The second step in following The Phoenix Principle to achieve superior returns is to study competitors.  Better, obsess about them.  Why?  So you can learn from them and position your products, services and skill sets in a way to be a leader.  We would hope that studying competitors would not lead a company to take on battles it's almost assured of not winning.  Too bad nobody told that to Mr. Schultz at Starbucks, who seems intent on killing Starbucks since his return as CEO.

Starbucks become an icon by offering coffee shops where people could meet, talk and share a coffee – while possibly reading, or checking their email.  One of the most famous situation comedies of recent past was "Friends", a show in which people regularly met in a coffee shop not unlike Starbucks.  People could order a wide range of different coffee drinks, and the ambience was intended to reflect a more European environment for meeting to drink and discuss.  This combination of product and service found mass appeal, and rapid growth.  Meanwhile, the previous CEO rapidly moved to seize the value of this appeal by stretching the brand into grocery store sales, coffee on airlines, liquor products, music sales, various retail items, some food (prepared sandwiches and high-end snacks, mostly), artist representation and even movie making.  He knew there was a limit to store expansion, and he kept opening White Space to find new business opportunities.

But then Mr. Schultz, considered the "founding CEO" (even though he wasn't the founder) came roaring back – firing the previous expansion-oriented CEO.  He claimed these expansion opportunities caused Starbucks to "lose focus".  So he quickly set to work cutting back offerings.  This led to layoffs.  Which led to closing stores.  Which led to more layoffs.  The company fast went into a tailspin while he "refocused."

Meanwhile competitors started having a field dayDunkin Donuts launched a campaign lampooning the drink options and the special language of Starbucks, appealing for old customers to return for a donut – and get a latte too.  And McDonald's, after years of study, finally decided to roll out a company-wide "McCafe" in which McDonald's could offer specialty coffee drinks as well.  While Starbuck's CEO was rolling backward, competitors were rolling forward – and in the case of McDonald's rolling like a Panzer tank.

Now, with a big recession in force, McDonald's is making hay by siezing on its long-held position as a low cost place.  Like Wal-Mart, McDonald's is in the right place for people who want to seek out brands that represent "cheap." With sales up in this recession, the company is now launching a new program to highlight its McCafe concept directly aimed at trying to steal Starbucks customers (readarticle here).

So, here's Starbucks that has "repositioned" itself back as strictly a "coffee company".  And the company has been spiraling downward for over a year.  And the world's largest restaurant company has its sites set right on you.  What should you do?  Starbucks has decided to launch a "value meal" (read article here).  Starbucks is going to go head-to-head with McDonald's.  Uh, talk about walking in front of a truck.

Far too often company leadership thinks the right thing to do is "focus, focus, focus" then define battles with competitors and enter into a gladiator style war to the death.  And that is just plain foolish.  Why would anyone take on a fight with Goliath if you can avoid it?  At the very least, shouldn't you study competitors so you compete with them in ways they can't?  You wouldn't choose to go toe-to-toe when you can redefine competition to your benefit. 

But that is exactly what Starbuck's has done.  Starbucks spent its longevity building a brand that stood for being somewhat "upmarket."  You may not be able to afford a Porsche, but you could afford a good coffee in a great environment.  Sure, you might cut back when the purse is slim, but you still know where the place is that gave you the great, good-inside feeling you always got when buying their product or visiting their store.  Now the CEO of that company has taken to comparing the product, and the stores, to the place where kids are jumping around in the play pit – and you can smell $1.00 hamburgers cooking in the background.  He's decided to offer values which compare his store, where you remember the cozy stuffed chairs and the sounds of light jazz and the smell of chocolate – with the place where you sit in plastic, unmovable benches at plastic, unmovable tables while listening to canned music bouncing off the tile (or porcelain) walls where you can wipe down everything with a mop.

You study competitors so you can be fleet-of-foot.  You want to avoid the bloody battles, and learn where you can use strengths to win.  Instead, Starbucks' CEO is doing the opposite.  He has chosen to go head-to-head in a battle that can only serve to worsen the impression of his business among virtually all customers, while tacitly acknowledging that a far more successful (at this time) and better financed competitor is coming into his market.  His desire to Defend his old business is causing him to take actions that are sure to diminish its value. 

Let's see, does this possibly remind you of — let's see — maybe Marc Andreeson's decision to have Netscape go head-to-head with Microsoft selling internet browsers?  How'd that work out for him?  His investors? His employees?  His vendors?

Studying competitors is incredibly important.  It can help you to avoid bone-crushing competition.  It can identify new ways to compete that leads to advantage.  It can help you maneuver around better funded competitors so you can win – like Domino's building a successful pizza business by focusing on delivery while Pizza Hut focused on its eat-in pizzerias.  But you have to be smart enough to realize not to try going headlong into battle with competitors that can crush you.