(…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.
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.
#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:
- Avoid head-to-head competition (both RCOM and HUL were guilty of this). Focus on niches.
- 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.