War! Attack! Response! Competency! Retreat!
No, a war isn’t on. These are the words firms use in business world when faced with competition. And that is where, strategy comes in.
In the words of Michael Porter:
‘Strategy is about making choices, trade-offs; it’s about deliberately choosing to be different’
According to me, the most interesting thing in this whole world is strategy. And through this article, let us try to glance into its highly fascinating and creative world.
Whenever a company is losing ground (read: market share), it resorts to an ‘attack’ on competition. How? Most of us will say by slashing prices or offering a new product. These are simple. What firms do, however, is that they combine the two: Offer differentiated products to a customer at low price. If customer sees the value, everyone is happy. If not, another strategy. Many of us think that firms come out with only a few products in a year, but that actually is not true. Firms like HUL, Procter and Gamble come out with over 100 products a year and junk many of those by year’s end because they don’t work. Firms strategize in this way : Rs 100 lost on 80 failed products; Rs 500 gained from rest 20. What is the net? Profit, of course. So firms don’t mind such failures.
Let us now look at what happens when the market is new and unexplored and no firms are currently competing in it. Here arises the question of which company will first enter the market or be the first mover. It is often argued that first movers enter the market because only they have the resources. That is not always true. Sometimes firms actually defer their plans and wait for their competitor to enter so that they can learn from the first mover’s mistakes. Such firms feast on other’s mistakes. Nintendo did this against Atari. And there are plenty of examples.
Certain foresighted strategies also help a firm against competition. These are out of the box things. In 2005, when airlines all over the world were in red, Southwest posted huge profits. They managed with oil prices! It has a hedging agreement which ensures that it will receive oil supply at $55, whatever the international price may be.
Mergers and acquisitions are also such strategies although acquisitions aren’t always successful. Hostile takeovers, which are a part of acquisitions, fall under this strategy. By the way, ever heard of terms such as ‘poison pills’, ‘shark repellants’, ‘white knight’ etc? Well, these aren’t shows on Discovery channel; these are strategies to thwart a hostile takeover. Also, can you imagine a highly profitable company taking over a high debt-ridden one even if it offers the former a competitive advantage? Well it happens; simply, to avoid taxes. Offset your profits against the latter’s debts and voila! Your taxable income reduces.
Who can imagine a company launching a new product which eats into the profits of its own, other product in the same category? The stock example would be of shampoos and soaps. Companies often follow this tactic known as cannibalization so as to stock shelf spaces in retail chains with their products; even if their other products garner lesser profits due to this. The advantage here is that if your products are on the shelf, your competitor’s are not; simple.
I can go on and on regarding this issue because companies follow thousands of innovative strategies. When Sun Tzu wrote the ‘art of war’ in 6th century, he could not have possibly imagined that same and more innovative tactics will be used in corporate boardrooms today. The world of strategy – be it financial or marketing – is a highly fascinating one. I have tried to throw light on some. Maybe I will write a part two of this article – till then, only I know my strategy, isn’t it?
[Image Source: http://flickr.com/photos/thomaspurves/211384522/]