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Throwing the Big Guys for a Loop

Your company -- or your idea for a company -- is nowhere near the size of those Fortune 400 outfits, some of which are your most threatening competition. Instead of seeing your small size as a drawback, think of it as an advantage -- something that makes you quicker, more creative, and less weighed down by the traditions and infrastructure that burden your larger competitors.

In other words, think judo, say David B. Yoffie and Mary Kwak of Harvard Business School, authors of the new book, Judo Strategy: Turning Your Competitors' Strength to Your Advantage. In this interview with BusinessWeek Online reporter Theresa Forsman, Kwak explains why judo's emphasis on skill rather than size makes the martial art an inspirational model.

Q: You seem to be saying that the broad components of judo strategy -- movement, balance, and leverage -- not only allow the smaller and poorer company to compete against the bigger and richer, but actually are easier for the smaller company to implement.

A: Broadly speaking, that's right. Larger, established companies are more likely to find that their existing commitments -- to products, to customers, to people within the organization -- make it difficult to innovate strategically. They also have a greater tendency to rely on the skills and assets that have brought them success in the past. By contrast, the first step in applying judo strategy is to study the competition -- and figure out how to take advantage of your competitors' apparent strengths.

There's a parallel here to the practice of judo. It turns out that students with great physical strength often find it harder to master the core concepts of judo. That's because they tend to try to overpower their opponents, instead of looking for tactics that minimize their use of force.

That said, it's important to remember that the most dangerous competitors in judo combine enormous strength with great technique. By the same token, large companies that succeed in mastering the challenges of strategic flexibility -- such as Microsoft -- can be extremely effective judo strategists.

Q: The small company that is successful at using these techniques is going to achieve its goal of growth, which puts it at risk for being less fast, agile, and creative, i.e., the target of a more nimble competitor. How does a company avoid this Catch-22 of success?

A: Unfortunately, there's no easy answer to this question. This is a dilemma that companies face no matter what strategy they use to grow. However, some of the techniques we describe can help companies protect their gains, as well as contribute to their initial success. For example, by adopting the "puppy dog ploy" -- or staying below your competitors' radar -- you can make it much harder for other companies to figure out how to attack. During its first 10 years in business, Capital One used this technique very effectively to protect its position against competitors.

Q: Given the emphasis on speed and agility in the high-tech economy, is this judo metaphor more apt today than ever, or are there good examples of judo strategy from Old Economy companies?

A: Yes on both counts. Many of the dynamics characteristic of the New Economy -- the sped-up pace, the blurring of industry boundaries, the heightened potential for competition between firms of different size -- put a premium on the ability to avoid head-to-head struggles and trials of strength. And that's the idea that fundamentally drives the judo metaphor. But this approach can also be very effective in mature industries where larger companies have become set in their ways. Some of the most interesting applications of judo strategy can be found in Old Economy sectors, such as the airline and consumer-goods industries.

The oldest example we discuss in the book comes from the 1930s, when Pepsi emerged from bankruptcy for the second time to take on Coca-Cola. Pepsi was finally able to establish a strong position in the market by figuring out how to turn one of Coke's greatest strengths -- its bottler network -- to its advantage.

Pepsi offered a 12-ounce bottle of soda for the same price (5 cents) as a six-ounce Coke. This made sense for Pepsi because the cost of the additional six ounces was close to zero. But Coke found it virtually impossible to match Pepsi's move: Switching to a 12-ounce bottle would have forced its bottlers to write off millions of dollars in investment -- remember these were reusable glass bottles -- while cutting prices would have gone straight to their bottom line. So for years, Coke did nothing, giving Pepsi a critical window of opportunity to build its brand.

Q: You say judo strategy typically applies to situations "where one player's loss is another player's gain." Are the elements of judo strategy ever useful when you want the outcome to be "win-win" for your company and your competitor's company?

A: Sure. The most obvious example is the technique we call "grip your opponent." The idea behind gripping is that by engaging directly with other companies you can make them less likely, or less able, to attack.

Back in 1997, for example, eBay began to build a marketing relationship with AOL that addressed both of these goals. eBay's immediate aim was to use AOL's reach to accelerate the growth of its customer base. This would make it much harder for AOL to compete with eBay in the future.

But, at the same time, eBay executives were working hard to alter AOL's incentives to enter the auction business on its own. The more extensively the two companies worked together, the less AOL had to gain from launching its own auctions, and the more it had to lose. As a result, eBay has managed to keep its most dangerous potential competitor out of the market -- at least to date -- demonstrating that sometimes the greatest victories are the battles you don't have to fight.

Q: It seems clear that judo strategy works best as an offense, not a defense. Is there any way to keep the battle "away from your competitors' home territory" if you're on the defensive?

A: You should always think in terms of playing offense and maintaining the initiative, even if you're responding to an attack. Especially when you're a relatively small or new player, it's critical to focus on keeping the competition on your terms. The alternative is to get dragged into playing your competitor's game -- and that way, you're much more likely to lose.

In practice, this requires the discipline to avoid tit-for-tat, or responding directly to your competitor's every move. Again, eBay provides a good illustration of this idea. When eBay was attacked by powerful companies like Yahoo! and, it resisted the temptation to match them in areas like price and marketing.

Yahoo, for example, allowed sellers to list items for free and advertised heavily on the Web. Many companies would have felt enormous pressure to do the same -- even though it meant getting dragged into a competition they couldn't win. How can you out-market Yahoo on the Web? But eBay stood its ground. It stood by its auction fees -- which, by the way, have the advantage of keeping the quality of listings relatively high -- and rather than trying to match Yahoo's online advertising, the company counterattacked with a renewed push in grassroots marketing, which was an area where eBay had an edge.

But avoiding tit-for-tat is only part of staying on the offensive when you're under attack. The second piece is a technique borrowed from judo called "push when pulled." The idea in judo is that if your opponent pushes you, rather than push back, you should turn his momentum to your advantage by pulling him off balance. The parallel in business is to try to figure how you can rechannel a competitor's attack.

Drypers did this in the 1980s when Procter & Gamble launched an aggressive coupon campaign to get consumers in Texas to buy Pampers instead of Drypers. Rather than fight back with coupons of its own, Drypers told customers that it would take P&G's coupons. Since Drypers were already cheaper than Pampers, sales shot up, and within a couple of months, Drypers was at full capacity and cash-positive for the first time.

Q: The success of Intuit's accounting/bookkeeping software, besides demonstrating judo strategy, seems to reinforce the oft-heard maxim among entrepreneurs these days: You don't have to do it first -- you simply have to do it best. When it comes to judo principles, it almost seems as if there's a disadvantage to being first -- that rivals will learn, at your expense, what works and what doesn't.

A: I'm not sure that being first is necessarily a disadvantage or that you have to wait for the first-mover to stumble in order to figure out what works.

In the case of Intuit, for example, the company's success was due as much to [founder] Scott Cook's mastery of consumer marketing -- which he learned at P&G -- as to the company's ability to learn from earlier products in the category. If Intuit had been first, it could still have been an extremely successful company. But you're right that being first is clearly not an unalloyed advantage -- except, perhaps, in the very rare cases where network effects are so powerful that long-term success depends on being the first to reach critical mass.

Q: As you note in the book, speed was mishandled by many New Economy companies that no longer exist. What can tomorrow's entrepreneurs learn from their mistakes?

A: There are at least two lessons here for future entrepreneurs. The first is that speed -- which many New Economy companies equated with quickly getting market share, or even just buzz -- is not an end in itself. The ultimate goal remains to build a strong and defensible market position, and that's not going to happen if the price of speed is poor product quality or dissatisfied customers or an organization that can't cope with the challenges of growth.

The second is that there are better and worse ways to pursue fast growth. The method that many companies followed at the height of the boom was to throw all their resources into an all-or-nothing effort to force their way to the top. And, not surprisingly, many of these companies ended up with nothing. By contrast, focusing on avoiding, or at least deferring, head-to-head battles with more powerful competitors has allowed companies like Palm Computing [now Palm Inc.] to make impressive gains.

Q: The message here is that these moves, while potentially very effective, are not simple and easy, not one-size-fits-all. Rather, they are the product of much strategic planning and hard work. Are most small companies equipped with the wherewithal to do this kind of thinking?

A: You don't need armies of marketers or spreadsheet jockeys to master this approach. What you do need is the willingness to think hard and often counterintuitively about the competition, and the discipline to resist the temptation to fight head-to-head. These are qualities that a small business is just as likely as -- or even more likely than -- a Fortune 500 company to possess. By Theresa Forsman in New York

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