Competition Demystified: A Radically Simplified Approach to Business Strategy
Business strategy is often shrouded in complex frameworks, grand theories, and buzzwords that promise to explain a company's success or failure. The Competitive Advantage by Bruce Greenwald and Judd Kahn cut through the fog. Their core argument is simple: the cornerstone of strategy isn't growth, differentiation, or visionary leadership, but competitive advantage — specifically, the presence or absence of barriers to entry. Everything else flows from it.
Chapter 1: Strategy, Markets, and Competition
Bruce Greenwald and Judd Kahn open by distinguishing true strategy from mere long-term planning. Many companies formulate elaborate plans to boost sales or expand, but the authors argue that such plans only qualify as strategic if they account for competitors’ responses. If a plan focuses purely on internal improvements (cutting costs, new marketing, etc.) without considering how rivals will react, it’s tactical rather than strategic. Real strategy, in their view, “looks outward ” – it’s fundamentally about positioning the firm in relation to competitors and potential entrants.
This leads to a key insight: whether strategy matters at all depends on the competitive environment. In markets with no barriers to entry, many players can copy each other’s moves freely. No company can sustain an edge, so trying to “out-strategize” rivals is futile. In such level playing fields, the only winning approach is to outrun competitors through operational efficiency, since any innovation is quickly imitated. Here, firms should focus on being the lowest-cost or best-run producer, not on complex competitive maneuvers. On the other hand, in markets where a company does have a competitive advantage, strategy is crucial. If a firm can do something competitors cannot easily do, it has a protected position – a moat – and the game shifts to defending and exploiting that advantage. The authors emphasize one question above all: “Are there barriers to entry that allow us to do things other firms cannot?” If no, focus on efficiency or exit to a better market; if yes, concentrate on how to preserve that barrier and keep competitors at bay.
Greenwald and Kahn credit Michael Porter’s famous Five Forces framework for bringing attention to industry structure, but they simplify it drastically. In their view, one force dominates all others: barriers to entry. While supplier power, buyer power, substitutes, and rivalry matter, none is as critical as whether new competitors can easily enter your market. If entry is blocked or difficult, firms can earn sustainable profits; if entry is free, profits will be driven down in the long run. Thus, barriers to entry = competitive advantages – the structural reasons a company can fend off competitors. This radically simplified lens sets the stage for the rest of the book. The authors outline three goals of good strategy: (1) identify your competitive environment and any advantage you have, (2) manage interactions with rivals and newcomers effectively, and (3) develop a clear vision for the company’s future that builds on its advantage. In short, Chapter 1 frames strategy as the art of understanding where your moat lies – or accepting you don’t have one – and acting accordingly.
Chapter 2: Competitive Advantages I – Supply and Demand
Having established that true strategy revolves around competitive advantage, the authors next explain how to recognize genuine advantages. First, they offer two empirical tests for the presence of a moat: stable market share and high profitability. If, over several years, the top few firms in a market consistently hold their positions without much churn, it’s a sign that newcomers aren’t easily displacing them. Likewise, if one or more firms earn returns on capital well above the norm (say 15–25% after-tax) for years while others struggle to break even, something is shielding those high returns. In truly competitive markets, market shares shuffle and profits quickly revert to average (roughly 6–8% returns). Stable shares + superior returns = likely barriers to entry.
What creates those barriers? Greenwald and Kahn assert there are only three kinds of genuine competitive advantage, and Chapter 2 covers the first two: supply advantages and demand advantages. A supply advantage means a company can produce at lower cost than competitors, in ways they can’t easily copy. This could come from proprietary technology, unique assets, or superior processes. For example, a patented invention gives a temporary cost or pricing edge (until the patent expires). Owning a rare resource (like a low-cost raw material source or a geographically strategic location) can also keep costs below what others must pay. Even absent patents, know-how can be a supply advantage – if a firm masters a complex manufacturing process through years of learning, rivals may struggle to catch up. However, the authors caution that pure production advantages tend to be the weakest and least durable moats. Technology diffuses, talent can be hired away, and “in the long run, everything becomes a toaster,” meaning today’s high-tech gadget will eventually become a common commodity. Still, while it lasts, a cost advantage deters entrants: a low-cost incumbent can slash prices and still profit, which scares off would-be competitors who can’t survive those price levels. Classic examples include companies like Xerox or Polaroid, which for years enjoyed cost superiority through patents and R&D, or pharma firms with exclusive drugs. But as patents expired or new technologies emerged, those moats shrank.
Demand advantages, the second type, revolve around the customer side of the market – often termed customer captivity. Here, a firm isn’t necessarily the lowest-cost producer, but it enjoys loyalty or lock-in that keeps customers from switching to the competition. Greenwald and Kahn identify three main sources of customer captivity: habit, switching costs, and search costs. Habit means buyers repeatedly purchase a product without re-evaluating alternatives, simply because it’s what they’re used to. This is common for everyday consumer goods. A trivial example: someone who’s drunk Coca-Cola for years might not seriously consider trying a new cola – they reflexively reach for Coke. Habit can be amazingly durable (think of brands like Heinz ketchup or Kellogg’s cereal that families stick with for generations). However, habit usually sticks only until a new generation of customers comes along; new buyers have no allegiance, so an incumbent must continually reinforce habit through marketing and availability. Switching costs make it painful for a customer to change providers. In enterprise software, for instance, retraining staff or converting data to a new system might be so costly and disruptive that companies stay with an imperfect incumbent product rather than switch. High switching costs effectively trap customers, giving the incumbent a captive base (as seen with many business software suites or equipment that requires proprietary consumables). Search costs occur when finding a new supplier or product is difficult and expensive, so customers tend to stick with what has worked before. Professional services often fall into this category – choosing a doctor, lawyer, or consultant is hard to do on purely objective criteria, so once you find one you trust, you’re unlikely to keep shopping around. In all these cases, the firm benefits from a demand-side moat: competitors can offer a similar (or even superior) product, but many customers won’t defect due to psychological inertia or the real costs of switching.
The authors stress that branding alone is not a sufficient moat. A powerful brand helps create habit or perceived lower risk (which relates to search costs), but if there’s no real cost to trying an alternative, branding won’t stop rivals from eroding a company’s market share over time. For example, Mercedes-Benz has a prestigious brand and loyal fans, yet luxury car buyers will consider Lexus or BMW – Mercedes’ returns on capital ended up merely average, because brand appeal didn’t equate to an unassailable barrier. True demand advantages often involve structural loyalty: e.g., consumers hooked on Coca-Cola’s flavor since childhood (habit) or enterprises deeply integrated with Microsoft Office (high switching cost due to training and file compatibility). These advantages can last longer than pure cost moats, but they too have limits. Customers die or change tastes, new generations are “up for grabs,” and switching costs can be lowered by technology shifts (for instance, cloud software has made switching easier in some cases). Thus, a firm with captive customers must keep working to maintain that captivity – through product updates, loyalty programs, or other means. For instance, companies increase switching costs by creating ecosystems (Apple’s integration of devices and services), or by loyalty rewards that increase with continued use (airline frequent flier programs).
In Chapter 2, Greenwald and Kahn essentially debunk the idea that “differentiation” alone guarantees success. Many managers believe simply being different will keep competition away, but the authors point out that differentiation usually has a cost (better features, more marketing) and if there are no entry barriers, competitors can also differentiate in response. The case of Mercedes above or any number of premium brands shows that in an open market, multiple players will coexist and push returns down, fancy brand or not. Real protection comes when competitors cannot replicate what you’re doing – either because you have a cost structure they can’t match, or your customers won’t leave you. Those are the twin pillars of competitive advantage introduced here, to be joined by a third pillar (economies of scale) in the next chapter.
Chapter 3: Competitive Advantages II – Economies of Scale and Strategy
The third and often most powerful type of competitive advantage arises from economies of scale – especially when combined with a bit of customer captivity. An economies-of-scale advantage means that a company’s unit costs fall as it serves more volume, making it increasingly efficient versus smaller rivals. What’s crucial, Greenwald and Kahn note, is not absolute size in the world, but relative size in a relevant market. If you are significantly larger than your competitors within the market you compete, you can spread fixed costs over more sales and undercut them on price (or enjoy fatter margins). Scale can apply in production (e.g., a bigger factory yields lower cost per unit) and in distribution or marketing (a larger sales volume lets you buy ads or shipping in bulk, or operate more efficiently per customer). However, a key insight is that scale advantages tend to be local and specific. There is often a natural scope or geographic reach beyond which scale no longer gives a benefit. For example, a single huge steel mill might minimize unit costs up to a point, but if you build one twice as large as needed, you just have unused capacity – being too big doesn’t help if demand doesn’t justify it. Similarly, a retailer like Walmart gained an edge by dominating regions one at a time (lowering per-store logistics and oversight costs), not by trying to cover the whole country overnight.
Greenwald and Kahn argue that the most durable moats usually involve combining economies of scale with a degree of customer captivity. If a company is big and its customers are sticky, a rival can’t simply match its scale by luring those customers away – the incumbent’s sheer size and loyal base form a reinforcing moat. Classic examples: Microsoft and Intel in the 1990s. Their markets (operating systems and microprocessors) were subject to network effects and learning curves, favoring one or a few big winners. Microsoft’s Windows OS benefitted from millions of users (scale) and the fact that users and software developers were locked in by compatibility needs (a form of switching cost/captivity). Intel similarly used huge R&D and manufacturing scale to stay ahead, while computer makers were reluctant to switch away from the “Wintel” standards due to customer expectations. The result: both firms enjoyed duopoly-like high returns for decades.
But scale advantages have a vulnerability: market growth can undermine them. If an entire market rapidly expands, an incumbent that was once dominant may find that fixed costs become a smaller portion of total costs industry-wide (so scale matters less) and that a bigger pie allows entrants to reach efficient scale more easily. The authors give a counterintuitive warning: “growth of the market is generally not a good thing for a scale-based competitive advantage.” As new customers pour in, by definition they have no loyalty yet (eroding captivity), and the incumbent’s percentage of the market might fall even if its absolute sales rise. A rival can target those new customers and achieve a viable scale of its own. For instance, if a local business with a quasi-monopoly suddenly sees demand in its region double, that might attract a competitor who can now get enough volume to operate efficiently. In contrast, a stagnant or slow-growing market is ideal for an incumbent with scale – would-be entrants see little opportunity to carve out a profitable share, and existing customer loyalties are more entrenched. This insight explains why dominant firms sometimes paradoxically prefer a stable or even shrinking market (where they can milk profits) to a booming one that invites competition.
To defend a scale advantage, an incumbent must be vigilant. If a smaller rival introduces a new product feature or a price cut, the dominant firm should match it swiftly – “price cut for price cut, new product for new product, niche by niche.” The idea is to never allow a competitor to gain a foothold that could snowball. For example, if Pepsi starts gaining share via a new flavor or package size, Coke needs to quickly offer something similar to prevent Pepsi from exploiting that niche. Scale moats can be eroded incrementally if the leader cedes little pockets of the market. Chapter 3 highlights mistakes where incumbents failed to respond: the authors mention how American carmakers ignored Japanese inroads in small cars in the 1970s, or how U.S. motorcycle firms let Honda capture the low-end market in the 1960s – in both cases, entrants started small but grew big. A vigilant incumbent would instead preempt or imitate such moves to deny challengers any advantage.
Greenwald and Kahn also underscore that scale advantages are context-bound. A company dominant in one area can falter badly if it ventures into another where it lacks scale. They cite Coors beer as an example: Coors was immensely profitable when it was a regional brewer in the 1970s, enjoying local economies of scale (one giant brewery serving a concentrated market). Once Coors expanded nationally, it lost that local density and its costs rose to the level of larger national competitors, erasing its edge. Similarly, Walmart thrived by saturating one region at a time with stores, which kept distribution efficient and advertising per store low; when it later expanded globally, it struggled to replicate those advantages overseas. The lesson is that being big in a defined arena (be it a geography or product niche) is what counts. If you spread yourself too thin chasing growth, you might end up smaller relative to each market you play in, thereby weakening your economies of scale.
By the end of Chapter 3, the authors have outlined the three fundamental moats: cost (supply) advantages, customer captivity (demand), and economies of scale. They note that the strongest advantages often involve an interplay of these factors. For instance, a company might leverage scale plus customer loyalty to create a fortress (like an airline dominating a hub city, benefiting from being the biggest at that airport and being the preferred choice of local fliers). In contrast, generic cost advantages (like a slightly better process) or simple product differentiation without lock-in are usually transient. The overarching principle is that strategy should focus on structural barriers – things competitors cannot easily imitate – rather than just on operational excellence or innovation for its own sake. If none of these advantages exist in your industry, the advice is blunt: don’t waste time strategizing, just run the business as efficiently as possible, because the market won’t let anyone win for long. But if you do have one of these advantages, everything – from pricing to expansion plans – should revolve around maintaining and leveraging it.
Chapter 4: Assessing Competitive Advantages
Now the book turns practical: how can managers or analysts figure out if a company truly has a competitive advantage, and what it is? Greenwald and Kahn propose a three-step process for strategic analysis:
- 1. Draw the industry map: Define the relevant market and break it into segments, identifying major players in each. Often what we call an “industry” is actually several distinct segments with different dynamics. For example, the broad PC industry can be segmented into components (CPUs, hard drives), operating systems, and PC assembly, each with its own leaders. By mapping segments, you avoid painting with too broad a brush and can pinpoint where a company faces which competitors. This step is about understanding who competes with whom, and on what.
- 2. Test for competitive advantages in each segment: Using the tests from Chapter 2, look at market-share stability and financial performance of each segment’s leaders over a meaningful period (say a decade). If you see dominant firms holding share and earning high returns, that segment likely has barriers to entry. If instead market shares shuffle and everyone’s profits are middling, it’s a competitive free-for-all with no strong moats. This data-driven check prevents wishful thinking. For example, in the personal computer assembly segment, you’d observe that dozens of manufacturers came and went, and margins were razor-thin – a clear sign of no advantage there. By contrast, in PC operating systems, one firm (Microsoft) kept ~90% share for years and enjoyed monopoly-like margins – a sign of a formidable advantage (high switching costs and network effects). The authors suggest focusing on a 5–10 year horizon for these metrics to distinguish structural advantage from short-term luck.
- 3. Identify the source of each advantage: If the second step flags that a segment has one or two companies with persistently strong positions, dig into why. Is it a cost advantage (e.g., a patented process, economies of scale)? Is it customer captivity (brand loyalty, high switching costs)? Is it a regulatory protection (like licenses or quotas)? Recognizing the type of advantage is vital because it tells you how durable it might be and what strategies will nurture or threaten it. For instance, if a firm’s advantage comes from a technology patent, you know the clock is ticking until expiration, and you’d strategize to develop new IP or convert that tech lead into customer loyalty before the patent runs out. If an advantage comes from economies of scale in a region, you’d be careful about expanding too fast and diluting that density (as Coors did). The absence of an obvious structural factor, despite good performance, is also telling – it suggests the firm’s success might be due to operational excellence or luck, not a true moat. In such cases, one should be wary because competitors can replicate best practices and erode those results.
To illustrate this process, the authors walk through a case study – analyzing Apple’s position in the personal computer industry around the early 2000s. By mapping the PC industry, they separate it into segments like hardware, operating systems, and microprocessors. They observe that in most of these segments, Apple was not the dominant firm (Microsoft dominated OS, Intel dominated CPUs, various OEMs dominated hardware by sub-markets). When applying the performance tests, the PC manufacturing/assembly segment showed no stable top dog – companies like IBM, Compaq, HP, and Dell were all competing and saw shifting fortunes, with fairly average returns, indicating no strong barriers there. In operating systems, however, Microsoft’s quasi-monopoly and high margins screamed “competitive advantage present.” Apple in that era had its own proprietary OS and hardware, which served a niche (graphics, education, etc.) but remained a small fraction of the overall market. The authors conclude that Apple lacked a broad competitive advantage in the PC segment – its market share was small and not growing, and it was up against the entrenched advantages of others. In their blunt words, “In the PC industry, Apple is going nowhere.” (Of course, history took a twist with smartphones and iPods soon after, but within the traditional PC space, their analysis was on point at the time.) The takeaway is that Apple’s great products and loyal fans did not amount to a structural moat in the computer market then, which had become dominated by Wintel standards. Thus, a clear-eyed strategic assessment would advise against expecting Apple to defeat the Microsoft/Intel stronghold in PCs; Apple would either need to find a new advantage or continue as a niche player.
Greenwald and Kahn encourage doing this kind of analysis for any business: map it out, find the segment where it truly dominates (if any), and understand what underpins that dominance. If you can’t find one, assume the company has no enduring competitive advantage and plan accordingly (i.e., focus on efficiency and avoid heavy investment that banks on rosy long-term profits). Chapter 4 effectively gives readers a blueprint for separating companies with moats from those just riding temporary good fortune. It’s a reality check – many firms praised for their strategy might simply be in a good industry cycle or executing well at the moment, but without a moat, those profits will attract competition and likely shrink. The authors want strategists to zero in on the hard facts of competition structure, not get distracted by hype or surface-level differentiation.
Chapter 5: Big Where It Counts – Walmart, Coors, and Local Economies of Scale
With the theoretical groundwork laid, the book shifts into a series of case studies to show these principles in action. Chapter 5 highlights how economies of scale can drive competitive advantage, particularly when they are localized. Two seemingly very different companies – Walmart and Coors – both illustrate the power and peril of scale.
In the 1960s and 70s, Walmart was a scrappy upstart in discount retail, competing against national chains like Kmart and Sears. Conventional wisdom credited Walmart’s success to various factors (a frugal culture, savvy merchandising, IT systems, etc.), but Greenwald and Kahn argue that those were secondary. Walmart’s true edge came from local economies of scale. Sam Walton expanded methodically outward from a regional base – starting in Arkansas and then neighboring states – rather than scattering stores nationwide. By concentrating its stores, Walmart achieved high market share in each local area well before it was a national giant. This dense presence translated into tangible cost advantages. Walmart could build distribution centers close to clusters of stores, enabling its famous daily truck deliveries – each center economically served nearby stores within a one-day drive. In contrast, competitors like Kmart had stores spread all over; a single Kmart distribution hub had to cover huge territories, raising transport costs and often requiring longer inventory pipelines. Walmart’s distribution cost per store was lower, meaning shelves could be restocked faster and cheaper. Similarly, advertising costs were lower for Walmart on a per-dollar-of-sales basis – it could blanket a local TV or newspaper market and reach a high proportion of its potential shoppers, whereas a rival with only one or two stores in that region would waste ad money reaching many people who weren’t near a store. Even management efficiency was better: Walmart’s district managers could drive between stores in Arkansas within hours, spending lots of time on-site coaching employees, whereas a geographically dispersed chain needed more layers of supervision and travel time to cover its far-flung outlets. The net effect was that Walmart enjoyed lower operating costs and could charge lower prices, fueling a virtuous cycle of gaining more local market share and further entrenching its economies of scale. At one point, Walmart was only one-tenth the size of Kmart in total sales, yet in regions where it operated, it was outperforming and growing fast – proof that being “big” in a focused area beat being “big” in aggregate but thinly spread. Kmart’s national coverage came at the expense of local dominance, making it actually less efficient in any given market than Walmart. Over time, Walmart simply replicated this local scale model in new regions, and Kmart couldn’t respond effectively. The lesson is clear: dominance in a region or niche (big where it counts) can trump a larger but less concentrated competitor.
The Coors story serves as almost a mirror image – demonstrating what happens when a company with a local scale advantage abandons it in pursuit of growth. In 1975, Coors was a regional brewery (mainly in Colorado and nearby states) with a legendary mystique and extremely strong performance. With just ~8% of U.S. beer market share (dwarfed by Anheuser-Busch or Miller nationally), Coors nevertheless earned 11% net profit margins, double that of bigger rival Anheuser-Busch at the time. Why? Coors had effectively monopolized its local markets. Operating from a single, very large brewery in Golden, Colorado, Coors kept distribution mostly in a confined area, minimizing shipping distances. Its marketing was regionally targeted (and boosted by a certain cachet – Coors wasn’t even available in many states, which strangely increased its allure). As long as Coors stayed regional, its costs stayed low and it suffered little competition in its stronghold. But in the late 1970s and 1980s, Coors embarked on a national expansion – a decision the authors argue was a grave mistake. A decade later, Coors still had only 8% national share, but it was now incurring the full costs of a national player: it had to ship beer long distances (raising freight costs and requiring more breweries or distribution centers), advertise across the whole country, and manage a far-flung wholesaler network. Its once-fat margins shriveled to the level of its large competitors – Coors’ profitability fell from 11% to around 4% by the mid-1980s and never recovered its old dominance. In essentially the same period, Anheuser-Busch (which had economies of scale nationally and kept expanding them) improved its margin from 5% to 6%, and by 2000 was at 12% while Coors was at ~5%. Coors discovered the hard way that its advantage was tied to a regional scale that couldn’t simply be stretched coast-to-coast. Once it left its “local fortress,” it faced the big boys on equal footing and lost what made it special. The authors note that Coors might have done better by sticking to its core region or expanding much more cautiously, maintaining pockets of dominance rather than going everywhere at once.
From these cases, Chapter 5 drives home a vital strategic point: scale advantages often depend on maintaining density or focus. Walmart’s genius was expanding while preserving local economies of scale – essentially cloning its fortress model in region after region. Coors’ folly was chasing growth in a way that destroyed the local scale benefit it had. For strategists, the implication is to carefully identify the scope at which your scale matters (city, region, product line) and expand adjacently from there, rather than leaping into markets where you’ll be just another player. A company should ask: Where can we be number one or two with a comfortable margin? That’s where scale pays. Conversely, if you’re going to be a minor player in a market, don’t expect scale-based cost advantages – you might be better off not competing there or finding another angle (like a niche product focus or differentiation if scale won’t work). As the authors put it, “Most competitive advantages based on economies of scale are found in local or niche markets. The best course is to establish dominance in a local market and expand outward.”
Chapter 6: Niche Advantages and the Dilemma of Growth – Compaq and Apple in the PC Industry
Growing a business is usually seen as a good thing, but Greenwald and Kahn caution that growth can be a double-edged sword – especially if it outpaces your competitive advantage. Chapter 6 examines how companies with niche advantages fared as their markets expanded dramatically, focusing on the personal computer boom of the 1980s and 90s. The stories of Compaq and Apple illustrate what the authors call the “dilemma of growth”: a strategy that works in a small, defined market may falter when scale and scope increase.
Compaq was founded in 1982 and quickly gained success by building high-quality, IBM-compatible portable computers (and later desktop PCs). In the early days of the PC industry, this was a lucrative niche – IBM had set technical standards, but independent startups like Compaq could compete by offering better design or service to corporate customers, at premium prices. Compaq’s strategy of compatibility + quality was an initial competitive advantage; it became known for reliable, well-engineered PCs and carved out a loyal base in the business market. During the mid-1980s, Compaq grew rapidly and profitably, outpacing many other PC “clone” makers. However, the PC market itself was exploding: industry sales grew at double-digit rates annually. With such growth, many new competitors entered – some focused on low cost (like Dell with direct sales), others on various niches. Importantly, as volumes soared, specialized suppliers emerged for every PC component, eroding any advantage an integrator like Compaq had in engineering its own parts. Over time, what had been Compaq’s edge (designing in-house for quality) became a disadvantage: competitors could buy motherboards, drives, etc. more cheaply from third-party manufacturers and still meet quality benchmarks. Compaq’s initial advantage “disappeared as the market grew,” because scale shifted to the component makers and economies of scale in standard components made Compaq’s all-in-one approach less special. By the 1990s, Compaq faced brutal price competition and lost its differentiation; its profits shrank. The company tried to respond by focusing on operational efficiency (streamlining manufacturing and later acquiring Digital Equipment Corp. to move into servers), essentially admitting that it no longer had a moat and needed to compete on execution. Compaq did remain a major player and a respected brand for a while, but ultimately it couldn’t sustain high returns – it was acquired by HP in 2002. The rise-and-flameout of Compaq underscores that a niche strategy that doesn’t build a lasting barrier will be outscaled in a booming market. When an industry is young and fragmented, a superior product can yield big profits; but if the industry becomes huge and competitors swarm, today’s niche leader can become tomorrow’s just-average firm unless it secures some unique asset or loyalty.
Apple during 1980–2000 provides a slightly different angle on the growth dilemma. Apple was a pioneer, controlling its own ecosystem (hardware + operating system + peripherals). It always had a smaller market share compared to the IBM/Microsoft “Wintel” standard, but it dominated certain segments (graphic design, education) and had a fiercely loyal following. One might call Apple’s advantage “differentiation with customer loyalty” – its products were distinct (Macintosh’s GUI, ease of use, integrated design) and it had some captivity (creative professionals using Mac-specific software, for instance). However, Greenwald and Kahn’s analysis in the late 90s concluded that Apple lacked a true competitive advantage in the broader PC market. Why? First, Apple’s share in each “segment” of the PC world was relatively small – it operated in multiple arenas (home computers, education, professional workstations), but in none was it overwhelmingly dominant in a way that conferred economies of scale. Second, while Apple’s users were devoted, the overall pool of new PC buyers was growing so fast (with millions of first-time computer owners in the 90s) that Apple’s base couldn’t lock up the market. Most new customers were going to Wintel PCs, which were cheaper and supported by a vast library of software. Apple’s closed system, paradoxically, gave it full control over its user experience but also isolated it – software developers and peripheral makers mostly catered to the larger Windows market, reinforcing a network effect around Wintel that Apple couldn’t crack. Essentially, Apple had a product differentiation and brand loyalty advantage, but not a structural barrier that prevented competitors from selling a similar PC (indeed, Windows 95 imitated many elements of the Mac GUI). Apple’s small scale meant its costs were often higher (fewer units to spread R&D and marketing over), forcing higher prices which limited market share – a vicious cycle. The authors pointed out that Apple was confined to a high-end niche without leverage to take the mass market, and thus its returns were not spectacular in the long run. (By 2004, Apple’s global PC share was in the low single digits, and it had gone through financial peril in the late 90s before reinventing itself with the iPod and later the iPhone – a story beyond this book’s scope.)
The common theme from Compaq and Apple is that rapid market growth tends to undermine initial niches. If a firm’s early success is based on doing something slightly better or different, a booming market attracts others who can copy the best features, drive down prices, or segment the market in new ways. Early movers often enjoy a sweet spot of high margins before the floodgates open. But as the industry matures, advantages often shift to those with the strongest structural position (scale, platform control, etc.). In PCs, the winners turned out to be Microsoft and Intel – not because they had the best products for consumers initially, but because they sat at choke points in the value chain (OS and CPU standards) that scaled phenomenally with the market. Apple and Compaq, for all their innovation, were outpaced by the tectonic pull of those standards.
Greenwald and Kahn’s advice here can be interpreted in two ways. For an investor or executive, be wary of businesses in rapidly growing markets unless they have a clear moat. High growth might look attractive, but if it’s not accompanied by high and stable market share, your competitive advantage may evaporate. For a company with a niche advantage, carefully consider how to grow. Some strategies to handle growth include replicating the niche in new markets (like Coca-Cola expanding globally with local bottling moats – an example they mention of replicating local advantage), or expanding the product space (like Intel steadily moving to more advanced chips as computing needs grew). Another is expanding from the edges of your dominant position (like Walmart did region by region, or Microsoft leveraging its OS dominance into Office software). These approaches ensure you are growing with your advantage, not beyond it. What Compaq did – trying acquisitions and broadening product lines to chase growth – arguably took it outside of any protective moat and into direct firefights with Dell, HP, IBM, etc., on efficiency terms. Apple eventually solved its dilemma not by outgrowing the PC market, but by creating new markets (portable music players, smartphones) where it could establish a fresh advantage. In the context of Competition Demystified, the message is: choose your battleground carefully. If you have a niche advantage, you may need to accept limits on growth to keep it, or find a way to transform that advantage as the market evolves. Blindly riding the wave of growth can carry you right off a cliff if you lose what made you special.
Chapter 7: Production Advantages Lost – Compact Discs, Data Switches, and Toasters
This chapter delves into scenarios where companies with cutting-edge supply-side advantages (production/technology leads) saw those advantages slip away. The inclusion of “toasters” in the title is tongue-in-cheek: it refers to the idea mentioned earlier that, eventually, every high-tech product becomes as common and low-margin as a toaster. Greenwald and Kahn explore how technological advantages can be fleeting and how incumbents cope with (or fail to cope with) that reality. They discuss two main cases: Philips in the compact disc (CD) market and Cisco in data networking, plus others by implication.
In the late 1970s, Philips (the Dutch electronics conglomerate) co-developed the audio Compact Disc with Sony. This was a groundbreaking innovation – a digital laser-read music format far superior to vinyl records or tapes. Being first, Philips enjoyed a production advantage: it had unique engineering know-how and patents and was poised to profit enormously as CDs replaced older media. However, Philips’ experience shows that pioneering a technology doesn’t guarantee long-term dominance. Philips never established a defensible market position despite inventing the CD. Why? The authors point out a couple of reasons. First, no customer captivity: consumers loved CDs, but they didn’t care whether their disc was made by Philips or another company – a CD was a CD. Music buyers were not locked into any one supplier; they simply wanted the format. Second, limited economies of scale: making CDs required some investment, but not so much that only one or two firms could do it. Once the standard was set (which Philips/Sony did collaboratively), many manufacturers could produce discs, and the market grew huge relative to the minimum efficient plant size. In other words, the CD became a commodity product relatively quickly – the technology was complex initially, but it stabilized. Philips essentially “worked for free for the industry”: it did the early heavy lifting to create the market and standards, then competitors (some licensed, some new entrants) jumped in and captured much of the manufacturing volume without needing to innovate as much. The result was that Philips did not earn extraordinary profits from its CD innovation. Consumers benefited (better music format), but Philips’ advantage proved weak because it couldn’t erect barriers around it – no captive customers (the music came from many labels and disc makers) and no lasting cost edge once scale was reached. The “toaster” reference fits here: eventually making CDs was routine, like stamping out toasters, and margins were slim.
The Cisco case is a contrast where a company actually did enjoy a strong advantage for a while, but then saw it tested when expanding scope. Cisco Systems, founded in 1984, was a leader in routers and networking equipment. Through the 1990s, Cisco grew phenomenally (60% annual growth, enormous profitability) by selling the routers that connected computers in corporate networks. Cisco’s advantage lay in a mix of technology and system scale: networking gear had a lot of software complexity, so having the best engineers and a head-start meant higher-performing products. They also benefitted from customer captivity – once a company had Cisco routers, it often stuck with Cisco for expansions/upgrades because of reliability and familiarity (and training staff on Cisco’s system). Moreover, as Cisco gained market share, it could outspend rivals in R&D, fueling a virtuous cycle of better products and even more share. By the late 90s, Cisco was dominant in enterprise networking and extended into adjacent areas like LAN switches, leveraging its relationships and technology across them. This looked like a textbook sustainable advantage: economies of scale in R&D and support, plus some switching costs for customers. However, Cisco then aimed even higher – going after the “carrier-class” telecom market, meaning the giant routers and switches used by telephone and internet service providers. Here, Cisco ran into trouble. The telecom equipment market had entrenched competitors (like Lucent and Nortel at the time) and very sophisticated customers (telcos who demanded highly customized, robust systems). Cisco discovered that in this new arena, it had no incumbent advantage: it was the newcomer. The big telcos were not “captive” to Cisco – if anything, they were deeply tied to other vendors through legacy systems and cautious about new suppliers. Cisco also lacked scale in that segment; its scale was in enterprise, which didn’t carry over to carrier-grade products (different requirements, R&D, sales channels). As a result, Cisco’s foray led to serious losses around 2001 – a $2 billion operating loss and a forced retrenchment. The authors narrate that Cisco had to cut costs, withdraw from parts of the carrier business, and basically regroup around its core strengths. This is a prime example that even a great company can overreach if it strays from the zone of its competitive advantage. Cisco’s assets (its tech expertise, scale, brand) were highly valuable in enterprise markets, but when it tried to apply them to a new domain with different conditions, the advantage evaporated and it had to fight entrenched rivals on equal terms – which it found untenable.
Apart from these, the title mentions “toasters,” meaning everything commoditizes eventually. The combined moral of Chapter 7 is twofold:
- If you rely on a production/technology advantage, be aware that it may not last. As industries mature, technology spreads and customers become less forgiving of price premiums. Innovation advantages need to evolve into something more defensible (brand loyalty, standards, economies of scale) to persist. If you invented the better mousetrap, start thinking about how to create switching costs or scale before everyone has a good mousetrap.
- Don’t assume your advantage in one segment automatically gives you an advantage in another. Even dominant firms should approach new markets with caution, because you may lack the things that made you strong in your original domain. Cisco’s misstep was assuming its general prowess guaranteed success everywhere – instead, it learned that advantages are market-specific, and entering a market with well-armed incumbents and no entry barriers in your favor can lead to a bloodbath. This echoes the book’s recurring advice: know exactly where your moat is, and don’t wander too far from it without a plan to build a new one.
By the end of Chapter 7, it’s clear that competitive advantages are not static. They can be lost through technological change, diffusion of know-how, or managerial overreach. Strategy requires humility and adaptability: companies must continuously reinforce or reinvent their moats to stay ahead. The phrase “What matters in a market are defensible competitive advantages, which size and growth may actually undermine” nicely sums up the chapter. Growth and innovation are good, but only if you can defend the turf you gain.
Chapter 8: Games Companies Play – Part I: The Prisoner’s Dilemma
Shifting from individual firms’ advantages, the book now examines competitive interactions when a few firms share a market. If multiple companies each have some advantage (or are at least well-established), strategy becomes a game of moves and countermoves. Chapter 8 introduces the concept of the Prisoner’s Dilemma as a model for pricing competition among a small number of firms.
Imagine two or three dominant players in an industry protected by barriers to entry (so they’re not worried about new entrants, just each other). They’d all profit handsomely if they cooperated implicitly – for example, by keeping prices high – because customers, having few alternatives, would pay those high prices. However, each individual firm has a temptation: if it alone cuts its price a bit while others keep theirs high, it could steal a lot of business and increase its own profit (at least short-term). The catch is that if all think that way and undercut each other, they end up in a price war, driving prices (and profits) down for everyone. This classic prisoner’s dilemma (PD) – where mutual cooperation yields the best joint outcome, but individual incentives drive toward a worse outcome – is very common in oligopolies, especially regarding pricing and output.
Greenwald and Kahn assert that “the essential dynamics of most competitive interactions revolve around price or quantity,” and price competition is the most frequent form among a few rivals. They outline conditions for a stable “cooperative” outcome (where firms maintain higher prices): stability of expectations (each firm trusts that others won’t suddenly drop their prices) and stability of behavior (no one can gain by deviating). Achieving these is tricky. The authors describe steps companies can take to reduce the intensity of the prisoner’s dilemma:
- Structural adjustments (industry-wide norms): These are measures that all competitors more or less adopt, consciously or not, which make the market less prone to destructive competition. For example, market segmentation – if each firm focuses on different niches or regions, they avoid head-to-head battles (essentially “occupying separate niches”). Think of how carmakers might specialize (one dominates trucks, another economy cars) to some extent, to not ruin prices for each other. Another structural idea is loyalty programs: if every firm has one, it raises switching costs and softens price competition because you’re competing for a locked-in base (though such programs only help if well-designed to reward cumulative purchases). Limiting capacity is another: if all players resist over-expanding production, it prevents gluts that spur discounting (OPEC’s oil quotas are a classic attempt at this). Additionally, the authors mention MFN clauses (most-favored-nation) as a pricing practice: a supplier promises a customer that it won’t give a better price to anyone else without offering the same, which discourages anyone from cutting prices to one segment because it must extend to all, making price cuts less attractive. They even note how social factors can stabilize expectations: if rival firms’ executives all know each other, share a common culture, or meet regularly (sometimes even literally on the golf course), they are more likely to develop a mutual understanding not to rock the boat on pricing. Historically, many cozy oligopolies (say, the old AT&T with the “Baby Bells,” or airlines in certain eras) benefitted from this kind of unspoken camaraderie.
- Tactical responses (tit-for-tat strategies): These are actions a firm can take unilaterally to punish cheating and encourage a return to high-price harmony. One key tactic: immediate retaliation to any price cut by a competitor. If Company A drops its price in a market, Company B should swiftly drop its price too, signaling that “price wars won’t gain you anything because we’ll match you.” Importantly, the authors advise being selective in retaliation to hurt the aggressor most. Instead of universal price slashing (which hurts both parties’ profits), target the competitor’s strong markets. For example, if Pepsi cuts soda prices in a region, Coke might retaliate by cutting prices especially in regions where Pepsi has high share (making Pepsi feel the volume loss strongly). Meanwhile, Coke might leave prices higher in areas where Pepsi is weak, to minimize its own profit loss. This smart retaliation teaches the aggressor that price cuts are painful and unrewarding. Another tactic is signaling willingness to return to cooperation. After the initial response, a firm can indicate it’s ready to raise prices back up if the other does too. This could be done through public statements (“we believe the industry can support higher prices”) or symbolic moves. The authors cite how after years of 1970s cola wars, Coca-Cola signaled a truce by spinning off its bottling business and taking on debt – a move that required better margins to succeed, thus showing Pepsi that Coke needed pricing to stabilize. Pepsi got the hint, and both eased off, leading to rising profits for both in the 1980s. Essentially, the tactic is: retaliate to show you can’t be taken advantage of, but also offer a path for both sides to climb back to profitability.
Greenwald and Kahn note that explicit collusion is illegal, but tacit cooperation can and does happen under the radar (“cooperation without incarceration,” as they later quip). The prisoner’s dilemma framework explains why industries sometimes fluctuate between price wars and peace. If a new entrant or an aggressive CEO (“when elephants fight,” as they say) decides to grab share, it can all fall apart. They even acknowledge that not every firm’s goal is profit-maximization – some want to “kill the other guy” or build empires at the expense of margins. In those cases, cooperation fails; price wars may persist until a player exits or leaders change. They mention how when markets globalize, the chances of tacit cooperation drop – because newcomers from different backgrounds don’t share the same assumptions or trust. For example, the entry of Japanese firms into U.S. electronics in the 1970s-80s broke a lot of implicit understandings the American companies had among themselves, leading to fierce competition.
Chapter 8 essentially sets up a toolkit for understanding oligopoly behavior: from why price wars happen (the prisoner’s dilemma incentive) to how firms can escape them (structural and tactical measures). The authors stress that in markets with a small number of competitors and high entry barriers, learning to maintain a cooperative outcome (higher prices) is often the key to long-term profitability. It’s almost a soft advocacy for oligopolistic harmony – not in an illegal cartel sense, but in rational restraint. They even go as far as to say “maintaining a cooperative outcome, with everyone charging higher prices, is the most important skill that interacting competitors can develop.” Of course, this is from the perspective of companies, not consumers! For a strategist, the implication is: if you’re in a market with a few strong players, think carefully about your actions – price cuts or aggressive moves can trigger destructive cycles. Sometimes the smartest strategy is collective moderation and focusing on growing the market or differentiating, rather than undercutting each other.
Chapter 9: Uncivil Cola Wars – Coke and Pepsi Confront the Prisoner’s Dilemma
To put theory into practice, Chapter 9 gives a detailed case study of the Coca-Cola vs. Pepsi rivalry – a quintessential example of a duopoly engaged in both all-out war and eventual cautious cooperation. Greenwald and Kahn trace how Coke and Pepsi’s competition evolved over decades, illustrating the prisoner’s dilemma dynamics from the previous chapter.
For much of the 20th century, Coca-Cola was the dominant cola brand, and Pepsi was the upstart challenger. Early on, Coke enjoyed what you could call a demand-side advantage: tremendous brand loyalty and habit among consumers (Coke was synonymous with cola for many). However, Pepsi continually sought to narrow the gap. They made savvy moves: in the 1930s, Pepsi doubled its bottle size for the same price – a direct value play. In the 1950s, as supermarkets rose, Pepsi sold larger take-home bottles appealing to families. In the 1960s, Pepsi’s “Pepsi Generation” marketing targeted youth, casting Coke as old-fashioned. By the 1970s, Pepsi’s share was growing, and in certain segments (like supermarket sales) it even surpassed Coke. Coke largely ignored these moves for a while (its strategy was “deny the rival’s existence”), but eventually it had to react.
The tipping point came in the late 1970s: Coke’s market share and margins began eroding. In 1977, Coke initiated a price war – cutting the price of its concentrate (the syrup sold to bottlers) in some markets to make its cola cheaper on shelves. However, Coke made a critical mistake: it gave the biggest discounts in regions where it was very strong and Pepsi weak. This meant Coke was effectively slashing prices for many loyal Coke drinkers who weren’t on the verge of switching anyway – thus sacrificing a lot of profit with little competitive gain. Pepsi had no choice but to follow suit in those areas (to support its small foothold), so Pepsi’s losses were relatively minor, while Coke gave up four times more revenue than Pepsi for the same volume of soda. Moreover, Coke’s concentrate price cuts hurt its own bottlers (some of which Coke owned directly), so it was almost punishing itself. This episode shows how misjudged competitive retaliation can backfire – Coke tried to hurt Pepsi but ended up doing disproportionate damage to itself.
Throughout the late 70s and early 80s, both companies escalated competition beyond price too: they churned out new products (like Diet Coke, Cherry Coke, Pepsi Free, etc.) and fought intensely for advertising spots and shelf space. Interestingly, some of these moves had a side effect of crushing smaller cola brands. Coke and Pepsi’s proliferation of flavors and packaging took up so much shelf space that regional or fringe colas got squeezed out. In a way, by playing the game hard, the two majors created a duopoly where they collectively enjoyed about 90%+ of the U.S. cola market by the mid-1980s. Yet, all that dominance was not very profitable when they were spending heavily on ads and promotions and keeping prices low due to mutual fear.
The “New Coke” fiasco of 1985 is a famous twist: Coke, worried that Pepsi’s sweeter taste was winning younger drinkers (per the Pepsi Challenge marketing), introduced a reformulated sweeter Coke. This was a rare instance of product change instead of a pricing war – but it backfired spectacularly when loyal customers revolted, forcing Coke to reintroduce “Coca-Cola Classic” within months. However, the authors note a strategic silver lining: having New Coke actually gave Coca-Cola a way to cater to the segment that liked sweeter colas (essentially a substitute for Pepsi) without replacing its flagship. After the debacle, Coca-Cola had two products (Classic and New) covering both taste profiles. This is a bit like occupying separate niches as a structural move – Coke could compete for Pepsi’s base with New Coke, while keeping its core fans. It’s arguable how effective that was, but it’s an interesting perspective that Coke turned a misstep into a sort of multi-tier strategy.
More importantly, around the mid-1980s, both companies changed leadership and philosophy. Pepsi brought in Roger Enrico and Coke had Roberto Goizueta – these CEOs were less obsessed with raw market share and more with profitability. They essentially agreed (tacitly) to end the cola wars. Instead of trying to one-up each other on volume, they focused on raising margins, controlling costs, and each growing in areas of strength. Throughout the late 80s, Coke and Pepsi maintained a détente, raising prices in tandem and not undercutting each other drastically. The results were dramatic: operating margins for both companies climbed significantly. It was a classic case of moving from the prisoner’s dilemma low ground (price competition) to the cooperative high ground. The authors show how operating margins improved from under 10% to over 20% after the cease-fire. They also mention that this truce wasn’t permanent – in the 1990s, successor CEOs (like Ivester at Coke) tried to push too hard or fell back into competitive habits, leading to some renewed fighting and weak results. But the main takeaway is that Coke and Pepsi learned to coexist profitably by implicitly carving up the market and avoiding destructive price-cutting. They still competed fiercely in marketing, but they understood that constantly trying to erode each other’s core base was mutually harmful.
From this rich story, a few strategic lessons stand out. First, know the battlegrounds where fighting is counterproductive – Coke shouldn’t have wasted ammo cutting prices where it was strongest (a lesson for any leader: don’t ruin your own profit sanctuary trying to chase a rival in their weak spot). Second, tit-for-tat works: each time one cut prices or launched a salvo, the other responded, often painfully, which eventually taught them that stability was better. Third, once both firms shifted focus to profitability (ROE) instead of market share, the game changed. This is akin to aligning objectives with a cooperative outcome – if both are chasing share, they’ll likely engage in PD behavior; if both prioritize profit, they’ll find ways to make peace. Finally, the cola war shows that competitive advantages can survive wars, but wars eat into the spoils. Coke and Pepsi both had strong moats (brands, customer captivity, massive scale in distribution). Those didn’t disappear, but when used aggressively against each other, they initially got zero-sum gains and hurt overall profitability. When used in tandem to squeeze out smaller rivals and maintain price discipline, those advantages allowed both to enjoy extraordinary profits.
In summary, Chapter 9 demonstrates the prisoner’s dilemma in a real-world context and validates the approaches from Chapter 8: limit direct confrontation, retaliate smartly, and cultivate an understanding (tacitly) to keep the industry profitable. It’s called “uncivil” cola wars because it was nasty at points, but ultimately the “ceasefire” proved more rewarding than total war – a theme likely to resonate in many oligopolies beyond soda.
Chapter 10: Into the Henhouse – Fox Becomes a Network
This chapter examines a different strategic game: market entry against entrenched competitors. The metaphor “into the henhouse” alludes to a fox sneaking in among hens – here, Fox Broadcasting entering the cozy club of the “Big Three” TV networks (ABC, CBS, NBC) in the 1980s. The big networks had long enjoyed an oligopoly with stable, high profits – a kind of protected turf. For an upstart to succeed, it would need to avoid triggering a ferocious response (hence, sneak into the henhouse without a massacre).
Greenwald and Kahn describe the U.S. broadcast TV industry structure pre-Fox. The three networks supplied primetime shows to their affiliated local stations, sold national ad slots, and had regulated monopolies in their reach (each only allowed so many owned stations). There were significant competitive advantages: regulation limited the number of networks (few VHF channel licenses available) and fixed some costs like AT&T transmission fees. They also enjoyed economies of scale in producing and buying content – a hit show’s cost could be spread over a nationwide audience, and large networks had bargaining power with advertisers and studios. Moreover, successful shows on one network built audience loyalty (a demand advantage) and local station ownership was like controlling “tollgates” to viewers. Importantly, the networks had an implicit cooperative behavior: they did not undercut each other heavily. As cited, they avoided price wars in ad sales (selling at upfronts under fixed formats, not on last-minute discounts), they didn’t steal each other’s affiliates (partly by FCC rule, partly by mutual restraint), and they usually didn’t aggressively poach hit shows from each other. This equilibrium meant all three networks made very high returns with little threat – a classic oligopoly club.
Enter Rupert Murdoch, who in 1985 announced plans to create a fourth network, Fox. For Fox to succeed, it needed to avoid a “scorched-earth” defense by ABC, CBS, and NBC. If the Big Three decided to crush Fox (by locking up all talent, tying up affiliates, slashing ad prices, etc.), Fox might never get off the ground. Murdoch’s strategy, as the authors recount, was a masterclass in strategic entry that aligns with the guidelines from Chapter 11 (though Chapter 11 comes after, Fox is the illustration).
Key moves by Fox:
- Local Stations: Instead of trying to sign up existing major network affiliates (which would provoke incumbents to fight back hard), Fox bought independent UHF stations in big cities (acquiring six of them) and recruited other independents as affiliates elsewhere. He carefully did not steal any ABC/CBS/NBC affiliate – thus the Big Three didn’t immediately lose coverage; they just saw a new player filling gaps (many of these independents were not highly profitable or were airing old syndicated content). This made Fox’s entry a bit less threatening initially – incumbents weren’t directly ousted from any market.
- Advertising: Fox set its ad rates about 20% lower per viewer than the Big Three and crucially limited ad time per hour. By doing so, Fox signaled it wasn’t going to flood the market with ads that would steal much revenue from incumbents; the 20% discount was “marginally aggressive” but not a devastating price undercut. It also made Fox slightly more attractive to some advertisers without completely destabilizing the networks’ pricing structure. By limiting ad minutes, Fox also appealed to viewers (fewer ads) and showed the others it wasn’t going to devalue TV ads with oversupply.
- Programming: Fox targeted an underserved audience (youth) and aired shows the others avoided. For example, Fox ran edgy or niche programming: they famously launched with “The Late Show with Joan Rivers,” aimed at a younger crowd, and later shows like 21 Jump Street, The Simpsons (animation in primetime, which others shied away from), and often content with more provocative or offbeat slants. They also scheduled programs at non-standard times (like starting with only two nights of primetime, not all seven). This approach did two things: it attracted a new audience segment (teens and young adults that advertisers wanted but who weren’t as tied to ABC/CBS/NBC offerings) and reassured the Big Three that Fox wasn’t going after their core family audience or their hit shows. Fox was basically saying, “I’ll take the scraps you aren’t focused on.” By not competing head-to-head at first in every time slot and demographic, Fox gave the incumbents less incentive to retaliate.
In short, Murdoch’s Fox strategy hit the key points of a peaceful entry from Chapter 11’s forthcoming framework: don’t directly challenge, enter gradually, target different customers, and limit your capacity/ambition signals. And it worked. The Big Three did not engage in predatory pricing or content wars to kill Fox in its cradle. They largely continued as before, perhaps underestimating Fox or figuring it could have its little corner. Fox established itself and slowly expanded programming nights and affiliate reach. Over time it gained traction with hits like Married... with Children, The Simpsons, and Beverly Hills 90210. By the 1990s, Fox was a bona fide fourth network, even winning NFL football rights away from CBS in 1994 – a coup that cemented its status.
The authors note that eventually the environment changed – cable TV and deregulation ended the three-network era anyway. The rise of many cable channels, satellite distribution, and the loosening of FCC rules (like ending the Fin/Syn rules that limited networks’ production) meant more competition for all. But by then, Fox was entrenched as well. The key is that Fox survived the critical entry phase by not provoking excessive retaliation. Previous attempts at a fourth network (like the DuMont network in the 1950s) failed, partly because the market couldn’t support it or incumbents squeezed them out. Fox succeeded because Murdoch understood the game-theoretic aspect of entry.
Strategically, Chapter 10 teaches that if you are trying to enter a market controlled by a few big players, don’t behave like a typical aggressive entrant (who might cut prices drastically or attack the leaders’ best customers). Instead, find a vulnerable flank or underserved segment, enter quietly and show the incumbents you’re not going to ruin the market economics for everyone. Essentially, convince them that accommodating your entry is less costly than fighting it. Fox’s case also highlights how signaling is crucial – every move (stations acquired, ad pricing, show choices) sent a signal to ABC/CBS/NBC about Fox’s intentions. Murdoch’s signals said “I’m not here to steal your chickens en masse, just to share a bit of the yard.” Whether by savvy or luck, that strategy let Fox in the henhouse to eventually become a fox among hens – a fourth major network.
In summary, Chapter 10 is a narrative example complementing the more general strategic rules in the next chapter. Fox Broadcasting’s birth showcases the principles of a smart entrant: avoid direct attacks, limit your initial footprint, differentiate your target market, and reassure incumbents through actions that you’re not aiming to collapse the status quo overnight. This way, a newcomer can gain a foothold without sparking a mutually destructive war.
Chapter 11: Games Companies Play – Part II: Entry/Preemption Games
This chapter generalizes the lessons from Fox and similar scenarios into a framework for entry and preemption strategy. We already saw parts of this in Chapter 10’s context, but here the authors lay it out systematically, akin to a decision tree or “game board” for incumbents vs. entrants.
They describe an entry/preemption game in steps: 1. A potential entrant decides whether to enter a market or stay out. 2. If they enter, the incumbent (or incumbents) then decides whether to accommodate the entry (peacefully coexist) or resist (fight to drive them out). 3. If the incumbent fights, the entrant must decide to withdraw (give up), persist/expand (double down), or maybe find a stalemate path.
Each branch has associated payoffs (profits, losses, future position) for both players. The entrant will have some expectation: “If I enter and the incumbent accommodates, I make X. If they fight and I persist, I make Y (or lose Z), etc.” The incumbent similarly weighs: “If I fight, I incur cost A to maybe deter them; if I accommodate, I lose some share B but avoid cost A,” and so on.
The authors explain that compared to price wars (which can happen quickly and be reversed quickly), entry games have different dynamics: - Capacity and entry moves are long-term: Building a new plant or entering a market is a significant, often irreversible investment that plays out over time, not an instant price cut you can undo next week. Mistakes here have enduring consequences. So the stakes are high and decisions can’t be easily tweaked. - Timing matters: There’s often a lead time in capacity expansion – incumbents can’t instantly flood the market; entrants can’t instantly capture the market either. This gives more room for signaling and strategic thinking than the rapid-fire nature of pricing moves. - The roles are clear: Typically, one side is the aggressor (entrant) and the other defender (incumbent), unlike in price wars where any firm can initiate a cut at any time. This clarity can sometimes make it easier to anticipate the sequence of decisions.
The overarching principle the authors give: an entrant should try to make accommodation the incumbent’s best response, and an incumbent should try to make not entering or exiting the entrant’s best response. In other words: - From the entrant’s perspective: How do you enter in such a way that the incumbent figures “fighting this will hurt me more than letting it happen”? - From the incumbent’s perspective: How do you respond (or posture even before entry) so that either the entrant decides not to come in, or if they do, they quickly regret it and leave?
For entrants, Greenwald and Kahn list concrete tactics (many mirrored by Murdoch’s Fox strategy or Kiwi’s strategy in Chapter 12): 1. Avoid head-to-head competition with the incumbent. Find some niche or customer segment the incumbent isn’t currently dominating. By not directly challenging their core, you reduce their incentive to fight. E.g., if the incumbent sells to large clients, maybe you sell to small clients. 2. Enter quietly and gradually. Don’t announce grand ambitions that will alarm the incumbent. Expand step by step so you’re under their radar or at least not provoking a full mobilization. Keep your initial capacity limited – that sends a reassuring signal that you’re not aiming to wipe them out overnight. 3. Limit your capacity and commitments to signal non-aggression. The authors suggest even financing expansion in an “idiosyncratic” way – for instance, using a one-time limited fund, rather than stockpiling a war chest (which would scare the incumbent). If you have a billion dollars ready to invest, incumbents think you’re here for a big fight; if you scrape by with lean financing, they might think you’ll stay small. 4. Spread your entry’s impact widely if possible. If there are multiple incumbents, try to nibble a tiny bit from each rather than taking a big chunk from one. If each incumbent only loses a little, none may find it worth an aggressive counterattack. (Kiwi’s case did this by flying routes that affected several airlines a bit, rather than one airline a lot.) 5. Make your presence somewhat irreversible (but not offensively so). This one is nuanced: they suggest an entrant can invest in a way that shows commitment – like building a specialized facility – which signals to the incumbent that you won’t back off easily if pushed (so they might as well accept you). However, this can be double-edged: too big an investment could alarm the incumbent. It’s about finding that balance where you’re committed enough to deter them from a fight, but not so large as to threaten them existentially.
For incumbents, the tactics are kind of the flipside: 1. Signal a confrontational posture from the get-go. Let it be known (through actions or reputation) that any entrant will face a fight. For instance, maintain excess capacity – if you always have some idle capacity ready, an entrant knows you can flood the market at lower prices if they enter (and thus they might think twice). This works especially if high fixed costs mean that extra capacity is a credible threat (the entrant knows you’ll use it because you need volume to cover those costs). 2. War chest: The incumbent can keep a bundle of cash or financing – essentially a deterrent signaling “we can endure a price war longer than you.” 3. Fill all niches: Make sure there are no “unoccupied territories” or obvious gaps in the market that an entrant can easily exploit. If you offer a broad product line and cover all price points, an entrant has a harder time finding a foothold where you won’t retaliate. 4. If entry happens, punish swiftly and smartly (as also described in the prisoner’s dilemma context) – e.g., cut prices particularly in the entrant’s initial markets to make life tough, while perhaps maintaining higher prices elsewhere so you don’t destroy your overall profitability. The goal is to raise the entrant’s costs or lower their revenue, ideally at a lower cost to you than to them.
They also mention “unoccupied territories” can become lawless frontiers – meaning if a new market emerges (like a new technology or region) where no firm is incumbent, it often gets very competitive because everyone sees the opportunity and no one has a clear advantage yet. These scenarios can be chaotic because the usual roles of entrant/incumbent don’t apply; everyone is an entrant. The authors likely bring this up to say: sometimes competition is inevitable and fierce (like the early days of a new industry) until a structure forms.
The general vibe of Chapter 11 is analytical – it’s guiding companies on how to think through entry deterrence or accommodation step by step. They recommend mapping out the “game” explicitly: list competitors, their possible actions, the payoffs, their likely motivations, etc., maybe even drawing a decision tree or payoff matrix. By doing this, strategists can anticipate how aggressive to be or how an entrant might behave and plan accordingly.
In essence, Chapter 11 is a manual: If you’re entering a market, keep it low-key and endear yourself to incumbents as much as possible. If you’re an incumbent, show your claws early so entrants think, “maybe try somewhere else.” But also, if an entrant is inevitable or already in, decide rationally if fighting is worth it – sometimes accommodating might indeed be less costly. For instance, a huge incumbent might accept a small new competitor that takes 5% of the market if fighting to save that 5% would cost more in price cuts or capacity. The decision often hinges on commitment and credibility: entrants need to commit enough to scare incumbents out of fighting; incumbents need to commit to fighting enough to scare entrants out of entering. It’s a delicate balance because over-committing can escalate into wasteful wars. So, the ideal outcome (from the industry’s profit view) is an entrant who “knows their place” and an incumbent who tolerates them – just like Fox in TV or Kiwi’s intended approach in airlines (though Kiwi’s outcome was different, as we’ll see).
Thus, Part II of Games Companies Play (Chapter 11) complements Part I (Chapter 8) – first we learned how incumbents interact among themselves (pricing games), now how incumbents and entrants interact (entry games). Strategy in both cases is about influencing the expectations and choices of your rivals to steer the game towards a better outcome for yourself. Whether it’s convincing a competitor to keep prices high or convincing them not to retaliate viciously, it’s a mind game as much as a resource game.
Chapter 12: Fear of Not Flying – Kiwi Enters the Airline Industry
This chapter is a case study of an entrant’s attempt to break into a tough market: Kiwi International Air Lines and its ill-fated entry into the U.S. airline industry in the early 1990s. The title “Fear of Not Flying” wittily references the famous book/film Fear of Flying and sets the stage that this is about the anxieties of a new airline trying to get off the ground (pun intended).
Background: The U.S. airline industry, after deregulation in 1978, became notorious for competition and instability. By 1990, several major carriers (United, American, Delta, Northwest, etc.) dominated hub airports, and many smaller airlines had come and gone. It’s a market generally considered to have minimal overall entry barriers – anyone with a leased plane can start an airline – but incumbents do have some advantages, especially at a local (hub) level. The authors highlight that while the industry as a whole had low profit margins and lots of churn (so no strong barriers industry-wide), certain carriers enjoyed local competitive advantages at their hub airports. A hub-dominant airline benefits from customer preference (travelers prefer an airline that offers the most flights out of their city and a large network of connections) and local economies of scale (efficiently scheduling crews, maintenance, gates, and marketing in that city). This means if you want to start a new airline, avoiding directly challenging a big airline at its hub is wise.
Kiwi International Air Lines was founded by former Eastern Air Lines employees after Eastern went bankrupt in 1991. Kiwi began flying in 1992 with a very cautious, strategically savvy entry plan – much like Fox’s approach in broadcasting, Kiwi tried to follow the textbook for non-confrontational entry: - It chose Newark, NJ as its base, which, while near the giant New York City market, was less dominated (Continental had a hub there but wasn’t as strong as, say, United at O’Hare or Delta in Atlanta). So competition was “less intense” at Newark. - Kiwi started extremely small: two leased Boeing 727 planes serving three routes (Newark to points like Chicago Midway, Atlanta, and Orlando initially). This limited capacity signaled to big airlines: “we’re just a tiny speck, no threat to your major routes.” - It aimed at a specific segment – budget-conscious business travelers who were fed up with the restrictions of big airlines’ tickets (like Saturday-night stay rules). Kiwi offered simpler fare rules, like unrestricted low fares that appealed to small-business owners or cost-sensitive flyers. This was a subset of demand not well served by majors (who catered to either full-fare corporate travelers or cheap leisure with advance purchase restrictions). - Kiwi did not undercut incumbents’ prices in a destabilizing way. They generally priced at the level of the lowest fares already in the market (so they weren’t initiating price cuts, just matching the cheaper end of existing fares). This was to avoid sparking a price war – they wanted to be seen as just another low-fare option, not a deep discounter forcing everyone to drop prices. - Kiwi tried to provide good service (hot meals, fewer seats for more legroom) to differentiate, without extra cost to passengers. This is an interesting tactic: out-compete on quality in a niche, rather than purely on price – which might annoy big airlines less (as it doesn’t force them to cut their fares; it just means Kiwi is a boutique option for certain fliers). - They did little advertising and relied on PR and word-of-mouth. Not trumpeting their entry loudly meant some incumbents might not even fully notice them at first, or at least not feel publicly challenged. - Kiwi also didn’t poach staff from the majors beyond hiring furloughed pilots (so they weren’t raiding the talent of competitors in a way that might anger them).
In theory, Kiwi did everything right as a delicate entrant. And initially, Kiwi did enjoy some success and positive press – it was known for friendly service from ex-Eastern staff, and consumers liked it. So why did Kiwi fail (it went bankrupt by 1994, just two years after launch)? The authors explain a few factors: - Maintaining the discipline was hard as they grew. When Kiwi expanded to more routes, costs rose. They added planes, which meant more complexity – e.g., they might have entered routes that forced them to hire more crews, set up maintenance elsewhere, etc. The initial simplicity (two planes, three routes) was lost. So their cost advantage or focus advantage eroded. - Incumbents responded to the broader trend, not just Kiwi. Kiwi wasn’t alone; the early 90s saw several new low-cost carriers (this was the era Southwest was expanding, and others like ValuJet and Midway (revived) started up). Also, many major airlines were in turmoil (Continental went through bankruptcy, etc.). With a glut of cheap leased aircraft and furloughed staff, new airlines popped up. The majors collectively responded by slashing fares on many routes to defend share (the early 90s had fierce price competition, partly due to a recession). Kiwi, being a tiny player, got caught in an industry-wide fare war initiated by big carriers to quash the swarm of entrants. In short, even if Kiwi alone might not have provoked a response, the majors were unwilling to let a bunch of low-cost airlines chip away at them – they “lowered prices” broadly, hurting Kiwi’s revenue yields. - Kiwi’s cost structure rose as it tried to grow. They moved beyond their original small niche – possibly flying further routes or adding frequencies where they couldn’t fill planes, etc. The authors note higher costs without proportionate gain in appeal to customers. - There’s an implication too: Kiwi lacked a true competitive advantage other than perhaps a temporary service novelty or goodwill. It didn’t have a cost advantage over Southwest or Continental in the long run, nor a brand moat aside from being “the nice ex-Eastern guys.” So even absent retaliation, sustaining its business would have been challenging as others emulated or undercut.
Ultimately, Kiwi went bankrupt in 1994 (only 2 years of operation). It’s a sobering counterpoint to Fox’s story. Kiwi followed the entry playbook but still failed, meaning sometimes even the best strategy can’t overcome harsh realities. The “henhouse” – airlines – might just be too tough a place. Why did Fox succeed and Kiwi not? One could surmise: - The network TV incumbents were content and maybe complacent, whereas airline incumbents were battle-hardened and aggressive. - Fox entered at a time when networks had fat margins to spare; Kiwi entered airlines when majors were already stressed, so they fought for every passenger. - Also, Fox’s Murdoch had deep pockets; Kiwi was under-capitalized. When majors fought, Kiwi couldn’t absorb losses for long.
The lesson from Chapter 12 is nuanced. It reinforces the entry strategies: Kiwi was well designed (the authors say its strategy “was well designed”). Yet, external factors (market conditions, multiple entrants, incumbent retaliation) can still doom a newcomer. Strategy can improve odds but not guarantee success. This underscores that even a great strategy has to contend with luck and timing.
For incumbents reading this, Kiwi’s tale is a success in deterrence: the majors did manage to wipe out many start-ups in that era by aggressive pricing and leveraging their hubs (plus some, like Delta’s low-fare “Delta Express” unit to compete directly). For entrants, Kiwi shows that sometimes the deck is just stacked – an industry with minimal overall entry barriers (so lots of competition) but localized strongholds for incumbents is extremely tough. To survive, an entrant might need either an even more disruptive model (like Southwest’s unique point-to-point low-cost model, which indeed thrived) or just better luck/capital.
In summary, Chapter 12 exemplifies the entry game dynamics: Kiwi tried to minimize incumbents’ incentive to resist by spreading the pain, staying small, and being nice. But the incumbents, facing many “kiwis,” decided to fight broadly, showing the harsh side of preemption. The chapter title “Fear of Not Flying” might hint that Kiwi’s founders, desperate to keep flying after Eastern’s collapse, took the risk – but fear (from incumbents) ensured they would not keep flying for long. It’s a cautionary tale that complements Fox’s optimistic one: sometimes the fox gets in the henhouse; other times, the fox gets caught.
Chapter 13: No Instant Gratification – Kodak Takes On Polaroid
Chapter 13 is another case study on competitive interaction, but in a different way: it’s about a major incumbent (Kodak) entering someone else’s niche (Polaroid’s instant photography), and how the incumbent got humbled. The title “No Instant Gratification” is apt – Kodak did not get the quick success it expected in the instant camera market; instead, it got a protracted legal and strategic defeat. This story illustrates the dangers when a big company tries to muscle into a market where another firm has a strong competitive advantage (especially a patent-protected, technology-driven one). It resonates with the concept of misjudging entry games and also touches on the strategy of knowing one’s own core advantages.
Background: By the 1970s, Eastman Kodak was a behemoth in traditional silver-halide photography – film, paper, and cameras. It had a virtual monopoly in film and photographic paper (in much of the world) and was extremely profitable (the chapter notes Kodak had a pretax ROIC of 33% in 1975). However, by the late 70s, the U.S. photography market was maturing; growth was slowing. Meanwhile, Polaroid, a company founded by Edwin Land, had created and dominated the instant photography market (cameras that produced self-developing photos on the spot). Polaroid’s barrier was a combination of customer captivity (proprietary film that only Polaroid sold for Polaroid cameras) and patents/know-how on the instant chemistry and cameras. Polaroid’s ROIC was even higher than Kodak’s, upwards of 40% in its peak years. So Kodak saw Polaroid’s high margins and got “growth envy.”
Kodak decided to launch its own instant camera and film in the mid-70s, thereby going head-to-head with Polaroid. According to Greenwald and Kahn, this was a classic case of an entrant (even though Kodak was huge, in this segment it was the entrant) not following the careful entry rules: - Kodak announced loudly and entered with fanfare (they spent a ton on R&D and marketing). They wanted to use their brand and distribution might to grab the instant market quickly. - They didn’t restrain themselves to a niche; they essentially said “We’ll do what Polaroid does, but better if we can, and leverage Kodak’s name.” This is head-to-head competition with a vengeance, basically what Murdoch and Kiwi avoided. Kodak’s cameras and film were aiming at Polaroid’s core consumers with a similar proposition (instant photos). - Kodak’s offering had no clear advantage over Polaroid’s. In fact, they had some initial quality issues (some models were delayed, some production snafus). Customers drawn by Kodak’s ads often found the product underwhelming or unavailable (empty shelves due to Kodak’s production delays). Meanwhile, Polaroid leveraged its head-start: it introduced new models and features, locking in retailer relationships and flaunting its tech superiority. - Most critically, Polaroid sued Kodak for patent infringement the moment Kodak entered (Polaroid had many patents on instant film technology). After a long legal battle, in 1986 Kodak lost and was forced to exit the instant business and pay nearly $900 million in damages to Polaroid. That’s a heavy defeat – Kodak’s entire venture was basically nullified by the courts, and it even had to provide compensation to consumers stuck with useless Kodak instant cameras (since film was discontinued).
From a strategic view, Kodak gravely underestimated Polaroid’s competitive advantages and resolve. Polaroid had: - A technological moat via patents and expertise (which it vigorously defended in court). - Customer captivity: once people had Polaroid cameras, they needed Polaroid film (Kodak tried to break this by selling its own film with its cameras, but everyone who already had Polaroids wasn’t switching). - Scale and brand in instant: Polaroid’s name was synonymous with instant photography; Kodak’s was with general photography. In instant, Polaroid had the mindshare and distribution at camera stores. - Also, Polaroid had no intention of accommodating; it fought on all fronts – legal, product innovation, and marketing.
Kodak’s incursion triggered a price war in the broader photography market too, indirectly. While Kodak fought Polaroid (and also tried entering photocopiers against Xerox, another fiasco the authors mention), it took its eye off its core business. Fuji and other competitors made inroads in conventional film (Fuji offered cheaper film especially during the 1984 Olympics and beyond). Kodak’s margins in film declined from the mid-80s onward partly because it wasn’t fully focused on defending it. Polaroid itself eventually struggled (the instant market shrank with the advent of digital cameras later, and Polaroid’s returns fell too in the 80s/90s). So ironically, Kodak’s attempt not only failed in the target market but also hurt its original franchise – a classic case of strategic misadventure.
Greenwald and Kahn likely use this case to hammer home: never attack a rival where they hold a strong, protected advantage unless you have a revolutionary edge. Kodak brought nothing truly disruptive to Polaroid’s game – just its money and name, which weren’t enough to overcome patents and incumbent loyalty. Without a cost advantage or a product performance leap, Kodak was fighting on Polaroid’s terms (Polaroid even had lower costs on film since it had scaled it for years). The authors say Kodak “consistently misunderstood its own competitive advantages and those of the companies it challenged.” Kodak’s strength was in conventional film scale and brand; instead of doubling down on that or finding synergy, it chased growth where it had no moat and the enemy did.
So Chapter 13 is almost a morality tale in strategy: Big doesn’t always win; smartly entrenched does. It reinforces earlier lessons: - A supply advantage like patents is formidable in the short-to-mid term – an entrant can’t ignore IP (intellectual property) as a barrier. - Customer captivity (once someone has a Polaroid camera, they buy Polaroid film) means you have to not just match the product, but also break the installed base’s loyalty – Kodak’s product needed to be a lot better or cheaper to persuade Polaroid users to switch; it wasn’t. - Incumbents can and will use every weapon (product improvement, distribution, legal) to defend their turf – Polaroid exemplified this.
It also touches on corporate strategy in terms of diversification mistakes – Kodak would have been better served investing in its emerging core challenges (like improving cost or preparing for eventual digital imaging) than blowing a fortune on Polaroid’s territory.
In game theory terms, Kodak entered not quietly but with a bang, so Polaroid fought tooth and nail (the opposite of Fox vs. networks). Polaroid’s payoff for fighting was high (it basically saved its monopoly and got damages), so it had every incentive to resist. Kodak clearly miscalculated those payoffs – perhaps out of arrogance that its size would steamroll Polaroid, which it did not.
In conclusion, Chapter 13 demonstrates the flip side of Chapter 12: where Kiwi was a careful entrant that still failed, Kodak was an aggressive entrant that spectacularly failed. It highlights the importance of accurately assessing both your own and your rival’s competitive advantages before entering a fight. Kodak learned (too late) that some moats are very costly to cross – and if you try, you might drown. As a result, Kodak in the 90s ended up weakened in its core and having wasted resources – a warning to any firm: choose your battles wisely, or you could lose the war at home.
Chapter 14: Cooperation Without Incarceration – Bigger Pies, Fairly Divided
After examining cutthroat competition and entry wars, the book’s tone shifts in Chapters 14 and 15 towards cooperation – how companies can jointly maximize profits when they all have moats and perhaps avoid constant battles. “Without incarceration” humorously implies cooperating without engaging in illegal collusion (which could get executives literally incarcerated).
Chapter 14 focuses on the idea of increasing the total rewards (the “pie”) and splitting them fairly, rather than each company trying to grab a larger share of a static pie. Essentially, it’s exploring legal or tacit ways for oligopolists to act more like a coalition optimizing the market, not adversaries.
The authors argue that when multiple firms all have competitive advantages and are stuck with each other long-term (an oligopoly within barriers), finding mutual accommodations can yield higher collective profits. The cooperative perspective asks: What is the maximum profit our industry could make if we all behaved optimally (like a monopoly)? And how can we allocate those profits so everyone is satisfied and no one cheats?
They outline two aspects: - Maximizing joint rewards (the size of the pie): This means doing what a monopolist would do – set prices at the level that maximizes total industry profit, avoid over-investing in capacity, eliminate wasteful duplications, etc. It might also mean cooperating on things like industry standards or marketing efforts that boost overall demand. For instance, if two firms both have high fixed costs, it might be mutually beneficial to not each develop the same new technology independently (wasting R&D), but perhaps share research or have one do it and license it to the other (if trust exists). Or like airlines code-sharing to fill planes rather than flying half-empty competing flights. In short, operate the market as if you were one firm up to the limits of legality. - Fairly dividing the rewards: The trickiest part, since each firm wants a good share. They articulate principles of “fairness” that echo game theory solution concepts (like Nash Bargaining or Shapley values): 1. Individual rationality – no firm should end up with less profit than it could get by going solo in a non-cooperative scenario. Otherwise, it will defect. So each needs at least its baseline profits. 2. Symmetry – if firms are essentially similar (no major differences in cost or market position), split gains roughly equally. People accept an equal split among equals as fair. 3. Proportionality (linear invariance) – if firms have different sizes or strengths, maybe split gains in proportion to some measure of that. For example, if one firm would have 60% market share in a price war and another 40%, then maybe in cooperation, profits are split 60/40 so both feel it reflects their “power.”
The point is to make sure no one feels cheated, because if they do, they’ll break the cooperation to try to get more for themselves (leading back to rivalry). In a stable cooperative outcome, every firm thinks, “This deal is as good as or better than what I’d get by competing.”
The authors likely reference that some industries manage near-explicit allocations: e.g., OPEC (a cartel of countries, not companies, but it’s analogous) sets quotas roughly based on reserves or capacity – i.e., bigger producers are allowed bigger quotas. Or in markets where two firms dominate, they might silently tolerate a fixed market share ratio and not attempt to upset it (each focusing on their share of new customers, etc.).
They caution that achieving cooperation is delicate. Trust and communication are needed (even if indirect). It can break down due to external shocks or greed by one party. We saw with Coke/Pepsi: when new CEOs refocused on ROE, they cooperated; later, new CEOs restarted battles and margins fell. So cooperation tends to be cyclical or require an alignment of mindsets.
By “without incarceration,” they mean doing this legally. That usually implies tacit understandings or industry norms rather than explicit price-fixing or market-sharing agreements (which are illegal). For example, all firms might independently realize that saturating the market with capacity is bad, so they all just happen to not over-expand. Or they might all adopt similar pricing formulas without meeting in smoke-filled rooms. These are conscious parallelism tactics that regulators often can’t prosecute easily.
In summary, Chapter 14 posits that if an industry’s players can trust each other to be reasonable, they can collectively reach near-monopoly profits by avoiding senseless competition and making sure each firm is content with its cut. It’s essentially the bright side of oligopoly: it doesn’t have to be war; it can be a peaceful joint harvest, as long as fairness keeps everyone on board.
This sets up Chapter 15, likely with examples of do’s and don’ts: showing how some industries achieved this (maybe implicitly) and others failed, plus what behaviors lead to sustained cooperation or breakdown.
Chapter 15: Cooperation – The Dos and Don’ts
Continuing from the principles in Chapter 14, Chapter 15 provides concrete examples of cooperative strategies in practice, illustrating what to do and what not to do to maintain a healthy “cooperative” equilibrium among competitors.
The authors present a few cases:
- Nintendo in the 1980s video game industry: Nintendo became the dominant console maker with the NES, achieving a near-monopoly on home video games. Its initial success was aided by a cooperative ecosystem it built – third-party game developers and retailers benefitted from Nintendo’s large user base (more consoles sold meant more game sales; popularity drew retailers). This was a kind of positive-sum cooperation: Nintendo licensed third-party games (taking a cut but allowing others to profit too) and consoles flew off shelves. However, Nintendo made some don’ts: it started treating its partners (game makers and retailers) poorly – demanding high licensing fees, limiting game releases, etc. This violated fairness: game developers felt exploited, and retailers were frustrated (some were restricted in how many units they got or had unsold inventory issues due to Nintendo’s policies). As a result, when Sega and later Sony came with new consoles, these partners defected eagerly to support the competitors. Nintendo’s dominance eroded; it went from huge returns to just another player. Lesson: if you’re in a position to share the pie with partners, don’t grab so much that they turn on you.
- Lead gasoline additive industry (likely referring to companies like Ethyl Corp, back when leaded gasoline was still around): The book mentions gasoline additives – a commodity chemical industry that nonetheless earned exceptional profits despite shrinking demand and bad PR. How? The authors indicate that regulatory moves (the EPA phasing out lead) actually helped by freezing new entrants and focusing the existing players on milking the remaining market (they “had the business to themselves, to profit during the slow path to disappearance”). The additive makers then cooperated in textbook ways: uniform pricing (everyone charged the same, avoiding price competition), advance notice of price changes (so no one could be sneakily undercut), MFN clauses, and joint production (maybe they had some shared facilities or swaps). These measures kept the market stable and profitable even as it declined. It was essentially collusion, but perhaps not strongly enforced by law due to the phase-out context. The key: the firms “continued to be masters of the prisoner’s dilemma game” – meaning they found ways to avoid betrayal and kept prices high. This is a “do” example (though one that skirts illegality): when facing a tough market, working together (tacitly) can preserve profits even if there’s overcapacity and decline.
- Sotheby’s and Christie’s (the top two auction houses): They attempted explicit cooperation in the 1990s – they colluded on commissions (agreeing not to cut the seller’s fees to win clients), not poach each other’s staff, etc. This was illegal, and eventually they got caught (both firms paid fines and an executive went to jail). But interestingly, even with collusion, they didn’t achieve great profitability. The art auction business had fundamental challenges – high fixed costs, volatile supply of art, etc. They colluded “ineffectively.” Why ineffective? Possibly because even not competing on commissions didn’t solve low demand or the fact that wealthy art sellers have bargaining power. Or one of them cheated secretly occasionally. The authors note the key to success would have been “restraint on competition” beyond those explicit moves – i.e., really acting as one, which they failed to do fully (maybe fear of antitrust or mutual distrust). This case shows that even if you manage to coordinate on some fronts, if the underlying economics are rough (shaky demand, high costs) and fairness isn’t clear (they were equals, but the pie was unpredictable), cooperation may not yield golden results. Also, doing it illegally risked ruinous penalties (which happened).
So, what are the dos and don’ts? From these: - Do: treat competitors and partners in a way that each gets their due. If you’re dominant (like Nintendo), do reward partners enough to keep them loyal. If you’re cooperating with direct competitors (like additive makers), do maintain discipline and transparency (uniform prices, etc.) so no one fears being undercut. - Don’t: get greedy. Don’t take more than your fair share (Nintendo did and lost out). Don’t try to cheat the agreement (Sotheby’s and Christie’s possibly undercut each other secretly even while colluding, plus they got legally busted). - Do: use legal means to align incentives. Some things are legal: public price announcements, industry associations sharing non-specific data, etc. Building trust via social interactions as mentioned in Ch8 – that’s a do. - Don’t: cross the clear legal lines (price-fixing meetings, explicit agreements) – Sotheby’s/Christie’s is a cautionary tale: they broke the law and it backfired. - Do: focus on joint value creation too. For instance, cooperating to grow the market or efficiency (outsourcing overhead to specialists as mentioned, which reduces costs for all). - Don’t: assume cooperation alone can fix a bad business. Auction houses colluded but still struggled due to fundamental issues. Or if technology shifts, cooperation might not save you (Nintendo cooperated with game makers initially, but a tech shift to new consoles reset the field).
In simpler terms, Chapter 15 says: if you’re going to “play nice” with competitors, make sure everyone wins fairly, and don’t break the law or trust. Sometimes sharing is more profitable than fighting – but it requires discipline, continuous communication (even if implicit), and moderation of ego and greed.
Nintendo’s downfall in that generation exemplified how not to behave when you have the upper hand – they violated fairness and lost their partners. The additive guys did well by quietly sticking together. The auction houses did the wrong kind of cooperation and also didn’t fix the real problems.
Thus, the key insight: cooperation (tacit collusion) can be extremely powerful, but it’s fragile. The “Dos” are about building stability (fair shares, focus on profit over share, maybe even compensating a competitor in subtle ways for restraint), and the “Don’ts” are about actions that destabilize the coalition (cheating, over-reaching, or ignoring external constraints like law or market forces).
With Chapter 15, the book has covered the entire spectrum: from fierce competition to peaceful coexistence. Companies need to gauge which mode suits their situation of advantages and number of players. If multiple firms each have strong positions, war can ruin all, so cooperation is the higher path (Coke and Pepsi learned that). If a company is alone with a moat, it should milk it (monopoly). If none have moats, they just need to be efficient (no strategy needed). This ties back to early chapters: the shape of competition depends on where the advantages lie and how many share them.
Chapter 16: Valuation from a Strategic Perspective – Improving Investment Decisions
After all the strategy analysis, Chapter 16 pivots to how these insights should inform valuing businesses, particularly for investment or corporate decisions. Traditional valuation (like DCF, discounted cash flow) often fails to factor in competitive advantages properly. The authors want to integrate strategy and finance.
They start by critiquing standard NPV (Net Present Value) methods. A typical DCF takes near-term cash flow forecasts (which might be okay) and then a big terminal value assumption (which is very uncertain). If those long-term cash flows are misestimated, the whole valuation is off. Why are they misestimated? Because many forecasters assume a company can keep growing or maintain margins without considering competitive forces. They might project a firm’s current high profits out 10+ years, implicitly assuming no one eats into those profits – which is only valid if a moat exists. Or they assume growth can be achieved easily – ignoring that entering new markets may require a huge spend or may fail if no advantage exists.
Greenwald and Kahn emphasize that strategic analysis (identifying moats, industry structure) provides crucial information for valuation. For instance: - If a company has a strong, sustainable competitive advantage, it might be able to earn above-average returns for a long time. So perhaps a higher multiple or lower discount rate is justified, or aggressive growth assumptions could be valid if the moat protects them. - If a company operates in a no-moat industry, assume reversion to the mean – high profits will likely erode, so don’t project them as permanent. Value such a business more on its current assets or a modest earnings level, not a rosy growth story. - Also, consider the asset value behind a business: They mention that NPV discards info about assets used to generate cash flows. But from a strategic view, assets like brand equity, network effects, and patents – those are what give power to future cash flows. If you ignore them, you might undervalue a company with valuable hidden assets (like a distribution network, or real estate at good locations, etc.). Conversely, if a company’s assets are easily replicable, you should be wary of assuming high growth – any competitor can buy similar assets.
They likely discuss valuing moats: Maybe using scenarios – e.g., a scenario where the moat holds vs. a scenario where competition erodes it – to weigh valuations. Or doing economic profit analysis (return on invested capital vs. cost of capital) to see how long high ROIC can persist given the competitive context. A firm with ROIC > cost of capital likely has a moat if it’s sustained for years; if we expect that to continue, our valuation should reflect those excess returns continuing (which is often underappreciated by naive models).
The authors possibly propose looking at breakup or asset-based value vs. earnings power value vs. growth value (similar to some value investing approaches). A company’s earnings power (if competition stabilized today) plus assets might put a floor, and any value above that must be justified by competitive advantage allowing growth or high returns. Integrating strategy, one might haircut or boost forecasts based on barrier analysis. For example, a growth stock with no obvious barrier = be skeptical (a la many dot-coms that had high projections in the late 90s but no moat, and indeed many crashed).
Thus, Chapter 16 essentially says: Traditional valuation often overshoots for no-moat firms (by assuming too optimistic futures) and undershoots for wide-moat firms (by being too conservative or using industry-average assumptions on a company that’s exceptional). To improve decisions: - Use strategic insights to adjust forecast horizons: if a moat exists, maybe forecast high ROIC longer; if not, taper off quickly. - Consider how growth will impact competitive dynamics: growth usually invites entry, as we learned, so maybe assume margins will decline if a company expands rapidly unless it’s protected. - Evaluate whether a company’s cash flows come from assets that can be reproduced or not. If competitors can acquire the same “assets” (skills, tech), then high profits will shrink – reflect that in valuations (no “moat premium”).
They likely call out that investors often ignore competitive analysis, which is why stock prices sometimes misprice companies. A smart investor should do what they did in earlier chapters: identify if a company has a barrier (like a local monopoly or captive customers). If yes, perhaps it’s worth more than standard metrics suggest, because its cash flows are more defensible. If not, be cautious – even if current earnings are great, the future could disappoint.
They might mention some approaches like EVA (Economic Value Added) or the franchise value concept by Michael Mauboussin, etc., which incorporate how long a firm can earn above its cost of capital. That “fade period” – the time until competitive pressure erodes returns – should be assessed through a strategic lens (moats extend the fade).
In practice, for example: - Coca-Cola with its brand and distribution moat might deserve a high multiple because you can credibly forecast strong profits for decades (which has been true). - A tech fad company with no lock-in should be valued on current cash and maybe short-term prospects, not a 50-year DCF of growth.
Finally, Chapter 16 likely admonishes decision-makers (investors, CEOs) to not rely blindly on spreadsheets, but marry them with strategic thinking. A strategic perspective prevents you from overpaying in M&A (many companies overpay for targets assuming synergies or growth that are not realistic if no moats exist). It also helps identify undervalued gems (companies with strong local niches that the market underestimates because their overall size is small or past growth was slow, but they actually have a fortress and can generate cash steadily).
The heading “Improving Investment Decisions” suggests they want these concepts to directly inform how one picks stocks or projects. In essence, valuing a business = valuing its competitive advantage (or lack thereof). They explicitly link back to earlier chapters: if a firm passes the tests (stable share, high returns, identifiable moat), treat it differently in valuation than one that doesn’t.
In summary, Chapter 16 implores that strategy analysis should be baked into valuation models. Recognize moats in your numbers: a firm with a moat might justify a lower discount rate or a longer explicit forecast period. Conversely, for commodity-like firms, maybe use a higher discount or assume mean reversion quickly. This will lead to better investment choices – avoiding overpriced glamour stocks with no moat, and spotting truly durable franchises possibly undervalued by those using naive averages. It’s the bridge from theory to the investor’s bottom line.
Chapter 17: Corporate Development and Strategy – Mergers and Acquisitions, New Ventures, and Brand Extensions
This chapter addresses how companies should apply the book’s strategic principles to major corporate decisions like M&A (mergers and acquisitions), launching new ventures, or doing brand extensions. Essentially, it’s about ensuring these growth or reconfiguration moves actually make strategic sense (i.e., enhance or exploit competitive advantage) rather than just chasing growth blindly.
A key idea likely is: Don’t diversify or expand outside your competitive advantage. Greenwald and Kahn presumably critique many corporate strategies where firms acquire other businesses or expand product lines without any structural advantage – often destroying value (the Kodak example in Chapter 13 was one of these). They probably advise: - Only acquire a company if it reinforces your moat or you can apply your advantage to it. For example, if you have a local scale advantage in one region, buying a competitor in an adjacent region might let you replicate your model there (makes sense). Or if you have a strong brand and you acquire a company whose product you can effectively brand and distribute better. But don’t acquire just for size or diversification – many conglomerate acquisitions fail because the parent has no advantage in the new business. - Mergers among industry leaders can make sense if they increase economies of scale or reduce rivalry (thus increasing joint advantage). But mergers in industries with no barriers (like two commodity producers merging) often just lead to short-term cost cuts, but then the fundamental competitive dynamic doesn’t change – unless the merger achieves a dominant market share that creates a barrier (like a near-monopoly). - For new ventures: ask “Does this new market allow us to use our existing advantage? Or will we be just another entrant there?” If the latter, maybe don’t do it. Example: Cisco should have asked that before going into telecom – its advantage in enterprise didn’t carry to the carrier market. A positive example might be something like Microsoft using its OS advantage to get into applications (Office) – there it leveraged its OS monopoly to quickly dominate the Office suite segment (using distribution and compatibility advantages). That’s a corporate development move aligned with strategy. - Brand extensions: similar logic. Just because you have a strong brand in one category doesn’t mean it works in another. Virgin extended its brand from music stores to airlines to cola to a ton of things – some succeeded (airlines maybe due to service differentiation plus brand), some failed (Virgin Cola couldn’t crack Coke/Pepsi’s moat). The authors would say only extend a brand if the brand itself provides some captive customer base or differentiation that actually matters in the new category, and if incumbents there don’t have structural advantages. Otherwise, you’re just slapping a name on a business without fundamentals. Warren Buffett often says strong brands are limited to their sphere (Coke’s brand moats are in drinks, but if Coke made shoes, it would likely fail). - They might mention new product launches too – invest in those that can be protected or give you an edge, not just scattershot R&D. - And joint ventures or alliances: could be useful to cooperate on non-competitive aspects (like sharing a tech standard) but avoid partnering in ways that your advantage leaks to others.
Another concept: corporate leaders often engage in mergers or expansions due to empire-building or growth obsession (like Kodak did, or Cisco’s expansion attempt, or any number of conglomerates). Greenwald and Kahn would say this often undermines value if those moves aren’t rooted in advantage (the Cisco story from Ch. 7; Cisco’s stock crashed when its expansion faltered). Instead, they champion a more focused approach: expand gradually outward from your moat (like Walmart did regionally, or Microsoft did from OS to Office to server OS, etc. – always building on a strength).
For M&A specifically, they might advise: - If you have a small competitor nibbling at you (maybe with a tech or niche advantage), acquiring them could neutralize a threat or incorporate a new advantage. - If the industry is suffering from price wars due to too many players, a merger can rationalize capacity and restore cooperative balance (though antitrust might intervene). - Avoid paying huge premiums for companies that have no moat or one that you can’t keep post-merger. Many acquisitions fail because assumed synergies never materialize, often because of cultural issues or because the acquired firm had no moat to justify the premium. - They likely mention that the only three rational reasons for M&A align with the three sources of advantage: get a cost advantage (maybe acquire a firm with a unique tech or lower-cost resource), get a customer base (captivity, like acquiring a company with a strong loyal clientele you can serve), or get scale (merging to become the scale leader in a market). If an acquisition doesn’t clearly do one of those, it’s suspect.
Brand Extensions: I think they’ll say: if your brand gives customers a reason beyond pure product attributes (like Disney’s brand – trust for family entertainment – extending to theme parks, merchandise, etc., which works because the trust/captive audience carries over), then an extension can work. But if the new category has strong incumbents or the brand doesn’t carry meaningful advantage (like putting the Heinz name on a new soft drink, which doesn’t overcome Coke’s moat), then don’t do it.
New Ventures: They might caution to treat internal new businesses with the same strategic lens: does this new venture exploit something we’re uniquely good at, or are we entering a playing field where we have no edge? For instance, many big companies started e-commerce ventures in the late 90s just to be in the trend but failed because they had no advantage online, and they wasted money.
In short, Chapter 17 applies "Competition Demystified" lessons to corporate strategy at the top level: - Expand only into arenas where you can either apply your competitive advantage or create a new one. - M&A, new ventures, and brand moves should be evaluated not just financially but through the lens of "Will this allow us to do things competitors can’t, or are we just going into a knife fight without a shield?". - Diversification for its own sake (the old conglomerate approach) is usually value-destructive because no company can have advantages in many disparate fields simultaneously.
Greenwald is a known critic of unjustified diversification – I recall his teachings emphasize focus on core competencies (similar to core in strategy literature). They might mention how companies like GE historically grew large across industries by focusing on businesses where they could either be #1 or #2 (Jack Welch’s rule) – which is implicitly focusing on advantage: if GE couldn’t be a leader (scale advantage) in a segment, it would exit. That’s a strategic approach to corporate development.
Finally, perhaps they mention “brand extension” in the context of investment as well – like companies trying to leverage their brand to justify raising prices or entering new markets; sometimes it fails if the brand doesn’t equal a moat. E.g., logo licensing (Harley Davidson putting its logo on anything from clothes to cakes – sometimes it erodes the brand).
Thus, Chapter 17 is a caution and guide: All corporate growth moves should be strategy-driven, not just revenue-driven. If it doesn’t strengthen a moat or use one, don’t do it. If it does, execute it carefully. It ties back to “the choice of markets is a strategic decision as it determines the set of outsiders who will affect your future” – Cisco learned that moving to telecom put it against big, entrenched outsiders (Lucent, etc.) and no captive base; that hurt. So picking what market to play in is as important as how you play – ideally, choose markets where you either are the incumbent or the incumbents are weak.
Chapter 18: The Level Playing Field – Flourishing in a Competitive Environment
In this final chapter, the book presumably addresses the scenario where a company is in a market without significant competitive advantages – a “level playing field” where no one has a strong moat. This is often the reality in many industries (commodity industries, many services, etc.). How can a company flourish (or at least survive and do okay) in such an environment?
The likely message: If you’re on a truly level playing field, don’t waste time trying to devise grand strategies to outsmart competitors (because anything you do, they can copy). Instead: - Focus on operational excellence relentlessly. Outrun, don’t outmaneuver. That means being the lowest-cost producer, the most efficient operator, the one with the best customer service, etc. These improvements are usually transient (others eventually imitate), but you have to keep moving the bar to stay ahead just enough to earn slightly better margins for a period. - Possibly, find and exploit temporary advantages faster than others. For example, adopting a new technology early can give you a short-term edge until others catch up. Or identify small niches within the broader market where you can differentiate (like a specific customer segment you tailor to) – though those may not be durable moats, they could yield above-average profits for a while if others aren’t focusing there. - Accept lower margins as a reality and manage accordingly – maybe aim for a high-volume, low-margin approach (be the cost leader). - Avoid huge long-term commitments or expansions predicated on optimism, because if there is no moat, bad times will come often and unpredictably. So maintain flexibility and a strong balance sheet to weather industry downturns. - Also possibly: innovation – keep innovating new products/services. Even though they’ll be copied, you can reap a premium in the short window where yours is better or first. Some industries like fashion or software without moats rely on constant innovation cycles.
But crucially, the authors likely counsel realism: If you can’t find an advantage in what you’re doing, maybe don’t invest heavily in growth or consider exiting to a field where you can have an edge. One of the first things in the book was if you have no advantage, either be efficient or “exit your current segment and find another where you can develop a competitive advantage.” Chapter 18 might echo that: flourishing might sometimes mean finding some advantage or creating one via innovation or changing the business model. For example, Dell in PCs turned a commodity product into a somewhat advantaged situation for a while by using a direct sales model (others eventually copied, but for a period Dell had a cost advantage).
They could also highlight companies that operate well in tough industries by sheer management skill – e.g., Nucor in steel, which had no raw material advantage, but used technology (mini-mills) and an incentive culture to be lower-cost for decades. Or Southwest Airlines – arguably it carved out a competitive advantage (low-cost structure + quick gate turnaround = more flights per plane), but it’s also an example of excelling in a historically level-field industry via execution and culture.
Greenwald often spoke about industries with no advantage being traps for investors because even good management eventually gets normalized results. But he wouldn’t say you can’t survive – just that you shouldn’t expect super returns.
They might also counsel that if you’re on a level playing field, you might consider consolidation if possible (to try to create a future advantage via scale or coordination). Or look for government protections or niches with regulation that can give a quasi-barrier (like if you can get licensed in something where the license is limited).
The phrase “flourishing in a competitive environment” suggests maybe some positive spin: even if you have no moat, you can still do okay by being nimble, cost-effective, and maybe by aligning interests (like maybe employee ownership to drive efficiency, etc.). They likely re-emphasize that in these markets, operational tactics > strategy. Visionary strategy might even harm if it leads to over-expansion or diversifying in hopes of finding a moat but just wasting resources (like many companies in commodity industries that try to brand their product or do differentiations that don’t stick – think PC makers adding gimmicks that are copied in months).
Finally, Chapter 18 may also serve as a conclusion, tying all together: - If you have an advantage, nurture it and exploit it (Ch. 2-7). - If multiple firms have advantages, manage interactions via the “games” (Ch. 8-15). - If no one has an advantage (the level field), know that strategy isn’t the holy grail; focus internally and maybe look to reposition to somewhere you can have an edge.
They might end on the note that not every company can have a moat and that’s okay – but those companies shouldn’t pretend strategic planning will magically lift them; they should run lean or maybe merge with others to gain scale, etc.
It’s possible they mention some success stories of thriving without moats by constant adaptation or superb execution.
Overall, Chapter 18 gives closure: it acknowledges that the ideal world of moats isn’t universal, but even in the harshest competitive conditions, understanding the nature of competition helps a firm make the best decisions – which might be to not engage in self-defeating “strategy” like price wars or capacity gluts, and instead maybe find an innovative angle or just be the most efficient and accept moderate returns.
It likely also warns investors: if it’s a level field, don’t expect any company to maintain outperformance for long; treat them differently than those with moats.
Thus, the book ends by reinforcing its key theme: the presence or absence of barriers to entry is the fundamental determinant of strategy. And even at the book’s close, for the “no barriers” case, the advice is essentially “focus on operations or find a market where you can get barriers” – circling back to that central question from Chapter 1: “Are there barriers to entry that allow us to do things others cannot?” If yes, strategize around it; if no, strategize less and operate more, or move.
That encapsulates Competition Demystified: strip away the fluff; it’s largely about moats – build them, defend them, play nice if you share them, and if you have none, either run fast or get out.
