Organizational Dynamics, Vol. 34, No. 1, pp.

6376, 2005
2005 Elsevier Inc. All rights reserved.
www.organizational-dynamics.com

ISSN 0090-2616/$ see frontmatter

doi:10.1016/j.orgdyn.2004.11.002

Leaders Beware:

Some Sure Ways to

Lose Your Competitive
Advantage
HAO MA

INTRODUCTION
From In Search of Excellence by Peters and
Waterman of the 1980s, and Built to Last by
Collins and Porras of the 1990s, to Good to
Great by Collins of the 21st century, business
bestsellers have helped articulate and popularize the varying paths toward the holy
grail of competitive advantage. They have
profiled the success of many leading firms
that defined the standard of excellence at the
time. Yet merely a decade or so later, quite a
number of those once excellent firms have
had to struggle; competitive advantages for
those strong-built firms did not exactly last.
Is a tough, turbulent environment solely to
blame for a sort of bad luck? Or is it possible
that leading firms own actions contribute to
their fall? Simply put, what destroys leaders competitive advantage; how do they
actually lose it? On this question, bestsellers
often remain silent.
In the academic literature, the process of
creating competitive advantage has been
addressed from a variety of perspectives.
For instance, the market-power approach
emphasizes the importance of industry positioning; the resource-based view focuses on
unique firm resources and capabilities; the
commitment approach treats irreversible

RANJAN KARRI

resource commitment as both necessary

and sufficient for sustainable advantage;
and the Schumpeterian perspective centers
on the core concept of innovation as source
of advantage. Although the dominant perspectives of strategy literature mentioned
above allude to the causes of competitive
disadvantage, it is the omission of conceptual development on destruction of competitive advantage that motivates our research.
Understanding destruction of competitive advantage is an important endeavor,
especially in the context of explaining firmlevel decline during economic downturns.
This may help to better explain decline at
the firm level, rather than to simply blame
macro-economic conditions such as lack of
demand growth, recession, unemployment,
tariffs, or the lack of tariffs. While blaming
macro-economic conditions may be tempting and indeed self-serving for managers, it
may also keep them from understanding
firm-level contributors to the decline in
competitive advantage. In this paper, we
propose a framework to elaborate on the
destruction of competitive advantage for
leaders in the market. Given the scant attention to this important strategic issue, this
effort has both theoretical value and practical relevance.
63

FADING GLORY OF FALLEN

LEADERS
There are several examples of leading firms
that lost their competitive advantage across a
wide range of industries. Some of the erstwhile leaders closed shop, and some are
struggling to keep afloat in turbulent waters.
 For more than a century, Eastman
Kodak was a successful pioneer in the photography industry. Kodak was to the photography industry as Ford Motor Co. was to the
automobile industry, and yet it lost the
advantage it enjoyed. Is that because of
new entrants armed with new technology,
or is it because of Kodaks refusal to embrace
changing trends in consumer preferences?
 United Airlines Inc., the second-largest air carrier in the world, filed for bankruptcy protection to restore the company to
long-term financial health. United was successful in holding on to a differentiation
advantage based on high quality service,
by building the Star Alliance network that
maintained a strong customer base, among
other initiatives. While the entire air carrier
industry was affected by the 9/11 terrorist
attacks, Uniteds woes are perhaps due to a
more fundamental problem of loss of control
over costs. Did Uniteds recent truncation
efforts result in the creation of its small air
carrier called Ted, or was it Uniteds eagerness to jump on the small is beautiful
bandwagon to keep abreast of competitors
who are willing to fly customers for a Song
(Deltas low fare carrier)?
 Sears, Roebuck & Co. is the quintessential American retail giant that experienced a near-death experience despite its
glorious past. By 1999, Wal-Mart Stores
and The Home Depot Inc. had crept into
the list of the thirty Dow Jones Industrial
Average companies, unseating Sears, which
had been part of the list since 1924. The
highly diversified retailer, hurt by severe
competition from the likes of Home Depot,
Wal-Mart and Target Corp., got rid of its
credit card operations and made acquisitions
to bolster its quality image. Is Sears not aware
of the faltering image that compelled it to
64 ORGANIZATIONAL DYNAMICS

reach out for Lands End, or is the acquisition

really a well thought-out move to bolster its
failing reputation?
 Commodity futures traditionally
involved goods such as oil, agricultural products, meat and coffee. Who would have
thought of trading in energy futures or bandwidth futures? Brilliant and innovative business ideas propelled Enron Corp. from a
distributor of natural gas and owner of a
large network of gas pipelines to a gigantic
market maker. The story of Enrons collapse is now part of folklore. Was it the case
of a few bad apples, or was Enron a victim of
its own meteoric rise? There is a litany of
firms such as Enron, Adelphia Communications Corp., Global Crossing, WorldCom
Inc., Parmalat and Vivendi Universalto
name a fewwhere top management squandered and ravaged the wealth and competitive advantage built over several years.
While it is easy to attribute the cause of firm
failure to dishonesty and greed of top management, it is also imperative to understand
the context that allows such disasters to
occur.

WHAT DESTROYS
COMPETITIVE ADVANTAGE?
We focus on Eastman Kodak to understand
what triggers the destruction of competitive
advantage. Kodak is an excellent example of
how a company lost its advantage and how a
company can attempt to regain its advantage.
Based on the facts illustrated in the case
outlined in Fig. 1, the key strategic issues
facing Kodak include: (1) attacks on market
share and global position, (2) the explosion of
digital infrastructure, including the Internet,
(3) rapid advancements in digital technology
applications in photography, (4) the increase
in the number of competitors resulting from
the use of digital technology, and (5) slow
growth in the traditional camera industry
(Kodaks mainstay segment).
Initially, Kodak ignored the potential
threat from advances in digital photography.
Later Kodak was compelled to pay attention

to the promise of digital technology in imaging. Despite its initial attempt at investments in research and development (R&D),
Kodak neglected the comprehensive nature
of digital photography markets. The major
environment shift caused by advances in
technology acted out Moores law in the
digital camera market. By 2001, digital cameras had become extremely popular, and the
trends suggested that digital photography

was bound to overtake the market for traditional photography. Kodak decided to focus
on the application of digital technology in
wholesale and retail photofinishing, and to
expand their presence in emerging film markets. Kodak was arrogant enough to wager
on the potential of markets for film photography in India, China and other Asian countries. Kodak assumed that the consumers in
developing countries could not afford the

FIGURE 1 KODAK: MOMENT PASSED AWAY . . .. DIDNT

GET THE

PICTURE?

FIGURE 1. Continued .

high prices of digital cameras. Currently, the

trends suggest that digital photography is
slowly becoming the norm in the rapidly
growing economies of India and China.
Rapid growth in digital technology had
an impact on Kodaks current financial situation and position within the camera and film
industry. Specifically, digital technology
threatened Kodaks mainstay film-based segment. Dynamics within the market have
Kodak on the defensive and reacting aggressively by engaging in fierce price-cutting
tactics. Such posture poses the risk of losing
profitability from its film segment and the
further risk of losing its status as the leading
film manufacturer. Thus, Kodaks future
health faces a double threat. On one side,
competitors such as Fuji are chipping away at
Kodaks profitable consumer film business.
On the other, the technology revolution is
undermining Kodaks conventional camera
and film interests.
Kodaks initial ignorance, followed by its
negligence and arrogant posture, combined
with the major shift in the technological
environment caused by the convergence of
several industries, attracted a host of new
and formidable competitors. Kodak found
itself in unfamiliar territories, including
desktop printing and digital storage. Taking
66 ORGANIZATIONAL DYNAMICS

advantage of Kodaks reluctance to enter the

digital market, rivals like Sony Corp. made
aggressive entry into the market and developed the market by taking a lead in setting
standards. Kodak is now alleging that Sonys
infringement of Kodaks patents is an act of
sabotage.
As seen in the example of Kodak, multiple triggers are often at work initiating the
destruction of a leaders competitive advantage. These triggers, internal or external to
the firm, spontaneous or purposeful, interact
and jointly affect the firm. However, for
analytical purpose and ease of presentation,
we examine each one of these triggers in
depth. Then we try to make sense of the
whole phenomenon of competitive advantage destruction in a more integrative manner by exploring the potential linkages and
patterns among the various triggers (Fig. 2).

INTERNAL TRIGGERS OF
DESTRUCTION
Ignorance
Leading firms can lose their advantage due
to their own lack of knowledge of the drivers
of their success. Firms may not be aware of the

FIGURE 2

TRIGGERS

existence or importance of their core competencies. Certain resources are unique and
valuable because they are socially complex
and causally ambiguous. Because of such
subtleties, the owner of unique resources that
provide sustainable competitive advantage
may not be aware of the cause of competitive
advantage. Thus, the firms management may
ignore their unique resources. For instance,
inappropriate hiring of new personnel who do
not fit in with the existing culture could jeopardize a superior organizational culture or
mode of teamwork. A company that thrives
on its dedicated and loyal employees may lose
its edge if it tries to substitute people with
machines in order to save short-term overhead costs.
Managerial decisions with regard to
acquisitions are spontaneous and without
much thought to the potential problems in
integrating organization cultures. AT&T
Corp.s acquisition of NCR Corp. in the early
1990s yielded negative results, owing to the

OF

DESTRUCTION

disparate nature of the corporate cultures in

the organizations. NCRs strong conservative
(hierarchical) culture was at odds with the
open work environment of AT&T. Managerial ignorance results in blinding some firms
to external threats that emerge spontaneously. Actions of the firm arising out of
ignorance can lead to shocking unintended
consequence, such as eliciting strong retaliation from competitors, attracting environmental lobbyists or legal actions.
Enhanced awareness about the nuances of
each market will prevent firms from being
surprised. General Motors Corp. got a rude
awakening when they decided to introduce
Buick Lacrosse in the Quebec market, as they
were not aware of the colorful meaning of
Lacrosse in French Canadian slang.
As proclaimed by Sun Tzu centuries ago,
know yourself and know your enemy. Take a
good look at your own firm. Do an internal
audit from time to time and assess your
strengths and weaknesses. Know your com67

petitive advantage and its underlying

sources, for what you do not know may cost
you.

Negligence
Negligence and the lack of rewards and
support for a skunk-works in a firm where
innovation lies at the heart of its competition
could also cause the firm to lose its advantage
vis-a`-vis rivals. Xerox Corp.s Palo Alto
Research Center (PARC) pioneered the graphic user interface for personal computers.
Yet due to the negligence of top management
of the research done at PARC, Xerox failed to
be a leader in the PC industry, giving away
its initial advantage. Similarly, the fall of IBM
Corp. and the rise of Microsoft Corp. in the
software market illustrates the loss of IBMs
competitive advantage in the software industry.
The negligence of the top brass at Barings
Bank of U.K. went so far as to let a selfillusioned traders bogus trading practice
go unnoticed for so long that the accumulating loss almost rocked the bottom of the
prestigious financial institutions. Enrons fall
is allegedly due to the negligence of its CEO,
Kenneth Lay. If there is any credibility to
Kenneth Lays I didnt know defense,
the destructive impact of negligence is irreparable to the stakeholders of Enron.
A firms top management might vaguely
know its competitive advantage and its
underlying basis; however, they might not
be alert enough to match advantageous
resource positions with emerging opportunity lines and commercial viability. Furthermore, failure in detecting accruing errors
and, worse yet, failure in taking corrective
measures, often give away a firms once
enviable position, destroying its competitive
advantage.

Arrogance
Success doesnt beget success. Success begets failure because the more
that you know a thing works, the less
likely you are to think that it wont
68 ORGANIZATIONAL DYNAMICS

work When youve had a long string

of victories, its harder to foresee
your own vulnerabilities.
Leslie Wexner, CEO,
The Limited, Inc.
Arrogance is not an uncommon trait
of successful leaders. Arrogance leads to
complacency and, as a result, firms develop
blind spots to threats in the competitive
environment. Blind spots make the firm
highly vulnerable to spontaneous attack
from competitors. Successful firms have their
own paradigms that make them blind. Shifts
in paradigms are required to bring about
change. Mainframe computers are the basis
of IBMs dominance; its reluctance to accept
the advent of personal computers led to the
erosion of competitive advantage. The same
core competencies that help firms gain competitive advantage become core rigidities
due to inflexibility and shortsightedness.
Think about the engineering and organizational apparatus Henry Ford set up for the
making of the once perfect Model T.
Despite its history of being in the leadership
position, Ford Motor Co. was unable to
embrace the total quality paradigm, thereby
yielding its advantage to its Japanese rivals.
Destruction of competitive advantage at Ford
was quite apparent as their quality problems
amplified in recent years.
The arrogance of strong incumbents often
blindfolds their top management teams and
creates illusions that they are invincible.
What worked before will always work. With
this mentality, they unjustly belittle their
rivals, mock their presence, and allow their
smaller rivals to grow and experiment essentially unchallenged, until the rivals become
too big to contain and too powerful to defeat.
Think about Hondas famous entry into
the U.S. motorcycle market, when Harley
Davidson dismissed the Hondas as toys.
Alternatively, think about the Wal-Mart
encirclement of K-Mart Corp.s stronghold
in the cities, or Fox Broadcasting Co.s ascent
to an established and successful network
broadcaster status thanks to the lack of major
threats from the big three networks. Once

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

arrogance of company leaders. Arrogance at
Lucent stems from their elite past, a culture
that does not allow rapid changes in tune
with the technological environment.

O v e r c o n fi d e n c e
A firms competitive advantage can be
destroyed through its own purposeful (in)
action. At least two types of action can
destroy or terminate competitive advantage:
firms either do not appreciate the source of
advantage, or do not want the source of
advantage. Unlike arrogance, overconfidence takes the form of apathy that arises
out of a false sense of security experienced
after success. Firms therefore see little need
for purposeful strategizing and thus find
themselves in a storm.
A firm may not appreciate a particular
competitive advantage and easily gives it
away. For instance, a major personal care
firm in Shanghai owned a well-known brand
in Maxim. In a joint venture with a foreign
firm, it licensed its brand name to the foreign
partner, allowing the promotion of the foreign partners brands. Years later, it found
that the licensed brand was indeed a very
popular one still attracting many loyal customers. The firm had to recover its brand by
terminating the joint venture. However, the
huge cost involved in this process taxed the
firm heavily. Similarly, under-appreciation
of a firms brand-image may also be reflected
in a firms choice to over-diversify and lose
its distinctiveness. For instance, Liz Claiborne Inc., by diversifying into essentially
every segment of the clothing business,
washed down its distinguished image
among professional women, its original target customers. Its competitive advantage
over other designers in the career segment
for professional women largely diminished.
Advertisements featuring large, muscular,
male drinkers gave Milwaukee-based Joseph
Schlitz Brewing Company a macho image.
As early as 1947, Schlitz became the worlds
top producer of beer. Schlitz was successful

as a formidable rival to Anheuser Busch until

the late 1960s. The overconfidence of the firm
led to a reckless expansion into a number of
markets, including Hawaii; Shlitz eventually lost focus on its core message of high
quality beer. Reveling in its success, Schlitz
was far from being humble, as seen by its
forays into diverse industriesranging
from fishmeal plants and fishing fleets in
Chile and Panama, to a glass factory and a
citrus concentrate plant in Pakistan. Finally,
after an incident of hazy beer, consumer
perception of poor quality sent the company
in a downward spiral. Joseph Schlitz Beer
Company was destroyed, and the only current presence of the brand is out of nostalgia;
it is marketed by Pabst Brewing Co., a survivor of the old bastion of American brewing in the Midwest, now based in San
Antonio. Similarly, overconfidence combined with arrogance leads firms like Ford
into activities outside their realm, resulting
in stinging blows to their bottom line. For
instance, Ford lost a billion dollars in 2001
because of its forays into trading a precious
metal called palladium (used in the catalytic
converters of SUVs).

Self-aggrandizement
Highly successful firms are often victims
of their grand success. Chief executives of
firms experiencing huge and rapid success
are prone to actions that have more to do
with ego fulfillment than with the interests of
the firm. Vivendis meteoric rise and fall in a
span of five years is a classic example of selfaggrandizement. Spearheaded by Jean-Marie
Messier, Vivendi started off as a small group
of diverse companies and rapidly grew into a
large group through acquisitions in the telecommunications, Internet and entertainment
industries under the pretext of the muchtouted convergence phenomenon. Messiers
crafty persuasiveness resulted in the acquisition of Seagram (leading music publishing
company in the U.S.) followed by the takeover of U.S.A. Networks. Messier became the
head of Vivendi Universal, and multiplied its
capitalization by four times. During the later
69

part of 2001 (after the September 11 crisis),

the shallow nature of the claims about
the promised land made by Vivendi
under the digital convergence phenomenon destroyed the company. Other notable
examples are Enron, WorldCom and Tyco
International, who lost their advantage due
to their reckless pursuit of greatness fueled
by initial success.
The recently beleaguered Walt Disney Co.
boss, Michael Eisner, is hailed as one of the
most successful CEOs that corporate America ever witnessed, in a ranking that is no less
than that of Jack Welch. Eisner achieved
success through aggressive revamping of
the Disney theme park business, and the
decisive injection of strong doses of much
needed creative power in its animation features. In the last ten years, however, Eisners
suffocating micro-management style, flat
refusal to name a clear second in command,
and super-sized compensation package even
when Disneys stock value plummeted, all
helped to contribute to loss of confidence in
him. The once unassailable Disney reputation and its host of competitive advantages
due to customer goodwill, creative prowess,
and service quality are at risk of becoming
past memories.
Mickey Mouse was perhaps a star larger
than life. Eisner turned out to be an even
bigger star than Mickey. In turbulent waters,
a visionary and a decisive leader may save a
firm from downward spiral and financial
distress. The irony is, however, that the same
decisiveness or tyrannical power that once
worked wonders isnt tolerated when the
firms performance is in perennial distress.
When a celebrated CEOs ego has to be massaged at the cost of the firms long-term
success and its wealth creation, both the
CEO and the firm lose.

Trade-offs and Missed

Opportunities
Decisions to make trade-offs to pursue or
enhance other advantages can result in termination of existing competitive advantage.
In the early years of Sam Waltons retailing
70 ORGANIZATIONAL DYNAMICS

experience, he controlled more than a couple

of Ben Franklin franchises. His advantages in
the variety store business abounded; his franchises were ranked the best in sales and
profit in the entire chain and among the best
in the region. At that time, discount retailing
only barely showed its potential; Sam Walton
went against the industrys convention by
launching Wal-Mart in small towns. However, discounting triumphed. The competitive advantage accumulated in Waltons
variety store business was terminated voluntarily. Walton was not narrow-minded about
his success in managing variety stores. He
was decisively shedding-off the variety store
mentality and embarking on a path that
totally embraced the discounting concept,
laying the foundation for the success of
Wal-Mart.
Similarly, consider Intel Corp.s exit from
the memory chip business and entry in to the
microprocessor business. Ted Turner moved
away from the highly profitable billboard
business he had inherited, to the television
business. Currently, Sun Microsystems Inc. is
facing a similar problem. Sun Microsystemss decline is due to its unwillingness
to shift course from its expensive R&D-intensive strategy. Scott McNealy was eventually
compelled to settle his differences with
Microsoft by entering into an agreement to
allow Suns computer servers to run Windows programs. Sun also missed several
opportunities; for example, it refused to
adopt Intel chips, thereby yielding advantage
to Dell Computer Corp. in the low-cost sever
market, and did not take advantage of its
acquisition of Cobalt Networks to develop
the market for Linux. It appears that Sun is
now stuck in the middle in Michael Porters terms, with its intent to be a contender in
both the low-end server market and the highend software technology market.
A firm has to know when to forgo an
advantage (often a diminishing or potentially
obsolete one) to gain a more important one
for the future. As discussed earlier, attempting to hold on to a competitive advantage
that has past its time may be even more
harmful than voluntarily destroying it.

EXTERNAL TRIGGERS OF
DESTRUCTION
Imitation
Intense competition in domestic marketsdue to small market size, demanding
customers, and a large number of competitorskept Japanese automakers on their
edge. Such intense competition helps firms
hone their skills and leads to competitive
advantage as they expand into international
markets. On the other hand, competition is
capable of destroying competitive advantage
through substitution and imitation.
Imitation by competitors drives down a
pioneering firms competitive advantage.
Imitation often reduces the differential
between the pioneering firm and the imitators in technological know-how, product distinctiveness, and manufacturing costs, hence
destroying pioneering firms competitive
advantage. For instance, although Intel pioneered the PC memory device business, the
Japanese firms that quickly imitated Intels
products and technology eventually drove
Intel to make a deliberate decision to exit
the business.
Apple Computer Inc.s Macintosh derived
its superiority and uniqueness from its graphical user interface (GUI), originally
invented at Xeroxs Palo Alto Research Center. Graphic icons and the use of a mouse
represented a big difference in ease and convenience compared with rival PCs running
on Microsofts DOS operating systems.
Microsofts ingenuity lies in its ready willingness to develop application programs on
the Macintosh platform. The stealthy imitation by Microsoft resulted in the eventual
dominance of the Windows operating system, nullifying the advantage held by Apple.
After ignoring Southwest Airlines Co.s lowcost strategy, major airlines such as Delta and
United began to imitate the low-cost carriers
strategy with their own version of low-cost
carriers, Song and Ted, respectively. WalMart, the torchbearer of successful discount
retailing, is not beyond the temptation to
imitate its competitors. Targets innovative
introduction of apparel lines by popular

fashion designers prompted Wal-Mart to

introduce the trendy George line of garments. Such imitation did not meet with
success either with the airlines or with leaders such as Wal-Mart.
Imitation can be competitive suicide, as
the imitator is trying to play in the leaders
home courts, where the leaders possess
superiority in market and/or resource positions. Imitation with an innovative twist,
however, may well turn the table against
the leaders. Consider the rise of Japanese
and Korean firms against Intel in the memory
device business. On the other hand, consider
Samsung, a latecomer, against Sony, a widely
acknowledged pioneer. Do not write off a
humble imitator too quickly. Imitation is the
sincerest form of flattery. Imitation is also the
most deadly sugarcoated bullet that kills.

Competitive Substitution
Competitive substitution can happen at
both the product level and the technology
level. First, a rival can neutralize a firms
product advantage by offering a substitute
product that matches or surpasses the quality
and/or function of the firms product, or one
that simply downplays the uniqueness of the
firms product. For instance, Compaqs IBM
clone effectively neutralized the IBM PCs
competitive advantage by offering a substitute product that was cheaper, with the same
functionality and technology. Second, a firm
can use substitute technology to bypass the
technological barriers raised by the incumbents. For instance, Canons New Process
technology in its plain paper copier helped
minimize the technical advantage Xerox had
held for decades.
Amazon.com, Inc. succeeded in eroding
the competitive advantage held by leaders
Borders Group Inc. and Barnes & Noble, by
entering the book retailing industry. By
leveraging the capabilities of conducting
commerce on the Internet, Amazon challenged the conventional mode of book distribution, compelling the incumbents to
incur large investments to ensure their survival. While Barnes & Noble survived the
71

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 the
immediate domain of the leaders. A substitute firm often sails from a neighboring
industry or areas outside the leaders radar.
Incumbent leaders may not clearly identify
the substitutors as serious challengers, due to
the rivals seemingly nonthreatening manner
in their initial foray into the leaders competitive maps. Direct imitation reduces incumbent leaders action space and chips away at
their advantageous positions. Substitutors
move the mountain and sea. They make
the leaders games irrelevant and their corresponding core competencies obsolete.

Environmental Shift
Environmental changes can invalidate
advantages of certain firms. Changes in
social cultural trends, technological developments, and government regulations are
among the major causes that can destroy
certain firms competitive advantage.
First, cultural trends change consumers
perception of different firms in an asymmetrical fashion, creating competitive advantage for some firms while destroying
competitive advantage of others. For
instance, the health craze in America in the
past two decades severely tarnished the
brand-image advantage of KFC, while
enhancing the promotional advantages of
firms like Nike Inc.
Second, changes in government regulation also affect a firms competitive advantage. For instance, increased governmental
regulation diminished the competitive
advantage of the tobacco industry. Similarly,
the deregulation of the commercial banking
industry brought a huge wave of consolidation, making the prior competitive advantage
of many regional banks disappear because
they now have to compete against large-scale
national banks.
Third, advances in technology can also
affect firms in an asymmetrical fashion by
72 ORGANIZATIONAL DYNAMICS

redefining the relative position of firms on

certain strategic dimensions. For instance,
Internet-based e-commerce allowed smaller
players in the encyclopedia business to challenge the dominance of Encyclopedia Britannica. On-line offerings of encyclopediatype products largely changed the intense
personal selling nature of the business, rendering Encyclopedia Britannicas huge sales
force obsolete.
Environmental shifts often redefine the
relevance of participating firms resources
and capabilities. They may threaten the leaders positions from places where the leaders
least expect it. General or macro environmental factors such as political upheaval, sociocultural trends and technological advancement may rock the foundations of leading
firms. Incumbents find it difficult to monitor
imitators or substitutors, as they do not
exactly initiate the changes in the environmental factors. The challenge to incumbent
leaders is therefore even more daunting in
this scenario.

Bad Luck
In imperfect markets, firms can enjoy competitive advantage over rivals simply
because they are lucky. For instance, they
could have acquired certain valuable
resources in certain historical events, precluding other firms from acquiring the same
resource. Just as luck has a role in a firms
competitive advantage, bad luck or hazardous events are capable of destroying the
position held by leaders in industry. Avian
flu in Asia poses a great threat to KFCs
advantage, built on its motto We do chicken
right. Similarly, the publics fear of footand-mouth disease had severely hurt the
entire beef producing and marketing industry in North America and beyond.
Crisis management is the key to prevent
the loss of competitive advantage due to
unforeseen events. Johnson & Johnson narrowly escaped its precarious situation following the deaths caused by cyanide-laced
Tylenol tablets in 1982. Quick response and
creative remedies in tragic situations arising

out of bad luck should prevent further

damage. This should be true especially for
single product line firms, for they have
nowhere else to escape to and nothing else
to lean on.

Sabotage
Internal acts of sabotage are not uncommon, as evidenced by the recent regularity of
criminal trials prosecuting top managers.
However, our concern is with the acts of
sabotage competitors undertake to undermine the advantage of leaders and pioneers.
Ensuing legal battles are waged at a great
cost, resulting in the victory of the mightier
and loss of the pioneer. Microsoft forced its
way to become the dominant player in the
Internet browser market by bundling its
browser with its operating system, and by
insisting that PC manufacturers place Internet Explorer on the desktop. Knowledgeintensive industries such as pharmaceuticals
and software are constantly under the threat
of deliberate patent infringements. While it is
possible for pioneers to protect intellectual
property rights, there are numerous possibilities for acts of sabotage by rivals. For
instance, Cipla Ltd. a pharmaceutical manufacturer in India, introduced generic AIDS
drugs at $350 per patient annually, compared
with $15,000 for patented drugs from the
pioneers of AIDS drugs such as BristolMyers Squibb and GlaxoSmithKline. AIDS
being a serious problem in poor developing
countries, the move made by CIPLA is an act
of sabotage detrimental to the massive
investments of leaders in the industry. Any
move made to protect patent rights, however
legal, is not viewed sympathetically, given
the acute need for affordable AIDS treatment.
Generic drug manufacturers in China dealt a
damaging blow to Pfizer Inc. when Chinese
authorities overturned the patent for Viagra.
(Anti) Competitive acts of sabotage are
best dealt with proactive measures. Anticipation of rivals actions and containment
strategies are the best defense. Containment
strategies not only involve defensive posturing, such as litigation, but also offensive

actions that prevent acts of sabotage by competitors. Cooperation and cooption of potential competitors help create disincentives for
any damage-inflicting activity. For instance,
multinational pharmaceutical firms now set
up shop in India by entering into cooperative
agreements and establishing wholly owned
subsidiaries.

MAKING SENSE OF
ADVANTAGE DESTRUCTION:
PUTTING IT TOGETHER
A useful approach to understanding firmlevel decline would be to identify some of
the triggers and relate the events that followed at the firm level. Triggers of destruction originate either at the top management
level or due to events in the external environment. The airline industry serves as a good
context to understand the triggers. The September 11, 2001 terrorist attack is an external
trigger that was sudden (spontaneous) for
the airline industry. The consequent change
in the industry environment was a major
upheaval resulting in a series of managerial
actions within airlines aimed at preserving
their positions.
United Airlines (UAL) suffered a severe
setback in the aftermath of September 11
events, thus revealing the airlines inefficiencies. In an effort to imitate the successful and
resilient Southwest Airlines, UAL decided to
take the deliberate action of launching a new
airline called Ted. It is yet to be seen
whether Uniteds actions are indeed effective
in regaining its lost competitive advantage.
Therefore, it is imperative to recognize that
sometimes, spontaneous external triggers
can cause a flurry of deliberate internal
actions that can lead to the erosion of competitive advantage. Similarly, deliberate
actions by entities exogenous to the firm
can trigger competitive actions that will
result in loss of competitive advantage. For
instance, deliberate government regulations
in the auto industry with regard to fuel consumption triggered competitive rivalry in the
new hybrid segment. Firms such as Toyota
73

Motor Corp. and Honda made a deliberate

commitment to developing new product
lines to take advantage of the regulatory
environment. China recently passed legislation that will require automakers to meet
more stringent fuel economy standards.
Ford, General Motors and Chrysler ignored
and neglected the regulatory environments
and as a result are highly vulnerable to Japanese rivals in the Chinese auto markets.

Rising from the Ashes: Kodaks

Valiant Attempts to Regain
Dominance
In 1997, advances in digital technology
started to have an impact on photographyrelated applications. New competitors began
to emerge. While Kodak had ignored the
potential of digital technology prior to this,
Kodak now paid lip service to its commitment to digital technologies. Wall Street
reacted favorably, and Kodak stock was at
an all-time high of $90 in February 1997. In
1998, Kodak formed deals to expand its digital offerings, including collaboration with
Intel and Adobe Systems allowing consumers to manipulate, print, and send personal
photos from their PCs. Kodak did not
embrace the digital route in consumer products and as result, its market capitalization
eroded substantially, with a loss of 73% in
market value over a period of seven years.
Kodak realized that it had neglected the
pioneering opportunities in the emerging
industry and in the year 2000, it began its
efforts to leverage its competencies in traditional photography to digital applications.
Kodak formed a joint venture with computer giant HewlettPackard Co. to develop
photofinishing equipment for digital photography; extended its push into the on-line
photo business by buying the remaining
shares (it already owned 51%) of PictureVision, a digital image storage service; and
acquired Lumisys, a maker of digital imaging
systems for the medical industry. In 2001,
Kodak acquired Bell & Howells (now ProQuest) imaging operations. With the introduction of the popular EasyShare digital
74 ORGANIZATIONAL DYNAMICS

camera, Kodak is now the second-largest in

the U.S. digital camera market with 18%
market share (in number of units). Kodak
plans to invest $3 billion to leverage digital
technologies in the photography market.
In March 2004, Kodak filed a lawsuit
against Sony for patent infringement. Kodak
hopes to recover lost ground in the form of
license revenues from Sony. Analysts speculate Kodaks return to the top in the digital
camera segment. However, Kodak is now in
the digital imaging business. Being the largest manufacturer of equipment is not
enough. The convergence of personal computers, handheld computing devices, photography equipment, data storage and printing
requires firms to integrate a number of
technologies. Competitive advantage is
gained by embracing the key technologies
and leveraging them effectively to maintain
leadership. Kodaks decision to acquire Nexpress (its joint venture with Heidelberg) and
Heidelberg digital, to deliver large-scale
color printing solutions, appears encouraging.

CONCLUSIONS
We presented an array of examples from
various industries illustrating the numerous
ways in which leaders lose their advantage.
Stakeholders can benefit highly from models
that can clearly discriminate between selfserving attributions of managers and the
more plausible set of variables outlined in
this paper that lead to erosion of competitive
advantage. Our framework has important
and practical managerial implications in
understanding destruction of long-held competitive advantage for market leaders by
providing clearer explanations of decline at
the firm level.
In the world of business, firms win or
lose; leaders come and go. Unlike sports,
where one can toil in minor leagues for life,
business has no minor leagueyou lose, and
you are out. There is rarely any lasting place
for the mediocre. Unlike a Hollywood actor,
who can win an Oscar in his/her 1980s, a

CEO doesnt enjoy the luxury of multiple

failing roles. CEOs worry about achieving
competitive advantages when they do not
have possession of them. They worry about
losing them once they possess them, thirsting
for even more.
While Andy Grove claims that only the
paranoid survive, or Ted Turner believes
that perhaps the only way to be secure is
to never to feel secure, Ralph Waldo Emerson long ago remarked, Every hero becomes

a bore;well, some sooner, some not. It is

perhaps against human nature to ask leaders
to be always on the alert. Complacency seems
so natural when a leader is showered with
success. Yet awareness of various potential
pitfalls, we hope, will help the heroes last
longer.

75

SELECTED BIBLIOGRAPHY

The most influential work on competitive

advantage by far is Michael Porters Competitive Strategy (New York: Free Press, 1980) and
Competitive Advantage (New York: Free Press,
1985). While the industrial organization
school of thought influences Porters work,
an emerging literary stream is based on the
resource-based view, which focuses on the
internal firm capabilities. The resource-based
view was advanced significantly by the work
of Jay Barney, Firm Resources and Sustained
Competitive Advantage, Journal of Management, 1991, 17, 99120.
Amongst a host of books on competitive
advantage, a few bestsellers are by Jim Collins 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 Leap
and Others Dont (New York: Harper Business, 2001). Gary Hamel and C. K. Prahlads
book Competing for the Future (Boston, MA:

Harvard Business School Press, 1994) had a

profound impact in understanding the basis
of competition. All of the above books provide excellent examples of the decline and
success of major corporations.
The dynamics of competition in the fastpaced economy is the subject of a popular
book by Richard DAveni, Hypercompetition
(New York: Free Press, 1994). Pankaj Ghemawats work Commitment: The Dynamics of
Strategy highlights the importance of commitment in strategy formulation (New York:
Free Press, 1991).
Schumpeter introduced the notion of
creative destruction in the seminal work The
Theory of Economic Development (Cambridge,
MA: Harvard University Press, 1934). A more
recent work by Richard Foster and Sarah
Kaplan presents the reasons why once successful firms under-perform, with a rich array
of contemporary examples: Creative Destruction (New York: Random House, 2001).

Hao Ma is a Professor of Management and EMBA Director of Beijing

International MBA Program (BiMBA) at China Center for Economic
Research (CCER), Peking University, Beijing 100871, China. He is also a
Professor of Management at College of Business and Management,
University of Illinois at Springfield, Springfield, IL 62703, USA. He
earned his Ph.D. in Strategic Management from The University of Texas
at Austin. His current research interests are the nature and causes of
competitive advantage, multiple market competition, managerial decision-making, and the entrepreneurial process (Tel.: +86 10 6275 6573;
e-mail: hma@ccer.pku.edu.cn).
Ranjan Karri is an Assistant Professor of Management at Bryant
University, Smithfield, RI 02917, USA. He earned his Ph.D. in Strategic
Management from Washington State University. His research interests
are in the area of strategic flexibility, strategic leadership, entrepreneurship, and business ethics (Tel.: +1 401 232 6069; fax: +1 401 232 6319;
e-mail: rkarri@bryant.edu).
76 ORGANIZATIONAL DYNAMICS