry
with new products, unusual publicity, and new advertising and promotion tactics.
Outthink your well-heeled rivals.
- Pursue market segments too small for competitive Goliaths.
Find market niches and tailor your product/service to those niches.
- Exploit distribution segmentation. Introduce
a brand for “drugstores” only, or “hardware stores” only,
or “feed stores” only. This is a common and highly successful entrepreneurial
ploy.
- Pursue geographic segmentation. This is the most
common type of market segmentation and one of the most effective. Examples
of geographic segmentation are concentrating your efforts on rural areas (instead
of urban), on the Southwest (instead of the United States), on suburban neighborhoods
(instead of urban), on the top-twenty metro areas (instead of the whole United
States), and so on. Geographic segmentation still works.
- Exploit private label/unbranded opportunities.
Your cash-rich competitors will turn their noses up and scoff at such “dirty”
business.
- Improve advertising effectiveness. Test your
advertising, and test your competitor's advertising. Be sure your advertising
is more effective than your competitor's. True, your richer competitor can
outspend you in advertising, but this can easily be offset if your commercials
are more effective than hers.
- Cultivate word-of-mouth advertising. An interesting
“story” about your brand/service (and it must be true), a story
your customers and dealers will want to tell over and over again, can help
build a brand or a business. The “Jack Daniel's story” about the
quaint little distillery in Lynchburg, Tennessee, is a wonderful example of
a brand with an interesting “story” that stimulates word-of-mouth
discussion and recommendation.
There is only one moral to this article: Winning strategies exist, no matter
what your company's status or situation, and no matter if you are the top dog
or the underdog.
Copyright © 1997 by Decision Analyst,
Inc.
This article may not be copied, published, or used in any way without written
permission of Decision Analyst.
About the Author
Jerry W. Thomas (jthomas@decisionanalyst.com)
is President/CEO of Dallas-Fort Worth based Decision Analyst. He may be reached
at 1-800-262-5974 or 1-817-640-6166.
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