Competition Demystified: Book Review

The thought process was all about figuring out the channels, patterns and practices with which a company can hold its ground against the marketplace competition. During this thought process, we stumbled across a book on investing by Bruce Greenwald and Judd Kahn. Both Bruce and Judd are professionals in the field of investing and have experience in the way things work. This book, published back in 2005, remains just as relevant in today’s world.

The books is called ‘Competition Demystified’ and provides a detailed framework for carrying out competitive analysis. It also provides details on effectively making use of strategic thinking.

MBA graduates are educated about ‘Porter’s Five Forces. This tool acts as a predecessor to many of the ideas mentioned in Competition Demystified. However, the authors of the book believe that this tool is too difficult to put to use. They argue that the five forces are difficult to weight. The objective lies in simplification. Out of Porter’s five forces, one stands out in particular i.e. barriers to entry. This factor is the key to understanding markets and how they may be shaped by competitive advantages. Using the words, ‘a market has barriers to entry,’ translates to saying that every firm has its own competitive advantages in the market. The existence of economic moats is what shapes barriers to market entry. Moreover, it also propels competitive dynamics.

What I liked about the book?

The main strength of Competition Demystified is that it offers a hassle-free approach to strategy making. This straightforward approach is like a breath of fresh air in a world where business authors tend to make things appear more complicated than they actually are. I spent a great amount of time thinking about economic moats and therefore enjoyed how specifically the authors discussed sustainable competitive advantage. The book contains caste studies with solid examples of instances where firms were able to hold advantages over their competitors in the field.

The authors present their view of strategy in a simple manner. The focus remains on understanding barriers to entry and following a process to conduct competitive analysis. This process consists of the following steps:

 

1.       Define the market and identify the competitive landscape.

2.       Establish whether any form of competitive advantage exists. This includes determining if the market shares and profits are stable.

3.       The last step after searching for the existence of competitive advantages in a market is to pinpoint the working competitive advantages.

Bruce and Judd argue in the book that competitive advantage can exist on one side; i.e., either the supply or the demand side.

1.       Supply – Competitive advantage that has to do with supply are constituted by an input cost advantage. They may be represented by expertise as well, which consists of patents or experience.

2.       Demand – Demand-related advantages deal with captivation of customers.  This advantage works on the mechanics of habit and switching and searching costs. It is important to note that over here, the authors make a controversial argument. They say that differentiation and branding do not result in competitive advantage. They do not always start competition.

Economies of scale is an extra advantage on the side of demand. These economic advantages are derived from the spread of fixed costs over a larger base. However, the scale itself does not aid in the creation of advantage. Instead, for a scale to be of importance, bearers must have the ability to approach customers. This approach usually involves one or another form of customer captivity. In addition to this, scale economies have more of an impact in local markets. But, firms should be cautious and not expand to more geographically spread out markets. This may make them a target of competition.

All of these concepts display the reality. Without the existence of competitive advantages, firms will compete based only on their efficiency while competitors will enter a market freely. Due to competition based on efficiency, firms will be unable to earn returns based on their capital cost. In such circumstances, focus and execution are the key to success. But, the authors have believed differently. They argue that operational effectiveness is more of a tactic rather than a matter of strategy. According to this view, there is no dimension of strategy to efficiency.

After the identification of pre-existing competitive advantages, the next step involves inspecting the nature of competition and the interaction among competitors. Game theory can help understand competitive dynamics. A particular game theory is the ‘Prisoner’s Dilemma.’ This theory helps in analyzing interactions. This analyzing involves questions like, are competitors regularly engaging in price wars? Are they being cooperative? Is this interaction, a mix of both competition and cooperation?

 

Since the authors have successfully established the framework, they then guide the readers through a series of case studies. These case studies consist of analytic methods to help explore numerous competitive advantages and dynamics of game theory, which help in the shaping of competitive interactions.  The book included good examples from the world of business, which perfectly fits the strategic framework that was set out in earlier pages.

Bruce and Judd analyze the competitive markets for Apple Inc. (NASDAQ:AAPL) first. These included chips, software and manufacturing of PC’s. The authors then reviewed the existing competitive advantage in each market.

Next, the authors moved on to more local economies of scale. They describe how Wal-Mart (NYSE : WMT) took advantage of local economies of scale to gain success in the market. For a counter-example, the authors talk about Coors’ experience, which originally remained a regional champion before realizing that this vision was harmful and wider distributions resulted in the loss of margins.

Similarly, another example involved Compaq. Compaq became successful by competing based on economies of scale. But, as the market began spreading out, others began to compete based on the scale advantages, thus resulting in the downfall of advantages based on economies of scale. This happened due to the ‘dilemma of growth,’ as the authors call it. Another similar dynamic was displayed by Phillips (NYSE:PHG) and the CD’s market. The market grew, and subsequently resulted in the elimination of scale advantages.

The authors gave another example involving Cisco (NASDAQ:CSCO). Cisco attempted to extend beyond their core market, which was corporations and universities, and into the space of telecommunication. This space was already widely dominated by carriers such as phone co’s and former bells. This left Cisco at a competitive disadvantage rather than an advantage.

With these numerous examples, we are able to observe a variety of results. These results highlight the aspects of competition.

In the next section of the book, Bruce and Judd talk about price competition and a game theory; i.e. the ‘Prisoner’s Dilemma.’ They start this section with the example of Lowe’s (NYSE:LOW) along with Home Depot (NYSE:HD). Next, they highlight the prisoner’s dilemma at play by giving examples from the ‘cola wars,’ which was the competition between Coca-Cola (NYSE:KO) and Pepsi (NASDQ:PEP). In the cola wars, both Pepsi and Coca-Cola had aggressive competition before cooperating. This cooperation led to an increase in profits.

Another great example was that of Rupert Murdoch and the arrival of Fox News into the market of network television. Murdoch was aware that it would be expensive for bearers to drive out Fox. Keeping this in mind, Murdoch positioned Fox with price cuts and had a competition with independent stations rather than those in prime time. This allowed the fox into the hen house, starting a more competitive era in broadcasting.

The next example is that of entry/preemption dynamics. The authors gave the example of Kiwi Air. Very similar to Murdoch, Kiwi’s team of fired pilots and airline executives signaled that Kiwi Air wished to cooperate. They signaled this intention by setting a low hub of competition, staying away from price wars and other actions, which may have been termed aggressive. But, when the shift of industry dynamics took place, it became easy to lease planes and hire pilots. This shift in dynamics led to the return of price wars, thus leading to the fall of the cooperative culture.

The book also provides a discussion on Kodak vs. Polaroid. The time when Kodak was stuck in competition when it tried to enter the instant photography market. The book gives numerous examples ranging from gasoline additives to Nintendo. All of these great examples further highlighted the aspects of competition.

It would be impossible to describe all the insights the examples provided in this brief review. Suffice to say, the authors provided a deep insight of competitive advantage and the dynamics of marketing. Anyone who has a passion for the deep analysis of business-related case studies will surely enjoy the style of this book.

Constructive Criticism

The presence of a heavy academic tone and reliance on too many case studies, are my main criticism of Competition Demystified. Although I did finish this book feeling much more educated about the nature of competition, the writing style was extremely similar to that of a textbook. The presence of this writing style has no fault in it, but can make for a very slow read sometimes.

I also at times questioned the statements provided in the book. For example, at one point the authors argue that branding is not a competitive advantage and that differentiation ‘does not work.’ Which seems agreeable at first.

However, in the next section I read the detailed analysis of Apple Inc. and find in the end that it has zero competitive advantages. Yet, here we are years later and Apple has success like no other. Wouldn’t it be difficult to argue that the unprecedented success of Apple Inc. was not due to its effective branding and the differentiation of its products?

In addition to this, I also found the ideas presented in the beginning of the book to be without any structure. The analytic structure only came together towards the end of the book and I was able to understand them.

Summary

Despite the minor issues, the lessons in the book did make sense in the end and they affected me greatly. This book gives an excellent description of competitive advantages and competition dynamics. Moreover, it also strengthened many of my core business concepts that are beneficial in the world of business.

If you are looking for a structure for strategic thinking, this book is an excellent source of key information, which will allow you to analyze and evaluate any industry virtually. Strategy executives who are looking for ways to extend their perspectives can also learn from this book. Competition Demystified is a book to have in your bookshelf if you are an educated investor.