Competition Demystified Chapter 2

 

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Differentiation may keep your product from being a generic commodity item, but it does not eliminate the intense competition and low profitability that characterize a commodity business. Although nature of the competition may change, the damage to profit persists because the problem is not lack of differentiation, but the absence of barriers to entry. Understanding the significance of barriers to entry and how they operate is the key to developing effective strategy.

But with a wider variety of luxury cars available, the sales and market shares of Cadillac and Lincoln began to decline. Meanwhile, the fixed costs of their differentiation strategy—product development, advertising, maintaining dealer and service networks—did not contract. As a result,  the fixed cost for each auto went up, and the overall profit margin per car dropped. Cadillac and Lincoln found themselves selling fewer cars with lower profit margins. Their profitability shrank even though their products were thoroughly differentiated.

If no forces interfere with the process of entry by competitors, profitability will be driven to levels at which efficient firms earn no more than a “normal” return on their invested capital. It is barriers to entry, not differentiation by itself, that creates strategic opportunities.

Efficiency matters

In copper, steel, or bulk textiles, it is clear that if a company cannot produce at a cost at or below the price established in the market, it will fail and ultimately disappear. Since the market price of a commodity is determined in the long run by the cost levels of the most efficient producers, competitors who cannot match this level of efficiency will not survive. But essentially the same conditions also apply in markets with differentiated products.

Competition Demystified Chapter 10 Into the Henhouse 筆記 (二)

 

AFFILIATING WITH THE LOCAL STATIONS

The networks did not steal one another’s affiliated stations. Government regulations permitted only one affiliate per network in a given market, so there was room for all. Also, regulations made it difficult to shift a license from one local station to another, another constraint on network poaching. Still, the genteel attitude of the networks toward one another did as much as the regulatory environment to temper their competitive zeal.

Still, a handicapper giving odds on a brawl between Fox and the existing networks would have had to favor the networks. They had the audiences, and they were not going to lose them quickly. Therefore, they could pay more for programs than could Fox, and they could charge more for their ads. They already had strong local affiliates in addition to their owned and operated stations. NBC, now owned by General Electric, and ABC, a division of Capital Cities Communications, had the resources to withstand a protracted conflict. CBS, in an effort to stay independent, had loaded its balance sheet with debt and was more vulnerable. Still, it had valuable assets it could sell, like the local stations it owned, and it could cut costs by consolidating operations. The lavish management style by which the networks had operated for years left them with plenty of fat to trim (修剪 整理) before they started to hit muscle or bone.

There is no doubt that a frontal assault by Murdoch, even one that ended in defeat for Fox, would have been costly for the networks. Had he competed on the price of ads, they could have matched him. But since his revenue stream was much smaller, the dollar damage to them would have been far greater. Had he bid for their programs, they could afford to pay more, but again, they had a whole schedule to defend and he was just starting out. For Fox and for the networks, abandoning the old game of carefully moderated competition for a bruising, no-holds-barred battle would have been painful.