Customer Reviews

Competition Demystified : A Radically Simplified Approach to Business Strategy

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This is an excellent text for investors wishing to develop their "circle of competence." Analysts often focus on the next earnings report but the most inefficient area of investing and hence the greatest rewards are what will be the value of a company in three to five to ten years. Throw out Beta and your Capital Asset Pricing Model and develop your valuation from a strategic perspective.

Does the company (your potential investment) benefit from barriers to entry? If it does, then what is the source of those competitive advantages: proprietary technical advantage, customer captivity and/or economies of scale? Does your company operate in an industry with market share stability, and does it have high returns on capital to confirm a competitive advantage like Coke and Pepsi in the Soft Drink Industry? If more than one company has a competitive advantage then how do they interact within their industry? If a company does not benefit from incumbent competitive advantages, then is management focused and running their business efficiently?

My point is not to summarize the book but to show the systematic analytical approach used. The authors go through numerous case studies and examples from the perspective of game theory, local economies of scale, branding, M&A, cooperation amongst competitors, competitive interactions, entry strategies and incumbent responses. The key is that you learn a process and approach to understand an industry and the interaction of competitors within that industry. Hence, you will expand your ability to grasp whether a potential investment has sustainable competitive advantages. As Mr. Buffett has often said, "How deep and wide is the moat around your castle?" Don't invest before you can answer that question. If you can't, then walk on by.

I recommend reading Michael Porter's books on strategy but I find this book superior in its clarity and focused approach. The book is almost 400 pages long and to absorb what the authors are imparting will take several careful readings. Strategic analysis even if simplified is not easy. It is more of an art than a science, but then why would the rewards be so great if the analysis doesn't take diligent effort?

By way of disclosure I have audited Professor Greenwald's-standing room only-- classes at Columbia University though I have never met him. He is a remarkably clear and entertainingly effective lecturer who uses recent business cases and events to illuminate his points. Though I am not a big fan of the typical MBA program which reminds me of the "Flat-Earth Society" instructing budding geographers-Beta and the other financial theories make no rational sense-Professor Greenwald's teachings have value. Investors can benefit if they learn how to assess the barriers to entry applicable to their companies.

This book is wonderful on the basics of competition and market analysis - especially on the role of barriers to entry. Most of the case analyses are strong. For this discussion alone, I would recommend the book to anyone in business. Some of the prescriptive advice/analysis on cooperating with competitors is puzzling. For example, at points it seems the authors believe that collusive agreements between competitors will not reduce innovation. That is hard to swallow. Everyone knows that without a real competitive incentive, R&D costs can and will be deferred in favor of other expenditures. Why improve the cow today, if you can milk the one you have and use the money to buy a beer? The case history on gas additives is silly. The authors admit that the FTC successfully challenged these people at least twice for illegal conduct. Why would their deals be cited as a model for anything that a law-abiding businessperson might consider doing "strategically"? It is not clear that the authors have a firm grasp of the antitrust laws (which can prohibit even "tacit" collusion) or the costs of an antitrust claim - they favor an approach to "competition" (wacking up markets) that runs very close to the line. Antitrust disclaimers are thrown in from time-to-time, but the legal limits of the suggested types of collusion are never adequately explored. Read this well-written book, but use it with caution (and a lawyer).

Greenwald lays out what he calls a simplified theory of competitive strategy," followed by analyses of a number of real-life situations. While the theory usually makes sense, Greenwald's application is not always as compelling.

"Competition Demystified" begins by observing that for at least the last half century, strategy has been a major focus of management concern. Sometimes enormous consequences flow from decisions not even thought to be strategic - eg. IBM's outsourcing creation of its PC operating system and CPU manufacturing. Regardless, effective strategy is central to business success.

Greenwald says that the first issue is selecting the arena of competition, and the second involves management of external agents. Barriers to entry is the area one should focus on first, and primarily in these analyses. If there are no barriers many strategic concerns can be ignored - the only option is to focus on being as efficient and effective as possible.

Greenwald believes that competitive advantages that lead to market dominance are much more likely to be found in a local arena (either geographic or product space). Further, there are only three kinds of genuine competitive advantage: supply (privileged access, proprietary technology protected by patents or experience), demand (eg. psychological or actual costs of switching - includes branding, loyalty programs, laborious setup and coordination issues), and scale economics.

An elephant (vs. ants) with a competitive advantage has as its priority to sustain what it has, and must recognize the sources and limits of its competitive advantages. Alternatively, companies with a competitive advantage may have potent competitors (eg. Coke - Pepsi, Boeing - Airbus). In this situation strategy formulation is most intense and demanding. They need to know what those competitors are doing and anticipate reactions to moves the company might make.

A common managerial axiom is to avoid commodity businesses - differentiate. However, Greenwald says that this doesn't work - Mercedes and Cadillac are clearly differentiated products, but their high original returns attracted new entrants (Lexus, BMW, Accura) and they now earn only average returns. (Another alternative is for existing competitors - eg. Lincoln - to expand; Lincoln, however was not successful in accomplishing this.) "Competitive Demystified" also notes that over-capacity, especially in a capital-intensive area - airlines, can create long-term poor profits. (This contradicts Southwest Airlines' success.)

Simple products and processes are not fertile ground for proprietary technological advantage. These are hard to patent (looks like "common sense") and easy to transfer (competitors could hire away employees). Similarly, technological advantages primarily provided by consultants or suppliers cannot be markets with substantial competitive advantages provided by technology.

The best strategy for an incumbent with economies of scale is to match the moves of an aggressive competitor - be they price cut, new product, or new frill. Any market share lost to rivals narrows the leader's edge. (Alternatively, competitive advantage based on customer captivity or cost advantages is not affected by market share loss.)

Greenwald believes that only a few industries have scale economies that coincide with global size - eg. Microsoft, Intel. Most are local. Meanwhile, growth of a market is generally the enemy of advantages based on scale.

Then, we come to application problems. My guess is that if American Airlines, etc. had tried to match Southwest's early fares in Texas (Greenwald's recommendation) they would have been found guilty of predatory practices under anti-trust laws, and severely hurt themselves economically in any case.

Greenwald comments negatively at length on Wal-Mart's decision to go national, pointing out that its financial returns fell when it did so, because its competitive advantage was mostly through local saturation, and not squeezing suppliers or superior distribution, etc. However, I cannot help but believe that if Wal-Mart had remained a regional phenomena it would not have the supplier leverage it has (Greenwald's financial review of this topic was overly superficial, at best); regardless, it would have been bought by a larger competitor (eg. K-Mart, Sears) and then probably atrophied in an alien management climate. Further, it probably would not earned sufficient funds to develop its computerized management systems for store replenishment and inventory control.

In Wal-Mart's case Greenwald forgot a basic rule of economics - maximum profits are reached by expanding until marginal revenues meet marginal costs. In addition, my understanding of the stock market is that maximum share price is attained through strong, steady profit growth (even if incurred at declining rates).

Other analyses within the book can be similarly attacked. My conclusion is that strategic planning is MORE complicated than Greenwald tries to make it out to be. Nonetheless, his book does provide useful background.

Every business student studies Corporate Strategy at one point or another. There are a huge number of books, articles, and prayers associated with this subject. Some classes become so complex that students sink from the weight of detail. Other classes are so superficial that the student walks away with what amounts to one of those tiny Swiss Army Knives with a blade, scissors, nail file, toothpick, and tweezers. Good luck with that!

If you are one of those that wants to get a handle on Corporate Strategy in a clear and usable way, this terrific book is for you. Bruce Greenwald teaches a very popular course on the subject at the Columbia Business School and offers this book to business practitioners and students alike. My own view is that he has given us a real gift. It isn't that I reject Porter, in fact I am a huge fan, but this gives us another approach to the subject and its complexities.

The book has 18 well organized chapters. If you have had a course on strategy you will recognize the topics and the progression. However, this book handles these topics in such insightful ways that you will find yourself nodding your head and seeing something familiar but for the first time. By that I mean, you will see something you already know with fresh and deeper insight so that it becomes new and more useful to you.

I also like the way Greewald (and Judd Kahn) use the examples from the business world. They aren't the typical b-school studies written to teach some key points. Sure, the stories provided here are used to illustrate specific points, but their real world complexities are shown and the ups and downs of the companies (see the story on Compaq, for example) are frankly shown. I enjoy that because too many books use the state of companies near the date of their publication to illustrate good or bad companies and managers. In fact, all companies have their ups and downs. Yes, bad executive management can destroy a company, but a company can have a great CEO and a good strategy and still have something go against them that puts real pressure on the company and its model.

The authors also use charts, tables, and graphs very effectively to make their points more clear rather than as eye candy. Too many texts insist on more graphics than necessary to hold the interest of students. For me, those books are cluttered. Here, the graphics add to the information we get from the text.

I think this is a book every business person will want on their shelf and will refer to again and again. The stories will stick in your memory and serve as exemplars or cautionary tales (or both).

Recommended!

Reviewed by Craig Matteson, Ann Arbor, MI

My two key takeaways from reading Greenwald's well-argued and counterintuitive premise are:
1. There are but a few fundamental sources of competitive advantage
2. Most companies can tap these sources at a local level (not a national or international level)

These show that the front-line manager - the regional coordinator of retail chain or the country manager of service firm - has the power (and the obligation) to pursue local competitive advantages. Greenwald provides a simple, intuitive method for helping such "front-line strategists" seek out a competitive edge.

I recommend this highly for anyone who aspires to be a strategist.

This is a fabulous book on learning about a company's moat. Warren Buffett coined this term, which simply means a competitive advantage. A moat protects the company's revenues from competitors just like a moat protected a castle from invaders. I found this book extremely helpful because it helped me with competition and market analysis. I also read Michael Porter's books and I enjoyed them very much, but this book was simpler to understand.

In this book, readers learn how to evaluate if the company has any benefits from barriers to entry and whether the moats come from a proprietary technical advantage, customer captivity or economies of scale.

For readers looking for more books on this subject, I also recommend The Little Book That Builds Wealth by Pat Dorsey of Morningstar. In his book, he describes that moats can come from intangible assets, switching costs, network effect, and cost advantages.

- Mariusz Skonieczny, author of Why Are We So Clueless about the Stock Market? Learn how to invest your money, how to pick stocks, and how to make money in the stock market

If you're an investor looking to improve your understanding of competitive advantages, buy this book. The discussion of local economies of scale alone is worth it. I found this book surprisingly more practical in evaluating the sustainability of superior margins at the firm level than Porter's four generic competitive strategies.

The book starts on the premise that competitive strategy is a complex subject and that Michael porter did give us a good structure/framework to analyze this phenomenon to succeed in the market place. Then the author is quick to add that among all forces analyzed by porter, "barriers to entry" is the most significant factor that affects competitive strategy. This is how the author sets the stage to explain "Competition Demystified"

With this quick and firm conclusion on the most significant factor affecting competitive strategy, the book starts off with case after case to justify this hypothesis. To simplify things, it looks at sustained profit margins and continuity of the key players in the given space as a proof for entry barriers. This approach is perhaps to support the second part of the title of the book "A Radically Simplified Approach to Business Strategy ". Granted that the cases discussed do justify the assumptions and are supported by hard facts or published numbers. But if competition lends itself to just a couple of variables, then every company can follow the strategy and hence no competition at all!. In fact one can say "The end of competition". Kindly recall "The end of history..."

The book however deserves praise for use of Game Theory in a simple non mathematical approach to analyze competitive situations and the behavior of the players. But again, this approach is just a part of the problem and not a full explanation of competitive strategy.

Given the speed of globalization and technological changes especially the internet in the last decade, the book fails to incorporate such forces that significantly affect the success of global firms.

Too voluminous, and fails to impress on what it sets out to accomplish.

There are so many excellent books already in print which focus on the formulation, implementation, and refinement of business strategy. (Several are identified within this book's Notes section.) That said, I remain convinced that senior-level executives should complete some due diligence on other volumes available by reading the comments on those which are rated highest in the Customer Reviews provided by Amazon. I also think it desirable to consult more than one source (preferably several) which seem most relevant to the specific circumstances within the given organization.

In this volume, Greenwald and Kahn succeed remarkably well with clarifying their readers' "understanding of strategy and to reframe their approach to it. We want executives to know how their markets work, where there competitive opportunities lie, and how to develop and protect them. To this end, we include both broad discussions of general principles and detailed case studies of actual competitive interactions. Taken together, we think they present a useful guide for people who make strategic decisions."

In large organizations, there are entire departments responsible for strategic planning. (Obviously, their efforts are supervised by senior-level executives and usually a board member or two.) In much smaller organizations, strategic planning may be conducted by the owner/CEO alone or by one or two executives. Whatever the situation, strategies are still "hammers" which drive "nails" (i.e. tactics) and invariably require both long-term commitments and substantial allocation of resources. Strategies are the cornerstones of plans for achieving and then sustaining success, plans which specifically focus on the actions and responses of competitors. Therefore, in essence, as Greenwald and Kahn correctly observe, "strategic thinking is about creating, protecting, and exploiting competitive advantages." That is as true of the family-owned neighborhood store as it is of a Fortune 500 company. The only major differences involve those of scale (e.g. operations and resources). However, I doubt that many owners of neighborhood stores will read this book.

I was especially interested in what Greenwald and Kahn have to say about business strategy at work within companies such as Wal-Mart, Coors, the Fox Network, and Kiwi Airlines as well as within others in direct competition: Compaq vs. Apple, Coke vs. Pepsi, and Kodak vs. Polaroid. I was also interested in what they have to say about mergers and acquisitions, venture investing, and brand extensions. In all organizations (regardless of size or nature), it remains imperative for their decision-makers to decide who their organization is...and who it isn't...before launching business development initiatives to become more successful, whatever the given competitive marketplace(s) may be. Greenwald and Kahn's final observation provides an appropriate conclusion to this commentary. In the absence of competitive advantages and barriers to entry, those initiatives have only one strategic imperative: "The efficient use of all the resources they require."

Places Porters 5 competive forces in proper context. Good overview, to the point, and a quick read. Chapter on valuation - NPV shortcomings is also good.