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


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.
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?