Ashridge Presentation
COMPETITION BY DENUNCIATION
I want to talk tonight about an aspect of competitive conduct that undermines most of the things you will have learnt have come to believe intuitively.
What I am about to say is controversial and provocative. At least I hope so!
Competitive Advantage
Michael Porter and the other proponents of the conventional models of competitive conduct suggest that the corporate objective is to seek competitive advantage through product or channel innovation or market positioning.
Essential their notion is that you maximise returns by finding a position of superior competitive strength to your competitors. The implication is that this is the only route or at least the optimal route to maximising returns.
Examination of the recent past shows that most businesses & products that achieved competitive advantage did so for a only brief moment. So brief in fact that it is questionable whether the gains accrued at the peak provided an adequate return for the investment and risk inherent in getting there.
This may be because the costs in the post peak period are enlarged as management and investors adopt expensive strategies aimed at preserving their advantage rather than recognise the need to play an early end game and extract the maximum cash or sell at the peak and leave the aftermath to someone else.
It is as though product and corporate lifecycles are becoming foreshortened, more fashion oriented.
There are a few exceptions such a Microsoft.
Other examples of ST successes…Apple, any model of computer or chip.
It is as though the best returns are gained by being #2 a follower rather than leader. A position where the investment in copying is less and the risks smaller. The returns are therefore greater. If you have the flexibility to respond and the prescience to get your timing right.
Some time ago people said ' I want to be a pioneer'. Now the say 'Please God don't let me be first!'
The capital markets mirror this (and probably encourage it). You cannot easily raise capital for a start up or green field business unless it is a specialist scientific (usually medical) venture.
Avoiding Competitive DISADVANTAGE
More worthwhile and lucrative strategy.
Competition as War Game.
Competitive conduct has often been compared with military conflict. The comparisons are compelling.
Sun Tsu & Von Clauswitz observed how large armies manoeuvred and how battles were won lost.
Both argued that it was optimal to so arrange your forces to demonstrate to your adversary that to engage you in battle would be futile as, on the balance of probabilities, he would lose and in doing so consume all or most of his resources.
If you can't win today retreat from the field and conserve your resources for a better opportunity tomorrow.
This concept extended conduct to never surround your adversary as this apparent hopelessness of his plight will encourage him to fight with determination to survive.
Always leave him an avenue of retreat…to demonstrate to him that there is a better strategic option to direct engagement.
Good Stuff.
But increasingly irrelevant if you have small technologically based military machines that never confront each other.
Strategy needs to ADAPT to the strategic environment.
The conduct of military confrontation can be understood in a Darwinian adaptive sense.
And so can corporate and marketing strategy.
It too must adapt.
Let's look at how military strategy has changed and how this may provide some insight to how commercial conduct will develop.
Military Corporate
1 Battles will be short but intense Accelerating Lifeclycles
HLT's cause rapid collapse
2 Electronic technology will dominate
3 Communication will be smarter Narrow casting replaces broadcasting
4 Weapons will be smarter and more selective Proposition individual consumers
5 Eliminate the enemy's command & control Hack into there computers
6
7 You don't need to be the biggest to have an influence Corporate terrorism
8 Eliminate the enemy's will to continue Competition through denunciation
This is the emergent nature of corporate strategy, business risk and competitive conduct
There may be no more big set piece marketing battles only skirmishes.
Large companies with substantial resources will not be confronted directly as they cannot be defeated on their terms.
However they will be increasingly vulnerable at the margins and their remote outposts to corporate terrorism such as;
• Hacking their Systems
• Implanting viruses
• Denouncing them to regulatory bodies
• Destroying consumer confidence…BSE
Think about it personal terms.
If you cannot fight off an organisation trying to steal your house what do you do?
• Complain to the Police and hope that they are able to apply stronger resources.
• Go to court to use the law (we are all equal under the law)
• Use the press to draw attention to the tactics of the assailant and hope that the threat of public attention causes him to retreat.
• Find that the CEO of the company has an embarrassing skeleton in his cupboard. (Clinton & lots of politics).
These things are difficult to deny
There is no gain for the defendant simply a return to the status quo ante.
It is costly, disruptive, introduces tension into the organisation strengthening some relationships but destroying others, distracts management for long periods, has a negative effect on customer and consumer relations.
Of most importance it costs the assailant virtually nothing.
Again on a personal level.
What if I start a rumour that you are a convicted child molester in such a way that you don't know that I have denounced you.
• Firstly you have to find out why people's reaction to you has changed.
• Then you realise that denial doesn't work..because people didn't expect you to admit guilt. (denial is consistent with the behaviour of the guilty)
• You must now prove your innocence. But how?
• You may not lose your job but you may not be promoted.
• You may not lose all your friends but the number reduces and you are invited to join the remainder less often
• Your wife and kids suffer by association
• The police intelligence department starts a file on you
• The local newspaper starts a file…you are never to be completely innocent.. it will always be tarnished innocence.
I think that you cannot extend this analogy to the corporate equivalent and conclude ho powerful it can be.
It is cheap to instigate, has a rapid effect, is difficult to counteract and leaves a permanent stain on you reputation and those associated with you.
You emerge wiser, more cynical. Chastened and disillusioned.
When you became king of the hill, you became a target.
When the collapse of the eastern block left the USA as the only superpower it became the target for every extremist regime that thought the USA would use its new position to impose its will on them... as they would if the positions were reversed.
They will impose their culture or control us through their economic imperialism. Beware MacDonalds cometh.
If we resist the Big Mac the will send a cruise missile.
We always expect others to do as we would in the same circumstances.
So you get a vial of anthrax or a suitcase nuclear weapon and you bomb their embassy in an African capital.
Corporate structures mirror command systems in society and military strategy influence is founded on the shifts in the structure of power. Without the USSR nuclear threat what is the point of threatening Iraq with nuclear obliteration. M.A.D. no longer works. Another Nash equilibrium has emerged in the game theory of geopolitics.
It will emerge in corporate conduct watch out for it.
Beating your Competitor in the Market or Disabling his Ability or Will to Fight.
More info about consumers… direct, remote contact through the Internet
More legislation more opportunity to weaken competitors
Poison the water/well.. to force the opposing army to retreat.
Political Relationship
Politics and business are closely intertwined. Some politicians emerge from the business community others enter it after their political career. Political campaigns are funded by business which, in turn, seeks influence. It is a symbiotic relationship.
Through legislation and their general acts of economic management politicians create the environment in which companies act.
If competitive corporate conduct could be successfully confined to engagement within the market place then managers would not seek to 'tilt' the playing field in their favour and by definition against a competitor) by influencing those people who manage the playing field. The Politicians.
The cost of politics is high and the price of influence considerable therefore only the wealthy can pursue the acquisition of influence effectively at an individual level (consider cash for questions). The less wealthy or powerful do so via collectives (CBI, IOD etc).
A socialists would comment how individually weak capitalists lobby and seek influence in groups for the government to use the law to prevent individually weak employees from using collective power through trades unions to balance their authority or pursue their own selfish interests. Greed is good so long as I am the beneficiary.
Therefore it may be argued that the wealthier companies are able to bias the commercial environment in their favour just as a powerful nation is able to use its military or economic power to intimidate weaker states that may compete successfully with it in some area.
An example here is the current banana trade dispute between the EU and USA. Or the perennial battle by American film studios for uncontrolled access to the French movie theatres. Or the EU CAP.
These disputes did not arise as a consequence of two or more competitors competing fairly in an open market. They are a function of influence, protectionism, calling in and buying favours. And that is the way they will be resolved. Not by the consumer's deciding which type of banana they prefer but consumers will have to consume the banana that trade negotiators and politicians decide is best to balance other interests. Bananas are not a fruit they are political currency.
More generally let us consider the way political conduct itself has changes over the last 50 years.
The great ideological debates have receded to be replaced by managerial politics. Political parties and their candidates no longer compete for your vote on the basis of their policies and the way society should be structured.
They do not challenge each others actions in Government by rhetoric and debate.
They attempt to use all means legal and unlawful to discredit their competitor. Consider Nixon, The Republicans against Clinton, The Tories against Mandelson, New Labour nd the Tory cash for questions.
Vote for me. Not because I am right but because I can show you that they are wrong.
This is what politicians practice because tabloid politics is the most effective way to influence the electorate.
Warfare is an extension of politics at an extreme. Its techniques are the basis of competitive conduct.
Can we therefore conclude that the disablement of competitors by covert actions, public criticism and denunciation to the regulatory authorities will increasing become a viable form of competitive conduct. I think so.
I have seen it practised on my company. I have seen the future and I can tell it is all it promises to be.
The government can use its unlimited financial resources to prosecute. The line at which prosecution becomes persecution is blurred. The government can say that they act to preserve the greater good. So they should to do so is important. But they can also be partial in their judgements of what constitutes the greater good.
Consider the Matrix Churchill affair where the UK government was prepared to withhold evidence of the innocence of defendants by using a 'public interest order'. In retrospect it seemed more like protecting the personal interest of certain political reputations was at the heart of the decision.
The playing field will never be level and those in power will continue to abuse it. This is an historical truth.
I do not want you to leave here this evening believing that there is a kind of corporate X file and that I am its Fox Mulder (or its Scully).
There has always been a grey area and it has become a little darker at the edges in recent times.
But I have learned through direct experience that the theory I was taught and practised about how to compete aggressively but fairly in the market place is no longer the only way some choose to proceed and some would argue not even the most profitable way to proceed.
We may not choose to practise these duplicitous skills but we must learned to defend against them and counteract them.
Football Analogy
Let's define competitive superiority as winning the Premiership. Only one team can achieve the goal out of 21 who try.
At the end of this iteration of the game (The season) one team will succeed, three teams will be relegated (the equivalent of corporate collapse).
Five others will almost succeed and gain consolation prizes of entry into European competition next season.
However one or two may have gambled heavily on expensive new players to improve heir chances of becoming #1.
Failure to achieve their objective will have mean an unacceptably low return on their investment. This may be an affordable set back for this season and simply encourage further expenditure in pursuit of the same objective for next season.
Persistent failure will exhaust resources and may result in a crisis.
Five or six others will almost fail. There managers may have been changed as they confronted potential relegation and their finances depleted as their gate receipts fell and they bought new players in an attempt to improve their performance.
The remaining teams will have nether gained the exceptional rewards accruing to the top 6 nor incurred the costs of avoiding failure.
Those that do not quite fail nor do they strive for absolute success will probably end the season in a more stable situation. Neither disappointed, because their objective was not absolute success, nor depressed, because they had taken sufficient steps to avoid relegation.
You may argue that underlying this is a sterile philosophy that on the balance of probabilities will lead eventually to failure as exogenous factors will disrupt this equilibrium in one season. Injuries to key players a run of last minute defeats, to many drawn games etc.
But as Keynes said in the long run we are all dead.
There is a choice here.
Safety and long term positive cash flows are most probably achieved through the sub optimal strategy of avoiding failure.
Higher short term gains accrue from leveraging the business to achieve a dominant position but do not ensure the maintenance of the position without additional expenditure.
As life cycles shorten and markets behave increasingly chaotically survival appears increasingly to be more attractive than dominance.
This is a Darwinian imperative.