Wednesday, March 30, 2011

Judo Highlights

Wilkes-Barre on a threatening day
An Unpromising Landscape?

The judo class was a capstone for the ideas of the first half of the course. In strategy, the easy thing is to identify promising business landscapes. The problem is that others can identify these same situations, and the space quickly becomes crowded. In strategy, being successful when you have a competitive advantage, while not easy, is much more promising than situations where you have no such advantage. So how do you find opportunities in unpromising settings where you have no advantage? (One good thing about such settings is that others are probably not looking there.)

Perhaps the most important contribution of game theory is to see the possibility in such unpromising settings. Our unit on judo strategies illustrated one avenue for using game theory to this end. Judo strategies are useful in settings where there is an opportunity for a niche player to compete in such a fashion that it provokes no competitive response to rivals. Avoiding a competitive response amounts to finding circumstances where the rival is sufficiently inflexible that aggressiveness does not pay. In our experiments, entrants pulled this off by staying small and pricing aggressively in the face of an incumbent that could not price discriminate over the targeted customers of the small firm.

But this idea is much broader and more powerful than merely that setting. Inflexibility can be used against incumbents with brand advantage. By choosing a niche where the appeal would undercut the brand associations of the incumbent, the entrant can survive and prosper. Red Bull is a nice example of this strategy.

Another type of exploitable inflexibility is the worry about cannibalization of existing product lines. A niche player can operate by selling a (possibly inferior) substitute to the main product line of the incumbent. Since retaliation drives down the value of the main line, incumbents are often reluctant. Connor Peripherals executed this type of strategy in hard disk drives. Similarly, Compaq pursued this strategy in "portable" computers against IBM.

Inflexibility might be tied up in channel relationships. For instance, the strength of IBM and HP's relationships with retailers allowed Dell to use the direct channel without swift retaliation. IBM did not pursue this strategy since it cost too much in terms of damaging the relationship with the main channel.

(An aside: In strategy, we often talk about the difficulty of undertaking a straddle strategy. Straddles are a classic type of inflexibility that can be exploited by entrants.)

Game theory provides a powerful analytic framework for identifying and exploiting these opportunities. The lesson for the first half of the class: Outward thinking opens up whole new avenues for value creation.

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