David against Goliath: How small companies could fight against bigger competitors

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David against Goliath How small companies could
fight against bigger competitors
Professor Costas Markides London Business School

February 2007
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The Evidence is Clear

• Most companies that try to enter a new market
  fail within a year. About 85 of them fail in 4
  years.
• This result applies for even the best and most
  powerful companies (e.g. IBM entering the copier
  market or Coca Cola entering the wine market)

• Most companies that try to move into a new
  country produce very mediocre results and often
  abandon their moves.
• This result applies for even the best and most
  powerful companies (e.g. Procter Gamble
  entering Japan or Dell Entering Europe)
• The majority of small companies that attack
  bigger competitors fail within one year. (It has
  been estimated that the probability that the
  largest firm in an industry will survive as the
  largest is 96 an almost certainty!).

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Why Such a Bad Record?

• Most companies look at their own strengths and
  competencies (that usually made them successful
  at home) and assume that these strengths will
  help them in the new markets or against bigger
  competitors.
• What they forget or underestimate is that the
  competitors that they attack also have advantages

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First-Mover Advantages

• Learning
• Economies of Scale
• Control of Scarce Assets (e.g. supermarket shelf
  or airport gates)
• Switching costs
• Resources to fight back
• Reputation
• Existing assets (such as distribution or brands)
• Political connections

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Yet, we have exceptions to these dire statistics

• USA Today
• Swatch
• Komatsu
• Federal Express
• Starbucks
• CNN
• First Direct
• Direct Line

• easyJet
• The Body Shop
• IKEA
• Rosenbluth Travel
• Edward Jones
• Canon
• E-trade
• Wal Mart

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All these companies succeeded by breaking the
rules of the game in their business - by doing
something fundamentally different from what the
established players do
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My First Key Point

• NEVER attack a bigger competitor head-on.
• The strategy that seems to improve the
  probability of success is the strategy of doing
  something different from the big boystherefore
  attack them by trying to break the rules of the
  game in the market.

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What Does This Mean Exactly?

• There are three main areas where you could
  attempt to attack a bigger competitor by
  avoiding them
• Go after a different customer to the customers
  that they focus on
• Offer a different Value Proposition to the
  customers
• Use a different value chain of activities.

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For Example
Which company is the biggest car-rental company
in the world?
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Hertz/Avis
Enterprise
Value-chain activities Location Airports Downtown
Push Marketing by Travel Agents Mechanics and
Insurance Companies Delivery Airport
Parking Lots Home Pick-up Car Drop-off Airport Ho
me Organisation Centralized Decentralized Custom
er Segmentation Business and Pleasure Replacement
and Travellers Discretionary Age of cars in
fleet Mainly New High Average age Price On
average, high Low
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ENTERPRISE is obviously breaking the rules
(i.e. doing something fundamentally different
in this industry). But what is the source of
this difference? Why did it come up with all
these different activities to pursue why do
they all make sense?
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ANSWER Compared to the traditional car-rental
companies, they have a different customer
in mind. They have strategically innovated
because they discovered a new WHO (customer
segment)
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Enterprise Rent-A-Car
replacement
travellers
discretionary
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Other Examples

• Barbie
• Edward Jones
• Lan Spar Bank
• CNN
• Honda
• Bright Horizons
• Progressive Insurance

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How Else to Avoid Head-On Competition?

• As the previous examples show, you can avoid
  head-on competition by targeting a different
  customer from your bigger rivals.
• But how else could you avoid them?

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Consider the market leader in mountain bicycles
in California.
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National Panasonic! How do they do it?
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National Panasonic has radically changed the
value proposition to the customer. Value
Proposition
Benefits to the Customer Price
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What is your value proposition to the
customer? Remember Every product (or service)
has many attributes and characteristics. The
established firms tend to emphasize the
feature that suits them, such as the
performance of the product. Pick another
feature to emphasize!
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For Example

• Swatch
• Starbucks
• LVMH
• Nespresso
• Body Shop
• Apple

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How Else to Avoid Head-On Competition?

• So far, I have argued that you can avoid head-on
  competition by targeting a different customer or
  offering a different value proposition.
• The third way of avoiding head-on competition is
  by employing a different value-chain of
  activities.

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How Do you Deliver Value to the
Customer? What distribution method do you use?
(e.g. First Direct) What inventory method do
you use? (e.g. Toyota) What manufacturing
method do you use? (e.g. Smart car/Levis) What
delivery method do you use? (e.g. IKEA) What
marketing method do you use? (e.g. Visa)
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How Do You Play the Game?
Dell Computers Toyota Taco Bell
restaurants Cemex Wal-Mart K-Mart (in the
1960s) General Motors (in the 1940s) Apollo
Synthetic Diamonds easyCinema
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Therefore
Think creatively about the Who-What-How questions
and come up with a unique positioning for you.
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Unfortunately, companies and individuals find it
difficult to be creative
Most companies tend to imitate each other We are
all blinded by our own strong beliefs and
assumptions (otherwise known as sacred cows or
mental models).
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Can you think of a word?

• __ ANY

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Can you think of a word?
MANY
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Can you think of a word?

• MANY
• __ENY

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Being Creative is more difficult than you Think!
Let me tell you, the solution is not to think
outside the box And its not to challenge and
question our assumptions
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Antony and Cleopatra

• Antony and Cleopatra are lying dead on the floor
  in an Egyptian villa. Nearby is a broken bowl.
  There are no marks on the bodies and they were
  not poisoned. No person was in the villa when
  they died. How did they die?

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Any Other Strategies that Work?

• Attacking by doing something different from the
  big boys (i.e. by breaking the rules of the game)
  is only one way to succeed against bigger
  competitors.
• Other Strategies that help are
• Buy time Build your competences first
• Use Allies
• Use the D-Day Analogy

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A clever strategy is not Enough!
Coming up with a clever little strategy is
obviously important. But its not the only thing
that you need to think about. Let me throw a
few more things at you to think about.
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From Strategy To Organisation
Even the best of strategies will fail unless
they are supported by the day-to-day behaviours
of all of our employees. The question then is
What determines how our employees behave?
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It is NOT only Knowledge that Determines our
Employees Behaviours!
The Priest Experiment Didnt the priests know
what the right thing to do is? If so, why didnt
they do it?
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IN GENERAL

• Just because you know something doesnt mean that
  you will do it!
• What determines how employees behave in a company
  is not knowledge but a host of other factors.

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What Drives Behaviours in Organisations?
Sumantra Ghoshal

• Downtown Calcutta
• Versus
• Downtown Fontainebleau

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The Moral of the Story
The underlying environment of your organisation
creates the behaviours that we/you see in your
organisation.
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The Right Underlying Environment for your
Organisation
Culture and Values
How we Behave in our company
Structures and Processes
Measurement and Incentives
People, (skills, attitudes, mindsets
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The Importance of Incentives
What gets measured gets done
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The Importance of Values
Imagine being behind enemy lines. Would you
shoot innocent children women?
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The Importance of Structures Processes
The priest experiment
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The Importance of People
(a) Attitudes
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Attitude
They will do it OR We will do it OR I thought
somebody else will do it
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Social Loafing
5 4 3 2 1
shouting
X
clapping
Sound pressure per person
X
X
X
X
X
1 2 3 4 5 6 7 8
9
Group Size
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Examples of Social Loafing

• The murder of Kitty Genovese, New York City, 1964
• The death of Marco Moretti in an Italian tunnel
  and the adventures of his 6-year old daughter,
  Vanessa
• Experiments by Latané Dabbs (1975) in elevators

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The Importance of People

• Attitudes
• Mindsets

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SUMMARY

• What have I really said so far
• The Underlying Environment of your organisation
  drives the behaviours that you see in your
  organisation.
• The underlying Environment is made up of four
  inter-related components incentives, culture,
  structure and people.

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Why is this Important for Strategy?
Remember Strategy is nothing more than the
difficult choices that you have made. But It is
the behaviors of our employees that give life to
Strategy.
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Why is this Important for Strategy
The day-to-day behaviours of your people can
either support or undermine your strategy
Creates the behaviours you see in that
organization
The Underlying Environment of your organization
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Strategy and Organisation is not Enough!
Coming up with a clever little strategy is
obviously important. Equally important is the
need to put in place the appropriate
Organisational Environment to support this
strategy. But theres more that needs to be done!
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From Organisation To People
Even the best of strategies will fail unless
employees are emotionally committed to them. To
win their emotional commitment, we need to not
only communicate our strategy but sell it to them
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What are the physical symptoms when you have
actually been successful in winning your peoples
emotional commitment?

• Energy
• Passion
• Fun
• Pride
• Working together as a strong team

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HOW TO WIN EMOTIONAL COMMITMENT
I KNOW I UNDERSTAND YES, I THINK I CAN I WILL
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From Organisation To People
What Else could we do with our people to enhance
our competitiveness?
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Just an Observation
You can find energetic people even in the heat
and humidity of downtown Calcutta in July and
you can find zombies even in the refreshing
environment of the forest of Fontainebleau in the
Spring!
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Attitudes to Look Out For

• Social Loafing Somebody else will do it
  (remember the priest experiment?)

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Attitudes to Look Out For

• Social Loafing.
• Conformity we dont like to stick our necks
  out!

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Conformity
Line A
Line 1
Line 2
Line 3
Line A is equal in length to Line 1 Line A is
equal in length to Line 2 Line A is equal in
length to Line 3
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Results

• On one-third of the trials, the subject conformed
  to the incorrect majority view
• When the size of the group was only 2 people, the
  subject never changed his/her position
• When the size of the group was 3, the subject
  conformed to the majority view, 13 of the time
• When the size of the group was 4, the subject
  conformed on 33 of the trials
• The addition of one more dissenter, reduced
  conformity to one fourth of what it was before.

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Attitudes to Look Out For

• Social Loafing.
• Conformity We dont like to Stick our Necks out!
• Too busy doing our own jobs to consider doing
  something else.

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• Can You Spot the Gorilla?
• Source www.viscog.com
• Richard Wiseman Did You Spot the Gorilla?
  London Arrow Books, 2004, page 6.

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Attitudes to Look Out For

• Social Loafing Somebody else will do it.
• Conformity We dont like to stick our necks out!
• Too Busy doing our own job.
• Strong beliefs and entrenched ways of thinkingwe
  think we already know.

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A Simple Exercise
Count from 1 until 100. How many numbers with a
9 can you find? (30 seconds).
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The Effect of Strong Beliefs on Us?
They make us efficient They make us passive
thinkers
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A Few Additional Examples of automatic behaviour
Writing a cheque in January with last years
date Driving past your house on the way back from
work The firing of guns by the British artillery
during World War I.
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The Effect of Strong Beliefs on Us?
They make us efficient They make us passive
thinkers They make us reject information that
does not fit with what we already believe in.
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Attitudes to Look Out For

• Social Loafing.
• Conformity.
• Too busy.
• Entrenched Ways.
• Fear what if I mess up.

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Attitudes to Look Out For

• Social Loafing.
• Conformity.
• Too busy.
• Entrenched Ways.
• Fear what if I mess up.
• Cognitive and Judgement Biases

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Cognitive and Judgement Biases

• We attribute good outcomes to our skill and bad
  outcomes to luck (therefore, we are less likely
  to learn from our mistakes simply because we do
  not see them as mistakes)
• (2) Over-Optimism and Over-Confidence
  
  (we believe that the accuracy of our forecast
  increases with more information).
• (we find it difficult to change views or
  position)
• Confirmatory bias
  
  (we tend to look for
  information that agrees with what we believe and
  reject information that does not fit).
• Anchoring
  
  (we tend to make
  decisions relative to an incorrect point of
  reference. (e.g. the past)

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Attitudes to Look Out For

• Social Loafing.
• Conformity.
• Too busy.
• Entrenched Ways.
• Fear what if I mess up.
• Cognitive and Judgement Biases
• Inertia Thats how we do things around here

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The Monkey Experiment
Put 5 monkeys in a cage. Hang a banana from the
top of the cage. Put stairs underneath itwhat
happens?
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And Now for my Last Word
I have told you many things about growing your
businesses and about innovation. Hopefully, you
now know some new things that you did not know
when you came here. However .
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Will you Do Any of this?
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MESSAGE
Even though I know that you accept many of my
previous messages you are still NOT going to
anything!
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Knowing is not Enough!
Most times, we know what we have to do. We simply
do not do it.
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The Knowledge - Doing Gap
Profits
A
Time
B
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The Sources of this Disease

• Spies
• Priorities
• Downtown Calcutta vs Downtown Fontainebleau

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When Do Organizations Change?
Successful organizations always talk about
changing they never do it until a crisis hits
them. Dont wait for the crisis to hit you.
Galvanize your organization into active
questioning by creating a positive crisis even
when you are successful.
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Is this Enough?
Of course it is not enough! But it is a
start. And Remember The future belongs to those
who dare take chances!