Recently, the Quora question and answer site tackled the question of what was the shrewdest business move ever. One of the most voted on answers to the question, as reported by Inc magazine, was this:
"Herbert Dow founded Dow Chemical in 1895, and invented a way to cheaply produce the industrial chemical bromine in Midland, Michigan. He sold the chemical for 36 cents per pound throughout the United States—but couldn't expand overseas as the international chemical market was dominated by an incumbent company from Germany. A gentleman's agreement at the time dictated that the German company wouldn't encroach on the U.S. market as long as Dow didn't try to muscle in on chemical sales in Europe.
"However, by 1904, Dow's business was struggling and he needed to expand. So he began selling bromine in England and quickly cut down the German competition—which sold its product at the fixed rate of 49 cents per pound. Outraged, the Germans began flooding the U.S. market with even cheaper bromine, on the order of 15 cents per pound, in an attempt to put Dow out of business.
"That's when Dow got crafty.
"He stopped selling his product in the U.S. altogether—and began buying up the German-made bromine. Then he repackaged it, sent it back to Europe, and began selling it as his own—for 22 cents less than the Germans did. The Germans couldn't figure out why Dow wasn't going out of business—or why there was such a high demand for German bromide in the U.S.—so they just kept lowering their prices to 12 cents, then 10 cents. By the time they caught on, Dow had broken the German monopoly in Europe and forced it to lower prices on its home turf. Ouch."
Companies can spend a lot of time trying to convince the competition to stop doing something. This effort is often futile, because:
1) It is hard enough to get your own company to change, let alone a competitor.
2) The normal reason you want to change a competitor’s behavior is because it is effectively hurting your business. Why would a competitor want to stop effective behavior?
When Dow was attacked in the story, it did not try to stop the competitor’s behavior. Instead, Dow let the competitor’s behavior continue and used their activity against them.
When designing your strategy, keep this story of Dow in mind. Instead of looking internally for a way to get an advantage over competition, look for ways to use your competitor’s strategy as a means of gaining an advantage.
The principle here is based on the concept of Judo. In judo, one can defeat a stronger opponent by using the opponent’s power against them. Dow, in the story above, used strategic judo to defeat its opponent. Dow took the power of the opponent’s price war in the US to create a price advantage in Europe. Using judo to describe strategy is not a new concept. Back in 2001, David B. Yoffie and Mary Kwak published a book entitled Judo Strategy.
In this book, Yoffie and Kwak discussed how to use Judo Strategy to defeat your enemy. I’ve summarized it below.
Judo Strategy #1: Movement
The first judo strategy principle is called “movement.” The idea here is that big, strong companies tend to have a lot of power, but usually not a lot of speed. They tend to choke on their huge bureaucracies, creating slow reaction. In addition, they got big and powerful due to following the rules of the status quo. Therefore, they are slow to want to deviate from the status quo.
As a result, a smaller, weaker company can beat a larger, stronger company by taking advantage of the opponent’s slowness. They can outmaneuver the opponent through faster movement.
Faster, superior movement tends to work like this. First, don’t stand still and directly attack the opponent under the rules of the status quo. This invites the stronger player to retaliate when they have the advantage. Instead, move the battle to a different competitive space where the rules of the status quo give no advantage. Third, move quickly to build a powerful position in the new space so that you can become stronger player under the new rules.
An example used by Yoffie and Kwak of this “movement” judo strategy was Quickbooks in accounting software. Quickbooks was late to market and battling against huge, established software firms (like Microsoft) with much larger budgets and staffs.
The status quo rules for success in the accounting software space were to:
a) Provide as many features as possible (the more, the better);
b) Use traditional accounting terminology and processes.
Quickbooks avoided the status quo and produced its product under a new set of rules:
a) Focused on doing the few, most common features in a superior (faster, easier) way.
b) Avoided accounting references and made it easy to use by non-accountants.
This new space gave Quickbooks an advantage. By the time the big, slow incumbents figured out what Quickbooks had done, Quickbooks had quickly taken over 70% market share in the space and put most of the former leaders out of the business.
Judo Strategy #2: Balance and Leverage
The second principle has to do with balance and leverage. The idea is to keep your own balance while getting the competition off-balance. Counter-intuitively, the worst way to keep one’s balance is by directly resisting attack by a stronger competitor. In other words, if they push, don’t push back. Resistance at the point of attack is like arm wrestling—the strongest wins. If you are not the strongest, this approach is folly.
Instead, if they push, you pull. Or if they pull, you push. That way, you are doubling their force. And if you use proper leverage, you can direct that doubled force in a way which puts the opponent at a severe disadvantage. That is how tiny judo experts can flip to the mat a much larger and stronger opponent. The tiny one uses the opponent’s force to make the opponent lose their balance and then uses leverage to direct them to the ground.
In business, this means not directly retaliating in a price war or feature war or product war. Instead, help the opponent waste all of their resources in the attack and use the weakness which comes from that huge investment by the attacker. This is what Dow did in the opening story. They didn’t react to the price drop in the US to create a deadly price war. Instead, they stopped selling in the US and encouraged the competitor to continue their attack (pulling when pushed). This pulled the opponent off balance in Europe, where Dow used the goods they purchased in the US at a subsidized rate from the opposition to profitably undercut them in Europe.
In another example, one of Coke’s biggest strengths in the mid-20th century was its huge network of independent bottlers. This gave Coke a big advantage in the distribution of cola in 7.5 ounce bottles. Pepsi did not respond product for product, but responded by doing something different—offering 12 ounce bottles for the same price as Coke’s 7.5 ounce bottles.
Coke was now off balance. First, the independent bottlers did not want to write-off their huge investment in equipment to handle the small bottles. Second, because the bottlers were independent, Coke was having a hard time coordinating a quick national response. Pepsi had turned Coke’s big asset into a disadvantage and quickly gained a huge jump in market share.
The principles of Judo can help small companies gain an advantage over stronger competitors. The idea is to avoid head-to-head confrontations in places where the competitor is strongest. Instead, use speed to move the battle where the stronger opponent is weak/vulnerable and then use their own power against them to get the stronger player off balance and vulnerable.