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 ?