Competition Sutra #9: The games companies play-II

(…Or bringing disparate ideas together)

This blog post will try to connect multiple ideas together, some of the ideas are old but just that I understood them enough to appreciate them quite late, some of the themes discussed here are quite famous business episodes and of course how incomplete is an blog post on competition without invoking some old and famous Chinese thinkers.

Míng xiū zhàn dào, àn dù chén cāng

(Openly repair the gallery roads, but sneak through the passage of Chencang)

The less famous cousin of The Art of War is 36 Strategems- a Chinese essay to reflect on the tactics used in politics,war and also civil interaction.Notice an idea here- both politics and war renders beautifully to a game theoretic representation at least in the bare minimum complexity.

One of the key strategem in these competitive games is deception.

This is idea #1.

This is November 27,2003 and Reliance has just announced its foray in telecom with a national roaming feature, directly pitting against the encumbent Bharti Airtel. This is a major move and Reliance never takes any prisoners.

Bharti Airtel’s collar grew damp. Sunil Mittal’s collar grew damp. These guys are known to pick up a competitor, chew them alive and spit them out. The leadership team’s mood was sombre. Mittal at this point is reported to have given a Churchillian speech, something on the lines of-

We shall go on to the end. We shall fight in France, we shall fight on the seas and oceans, we shall fight with growing confidence and growing strength in the air, we shall defend our island, whatever the cost may be. We shall fight on the beaches, we shall fight on the landing grounds, we shall fight in the fields and in the streets, we shall fight in the hills; we shall never surrender

Mittal reportedly saw inspirational movies every day to feel and look like a fighter- even though he was deflated inside- (Rocky series being his favourite)

Exactly one year later- when the leadership team met once again to take stock- they knew one thing- they have stood up to the Goliath and stared it down.

Idea #2

I once read Prof Bakshi descibe an Aesopian lesson as an important mental model. The lesson being – “A hare runs for its life, while the hound only for its lunch”. I always dismissed it as a flight of fancy- “huh, an aesop fable as an investing mental model- what next? Mullah Naseruddin’s wittisms?”

While I do agree they can provide a nice operating system to live a life, but now I also do agree on the fact that it can be a very interesting mental model as well.

The following business case provides ample context

In 1993- HUL announced its entry into toothpaste business by introducing Pepsodent brand in Indian markets. Prior to that almost 80% of the market was ruled by Colgate-Palmolive.

The stocks of Colgate-Palmolive quickly fell. And fell as if it has been dropped by investors like it was hot!

Savvy investors muttered to themselves -Colgate is the hare and HUL is the hound and I am Aesop. They bought the shares on truckloads and eventually after a year or two when market realized that Colgate is taking the fight back to the HUL, the price of shares eventually corrected upwards.

Truth to be told, I never understood how can someone use such a subjective idea into backing up their own conviction. Doesnt it look like stretching the facts to fit the story?

Herein lies the kernel of our next idea. Ladies and Gentlemen- here is our idea #3. Or better word here will be  case snippet.

Three disparate ideas in one blog post. If your head was still not spinning, then let me add a fourth one here. Allow me to discuss the few key takeaways from the Chapter 11 of Competition Demystified.

Few takeaways:

#1: In the previous post, we discussed an important but albeit incomplete version of competition- pricing and localised expansion. This post will more specifically talk about entry/pre-emption.

I.E the different scenarios which arise when a new competitor decides to enter an arena, where already one or a few incumbents exist.

As such, the nature of quantity competition differs in fundamental ways from that of price competition.

#2: The first non-obvious difference between quantity competition and price competition is timing. While pricing change can often be executed within a short notice- entry/pre-emption cannot be . Significant lead times are needed to set up a plant and start production.

Its implications are clear.

While in price wars anyone can be a follower or a leader and thus all players are pitted almost equally (hence the matrix system and the Nash equilibrium plays out so beautifully in this form of games- zero sum games), in entry/pre-emption games one can almost always put his finger and say – “here Joe is the entrant and Harry is the incumbent”

Another non-obvious difference is the “permanence” of the decisions. Just like price cuts can be achieved very easily, so can the decisions to reverse it.But a decision to reverse a previously taken market entry decision will likely attract a lot more attention (“unwelcome” and “media” are helpful adjectives here), costly write offs (when Berkshire exited the textile industry finally by selling all the machinery in one swoop- WEB commented that anyone winding up will realised how big a gulf exists between realizable value of fixed assets and the amount that is carried in the books. I just can’t help but show you this link. Thank you for your patience! ) and most strikingly some rolling off the heads.

Given all of this- the propensity of an entrant to resort to aggressive decisions are reduced.

 

#3: What makes things even more complicated – is the “rules” of the game change with every slightest development. Let me explain:

The decision to enter is to be taken by a challenger, and all the defender can do in a general way is to resist the incursion. Assuming that the entrant chooses between two possible entry moves – full frontal assault and avoid, the world looks markedly different for the incumbent in both the cases. When an entry has taken place- by definition deterrence has failed. An aggressive reaction to repel the entrant can lead to expensive,drawn out conflicts involving price wars, costly advertising expenses and extensive promotions.

In such cases the decision to compete needs to be balanced with the idea of accommodation as well. Balancing here implies the cost-benefit checked.

#4  These kind of dynamical situations yield themselves particularly well to tree form of analysis(we will discuss this in a later post). The matrix form is suitable for pricing, marketing and product feature decisions which in general are more easily revocable and can be adjusted many times.

#5. The first step in a simulation is to identify the actors, their motivations and the initial choices that informs them.

Once the incumbent has made its choice- the entrant has limited flexibility. It can either retreat or advance from its initial position. In the extreme it may decide to back out altogether. But the nature of such a simulation implies that a large part of the outcome will be determined by the incumbent’s reaction to entry.

So if an entrant has to maximise his chances of survival, it can do everything possible to avoid provoking an aggressive response by the incumbent.

The following strategies can work to alleviate this problem:

  1. Avoid head-to-head competition (both RCOM and HUL were guilty of this). Focus on niches.
  2. Proceed quietly. Taking one small step at a time. Dont go all out on TV  openly proclaiming to capture incumbent’s market share.

The lobster dropped suddenly into a pot of boiling water struggles and tries to jump out. Lobsters eased into a pot of cold water which is then heated gradually, remain passive, even as they become dinner.

3a. Signalling works. Use signalling to send out non-confrontational message out. A single store is less threatening than five. A single plant that satisfies only 5% is less threatening that 15%. Idiosyncratic financing works- large and visible war chests do not. Note both RCOM and HUL were guilty of breaking all of them.

Startups working away in garages busying themselves not only in stealing an incumbent’s market shares but also killing their business models attracts nothing but derision and board room laughter.

3b.  An incumbent who has only one specialization, who has only one line of income will be that much more vehement in his response than those who have a hundred eggs to watch. (Note Bharti and CP both met this criteria and thats why Bharti and CP ran like a hare, or rather fought like lions while the entrant was merely a bloodhound.)

4. Move in one market and not all at a time.

5. If there are multiple incumbents an entrant should spread the impact of its entry as widely among them as it can. Doing a little damage to all is far better than doing total damage to one.

6. Keep your fixed costs low for the time being.

Any attempt by the incumbent to hit back will likely lead to a huge collateral damage because the incumbents have a lot more to lose (because quantity of incumbents >> quantity produced by entrant. So profits foregone by price cuts is that much larger)

At all times- the entrant must openly repair the gallery roads but secretly sneak in through the passage to Chencang. Which was our idea #1.

A commentary on Competition Sutra #8

This is an analysis and commentary of the case study posed in the previous post.

For Vikram Monga, the scenario is completely skewed against him. He can’t win. And any victory will be merely pyrrhic( hollow). Plus, the choices shown here reflect only one iteration of moves. But real life is a string of moves – each joining with the next, caused by the previous. While a rational choice suggests to move to the Nash Equilibrium i.e. move towards price cuts and let the game play out. If Sam turns out to be truly wise he will also respond with his cuts. Not cutting will steal his customers, expanding physically to gain them back is suboptimal. Which implies there is only one action left for Sam to respond – price cut of his own.

As a result, a price cut will be matched by a price cut. But lets think from a different perspective. This game can be played once more, and again the same decisions will be taken – price cut matched by a price cut (perhaps this time Sam will cut the price first to force Vik’s hands).

When you set out to dig a grave for someone, dig two.

What looks optimal in short term, may turn disastrous in the long run. Having a long run perspective is perhaps the most important skill for a successful leader. If Vik realises that a price cut will initiate a chain reaction, then he can very well intrapolate that one day the margins left will be as thin as a wet tissue paper. He may walk into the sunset as a gung-ho leader who played a “no-holds-barred” game with his competitors and who knows the business media might celebrate it as well- and yet his successor will none the less be worse off.

A simple thing for Vikram to do is to choose to not to do something. That is- don’t disturb the apple cart, do nothing, choose nothing, let the status quo be maintained et al. However if he must he can try to completely change the nature of the game:

When you can’t win, change the rules

One of the big takeaway from this game is that there are certain rules at play. However real life is varied and different with its own dynamics. Vikram should try to change the rules of the engagement altogether

a. Invent itself as a platform: Can B&M increase the engagement of an average customer with its products and services? Can it make the average customer interact with the existing setup? And in the process can it give some value to her? Think how Target drives its business. It doesn’t see itself as a dispenser of products, it sees itself as a dispenser of retailing experience. That way it can turn the rules of the game on its head by imposing a psychological switching cost on the customers and monetizing it by raising the prices.
b. Niche, Niche, nice! : Can B&M and Jubilant Retail come to an unwritten, tacit understanding with the help of (plenty of) signalling to divide the offerrings completely among themselves? One of them completely focusses on the home and kitchen appliances, while the other stocks it minimally (else regulators will catch hold of them) and focusses completely on entertainment.
c. Loyalty Programs: Airlines do it, so can retail. Vikram should focus on increasing the psychological switching cost for his customers. Cutting price is also a kind of imposing a switching cost on the customer- but it is the feeblest and the weakest cost because anyone else can come in and undercut your price.

Competition Sutra #8: The games companies play

 

Vikram “Vik” Monga is thinking hard. And if he isn’t, he should be.

For Vik the piece of paper lying in front of his was telling everything he needed to know. And he was right. The situation is messed up- with no avoiding of the blood bath that lay ahead.

 

52 year old Vik was the CEO of Bentham & Martin – one of the largest retail chains in India and the largest in Eastern India. However for Vik, life wasn’t easy. He had Jubilant Retail snapping up at his heels.

Jubilant Retail was the new kid on the retailing block. Started merely 12 years back, aggressive expansion was in its DNA. It was almost as if the entire team of Jubilant were a bunch of toughened gun slinging westerners. There was Samarth “Sam” Prakash- their CEO, a young man with a taste for hard negotiation, close competition and fast expansion. 8 years back, Sam broke the back of a local suppliers cartel by acquiring a Bangladeshi supplier. At that time, the local suppliers scoffed at the move. But by the time they  scrambled to prevent the damage, their demise was cast in stone. Since then local suppliers stopped holding their prices high and Sam got cheap inventory.

Till now the Bentham & Martin had 450 stores in Eastern India. Jubilant Retail has 390 stores. 8 years back it was an expansion machine, but today it has settled down into an uneasy truce with Bentham & Martin. However, the low number of stores shouldn’t be judged as a giving up by Jubilant Retail. Bentham& Mills and Jubilant Retail were competing store for store in the most profitable circles of Eastern India. If anything, it didn’t compete in the sub 450 circles (Circles are divided as per the average billing rate of an individual customer unit- even a family shopping together will be counted as one customer. 450 implied here the average billing rate. It stretched to maximum 980 evident in metros to a minimum of 300 evident in tier 3 and 4 cities).

For Vik the problem was two fold. Western India was slowing down and to maintain the profitability he had to milk the Eastern cow. But milking the eastern cow was not easy. Any move to break the uneasy truce in East will lead to a bitter tooth and nail fight for market share.

It was a dicey situation indeed.

What in the hell is brewing here mate, muttered Vik to himself. If he opens new stores, Sam will mirror each move with his own store in every new circle. Result, driving real estate prices preventing further expansion, a decline in footfalls. This will kill the profits for both the firms and the net profitability per customer for both will fall to Rs 15/cust. However if Jubilant Retail decides to cut the prices- Bentham & Martin will be left holding the bag – Jubilant’s per customer profitability will outstrip Bentham’s.

 

For Vik Monga- the situation was worse than it looked. Any move to cut prices can create a converse situation where Jubilant responds by building new stores ( which will create the exact converse replica of the case where Bentham expands physically and Jubilant cuts prices, with the exact concomitant result) or matches the price cut by a price cut. In the later case, a price cut when matched by a price cut will give them both a near about the same net profitability per customer. Only, the  profitability difference between the two will shrink from 8% to 4%.

But for Vik – it was both a blessing and a curse that most probably Sam was also doing the same calculation. The blessing it was because in such a wafer thin margin business a dumb competition can kill the entire sector. Curse because dumb competition also meant easy lunch for the smart. And for Vik the balance was completely skewed. While he was given four choices – two of them were just decoys. And he understood it very well. If he played the game for a long time where each of them chose differing choices (i.e. not mirroring each other) then the resultant payoff for each player will  be sum of probability weighted profits ( in this case 50% of 30 + 50% of 20 = 25).

Bloody decoys. 

 

Vikram Monga looked up at the clock. It was 5.30 pm already. His  8 year old grandson had a school play today and he wont be missing it. He took off his jacket off from the chair, swooped his arms in. But his mind was still racing, he was thinking about the situation and mess both of the companies are staring into.

It’s a cesspool of blood, mud and filth. All the choices lead to either one of them.

If you are the advisor to Vikram Monga, what advise would you give him ?

Competition Sutra #6: The Coors went national

This is the sixth part ‘in Competition Sutra’ series. This series is an attempt to distill the core learnings of Bruce Greenwald’s seminal book “Competition Demystified”. We explored in previous posts what does growth do to incumbents. But we never did explore the effect of lack of growth on competitors who are trying to enter the market. This post aims to correct that.

It doesnt take much for Brendon Elliott Mills to stay amused. This is 1998 and his sharp mind, keen eyes and deep intellect has enough of the feed to keep him amused. For another lifetime. For the 67 year old Mills, amusements comes in three flavours- funny, damn funny and business hubris.

And why not, Mills have seen such an act of hubris from very close quarters. And he has been involved in it far more than he would like to admit. But Mills, today admits being struck with the fine predictions of untold riches due to a shiny new thing called internet. The Coors can of beer resting by his side, he glances through the business newspaper scanning the important news of the day. It took a lot for some people to spot others mistakes. For Mills, it comes easy.

Some one once asked him what interested him so much about failure and he couldn’t properly answer her. At 67 years, he understood himself better. He looked at the Coors can resting on the sofa side and his thoughts went 30 years back.

To his time in the company which didn’t have to pay a single penny to two greatest icons of his time to promote its products.

Because Paul E. Newman and Henry Kissinger drank Coors beer.

At the turn of the decade of 1970s, Coors had everything going in its favor. It produced a unique unpasteurized form of beer. Its devotees claimed it to have a certain “draft-like” taste of beer. Coors went one step further and touted the gifts of “Rocky Mountain” spring water with which it manufactured the beer. As a mid manager in Marketing division of Coors, Mills was aware of the strengths of the brand. However his sharp eye didn’t prevent him from seeing the differences between Coors and its bigger competitors like Anheuser- Busch.

Integration: The Coors way

For one, Coors was integrated vertically to a staggering degree. It produced its own strain of barley, mined its own coal and aluminum for the energy and cans respectively. It even owned the land from which the Rocky Mountain spring water came up from. It owned one big brewery in Colorado of the size of 7mn barrels in 1970. For the 37 year old Mills, it was a source of strength, for the 67 year old he has its doubts.

“Coors was a regional player till 1975. It produced and was consumed in 11 Midwestern states only. This lack of volume prevented the scale of economies kicking in for its various feeder businesses. That implied a higher cost and a higher management bandwidth to maintain it.”

These problems, Mills recounts, the management was aware of . But they drew the wrong lessons from it. He remembers “Old Jeremy”- Jeremy Wilkins, Head of Marketing and mentor of Mills , to have fought tooth and nail against the lesson which the management took from this.

At that time, Wilkins was seen as a dinosaur, a remnant of the past.

10 years later Wilkins was vindicated. But that didn’t matter- he died in 1980 and Coors started having trouble shortly thereafter.

“Old Jeremy correctly saw what the problems were and what its solution was. When you see the problem as lack of scale you will infer that the solution was building scale. And the management bought into it. Jeremy understood that things were not as easy. If you tried to build in a scale, that would imply expanding into untapped markets and territories. That strategy puts the company fortunes in terrible jeopardy. Expansion and growth is never free. And expanding into unknown territory with other competitors firmly entrenched can prove to be very costly. And indeed it was. Old Jeremy saw it.” remembers Mills.

It was not that Coors management are to be solely blamed for its harakiri. In 1975, Federal Trade Commission mandated Coors to go national. It was just the excuse that management needed. They expanded with gusto and shipped with passion. Till 1975, a single can of Coors earned almost twice an AB can did. At 11%+ net profit margin on a $520mn sales, Adolf Coors and Co. eked out more than AB did out of every single dollar of sales- $85mn profit on a sales of $1.65bn.

The Cost of Growth

” Coors when it expanded into new markets, had to buy its way in. We had to forge new relationships and new wholesellers. Often the stores with whom we signed the contracts were fringe players themselves. The larger ones were all taken and locked out by the heavyweights. That’s one. Coors flagship product was High Life brand of beers- which were unpasteurized. This implied tight cold chains, fanatical inventory management and the entire works. And that’s two. In business its hard enough to survive with three strikes. In beer business, two is all what it takes. Somewhere in late 1980s, we realized we have lost the plot.”

By 1985, Coors sold in 44 states across US, completely negating its local advantages of scale. On top of it, Coors ran a remarkably integrated ship. Its hub and spoke model of beer distribution centered around Colorado also increased the transportation costs. The story of Coors cuts across two big developments- beer is seldom seen as an aspiration product and expansion in a commodity business is fraught with immense risks. But what about the endorsements by Newman and Kissinger?

Priceless Mystique

The mystique of Coors didn’t translate quite well into profits.

In 1977, Coors collected $41.50 per barrel whereas AB without all the mystique collected $46.The trend continued till 1985 as well.

That mystique is no mystique when it is sold for free.

With the absence of such differentiation, Coors beer reduces to just another beer and thus a fiercely fought commodity war ensued. On top of it, while AB expanded its production capacity aggressively it was able to pick up the economics of scale quicker. In 1977, Coors production costs per barrel was $29 compared with $36.60 of AB. In 1985, it was $49.50 for Coors compared to $51.80 for AB.

 

But what changed between 1970 to 1985 that made Coors turn into an also ran? Mills takes a long gulp of the beer and recalls:

“Coors before 1975, was a regional powerhouse. We had 8% of our market share in our pocket by merely focussing on three Pacific Coast regions. Two out of these three, Coors was the dominant force. And in the other we ranked equally with AB. Post expansion, we still had 8% market share but we trailed AB in every state.

For Coors, expansion meant dispersion and dispersion meant costs. When Coors went national, it sacrificed its local home advantages and chose to compete on a level playing field with AB. For the national beer market, AB was the incumbent and Coors was the player outside looking in. AB was saved by the lack of growth in the beer market. It grew by only 3% annually in that period. And for Coors this lack of growth implied that scale advantages couldn’t be achieved fast.

The result? Coors operating income margins fell from once mighty 20% to a mere 9%. AB expanded to 15%. The difference is more stark in the details.

While AB spent 3 times as much as Coors for advertising, but $4 less per barrel.

Coors had this equation inverted, when it stayed limited to a region. Advertising costs are fixed on a regional basis. So AB coming in and trying to wrest away markets purely on an advertising spree will not be on a terrific advantage (just because of its deeper pockets).

Mills remembers somewhat wistfully- “If you take a look at the numbers of AB and Coors from 1970 to 1990 and hide the years you can perfectly imagine it as a zero sum game. Coor lost and AB won. Almost to the exact decimal point.”

Its inevitable that Mills doesn’t feel some chafing at the great fall. He saw the giants make mistakes and saw its demise from a very close angle. He quotes von Clausewitz these days to make sense of it all.

 

“Perhaps, Coors should have read ‘Vom Krieg’ , Clausewitz said- concentrate your best forces on your central line. Coors should not have expanded into unchartered territories. And when pressurised by FTC, should have done it only sparingly, trying to meet the bare minimum requirements. Perhaps we could have charged heavily for each can so that real demand stays low. Its counterintuitive, who kills a demand after all, but perhaps necessary”- offers Mills if somewhat presciently.

There is no guarantee that the “think local” strategy would have worked. But there is a fair chance that it would have made lives of AB executives a little bit more tougher. Beer drinkers are remarkably fickle. Footloose customers often signify lack of differentiation. So what remains is in essence branding and promotion to take care of it all.

As the markets make new highs, one is tempted to ask what he thinks about the new dot coms.

“Make no mistake”, Mills says – “Internet has made everyone an outsider looking in. There are no incumbents here. It is just the opposite of the beer industry. We are seeing a spectacular growth and everyone is competing. Growing a scale advantage or any other advantage is easier said than done here.”

“At the end, every site is a toaster. Zero differentiation.”

 

The post is a fictionalised version of the brilliant chapter in Competition Demystified. The characters are imaginary.

 

Edit: Discovered there were bucketful of grammatical errors. Fixed them all.

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Competition Sutra #5: Localization- The secret to WMT’s success

WMT

This is the fifth part ‘Competition Sutra’ series. This series is an attempt to distill the core learnings of Bruce Greenwald’s seminal book “Competition Demystified”

 

Walmart had no patent, no product, no intellectual R&D pipeline and no government license, yet it has thrived in such a competitive sector as retailing- it is worth taking a look.

Walmart’s success hinged on three manifestations of the advantages a localisation strategy offers.

1. Supply Chain Efficiencies:

Walmart’s supply chain even back in 1970s was a work of art. Due to close concentration of stores, a truck plying on a single route could serve multiple stores. This reduced WMT’s overheads and led it to innovate on a very early variant of just in time supply chain.

2. Lower Ad-Spends:

The policy of localisation and concentration also led to higher efficiency in its ad programs. Since a TV station charges on the basis of per 1000 customers served, for WMT this meant efficiency if it opened more stores. This led to lower ad spends per dollar of sales made. Walmart could penetrate deeper into a community by building more stores and lowering its ad costs . In fact point #1,2 led to an overhead reduction by almost half while compared to K-Mart or Seers. Resulting in operating margins about double to that of its larger peers.

3. Executive Supervision:

To be fair to WMT, the management has always been a top class affair in the organisation. The operations were divided under different area managers, who spent 4 days of the week starting from Monday in their respective stores and held meetings with Mr. Walton in the last two days of the week. The dense concentration of the stores made it possible for the managers to spend more time in the stores than travelling between them. This in turn led to better managerial oversight and improved strategic performance.

Competition Sutra #4: The Economics of Scale

This is the fourth part ‘Competition Sutra’ series. This series is an attempt to distill the core learnings of Bruce Greenwald’s seminal book “Competition Demystified”

1. A 1000 pound gorilla can dominate an alley better than a highway.

When a firm has scale built into it, it would like to have its market as a niche market and not a globalised open for all turkey shoot. In that way, it can preempt any attempt by any other firm to undercut its market.

2. Local advantages, Global learnings: Go Local!

When a firm is trying to scale up, it should concentrate on local business, local markets and local demands. In a globalised world, it is seductive to think big, but when in doubt remember rule #1. Wal-Mart’s example might help as well(Competition Sutra #5).

3. An expanding market poses significant risks to firms built on economics of scale

Remember the 1000 pound gorilla on the narrow alley? Now imagine that alley growing fast to turn into a street, then a national highway and then 40 lane international cargo lanes. The gorilla will be outsized by the market it has to dominate. Thus allowing any other competitor to come in and steal market share.

With a fall in market share, the fixed costs to sales decline for the incumbent and the difference in the economies of scale of the two firms thus shrink.

Competition Sutra #3: Tenets of Supply Advantages

This is the third part ‘Competition Sutra’ series. This series is an attempt to distill the core learnings of Bruce Greenwald’s seminal book “Competition Demystified”

Sources of Supply Advantages- Proprietary Technology or Lower Cost Structure

In the long run, everything is a toaster

-Bruce Greenwald

Lower cost structures can flow either because of lower input costs or more possibly because of proprietary technology.

Proprietary Technology for starters can be either product patent or process patent. In the modern day, post TRIPS signing in 2005 by India, process patent has been phased away. However product patent still exists and is used very thoroughly in pharmaceutical business.

The possibilities of patent infringement can make cost of entry for a competitor extraordinarily high. As a result, competitors shy away.

But there can still exist “process patents” in the modern world- albeit in a different form.
In industries which have a complicated process cycle, being long time in business can facilitate learning and experience of the best practices of production. This prevents any new competitor from replicating it easily.

However both of these sources can be rendered moot by a very fast changing technological landscape. If the landscape undergoes shifts every 10-15 years, then any such advantage withers away.

Additionally, until unless innovations (product or process) are created in house it poses no significant barrier to entry. Any third party creation of such innovations lead to creation of entry of barriers for the third party and not the firms to which it serves.
Why?
Because the outsiders can always supply the innovations to the incumbent as well as the competitor. Think of Warren Buffet’s decision to shut down Berkshire’s textile business when a consultant came knocking in with technology upgrades.

Similarly, access to cheap capital and cheap labour are largely illusory advantages. Subsidy cant make a bad business look good, it only hides the cost of capital. Similarly, cheap labour leads to eventually costlier labour in this world of globalization.

But can we ask, if fast changing technological landscape leads to withering away of advantages, can we conclude just the opposite for slow changing landscapes?

In such a case, the competitors will eventually learn the nitty gritties of running the business and thus catch up with the incumbents. It is evident in the radio business. Radio business was initially a very high profit business due to very few competitors knowing the manufacturing process. But in the long run, radio lost the mystery and turned out to have the same esoteric nature as a toaster.

In the long run, everything is a toaster.

Competition Sutra #2: Efficiency is the difference

This is the second part ‘Competition Sutra’ series. This series is an attempt to distill the core learnings of Bruce Greenwald’s seminal book “Competition Demystified”

The lowest cost operator wins

In a market where there are no barriers to entry, efficiency ensures who will survive and who will not. More so in case of differentiated products than commoditized ones.

In commodity markets like copper, steel, wheat it is evident that if a company cannot produce at a cost below the market, it will lose its money and ultimately fail. For such companies, fortunately there is no need of a marketing strategy as well. Hence their entire focus should be on making their production process as efficient as possible.

However in differentiated segments, efficiency matters not only in production costs but also in marketing costs. When there is a firm which has highly efficient operations, it will be able to expand its operations and market at a much lower cost than its competitors.

This is visible in many industries across the world- automobiles, airlines, retailing, appliances even beers.

Competition Sutra #1: Differentiation as a strategy

This is the first part ‘Competition Sutra’ series. This series is an attempt to distill the core learnings of Bruce Greenwald’s seminal book “Competition Demystified”

Differentiation is not enough

Differentiation may keep a product from being a generic commodity item, but in itself it does not eliminate the intense competition and low profitability that are characteristics of commodity business.

Differentiation by itself does not create a significant enough barrier to entry. Without a significant barrier to entry, competitors can rush in and undercut the incumbent firm and outmarket it.

A very relevant example is the fate of American automakers. But the nature and the pace at which the commoditization of luxury cars happened was startling. Immediately after WW-2, Cadillacs, Mercedez Benz dominated their markets and made enormous profits.

This turned out to be an open invitation to competitors.

Europeans came in first and then Japanese rushed in- with their Lexus, Acura and Infinity. However, they didn’t immediately start undercutting Cadillacs and Mercs in prices or even competing with them. They just started offering their own varieties of cars and started stealing away market share from the incumbents.
As a result , with lower sales, their overhead cost margins soared and ultimately led to very low profit margins.
Since by DuPont formula, return on capital employed is directly dependent on profit margins, it plummeted. With the result being, there is no difference between automakers and any other commodity business.

Can we think of a similar example in India?

How about the business of broking?