JUDO IN ACTION Managerial economics paper Submitted to: Prof. RAJAT KATHURIA Submitted by : AMAR JYOTI(12PGDM128) KARTIK PERI(12PGDM158) KSHAUNISH BANERJEE(12PGDM147) NIKITA (12PGDM154) SONIKA GARG(12PGDM176)
GROUP 8 8/29/2012
JUDO IN ACTION
ABSTRACT
Judo economics is a reference to a collation of those strategic principles which a new entrant or challenger in a market could adopt to combat a large and powerful incumbent. While facing an incumbent, a challenger has to compete with its greater brand value, brand recognition and large marketing budgets. Though this can prove to be intimidating, a competitor’s very size can prove to be an advantage for a nascent player as an incumbent’s si ze would deter
experimentation for the fear of failure and its ramifications on its brand. Also, its huge size may render certain segments of the market too small for its consideration. These are just a few avenues where an entrant can exploit an incumbent ’s size and strength in the market and have been dealt with it at length in the following cases. One can see the veracity to the analogy with Judo when it comes to the employment of such strategies as Judo is a sport which advocates using speed and balance to overthrow a stronger opponent using his own strength and size against him. We have attempted to analyze the given cases and determine the efficacy and shortcomings of these strategies and we have seen that this “Judo” analogy only
strengthens as the cases are explored in detail. What we also see is that these strategies may not always be long term solutions as with three of the four cases, despite the employment of these “Judo strategies”, the matter has transpired eventually into an attritional price war
which has inevitably spelt doom for the entrants or challengers.
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KEYWORDS 1) Judo Strategy 2) First Mover advantage 3) Market Cannibalization 4) Entrant 5) Incumbent
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JUDO ECONOMICS
Judo economics build on the analogies of the sport Judo and is a common reference to a set of strategic principles that can be developed by companies to help put stronger opponents on the mat. 1 Salop and Galman coined the term “Judo economics” to describe strategies that may use the opponent’s size to its
advantage. In essence, a new competitor or entrant into the market faces an ostensibly “catch-22” situation. If it were to compete predominantly on prices then the
incumbent will be forced to lower its prices. This is beneficial to the consumers but bleeds both the challenger and the incumbent. The incumbent, however, has the greater ability to absorb this hit in revenue due to its magnitude and turnover, in general. Hence, the incumbent survives, wounded whereas the challenger is relegated to oblivion. If however, the challenger decides to concentrate on quality, it will be faced with the need of publicizing the marked advantages of its product over its competitors. This would entail a large marketing budget, often unavailable to a new entrant and often matched with consummate ease by a larger consumer due to its larger turnover and profit. Newcomers to a business face many disadvantages They lack: 1. Proven products 2. Brands 3. Loyal customers 4. Manufacturing experience 2 5. Relationships with suppliers, distributors, regulators, etc. Therefore a profit-maximizing, risk-neutral firm should enter a market if the sunk costs of entry are less than the net present value of expected post-entry profits. The idea is to maximize these post-entry profits, carve out a sustainable market share and eventually capture the market.
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In order to do this, we must identify the advantages that a new entrant might have over the incumbent by the very virtue of being an entrant. These are captured by “Judo economics”.
Some of the commonly and successfully employed “Judo strategies” are: 1) Maintain a low profile: The judo strategy counsels challengers to keep a low profile and avoid head-to-head battles that they are too weak to win.3The incumbent is not as perturbed by this strategy as it fails to identify the challenger as precisely that; a challenger. 2) Capacity Limitation: By moderating output, the entrant manages to target a small section of the market. The incumbent finds this situation manageable and finds it preferable to give up a small share of the market rather than enter into a full blown price war to nip the competitor in the bud. 3) Defining one’s Core Capability: Fighting an incumbent in his area of expertise is a losing battle. Therefore, a challenger needs to work on his competitor’s weakness. Identify a core competency that has been hitherto ignored and build on that. 4) First mover advantage: The fact is that the incumbent is not naïve and will not be unaware of the entrant’s ploys for too long and on other occasions, will not be satisfied giving up any share of the market. Coca Cola is a powerhouse brand which is notorious for not giving up the smallest share of its market. Coca cola acts swiftly and aggressively to extirpate competition, however insignificant. Therefore, challengers must act swiftly to gain a position of advantage before the competitor employs all its brand and monetary might to combat the entrant. Excessive finishing and modification may prove to be detrimental as the entrant may end up losing the first mover advantage if it launches its product after an established competitor. 5) Collaboration: Often small entrants find it prudent to enter into partnerships or joint ventures with its large competitors. In this manner, the entrants enable its competitors to be beneficiaries and stakeholders of their business and by doing so, mitigate the threat of eradication at the hands of these established powerhouses. 5|Page
There are several other such strategies that fall within the ambit of “Judo economics” and some of them have been illustrated in following cases.
SOFTSOAP CASE
Minnetonka Corp. developed the incredible soap machine, which dispensed liquid soap in 1977. This proved to be an incredible competitive advantage. Minnetonka was able to carve out a new market which ate into the traditional bar soap market. Minnetonka was able to gain significant first mover advantage as the traditional powerhouses in the bar soap market such as P&G, Lever brothers and Palmolive were uncertain about the tenability of the new product. sThey feared the damage a failed product would do their brand and in order to mitigate that fear, P&G decided to test market a liquid soap under a different name than that of their flagship, “Rejoice” . Their indecisiveness was further fuelled by their fear of eating into their own market as the liquid soap market had been carved out of the existing bar soap market, in which they already had large existing shares. Introducing a competitor to Minnetonka’s liquid soap would be tantamount to market cannibalization . This
however, proved to be inevitable as the incumbents realized that the demand for this novel product was here to stay. Though Minnetonka attempted to promote their product extensively by allocating relatively large marketing budgets to their product, it was bested in this respect by the likes of P&G and its “Ivory” brand of liquid soap. Even though Minnetonka’s first mover advantage saw them catapulted into the
position of market leader for a long period of time, it had to sell Softsoap to Colgate-Palmolive for $61 million as it could no longer compete with the might of the incumbents.
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RED BULL
Red Bull was introduced in 1987 in Austria. As it was perceived to be a diet product, bars and nightclubs decided to give it a wide berth and therefore it had to be marketed through the traditional retail outlets and then filling stations. Soon, snowboarders, windsurfers and other adrenaline junkies started to consume Red Bull in droves and the product started to gain a reputation as a “happening” drink. It gained a notori ety which was further propelled by incidences that one would believe would damage an ordinary “wholesome”
brand. The fact that health experts were on the fence when it came to the health hazards posed by this product and rumours about it being a stimulant akin to ecstasy when mixed with Vodka, added to its edgy interesting appeal. Red Bull was able to identify this advantage it had cultivated amongst a niche crowd and decided to align its marketing strategies to accentuate this very edgy, risqué image of its product. Red Bull connected with the “colourful” locals, such as deejays who best paralleled the drink’s image and while it didn’t go into full blown traditional marketing through the usual channels, it employed “consumer education teams”
that would drive around in a vehicle emblazoned with the Red bull logo to provide free samples. It also started sponsoring “extreme” sporting events, such as Red
Bull Cliff diving and Street Luge competitions. Red Bull’s distribution was also unique. They decided to build their own
distribution network so as to distinguish it from the masses of drinks available. Red Bull vans delivered the drinks to independent warehouses set up by small distributors. Initially Coke and Pepsi ignored the energy drink market as it accounted for only a small insignificant percentage of the soft drink market but seeing the success of Red Bull, they decided to foray into this segment as well. They noticed how they could earn a premium on this product as opposed to the wafer thin margins in selling cold drinks to a larger consumer base. 7|Page
In response, Coke came out with KMX, an Orange flavoured energy drink marketed through a unique “hush -hush” strategy designed to create a buzz about
the product in the underground circles. The likes of Anheuser Busch also came up with similar products and marketed it via unique methods as they had identified that their product was catering to a niche. rd
Red Bull has maintained a 2/3 share in the energy drink market and even though it is still a small fry when it comes to posing any serious threat to the superiority of Coke and Pepsi, it has led to marginal falls in their market shares in the soft drink market. This is an inspiring example of succeeding by knowing your target segment, keeping selective and limited supply and keeping a low profile.
U.K. Petrol Price War The three types of companies that owned retail gasoline stations competed within a group rather than between a group rather than between groups as each had its own marketing niche and they all operated into their strengths. They were all careful not to start price wars due to the low margins in the business. In the early 90s however, supermarkets had begun to expand their own retail gasoline operations and they did so by lowering gas prices to lure customers into their stores. Since this is a very price sensitive product and price is the only consideration in a customer’s purchasing the product, erstwhile loyal customers
of the integrated firms, flocked to these supermarket run stores. As a result, their market share rose to 6% in 1991 from 1% in 1980. The incumbent, Esso struggled with the idea of ceding market share or fighting the supermarkets. Both decisions entailed inevitable loss of revenue. Eventually Esso decided to fight a price war of attrition so as to hold on to its market share.
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Esso eventually lost out on an estimated 200 million pounds in 1996 in profits but claimed to be able to reclaim 1 million customers who had defected. This is an example of how a price war with an incumbent is unsustainable and leads to the bleeding of all competitors. The incumbent comes out eventually,as the victor but is often gravely wounded, as was Esso.
AOL v Freeserve
AOL was the dominant internet service provider (ISP) in the US in the late 1980s and 90s. AOL had also made waves in the international markets, specifically Britain. Freeserve entered the scene in September 1998. It was launched by Dixons, Britain’s leading electr onics retailer, who offered every customer who bought one
of its computers a free CD that contained the online service. The ISP enabled users to go online for just the cost of a local telephone call. Though Freeserve offered its customers a plethora of services, its features paled in comparison to those of AOL. AOL, being complacent of its basket of services, decided that their product was markedly superior and would strike the customers as such. With this belief, AOL even publicly dismissed Freeserve as no threat. However, this proved to be false as the Europeans took to it and soon Freeserve became twice the size of AOL Europe by the summer of 1999. Having finally identified the threat posed by Freeserve, AOL launched its free ISP service, Netscape online to directly compete against the Freeserve ISP. It also slashed its British monthly fee of $27 by 40 percent. It also changed its target audience from mainstream consumers and families to younger internet users who were technically adept and didn’t require much support.
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Freeserve tried to compete by matching AOL and charging even lower monthly fee but was unable to sustain the ensuing operating losses and announced on December 6, 2000 that it would be acquired by Wanadoo , France’s largest ISP.
Once again, we see that an entrant gains mileage on a new idea or by bettering the incumbent’s idea. But this mileage is short lived as the incumbent reacts to match the challenger’s offerings and then the war comes down to prices. This is a
war that the incumbent is sure to win as its size will ensure that it will absorb the losses for longer than the challenger.
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APPENDIX 1. JUDO STRATEGIES : 10 Techniques for Beating a Stronger Opponent by David B. Yoffie and Marie Kwak 2. Application : Judo Strategy by Adam Brandenburger 3. Entry accommodation under multiple commitment strategies: Judo Economics Revisited by Nicolas Boccard and Xavier Wauthy.
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