THE STORY
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.
