During the Cold War between the United States and USSR in the latter half of the last century, both sides accumulated thousands of nuclear bombs. There were enough of these nuclear bombs to kill every man, woman and child on the planet many times over.
Yet, despite the great effort on both sides to build as many of these bombs of mass destruction as they could, neither side ever actually used any of these bombs. Why did the United States and the former USSR build so many bombs and then never use them?
The problem was that both countries could detect whenever the other side launched one of their nuclear bomb missiles. In fact, they could detect the launching so quickly, that they could stage a counter-attack with their own bombs before the first bombs were able to accomplish their mission.
As a result, it was well known by both nations that a nuclear war was unwinnable. If you started an attack, a counter-attack would quickly occur and both nations would end up being destroyed. Rather than having a winner and a loser, you would have two losers.
The Analogy
Strategic planning can often be like nuclear warfare.
One time, I was holding a meeting with some executives at a particular company and I asked them this simple question:
“Suppose that one of your largest competitors just came out with a new product or strategic initiative that had the potential of taking away about 25% of your market share. What would you do?”
Well, it didn’t take long for this group of executives to quickly come up with a list of activities that they would initiate to thwart the attempts of their competitor to take away 25% of their market share. They said they would remobilize the sales force, drop prices, come out with a competing product, and a host of other activities.
So then I asked them a second question:
“Given all of this retaliation on your part, do you think the competition would succeed in their attempt to capture 25% or your market share?”
The answer was a resounding “Of course not! We would do whatever it takes to stop them.” The group was excited, animated, and positively convinced that the enemy would not gain any meaningful market share against them.
So then I asked a third and final question:
“If you would go to that much effort to prevent your competition from taking market share from you, don’t you think that your competition would do the same to prevent your attacks from succeeding on them?”
Suddenly, you could see the complexion change on the faces of the executives. All day, this group had been discussing plans and strategies to gain significant amounts of market share. They had convinced themselves that the battle would be relatively easy. Now, these executives had to come to grips with the fact that the war would be difficult, if not impossible to win with their strategy, because they suddenly realized that the competition would not stand still, but resist them intensely.
The situation is very similar to nuclear war. Just as the opposing country could determine when you were starting a nuclear attack and react before your bombs had impact, opposing companies can determine when you are attacking them with a new strategy and react before your strategy has a chance to make meaningful impact in the marketplace.
For example, let us assume for a moment that you have a strategy to gain significant market share from your largest competitor by offering your product at a price 15% below their prices. So long as you are able to maintain a 15% price advantage, you will continue to gain market share. However, if your competitor quickly drops its prices to match yours, you lose the advantage and stop gaining market share. You have the option of dropping your prices an additional 15%, but your competitor has the option of matching those prices as well.
As a result, your market share is no higher than when you began, but you will have destroyed the profitability of the market share you already had by giving away your profit margin in a price war. This is just like the nuclear war example mentioned above. Rather than having a strategy where you win and they lose, you have a strategy where both of you lose.
The Principle
There are three strategic principles we can learn from this story. First, whenever you devise a strategy that has the potential to seriously upset the status quo, assume that the status quo will fight fiercely to stop you. Take this retaliation into account when detail your strategy.
For example, let us assume that you have a new strategy which requires the building of a new factory. Let us also assume that you need to sell approximately 10,000 units per year of your new product to break even (i.e., get a fair return) on your factory investment. Now, if the competition does not retaliate, your new product is so superior that you should be able to sell 20,000 units per year. Hence, one’s first reaction may be to approve the building of the factory.
However, what happens if the competition finds a means to retaliate? Now you may feel smug today because you have a patent, so your new product cannot be directly copied. But just because a competitor cannot directly copy your product doesn’t mean that he cannot thwart your efforts.
He could lower prices on his products so deep that it isn’t worth paying the premium for your benefits or force you to lower your prices to the point where your break even jumps to 30,000 units per year.
- He could lower prices on his products so deep that it isn’t worth paying the premium for your benefits or force you to lower your prices to the point where your break even jumps to 30,000 units per year.
- He could disturb your distribution channels to the point where you have difficulty getting your products sold.
- He could rush into research while your factory is being built and develop a competing product that makes your product less unique. Because you have already done the test marketing, the competitor can skip that step and get his product out at almost the same time as yours.
- He could perhaps hire away some of your top employees and thereby disrupt your efforts.
- He could perhaps find a way to take you to court and thereby stall your ability to proceed.
- He could attack a different part of your product mix, thereby diverting your attention or causing you to lose the cash flow you were planning to use to build the factory.
Any one of these strategic responses could make your factory investment turn negative right away or delay its implementation until the competition can adequately counter your move and make the investment negative later. Hence, it might not be such a good idea to build that factory after all. So think your strategy through and put competitor response into your equation. This sounds simple enough, but you’d be surprised how many times I’ve seen people fail to do it.
The second strategic principle is to drive towards strategies that are inherently harder for competitors to thwart. Try to make the pain of retaliation hurt them more than it hurts you.
For example, if you are entering an area that is new for you, but not for your main competitor, you may be able to offer an extremely low price to lure away some initial clients for your product. The established competitor may not be able to match your price because he has “most favored client” arrangements with a large number of his clients.
If he matches your price with the one client, he may be contractually obligated to give that same lower price to dozens of other clients covered by the “most favored client” clause. Hence, by hurting yourself on margins with one client, you may be able to hurt the competition with many clients, thereby making it harder for him to retaliate, no matter how hard he wants to. For more on this topic, see the chapter on “Home Field Disadvantage.”
Another way to make it harder for competition to retaliate is by looking for strategies that are truly revolutionary, rather than just incremental improvements. The more incremental your strategy, the easier it is for you competition to make the same small increments. The more complex and revolutionary your strategy, the harder it is for competition to build a simple blocking move.
Going back to the nuclear war story, let us say that instead of simply building bigger and better missiles and nuclear warheads, you built an extensive and elaborate terrorism network that infiltrated the enemy’s country with a complex array of spies, tactical bombs, chemical warfare devices and computer viruses. That would be much harder for your enemy to counteract with their large bombs. What are they going to do, drop a major bomb on their own city in order to kill a couple of your terrorists? That would only result in killing millions of their own people and potentially setting off one of the chemical warfare devices.
The third principle we can learn from this story is to keep an eye on competition. The sooner you understand what they are up to, the sooner you can retaliate. Studying the competition should be integral to every company’s strategic planning process. Sometimes, your best strategic option is to try to maintain the status quo. Understanding how others may be trying to upset that status quo and having the ability to rapidly respond could be critical to your success.
That is why, during the Cold War, the United States spent so much money on early warning radar devices and rapid deployment of counter attacks via the Strategic Air Command. The sooner the US could learn of a nuclear strike and the sooner they could retaliate, the more of a deterrent there was to having a nuclear strike in the first place. Status quo was thereby maintained.
Summary
Bombs typically start wars, not end wars. Assume that any strategic move you make that has the potential to seriously hurt your competition will cause them to retaliate strongly. Therefore, a good strategist should:
- Factor aggressive competitive response into any strategic plan. That exercise may force you to abandon or significantly alter your plan. It’s better to learn this before you go to the expense of implementing a faulty plan than afterwards.
- Focus on strategies that are revolutionary or complex enough to make it difficult for competitors to easily thwart. Small, one-dimensional, incremental strategies are easier for competitors to block.
- Develop a system to regularly gather intelligence on competition and build rapid response capabilities in case they try to drop a “bomb” on you.
Final Thoughts
Be sure you are starting a war you can ultimately win. When the terrorists flew two planes into the World Trade Center towers in New York City on September 11, 2001, they didn’t end the battle. Instead, they aroused world-wide retaliation on a massive scale. Assume that your competitors will do the same to you if you threaten them.
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