The Empire Strikes Back: Counterrevolutionary Strategies for Industry Leaders - How Busch Beat the Beer Blahs

by Richard D'Aveni

Governments instinctively fear revolutions. Political instability always breeds anxiety that the old regime will be supplanted by a new regime, bringing in a new power structure and a new set of rules. But a quick look at the history of civil wars from ancient Rome to the modern world tells us that such fears are misplaced. Revolutions seldom succeed. Even when they do, it is almost always because of the ineptitude of the incumbents' leadership rather than the superiority of the challengers' ideas. The 1917 Bolshevik Revolution, for example, prevailed because of the Czar's incompetence in managing World War I and internal Russian affairs, not because Communism was a powerful ideology. Similarly, it was the Shah of Iran's corruption and ineffective response, rather than popular enthusiasm for a government of clerics, that allowed the 1979 Iranian Revolution to succeed.

The same is true in business. Industry leaders frequently worry that new technologies and business models will render their firm's competencies and products obsolete. But when established companies do succumb to revolutions, they usually have only themselves to blame. Either they have ignored the threat for too long, giving it time to gather momentum, or they have hyperactively embraced it too quickly, wasting their resources and destroying their existing strengths without acquiring new ones. Regrettably, even some of the most adroit companies fall victim to the extremes of passivity or panic. Motorola, for example, chose to ignore GSM wireless technology, believing it could be dealt with later on, and ended up ceding leadership of the cellular telephone industry to rivals Nokia and Ericsson. At the other extreme, AT&T embraced broadband technology far too early, and the costs to the organization—and its reputation—have been high.

Over the past five years, I have studied the strategies of more than 100 incumbents that faced a real danger to the competitive dynamics, business models, or technologies of their industries. Few successful incumbents, I found, adopted either extreme strategy of wholly ignoring or completely embracing revolution. They relied instead on a mix of strategies intended to restrain or to modify the threat—or, in some cases, to attack it head-on. Those strategic responses fell into five categories that correspond, loosely, to the stages a revolution goes through as it gains steam.

Companies that perceive a revolution in its earliest stages can use strategies of containment. By throwing up roadblocks, incumbents can often limit the degree to which customers and competitors accept it. And, often, the revolution will die there. If it doesn't, early containment buys a company some time to try the second approach: shaping the revolution so that the new technology or business model complements, rather than supersedes, the incumbent's. If shaping does not eliminate the threat, it can give an industry leader yet more time to work out how to absorb it by bringing the new competencies or technologies inside the corporation after having modified them so they don't destroy its existing strengths and capabilities.

Not all companies can take control of a revolution's early progress, though. In many cases, it matures so quickly that the incumbent does not have time enough to contain, shape, or absorb the revolution. In those situations, companies have to resort to one of two relatively more aggressive approaches. Neutralization strategies meet a revolution head-on and terminate it—if necessary, by temporarily giving away the benefits offered by the challenger for free. Annulment strategies allow the market leader to leapfrog over or entirely sidestep the threat, making the revolution irrelevant.

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The king of counterrevolutionaries
The five counterrevolutionary strategies need not be used in isolation. Indeed, sharp industry leaders often draw on more than one to counter different aspects of a revolutionary threat. An apt example is Anheuser-Busch, maker of Budweiser, Bud Lite, Michelob, and Busch. It wove together several counterrevolutionary strategies to dampen the threat from craft beers in the 1990s and reinforce its position as the dominant force in the U.S. beer industry.

In the early 1990s, Anheuser-Busch was experiencing a market as flat as a two-day-old draft, as growth rates hovered between 1 percent and 2 percent a year. But one segment of the market was taking off: craft beers. These were made by numerous small brewpubs and microbreweries like Sierra Nevada Brewing and Redhook Ale Brewery, as well as by contract brewers that outsource the manufacturing of their brews to large and regional breweries. Boston Beer, which markets the Samuel Adams brand, is one of these.

Although in 1994 craft beers accounted for only 5 percent of the market, their sales had been skyrocketing, growing between 25 percent and 70 percent annually since 1990. Craft beers captured the youth and high- to middle-income segments, while brands like Budweiser, Miller, and Coors increasingly appealed only to the older and lower-income segments of the population.

Craft beers seemed to represent a fundamental change in American beer-drinking habits. The same force driving this trend—a demand for ever-greater variety—had revolutionized the coffee and wine markets over two decades. Smaller wineries were supplanting Gallo, the Anheuser-Busch of wines, despite their lack of economies of scale. Flavored coffees were taking over from the big brands sold by Procter & Gamble and General Foods. Worse, the trend toward craft beers was a global phenomenon. The top four brewers in Germany together held only 25 percent of the market, while 1,200 small brewers controlled the rest. In the Netherlands, industry leader Heineken shared the market with many Belgian specialty beer makers. And the Chinese market was largely made up of thousands of local beers, with only one national brand, Tsingtao.

The microbreweries threatened to make Anheuser-Busch's traditional cost advantage, which was based on mass manufacturing, obsolete. Embracing the revolution, however, was an expensive option. The industry leader would have to invest heavily to emulate Britain's Bass Brewers, whose breweries had been redesigned to handle multiple low-volume products using small kettles and flexible production lines that were not as efficient as Anheuser-Busch's plants.

Anheuser-Busch decided to try a different approach and began its counterattack in 1993 with a series of containing moves. First, it launched a number of blocking products by setting up its Specialty Brewing Group, which distributed small volumes of craft beers like Red Wolf, Elk Mountain amber and red amber ales, and Elephant Red malt liquor, importing some of them from Canada. Rather than trying to replace the company's major brands, this group provided products so that Anheuser-Busch distributors would not pick up products from the independent contract brewers and microbrewers.

The incumbent followed this with cash incentives and other "voluntary" programs to get its 900 distributors to carry only its brands. Although this campaign for "100 percent share of mind among 70 percent of distributors" resulted in an investigation, the U.S. Justice Department dropped the probe in October 2001 without taking any action against the company. The blocking brands, coupled with the market leader's distribution muscle, confined the threat temporarily.

By mid-1994, the Mammoth Missourian realized that it could not contain the revolution any longer and decided to shape it. Anheuser-Busch became the first megabrewer to invest in a microbrewery when it bought into Seattle's Redhook Ale Brewery. Redhook used the funds to build several plants, including one in New Hampshire, and Anheuser-Busch announced that it would distribute Redhook's products in Boston Beer's home market, New England. That play alarmed the microbrewers. They realized that Anheuser-Busch was trying to shape the revolution by conscripting microbrewers like Redhook to its cause and using them to weaken more-threatening high-growth craft brewers like Boston Beer. Boston Beer's founder and CEO, Jim Koch, rightly termed the move "a declaration of war."

Anheuser-Busch also signaled that it planned to absorb the revolution as if craft beers had been its idea all along. Indeed, the company made its intentions public by stating that its goal was to capture half the $400-million craft beer market in five years. To absorb the threat, Anheuser-Busch began producing microbeers in its big existing plants by varying the ingredients, temperatures, and process. The manufacturing techniques it improvised generated economies of scope, allowing Anheuser-Busch to manufacture a range of craft beers more cheaply than a microbrewery could. The company also benefited from its economies of scale in marketing and distribution.

The company flooded the market with brands ranging from the nationally distributed American Originals line to micro-targeted beers such as ZiegenBock (which it sold only in Texas) and Pacific Ridge Pale Ale (which was available at first only in California and still is sold only in certain Western markets). The incumbent also leveraged its fading Michelob brand to launch several lower-priced specialty color beers such as Michelob Maple Brown Ale, Michelob Winter Brew Spiced Ale, Michelob Amber Bock, Michelob Honey Lager, and Michelob Pale Ale.

Crucially, the beer giant was able to attack the revolution head-on, proving that customers would accept a craft beer with a big brewer's name on the label. That neutralized the fundamental tenet on which the craft brewers had originally based their revolution: that high-quality beers had to be made in small breweries by obscure artist-like brewers. As customers lapped up its new beers, Anheuser-Busch turned the craft beer revolution from a microbrewery revolution into a specialty beer revolution.

Excerpted with permission from "The Empire Strikes Back: Counterrevolutionary Strategies for Industry Leaders," Harvard Business Review, Vol. 80, No. 11, November 2002.

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Richard D'Aveni is a professor of strategic management at Dartmouth College's Tuck School of Business in Hanover, New Hampshire. His most recent book is Strategic Supremacy: How Industry Leaders Create Growth, Wealth, and Power Through Spheres of Influence (The Free Press, 2001).