As a young banker in Lagos, I wrote a report that one of the reasons responsible for collapse of many small businesses in eastern Nigeria was communal mutual poverty. I have observed that many of the entrepreneurs started well, but as soon as they become fairly successful, family and extended family system would cripple them. As more people depend on their supports, they would eat into their working capitals and will eventually collapse.
It happens very often as most of the men, presently unemployed in many villages, have managed growth companies at one time in their lives. They were sent by their parents for apprenticeships in the cities and after serving their masters, they were assisted to start their own companies. As soon as they begin, the communal power of African family system will come upon them.
More family members will move into their houses and unintentional activities that will destroy their businesses and eventually bring them back to poverty accelerated. It seems that you cannot have these rich men in a system where many are poor. They are dragged down until the day the businesses collapse and they return poor to the village.
I concluded that report by noting that entrepreneurs from stable and supporting families succeed on average over those whose families would depend on them disproportionately. My motivation was to help banks understand the risk profiles of business loan applicants. It was not a technical report; it was just one on a free time which no one actually used.
The African Insurance and Managing Communal Mutual Poverty
What I have described above may seen extremely challenging for a non-African. But it turns out that we insure ourselves in Africa through helping families including extended families.The little boy you help pay his school fees becomes an insurance policy for one’s old age, since few save for retirement. That is the same reason why parents put all they have to make sure their children get the best, so that at older age, they will take care of them.
For entrepreneurs, the first wisdom is knowing the balance. While you must support others, it is always a good idea to pay yourself a defined salary. That salary becomes the only source you can tap to assist family members. This provides guidance making sure you never dip into working capital for the business.
For example, depending on the size of your business, you can pay yourself N300,000 per month. No matter the level of support required from you, have the discipline as if you are to be working in a bank or a company, you cannot just walk into the accountant and ask for money to help people. Push yourself to stay within that spending limit. (Sure, there could be moments you may need to take small loan from your company to deal with personal issues, but do that with wisdom as though you are an employee, and not an owner of that firm). If you have that level of discipline, you will be successful in your business.
The Risk of Herding in Business Strategy
The same analogy above applies in many modern industries. Companies increasingly congregate in their competitive strategies. They tend to do similar things in order to self preserve themselves. In the era of Yahoo and AOL, they provided similar services. Cell phone companies provide services and pricing models that are largely the same. Everyone wants to eat from the same pot and let the help offer assured preservation or total destruction whichever flips.
Even the network televisions are not spared this effect. From casinos to airline industry, we can see an ordered communality across industries. They mutually agreed, though never admitting it, to move in features, services and prices alike. The airline industry was notorious for it about fifteen years ago. In most developing markets where Internet has not penetrated deep enough, the media empires move in tandem on their stories, prices and distribution networks.
I call this communal competitive strategy because it simply means that these firms in their respective industries form communal ties and agree to provide services that will preserve them with lesser disruption to their industries. They may not band together because that could be illegal but the outcome shows they watch one another. Many have called this win-win strategy. It has also been seen as co-opetition where, especially in banks, they cooperate though competing against one other in other to keep the industry healthy.
Unfortunately, just as communal mutual poverty ends up badly; communal competitive strategy (CCS) is doomed in this age. The 21st century is not the one where industries can drive the consumers. Technology disrupts our needs a lot faster and makes it possible that trends arrive and fade quicker. This is in line with my argument that focusing on customer needs is a recipe for disaster; rather, firms must focus on meeting the perception of customers. That means going to offer services and products you envision they need and not asking at the moment. The idea is that very soon, the trends will make them to need them. It is like developing iPod or iPhone when few thought they were unnecessary, but when they arrived, we all liked them.
As social media, technology and globalization make consumers more informed, firms must resist the urge to follow competitors into CCS. I understand how difficult it would be to be unique or possibly a loner when something is working for everyone in the industry, and someone is asking you to follow a different plan. Banks destroyed their industry when most of the big ones got into subprime mortgage loans. In most cases, the defense from these banks was making those loans was an industry norm.
The old Ford Motors, Chrysler and GM followed a pattern- making big gas-hungry vehicles. They were all herding one another and the competition was defined on pushing more SUVs in the market. The 360-degree understanding of your market and the need of seeing the perception of consumers based on the environments which included climate movement, oil price projections and other factors played minor roles in their strategies. They were happy to communally compete, it was working, and none was ready to become a loner, even when data proved the necessity.
Breaking Industry Herding
So what must firms do to avoid the trap of CCS? They must move away from the competitive mutuality, where necessary. Google disrupted the search industry when it emerged because Yahoo, MSN and AOL were basically doing the same. I recalled that the highest email storage one could get those days was 8MG; Google provided 1GB. In airline industry, we have seen Raynair and other budget carriers in Europe disrupted the industry by offering competitive prices and taking market shares from the national carriers. We all know what happened to the US big auto companies when the Asia companies built models that appealed to customers.
Innovation provides the elements to avoid herding because innovation process means you are moving from the common way of doing things. The common way of doing things is usually what everyone does. The principle of innovation is fundamental in a firm creating differentiation and that is a key way to avoid herding.
Largely, competitive herding is totally bad. However, if an organization relies on that it will not survive for long. Most new entrants usually focus on attacking those models and when they do, you will be affected. This means you must have a strategy that is different from your competitors. You have to become like McDonald that invested in Chipotle Mexican Grill. While the model of Big Mac was under attack by policies, they covered themselves with Chipotle. Similarly, Pepsi has since evolved from purely a soda firm. If you focus on attacking the soda business, you will not get Pepsi. They got out of the soda war with Coke and reinvented.
Avoid the CCS trap and when everyone in the competition is giving customers more, you may go sole and refuse to give. And in cases where they are taking, give the customers more. Herding with your competitors is not a guarantee that you will survive. It simply means that your industry is vulnerable because your singular model can easily be attached by an outsider.
---Visit our Store for my books, cases, notes, etc. Now, enjoy our consolidated subscription for all contents (past, present and future).
-- We offer Advisory Services (tech, strategy & Africa).