Making Sense of the Competition

Two interesting articles from McKinsey on competition (premium membership required for full articles, but the trailers are still worth reading)

• How companies can understand competitors’ moves (January 2009) Even when companies change their strategies spontaneously, their competitors have a good chance of figuring out what they’ll do and when.

• Getting into your competitor’s head (February 2009) To anticipate the moves of your rivals, you must understand how their strategists and decision makers think.

Kim Warren comments: "I’m still puzzled so little is written in this or any other strategy sources about what to actually do against competitors" (via A Jangbrand).

Although the word "strategy" sounds grand and majestic, the true strategists are tricksters (Odysseus). The end supposedly justifies the means, but the means can be pretty mean. Like diplomacy, you may want to look away now.

Strategy can be ethically problematic, so a lot of books on strategic action are set in a safe historical period - like the Japanese samurai, or Sun Tzu's Art of War. Perhaps the best way to learn about modern strategy is to study biographies (not autobiographies) of business leaders. And read between the lines.

Clockspeed and Competition

Innovation is supposed to grant competitive advantage, among other things. So we might expect the rate of innovation in a given sector to be linked to the degree of competition. (Setting aside for a moment the difficulties in measuring either of these objectively.)

In my very first post on this blog, Technology and Competition, I referred to the Marxian notion that technology is linked to a falling rate of profit, in which case it would make sense for monopolies to resist new technology. I found some support for this idea in a commentary about the Microsoft anti-trust case from the Economist magazine.

Even the advocates of accelerating technological change acknowledge the relevance of competitive forces. In his post Is the Pace of Business Really Increasing? Dave Bayless makes this point when discussing Charles Fine's notion of Clockspeed.

"The barriers to entry to the commercial aircraft and computer operating systems businesses, for example, slow industry clockspeed dramatically."

There are two contrary ways of viewing this. One is to describe technological change as primarily a technological phenomenon, which can then be influenced by secondary socioeconomic factors (e.g. increased by competition and decreased by monopoly). The other is to describe technological change as a social construction, where socioeconomic forces can make technologically trivial changes seem economically important.

Innovative Industries

Food and consumer goods companies are the most efficient innovators, according to a recent survey of 850 companies by Arthur D Little, while aerospace and utilities are the least efficient. Innovation efficiency is defined as the amount of revenue attributed to new products, proportional to R&D spending.

Source: Financial Times, April 21st 2005

Perhaps not surprisingly, innovation is most efficient in the industries where competition is keenest. This appears to support our previous thoughts on Technology and Competition.

Technology and Competition

There are Marxian arguments linking technological innovation with a falling rate of profit.



In many situations, innovation yields at best a short-term competitive advantage to the innovators, since rival firms are apparently "forced" to copy the innovation to remain competitive. Banks and ATMs are commonly cited as an example of this, although I have not examined the data.



This would suggest that technology "diffusion" is influenced by the competitive environment. It is "rational" for a monopoly to resist technical innovation, since innovation is likely to erode profit. We should therefore expect greater resistance from monopolies (and perhaps oligopolies), and lower resistance in markets where competition is keener.



This suggestion may only apply to some types of innovation. If so, it would be useful to know which types.



I am interested to know of any relevant studies on the relationship between technology change and profitability, possibly (but not necessarily) from a Marxian or neoMarxian perspective.



Further Notes ...

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Update November 2004

I have found some relevant commentary on the Microsoft antitrust trial from two years ago. This includes an article from the Economist, quoted and extended in several blogs.



"What is striking is how little innovation there has been in the bits of the market that Microsoft dominates, and how much where it has little influence. Operating systems, web browsers and word-processing software all look much as they did five years ago. But not many people are using five-year-old mobile phones, handheld computers or music-sharing software. Opponents of the case always argued that there was no evidence that Microsoft's monopoly was doing any harm. But the harm lay in the (necessarily invisible) innovation that did not occur. Conversely, much of the innovation going on in other parts of the technology industry owes a lot to Microsoft's absence. And that absence can be attributed, at least in part, to the trial, which lifted the lid on Microsoft's behaviour."

• Giving the invisible hand a helping hand (Economist, November 9, 2002)
• Nathan Newman (November 12, 2002)
• Brad Delong (November 13, 2002)
  
  

There is a lively discussion following Brad's blog entry, which shows that the evidence can be interpreted in different ways. That was the point of my original blog posting. It is not hard to find anecdote and advice about innovation - just look in any airport bookstall. But what passes for serious research is often little more than rehash of received opinion .