Tuesday 12 July 2016

Your Competitors are your Best Friends

I want to tell you a true story, but I’m going to change everything that identifies the actual participants.  It’s about two companies who saw each other as their biggest competitors.  There was no love lost between them, not to mention countless law suits and counter-suits.  These were large and professional public listed companies, one with hundreds and the other with thousands of employees.  Professionally managed by people with more PhDs and MBAs than you can shake a stick at.  But still …

The global market for ‘Widgets’ is $20-50 Billion dollars per year and growing, and is served by several of the world’s largest international corporations.  Widgets are manufactured in colossal volumes on highly automated production lines which run 24/7.  The manufacturing process is a multi-stage line, with each stage comprising its own dedicated machine tool.  One of these stages is the ‘Widget Tuning’ stage where the performance of each individual ‘Widget’ is precisely ’tuned’ to very tight specifications.

Widget tuning machines are evaluated against three broad parameters - (i) the precision with which they can tune a Widget, (ii) the net throughput with which they can tune Widgets, and (iii) their overall cost of ownership.  The preferred technology for Widget tuning was known as OWT (Optical Widget Tuning), and there were two manufacturers which supplied OWT machines to the global Widget industry - Opticorp, and General Optics International (GOI).  The total worldwide market for OWT machines varied between $200 and $500 Million annually, and was typically shared 60:40 between Opticorp and GOI, with both vendors generating excellent margins on these product lines.

Widget manufacturers appreciated having two vendors for these expensive manufacturing tools, which sell at up to a million dollars apiece and require comprehensive and reliable support and maintenance.  Although the market is quite a large one, it isn’t really large enough to support much more than two vendors considering that the barriers to entry are very substantial.  What would happen was, as Opticorp began to stretch their lead in market share, GOI would focus on new technology resulting in improved Widget tuning performance, and would gradually claw back market share.  Being the market leader, Opticorp would be more reluctant to risk investing in new technology, but would eventually be obliged to do so to avoid the risk of losing their dominant position.  And if neither vendor produced a compellingly differentiated product, the Widget manufacturers would start to pressure them on price.

Overall this ongoing competitive situation was good for the Widget manufacturers.  The Widget tuning process was an effective one for them, and they had two highly reliable vendors that they could play off one against the other to keep them both sharp.  But Optical Widget Tuning was not their only option.  A new technology called Electrical Widget Tuning (EWT) was waiting in the wings.  It had the potential to be at least as effective as OWT, but required other changes to be made to the overall design of the Widgets to accommodate it.  But so long as OWT remained viable there was no pressing need to abandon it.

So long as OWT remained viable …

Out of the blue, the CEO of GOI made a monumental strategic decision (the specifics of which are not germane to this discussion), and which put GOI deeply into debt.  No sooner was this announced than a global financial recession suddenly set in.  Within months it became evident that GOI was in desperate financial straits, and talk of possible bankruptcy was in the air.  And indeed, the following summer GOI went under.  Attempts to sell off their OWT business came to nought as at first they demanded too much for it, and later were forced to lay off so many of the key employees that there was no longer a critical mass that could form a viable acquisition.  There was great joy in the corridors of Opticorp as their bitter rival and only OWT competitor bit the dust and left the lucrative OWT market entirely to them.

In the boardrooms of the Widget manufacturers, though, things looked rather different.  With Opticorp now their sole supplier, they would have nothing with which to push back against price increases, and there would be limited incentive for Opticorp to invest in advancing their technology rather than pocketing cash.  Instead, they decided that they had no choice but to go all out to bring Electronic Widget Tuning to maturity as their preferred Widget tuning technology.

Opticorp insisted that they didn’t see this coming.  In internal meetings their product managers gave presentation after presentation showing how OWT met all Widget manufacturing requirements, how EWT would offer no advantage, and how a switch to EWT would be disruptive across the board.  In short, gentlemen, EWT was a load of hot air and would never happen.  But happen it did, despite Opticorp’s technical analysis being pretty well on the money.  What it utterly failed to take into account were the strategic perspectives.  Within two years Opticorp’s OWT sales had dropped by 75%, and within another 12 months they had evaporated completely.  Shortly thereafter, Opticorp’s CEO was shown the door.

The point of this post is not to show how Opticorp could or should have responded differently.  That is actually far from simple, and would form a much more elaborate case study.  Instead it is a reflection of how events which would lead to the demise of a highly profitable $250M business within three years were greeted by whoops of celebration, and not a hint of trepidation over how it might end up playing out.  And how a proper assessment of the situation failed to be undertaken through hubris and conceit.

As I said, this is a true story, I hope accurately portrayed, and it teaches a valuable business lesson.  It really doesn’t matter what size your business is - you need competition, and you have to understand why.  Competitors keep you honest.  Without competition for your business there is no incentive for you to reduce costs, increase efficiencies, and improve service.  There is no incentive for you to invest in making your product better.  And ultimately, there is no incentive for your customers to remain interested in it.

For better or for worse, consumers at all levels - whether consumers of shampoo or OWT manufacturing tools - want to have choices.  Sometimes it is because people just feel more comfortable when they have choices - but sometimes it is because a well-considered strategy demands alternatives.  Where there is no choice there is stagnation, such as is typically the case with things like public transport.  Having competition is what keeps any business fresh.  Your competitors may want to put you out of business, and you them, but in reality they are your Best Friend.  Embrace it!