Saturday, May 3, 2008

Analogy #177: Monkey Business

Back in 1940, Esphyr Slobodkina wrote a children’s book called “Caps for Sale: A Tale of a Peddler, Some Monkeys and Their Monkey Business.” It has become a children’s classic.

The story is about a man who earns his living by walking around selling hats. He kept his inventory on his head—a tall stack of caps of various colors.

One day, he was tired and fell asleep by a tree. When he woke up, the hats were gone. At it turns out, the tree was full of monkeys, who had each taken a hat to put on their head.

The peddler tried everything he could think of to get those monkeys to give him back his caps. But all the monkeys would do is imitate the silly antics of the peddler. Whatever the monkeys saw the peddler do, they would copy exactly.

Finally, in disgust and frustration, the peddler gave up trying to reason with the monkeys and threw his hat to the ground. Immediately, all the monkeys did the same. At last, he got back his hats.

Monkey business is not all the different from human business. A lot of what is called strategic action is nothing more than imitating what someone else did.

There’s an old saying—“Monkey See, Monkey Do.” In other words, whatever actions a monkey sees, it will imitate. That was the basis of the story above. It is also the basis for a lot of what happens in the business world. If a competitor does something, firms frequently respond by doing the same thing.

The good news is that this behavior is rather predictable. When behavior is predictable, it is easier to build a strategy around it. The bad news is that the peddler did not proactively take advantage of that predictability. It was only by accident that he threw down his hat in disgust. Had he been more proactive, he would have realized sooner that the way to get the monkeys to throw down their hats would be to throw down his own (for more on this concept, see the blog “Mission Unpredictable”)

Of course, if he had done that, it wouldn’t have been much of a children’s story. But our goal is not to entertain children with silly antics. Our goal is to make money.

Rather than being like the peddler, who immediately got all emotional and quickly did silly things (which did not work), we need to take some time to assess the situation and then take advantage of the patterns we see.

Similarly, rather than being like the monkeys, who blindly imitated what they saw (and eventually lost their caps), we need to stop and see if there are better alternatives than just copying someone else.

The principle here has to do with “Action” and “Reaction.” The idea is that before taking any action, we should consider what the competitive reaction will be. In addition, if the competitor acts first, we should consider all of our options before reacting and not just blindly copy them.

Unfortunately, it appears that businesses act more like the monkeys in our story than reasoning strategists. McKinsey & Company has just released results of an April 2008 survey of 1,825 executives. These executives were asked about what they do when faced with serious competitive threats. They categorized two kinds of competitive threats: a price cut and a new innovation.

Based on the survey results, the majority of the respondents tended to react as follows:

1) They did not find out about the competitor’s action until late in the game, such as after it was already introduced to the marketplace.

2) They reacted slowly, often missing a couple of purchase cycles.

3) They only considered 1 or 2 possible response options.
- Options often based on “What did we do last time?”

4) They did not do a sophisticated analysis of those options:
- They only looked out a year or two.
- They did not look at return on investment or NPV
- They only looked at a couple of income statement measures like sales or net profits

5) They tended to respond with a monkey-like “me too” reaction:
- Price Cuts were met with a price cut
- Innovations were met with a copycat innovation

6) The response was internally motivated (stop our losses to competition) rather than externally motivated (hurt the strategic intent of competition or cause them to be no longer relevant to your customers).

7) They were content with how they reacted and would do something similar the next time.

So then, what can we learn from these results? First, let’s look at this from the point of view of the initiator.

1) There are indeed First Mover Advantages
If it is true that competitors tend find out about your actions late and react slowly, then there is going to be a period of time in which you have a competitive advantage. Therefore, there are advantages to taking the initiative and making the first move. We discussed this in an earlier blog (see “Early Bird”).

2) Expect Imitations
Although first movers have a window of time for their competitive advantage, it will not last forever. Eventually, imitators will copy your actions. For example, if you lower prices, that price will eventually be matched. In the long run, all you have done is lower the profit margin for the entire industry. If such a price war goes on too long, all the profits will be wiped out of the industry. Unless you are the lowest-cost operator, you will probably not be better off in the long run.

The same applies to innovation. The initial differential advantage from the innovation will eventually be narrowed and eliminated via imitations. On a relative basis, you are back to where you started in the marketplace.

Therefore, when running the numbers on your potential strategic action, only assume a short period of advantage. Put into your assumptions the likelihood of being copied and having the advantage narrowed. We discussed this in more detail in an earlier blog (see “Bombs Start Wars”).

Now, let’s turn our attention to what can be learned for those reacting to competition.

1) Reacting is not a way to Get Ahead
In the McKinsey survey, respondents claimed that their reactions allowed them to suffer less financial pain than had they done nothing. However, they still suffered some pain. At the end of the day, they were worse off.

If you want to gain ground, you need to become more of an initiator, rather than a reactor. Initiating does not always mean being first to introduce the price change or innovation. Initiating means being the first to get credit for the action in the mind of the customers. For example, Coke rarely is the first to do anything, but it reacts so quickly and completely that it gets the credit in the minds of the customer for the innovation. Companies seen as laggards rarely instill much customer loyalty.

2) Consider More Options
Wal-Mart has a great price strategy which works very well for them. However, if you compete against Wal-Mart and do nothing more than just copy their prices, you will fail. The business graveyards are full of discount store chains which ceased to exist because they were nothing more than an inferior imitation of Wal-Mart. By contrast, Target has succeeded because it provides a distinctively different consumer alternative. It did not imitate Wal-Mart. Instead, Target chose its own path.

There is more than one way to build a compelling value package. Don’t take someone else’s. Build your own. Build such a unique and compelling value package that consumers will not be tempted to switch when the competitor does something new, because the competitor is no longer relevant to your customer.

Companies seen as weak imitators never instill as much loyalty as a company seen as owning leadership in a distinctively different value space. As long as American automakers are viewed as weak imitators playing catch-up with foreign brands, they will continue to lose market share in the US. Instead, these automakers need to break out of the pack and find their unique point of leadership.

Business leaders often tend to act like monkeys and imitate others. If you want to get ahead, stop being a monkey and chart your own path. Move from monkey business to smart business.

Imitation may be the sincerest form of flattery, but differentiation is the surest path to sustainable profitability.

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