Playing To Win
The Shift from Pre-Competitive to Competitive
Industries go through a particular transformation that typically isn’t obvious until after it happens. However, the transformation is deadly to most players that are there at its start. To help those players, I decided to write my 26th Playing to Win/Practitioner Insights (PTW/PI) piece on The Shift from Pre-Competitive to Competitive. (Links for the rest of the PTW/PI series can be found here.)
What is Pre-Competitive?
In pre-competitive industries, many competitors typically co-exist in relatively happy state. While they compete for business, when they lose a piece of business, it isn’t a terribly big deal. Although not pleasant, losing a piece of business doesn’t alter the competitive dynamics. There is always other business to win.
This sort of pre-competitive state would describe garbage collection before Waste Management Inc (WMI). There were thousands of small garbage collectors across the country. They may have competed for business at the edge of their territory, but it wasn’t all or nothing competition (except maybe in New Jersey!). The same held for video rental stores before Blockbuster.
In the mid-1980s, my industry, strategy consulting, was pre-competitive. In addition to the largest competitors of the day, McKinsey, BCG and Bain, there were innumerable smaller firms competing, including my firm, Monitor, but also Corporate Decisions, Strategic Planning Associates, Oliver Wyman, Marakon, Parthenon, etc. It felt like in our office building off Harvard Square alone, there were a half-dozen strategy boutiques.
There are still lots of precompetitive industries today. The corporate legal services market in NYC today is pre-competitive. There are still a bunch of white shoe law firms in NYC, all of which feature partners who make lots of money doing their own practice. They compete, but not to the death — because each of them is relatively satisfied with their existing business model and their slice of the big, profitable pie.
It is not just smaller industries. The automotive industry is only now moving out of its pre-competitive stage. Since its inception, there have been scores of competitors around the world. Until recently, the biggest global market share stood at barely over 10%. Even now with a global consolidation underway, it is only 13% for co-leaders Toyota and Volkswagen.
All of the participants in garbage collection, video rentals, and strategy consulting in the 1980/1990s, automotive in the past decade, and corporate legal services today would claim that they are in competitive industries. They are and they aren’t. They compete, but gently — not as if survival is at stake.
But survival will be at stake because someday, some player — either from inside or as a new entrant — takes an action that precipitates a transformation, one that rarely stops after it gets started. The action is to push a scale button in a way that makes remaining a small player nearly or entirely impossible.
When Wayne Huizenga of WMI started buying up clusters of small garbage collectors, building centralized repair depots, and getting sizable volume discounts on his trucks, he changed the competitive dynamics. Scale provided such dramatic advantages that WMI just kept getting bigger and at the same time competitively stronger until such time that most of the little players were wiped out of the industry — and now WMI, Republic and Stericycle duke it out in a competitive market. And in general, WMI makes lots of profit, Republic decent profit, and Stericycle little or none.
It happened in strategy consulting, initially driven by McKinsey. I remember being co-head of Monitor in the mid-1990s when McKinsey announced that it would spend annually on R&D/product development an amount that happened to be equal to our total revenues. I knew that wouldn’t be good! The ante got upped with free work to get a client started. It used to be that you sold them a study to figure out the answer. Then it became that you gave them the answer free up front to win the relationship. Then you built a low-cost analytical capacity in India. And a Global Institute to build new IP. All of these competitive weapons required scale that made it relatively easy for McKinsey, harder for BCG, harder still for Bain and impossible for Monitor-sized competitors. This was clearly an exercise in pushing the scale button in strategy consulting.
Now the industry is dominated by the consulting giants, McKinsey, BCG and Bain, plus the huge broad-based professional service firms, Deloitte (which absorbed Monitor), EY (Parthenon) and PWC (Booz). The few mid-sized players left (OC&C, SDG, LEK, Mitchell Madison, Roland Berger) exist on the fringes of a competitive industry with an independent future in doubt because the big players have pushed the scale button and the little guys just can’t keep up.
It is finally happening in the automotive industry, driven by the massive investments needed to participate in the transition first to electric vehicles (EV) and then to autonomous vehicles (AV). Tesla has demonstrated that you either make gigantic investments in EV or you don’t get to play at all. And Google is attempting to prove the same thing in AV with its Waymo venture. It spent countless billions of its own capital before getting outside investors to pump another $2.25 billion into a venture for which returns aren’t remotely close to being realized. The merger of Fiat Chrysler (FCA) and Peugeot (PSA) is their way of responding to a competitive environment that will require mountains of investment dollars.
The feature that defines a market as competitive is that losing a piece of business means that you are making yourself competitively weaker and the competitor to whom you lost the business competitively stronger. While corporate legal services in NYC is pre-competitive, I would argue that the proxy solicitation segment of the business is competitive. The narrower territory pits the competitors more clearly against one another. There, a smaller set of specialist duke it out, including recognized leaders such as MacKenzie, Innisfree and D.F. King. When one loses an assignment as the solicitor for a high-profile proxy battle, it gives the winner a reputation boost and the added experience necessary to make the next beauty-contest easier for it to win and harder for the loser. A string of losses in a row can result in a fall from which recovery is challenging. They need to compete as if survival is at stake.
Sometimes the shift to competitive can happen very quickly. When Canadian regulations changed to enable the large life insurance companies to demutualize, I strongly encouraged my law firm client to compete super-aggressively on the very first big one and have one of the firm’s top partners lead the file. They wondered why I was so adamant because traditionally providing legal services to Canadian insurance companies was not a big deal because they were sleepy mutual companies that required routine legal services, much of which the insurance companies did internally. But my client listened, won the business, and based on that initial experience, built up the proprietary know-how that enabled the firm to dominate the transformation of the Canadian life insurance industry to public companies. In this case, the insurance industry legal services market went from pre-competitive to competitive in one fell swoop.
The most important practitioner insight is to not assume that the level of competitiveness in your industry is natural — the way it should be — or stable — the way it will continue to be. It can change precipitously. The rules of competition change quickly, and it doesn’t take long for the consequences to become inevitable.
The flow is one way. When it goes competitive, it will be irreversible. I have never seen a competitive industry return to pre-competitive state. It may happen someday, but I am not holding my breath.
There are defensive and offensive implications of the specter of the shift from pre-competitive to competitive.
On the defensive side, it is critical to be extremely wary of and attentive to a competitor — existing or new to the space — pushing a scale button in your industry. Bricks and mortar MBA programs had to recognize early that on-line players had a model in which increasing scale increases cost effectiveness rather than their traditional model that featured limited benefits to scale. Already the biggest on-line players are multiples of the size of the biggest MBA programs and many traditional MBA programs are shuttering — and it is just the start of that transformation. It is a tricky decision whether to follow as soon as the transformation starts. But if you don’t do so immediately, it becomes too late very quickly. My prediction is that by 2030 there will be fewer than 50% of the US MBA programs that existed in 2015.
On the offensive side, it is always worthwhile to contemplate ways in which you can push the scale button before anyone else. If it can be done, it will be done by somebody. If someone can build a more scalable classified advertising platform than your newspaper, they will build it eventually. And when they do, your business won’t suffer: it will implode. Long before online travel intermediaries began to aggregate customer demand and interpose themselves between customers and airlines, Southwest Airlines recognized that the travel agents represented a high cost, low service-quality channel and moved aggressively to get its customer base to book directly with Southwest online. As a result, Southwest was not a small player in online booking when the aggregators (Expedia, Travelocity, etc.) built their businesses. Similarly, Domino’s Pizza began in 2008 to create a digital customer experience with its ‘Pizza Tracker’ mobile app long before food delivery applications achieved meaningful scale. By 2017, 60% of Domino’s pizza were ordered via their app. Southwest and Domino’s went on the offensive and pushed scale buttons before they were pushed by somebody else. Did it eliminate the threat from aggregators? No. But going on offense early helped build scale positions that their competitors did not attempt until far too late.
Whether your reaction is defensive or offensive matters less than whether you make a decisive choice in the face of a shift from pre-competitive to competitive.