Review of “Competition Demystified”
In Competition Demystified, Bruce Greenwald and Judd Kahn define strategy as outward facing decisions addressing two primary issues: the arena of competition and the management of external agents. In other words, which markets should we enter (or leave) and how do we deal with competitors, suppliers, etc.
The authors offer a simple reformulation of corporate strategy. Their thesis is that Michael Porter’s “Five Forces” model is too complicated. While all five forces are important, they are not equally important and lead to a cumbersome — borderline unusable — model. Their solution: focus on a single force — barriers to entry. [Note: barriers to entry and incumbent competitive advantage (shortened to competitive advantage) are used interchangeably.]
According to the authors, there are three forms of competitive advantage:
- Supply advantage — proprietary technology, experience, exclusive supplier agreements, and other abilities to supply unique products or supply products at a much lower cost than competitors.
- Demand advantage — customer captivity based on things like habit, switching costs, or search costs.
- Economies of scale — the ability to reduce costs per unit as volume increases, largely due to spreading fixed costs over a greater number of units sold. The value of economies of scale are determined by relative share of the relevant market rather than by absolute size. In other words, a company with 75% market share in a small market enjoys greater scale advantage than a larger company whose market share is only 5% of a huge market.
Not every market allows for barriers to entry. Companies must identify whether competitors in their market have competitive advantage. Greenwald and Kahn identify two telltale ways to identify companies enjoying a competitive advantage:
- Persistent high market share
- Persistent high returns
There are three mutually exclusive scenarios to consider when assessing a market:
- Nobody has a competitive advantage
- One competitor dominates the market
- Multiple competitors enjoy differing competitive advantages
The strategies for each type of market situation are different.
Strategies when nobody has a competitive advantage
If none of the competitors in a market have a competitive advantage and an advantage can’t be created, competitors have no way to generate abnormal returns. Competitors in these markets should focus on operational efficiency. Minimizing costs is the best strategy to potentially improve your return.
Strategies when one player dominates the market
If you’re the dominant player with strong competitive advantage, high market share, and/or abnormally high profitability do whatever you can to sustain that position. If you’re not the dominant player, get out of that market.
Market where multiple players enjoy competitive advantages
Markets where multiple players enjoy competitive advantages are where strategy gets interesting (and complex). Greenwald and Kahn explore different strategies, but take that stance that market competition is a fixed sum game and cooperation is often the best strategy. They stress that cooperative arrangements must be arranged indirectly through signaling to avoid breaking the law. The key is to create a situation where each player ends up with more than she would have if she didn’t cooperate.
The cooperation strategy is interesting in theory, but I questions how effective it is in practice. Not all competitors are rational enough for it to work. There may be at least one firm that is aggressive, competitive, or desperate enough to wreck the plan. Not to mention the slippery legal slope.
Overall, I really liked this book. Greenwald and Kahn’s framework offers a simple, but informative way to think about strategy and the book contains many real-world examples to illustrate their points.