The Competitive Disadvantage
By: David Gritz
As the Dow marked a psychological rebound at 10,000, few analysts were quick to verify this achievement. With an unemployment rate heading for 10% and no clear connection to revenue, the 10,000 mark might just be an artifact of a much bigger picture.
Internationally, the dollar is suffering, exchanging at only €0.67, almost a split from a 2001 high of €1.20.1 Nationally, banks are still suffering, with Bank of America reporting a one billion dollar loss; real estate demand is dwindling with record lows in rent; and companies are only exceeding earnings by cutting costs.
In this climate of rising futility, weak markets, and unpredictable demand, companies are becoming increasingly cutthroat in their competitive strategies. Businesses are responding to decreasing market size with more aggressive strategies to demolish their competitors through hostile competition, mergers and acquisitions, and unethical behavior. A look into a few companies emphasizes this point.
Head-to-head, Amazon and Walmart are engaging in airline style price wars with books. Cutting bestsellers from the typical $25 to $10, Amazon thought they could out-price Walmart. Think again. Walmart, known as a cost leader, cut the price to $9, and when they were matched by Amazon, went down another penny to $8.99 a copy.2 In the same context, Microsoft sought to challenge Apple in the retail arena by opening two Microsoft retail stores. These stores will function as near replicas of Apple stores, selling high-tech gadgets and software packages licensed by Microsoft. They will even copy the Genius Bar, Apple’s signature customer service and repair center at the back of every store.3
Top-to-bottom, Oracle offered to buy Sun Microsystems for $7.4 billion in order to compete directly with IBM as a one-stop-shop for big business IT solutions.4 Bloomberg bought BusinessWeek to expand its information clutch on the magazine channel.5 These big buys were financed by the industry of continual mergers: banking. With JP Morgan connecting with Chase and TD enveloping Ameritrade and Commerce, it’s hard to get anyone’s name straight.
Unethically, Toys ‘R’ Us is under FTC review for using market forces to hike the price of strollers and breast pumps.6 Likewise the SEC has recently identified the largest insider trading ring in a century.
In this environment of ultra-competitive forces, companies and watchdogs need to step back and observe the long-term results of their actions. Will this competitive behavior end the recession? Is it best for us and our customers?
In most cases the answer is a clear ‘no.’ In the long run, consumers and producers will both lose. As companies increase cutthroat competitive tactics, they will decrease long-term profits. If you make the seas red, no one wins. Customers will lose choice and quality while companies will lose capital and positive PR.
In the case of book selling, Walmart and Amazon will have to sell below cost and will discourage publishers from selling through their channels. For Microsoft, they will create channel conflict with their nearby retailers and increase costs for the customers, since retailing is not their core competency. Oracle will minimize the functional number of customer combinations from nine (e.g. IBM + Oracle, Oracle + Other, or IBM + IBM) to two: either IBM or Oracle. This will decrease the market capacity for their software product while increasing the risk of gaining market-share since Sun + Oracle is not a well-established combination. Finally, the losers will lose – unethical business practices never get companies ahead. Toys ‘R’ Us will end up paying in the jugs for their breast pump price fixing.
In this zero-sum game, there is only one way to get ahead and win in the long run: ignore the rules. Instead of buying into the U.S. magazine market, Bloomberg could offer a hybrid terminal with a magazine feel. This would create a “blue ocean” of uncontested market space. Instead of trying to find more ways to sell products with bugs and overheating Xboxes, Microsoft should focus on developing an operating system that is not vulnerable to viruses. Banks might even be able to do more than clean their balance sheets by offering investment products to small companies.
Taking this theory out to the market, analysts see a bleak future because companies are hollowing out. They are trading cost-cutting strategies for revenue-building approaches. Instead of expanding their intellectual property they are selling it below its true value. When we can learn to step off the battlefield, our market will stabilize.
Sources:
1 – http://www.x-rates.com/d/EUR/USD/graph120.html
2 – http://online.wsj.com/article/SB10001424052748704322004574477050954174722.html
3 – http://online.wsj.com/article/SB125582090441392365.html
4 – http://blogs.wsj.com/digits/2009/10/15/ellison-oracle-wont-be-seventh-in-services/
5 – http://online.wsj.com/article/SB10001424052748704107204574473382444906054.html
6 – http://online.wsj.com/article/SB125573656435491057.html
