Monday, February 1, 2016


Job #1 in strategy is analyzing, and characterizing the business landscape in which the opportunity exists. The use of 5 forces, value net, etc. all represent frameworks for such analysis. Suppose you evaluated the opportunity of an incumbent, small market NBA team seeking to retain a superstar player? You would, of course, examine the rivalry for this all-important asset and sensibly conclude that rivalry is witheringly intense. From here, you would be forced to conclude that the prospects for making profits from such an opportunity are correspondingly small.

Put simply, the intense rivalry of the landscape will compete away all of the "rents" from the superstar player. And, from here, you might also conclude that the overall opportunity of being a small market NBA owner is not worth much in such a landscape.

If, however, you look at the available data, you'll find that teams like the San Antonio Spurs, the Cleveland Cavaliers, and the Indiana Pacers all more or less mint money with their NBA franchises. That is, far from the prediction of our landscape analysis, these are promising opportunities, not poor ones.

The difference is that the analysis presumes that just because rivals can compete all out, they will compete all out, to the detriment of the smaller teams and the overall opportunity. Yet, as we saw in the experiment, competition under the ROFR clause is quite subdued. Rival teams could enter and compete, but they know they won't be successful. Moreover, since competing itself is expensive, there's no point in doing so unless the prospects of success are decent. So, far from the prediction of our models, that unbridled rivalry will destroy value, the reality is more of a "gentleman's" labor market where the incumbent team faces little competition.

On the other hand, take away the ROFR and the labor market becomes as the models predict, brutal and difficult for the small market players. Superstars are retained by the incumbent team only by offering extremely favorable salaries, vastly reducing the quality of the opportunity from owning a small market team.

So the major lesson is one of landscaping. A business landscape may appear unfavorable in pure form, but the details matter. A ROFR clause essentially redoes the landscape of the NBA labor market in a massively important way. An outward thinker is alert to such things in doing strategic analysis of opportunities. The ROFR is an apparently small thing, put in place officially for entirely different reasons than to suppress competition. Yet it and other distortions in the NBA labor market make the opportunity far better than what a simple 5 forces would imply.

How to Think Outwardly

A good exercise in learning to think outwardly is to perform 5 forces or other similar analysis to opportunities of interest as you would in strategy. The twist, though, is to now pay attention to WITS type moments where the implicit assumptions of such analysis get altered, using your outward thinking.

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