Paying for Bad News #2: Distorted Markets

Paying for Bad News #2: Distorted Markets

By Mark Chussil

This series of four posts was published as a single article by SCIP in the April-June 2012 issue of Competitive Intelligence Magazine. (SCIP is Strategic and Competitive Intelligence Professionals.) You can read or download that version of the article.

Introduction

With his heartfelt goodbye-cruel-world article “Peak Intel: How So-Called Strategic In­telligence Actually Makes Us Dumber” in The Atlantic, Eric Garland sparked an elec­tro­nic blaze on LinkedIn. His article fired up many people (see Acknowledgements), includ­ing me, in the fields of competitive strategy and competitive intelligence over a few days in April 2012.

The article and commentary hovered around three themes, which I’ll call Closed Minds, Distorted Markets, and Stormy World. Those themes are perennially old and current-events fresh.

I’m not saying the themes are wrong. I am saying I don’t think the evidence establishes they’re right. They might be right, but they aren’t right yet. Until they are right I believe it’s worth considering other perspectives.

This essay, Distorted Markets, is the second of four. It is my commentary on Mr. Gar­land’s article, and my commentary on the commentary on his article. See the others: Closed Minds, Stormy World, and Beyond The Themes.

Distorted Markets

Situation: Oligopolies are getting bigger and more powerful. Government is playing an ever-more active role in markets.

Observations: Oligopolies and government distort market forces. They cloud the future by subjecting it to the caprices of industry dominators and political lobbyists.

Outcome: It gets ever-harder to predict the future.

Conclusion: Traditional competitive and market analysis is increasingly irrelevant.

Needed: A Fundamental Market Rationality

Business analysis, education, and thinking assume a fundamental market rationality. When we draw up our strategies we assume the market is fair: customers can choose without coercion, regulations apply equally to all, and so on. A level playing field.

Without those assumptions, we’d find it very hard to plan; we might even find planning pointless. For example, if Abrams-tank incumbents could gang up on poor little Smart-Car us, we couldn’t enter their market. For another, if government could direct people to buy or not to buy from specific businesses, then we could find our fortunes rising or falling through no virtue or fault of our own.

The Distorted Markets theme says that oligopolies have tightened their influence of more markets, perhaps directly through market power, perhaps indirectly through lob­bying for favorable rules. It says that governments are growing more intru­sive by pick­ing winners and losers, supporting the former with subsidies, tax incentives, tariff pro­tection, or direct investment, penalizing the latter by withholding those advantages. Some of those effects take place within a national economy, others are part of maneuver­ing among countries. The theme calls those effects distortions and asserts that those distortions are increasing. (Of course, companies designated “winners” don’t think of those effects as distortions.)

Obviously these are highly charged political issues, and much as I want to join that bat­tle I will throttle myself. For the purposes of this essay, my job as author is to use neutral language and de­scribe points of view without judgment, no matter how desperately they need to be judged. In return for my restraint, your job as reader is to give me a break. I’m happy to talk about politics over a nice single malt. But here let’s focus on the Distorted Mar­kets theme, not on the legitimacy of the distortions.

Prevalent and Potent Distortions

The point of the Distorted Markets theme is that the distortions are so prevalent and potent that they make it difficult or impossible to strategize effectively.

I don’t think an­yone disputes whether market concentration and government policies have effects. (People do dispute whether those effects are good, which is the debate we’re not having now.) I think the important question for those of us in CI and competi­tive strategy is whether those distortions so confound our efforts to run our businesses that it’s reasonable to goodbye-cruel-world strategy analysis and focus instead on raw power.

The Distorted Markets theme might be right, but it isn’t yet, at least not for me. There’s still plenty of strategizing to be done.

A little historical perspective relevant to oligopolies.

• A few decades ago it was fashionable to vertically integrate. We want control over everything between raw materials and the customer: it’s profitable and helps us control our costs.[1]
• Then it became fashionable to outsource anything that wasn’t a company’s core com­petence. (Vertical disintegration?) Our suppliers have economies of scale, and we don’t have to manage operations we don’t know well.
• Now it’s fashionable to partner with companies (affinity programs), to join with them in networks (airline alliances), or simply to buy little companies if they show promise (pharmaceuticals). We take on less risk and we can move more quickly.
• On the day I wrote this part of the essay (April 30, 2012) Delta Air Lines an­nounced it would buy an oil refinery to reduce its fuel costs. Back to vertical integra­tion?

Companies have jockeyed for control and competitive advantage for a long, long time. They have experimented with different methods, and done so in a surprisingly herd-like way. The exact nature of the methods changes from time to time and from place to place, but there’s always something. And that’s the point: there’s always something. That’s why I can agree that today’s oligopolies have distorting effects while also saying that they’re not so different, in kind or in number, from the distortions of the past. (Note too that some oligopolies are shifting or shrinking, as in book publishing and consumer elec­tronics.) We can quibble and quarrel over matters of degree and over a nice single malt, but I don’t see a massive shift in the fir­mament. I could be wrong soon but I don’t think Distorted Mar­kets is right yet.

We don’t necessarily need to know much about the something. It matters to us if we find ourselves competing with a company that has a cost advantage. What matters too is the size and importance of its cost advantage, the likelihood it will persist, and whether we can gain advantages of our own. It doesn’t matter so much whether its cost advantage comes from long-term contracts with suppli­ers, favorable tax rates, getting acquired by a sugar daddy that buys a new factory, or locating where labor costs are low. In other words, you can confront the same effect — a competitor with a cost advantage — that is or is not the result of a “distortion.”

Government “intrusion” ebbs and flows too, accompanied by political hysteria as an entertaining bonus. Regulations are relaxed, regulations are tightened. Lobby­ists are in­vited in, lobbyists are locked out. Retired politicians leverage their net­works. Perhaps the biggest government-intrusion change in the USA in recent years is the Citi­zens United case, which opened the door for big money to, uh, participate more enthusi­asti­cally in poli­tics. I think we should classify that as corporate intrusion affect­ing, ef­fecting, and in­fecting government intrusion, but the effect by any name would not smell sweet.

Citizens United may be a material change for industries rich enough to use it aggres­sively. It remains to be seen how effectively corporate money will be countered by forces such as social media and mass demonstrations. (I’m expressing ignorance, not skepti­cism.) Meanwhile, let’s enjoy our ride on the quadrennial Ameri­can election spasm.

Then we have local, state, provincial, national, and international taxes, tariffs, currency fluctuations and manipulations, sanctions, protectionism, state-backed industries, and so on. These things have been around a long time too, and to me fall into the category of there’s always something.

As I understand it, Distorted Markets doesn’t mention the effects of natural disasters, war, un­employment, mass migrations, or the near collapse of industries (housing in the USA) or national economies (Greece, Spain). Those effects can be large and sudden. If we’re wor­ried about our ability to plan and predict, why focus only on oligopolies and govern­ment? If the distortions are meaningful to a business, it seems irrelevant to me whether they are deliberate or fortuitous.

Looking Through Distorted Glass

The point of the Distorted Markets theme is that distortions make it hard to analyze and strategize. Perhaps I’m missing something, but in my experience markets can actually be analyzed well even with distortions. I know because I’ve done it, in dis­torted markets such as airlines, oil and gas, pharmaceuticals, and tele­communica­tions, on five conti­nents. You’ll get frustrated indeed with the cruel world if you analyze by, say, ex­trapo­lating the past into the future using trend lines or common statistical models. But if you apply what-if analysis using models designed for strategy simulation, you’ll get ac­tion­able insight. (See All About Models.)

We have to let go of the idea that we can predict the future. Predicting the future is not possible except for grindingly dull situations, and in those situations the successful pre­dictions are due not to the predictor’s brilliance but to the situations’ grinding dullness.

Instead, embrace three ideas:

1. Competitive advantage starts with exploring futures. That’s why people work with sce­narios, contingencies, competitive intelligence, business war games, and simula­tions.
2. We are not passive recipients of whatever a random-number generator doles out. Our positive actions make a difference.
3. Remember that our objective is to achieve good results, not to make good predic­tions. To do that we need good decisions, and good decisions require a lot more than predictions.

Next, Read Part Three: Stormy World

Click here to read part three in this series of four essays. Part three is about the Stormy World theme.

Acknowledgements

The LinkedIn e-conversation, in the Corporate Planning, Strategy & Strategic Market Segmenta­tion group, contained wis­dom from James Andrus, Babette Bensoussan, Ben Gilad, August Jackson, Alan Michaels, Seena Sharp,and many others. People cited Benjamin Franklin, Daniel Kahneman, Friedrich Nietzsche, and Mi­chael Porter. We covered blind spots, business war games, the curse of success, hon­ing the craft, industry databases, News Radars, oligopolies, political influence, and strat­egy simulations. I have done my best to reflect that commentary in my essay. Blame mistakes on me, and credit wisdom to them. My thanks to Sean Campbell for sage advice.