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No time like bankruptcy for squeezing competitors Add to ...

Today's economic stress is pushing companies to the wall.

Some have seen revenue declines of 30, 40, even more than 50 per cent. Bankruptcies in the United States and Canada are reaching record levels.

So what do you do if one of your competitors files for bankruptcy protection while it reorganizes its affairs?

If you are a "nice guy," maybe it is business as usual. But if you want to use a competitor's filing to your own business advantage, nice guys finish last.

If a company is able to get court protection while it reorganizes, it actually sees an immediate improvement in its competitive position.

First, the company gets relief for some interest and even debt repayments. This reduces its burden to generate cash to meet its terms with creditors.

In other words, it does not have to be as profitable. That means it can cut prices to protect volumes, cover fixed costs or make investments in its business with money it would otherwise not have.

Second, if the competitor is unionized, bankruptcy protection often enables it to abrogate its contracts with unions to seek lower wages and improved productivity.

Third, contracts with customers are also open to renegotiation. This can lead to lower costs of operations - and a better competitive position.

What does all this tell you? When competitors go bankrupt, you can't afford not to act. That's precisely the time to turn up the heat.

In bankruptcy, your competitor's major issue is a shortage of cash - which is what led it into bankruptcy in the first place. Take advantage of it.

You can put pressure on that shortage by further straining your rival's ability to generate cash, or boost the cash it needs to run its business, forcing your competitor to yield market share, customers, product and service offerings. It is fight versus flight for the bankrupt competitor.

How to raise the cash ante? Consider some of the following tactics:

Introduce e xtended terms. Offer your competitors' customers longer payment terms. Your rival will either lose the business of customers that bite, or be forced to do the same, thus reducing its ability to generate much-needed cash.

Consignment pricing, where the customer pays only after the product is sold, is the ultimate extended term and will be difficult for a competitor in bankruptcy to match.

Boost marketing expenditures. Raising your advertising and point-of-sale spending will have a similar effect: Either your competitor will also have to spend more, or risk losing customers that you attract.

Lengthen the "tail" of the revenue stream. Add more after-sale services and spiffs - if your competitor has to do the same, it will raise the cash costs of getting and keeping customers.

Launch more products. New product development and introduction eats up a lot of cash - and a cash-short competitor is unlikely to be able to do the same. If you go all out, introducing many more new products than a bankrupt competitor possibly can, you could make your rival's offering obsolete in the minds of customers, forcing it into fire sales in a panic to raise cash.

Pursue your competitor's most profitable customers. Good management teams know where their company makes and doesn't make money. Great management teams know this about their competitors.

This insight can be used to target customers, geography, products and services of the bankrupt competitor to gain market share.

The competitor will be hesitant to counter your move against its most profitable customers because it needs the cash these customers generate. It will be more likely to maintain the status quo with these customers in the hopes the cash will keep coming.

Lawsuits. Now is the time to file the lawsuit you've always wanted to. Your bankrupt competitor will not have the discretionary resources to fight and will likely come to terms quickly.

There are also broader strategies to consider. Among them:

Sell against the competitor. When companies are in trouble, customers may worry that they won't be around to service products or provide future upgrades.

This fear can be a powerful weapon: These customers may be persuaded to take their business to companies on a sounder footing.

Go after the best talent. Anxiety about the plight of the competitor will be just as rampant among your rival's employees and suppliers as it is among customers. You can leverage that angst by going after top talent and strong suppliers - and offer terms and conditions that your competitor will have a tough time matching.

Force the sale of attractive assets held by your bankrupt competitor. A competitor in protection is not its own boss. The creditor committee is likely to care more for the cash it can get from an asset sale than who buys the assets.

Leveraging a competitor's bankruptcy protection against it carries risks.

First, you need to make sure that any move you make won't land you in similar trouble. That takes research, preparation and a real understanding of your rival's situation, and your own. You may not even need to wait for a bankruptcy filing to exploit a competitor's financial weakness.

Second, consult with counsel about the risks that your moves could be judged as anti-competitive, resulting in you being exposed to the competitor with the deepest pockets - the government.

Finally, know that if the competitor does emerge from protection, it will likely be stronger - with less debt and fewer non-performing assets, more focus, hungrier and tougher to deal with. It won't be a nice guy.

George Stalk Jr. is senior adviser of Boston Consulting Group of Canada Ltd. and adjunct professor of strategic management for the Rotman School of Management at the University of Toronto. He is the author of Hardball: Are You Playing to Play or Playing To Win?

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