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Competitive Intensity, Business Models, and Distributed Authority

Competitive Intensity, Business Models, and Distributed Authority

. 2 min read

If it's a pure commodity like airline seats, you can understand why no one makes any money. As we sit here, just think of what airlines have given to the world—safe travel, greater experience, time with your loved ones, you name it. Yet, the net amount of money that's been made by the shareholders of airlines since Kitty Hawk, is now a negative figure—a substantial negative figure. Competition was so intense that, once it was unleashed by deregulation, it ravaged shareholder wealth in the airline business.

Yet, in other fields—like cereals, for example—almost all the big boys make out. If you're some kind of a medium grade cereal maker, you might make 15% on your capital. And if you're really good, you might make 40%. But why are cereals so profitable—despite the fact that it looks to me like they're competing like crazy with promotions, coupons and everything else? I don't fully understand it.

Obviously, there's a brand identity factor in cereals that doesn't exist in airlines. That must be the main factor that accounts for it.

And maybe the cereal makers by and large have learned to be less crazy about fighting for market share—because if you get even one person who's hell-bent on gaining market share.... For example, if I were Kellogg and I decided that I had to have 60% of the market, I think I could take most of the profit out of cereals. I'd ruin Kellogg in the process. But I think I could do it.

In some businesses, the participants behave like a demented Kellogg. In other businesses, they don't. Unfortunately, I do not have a perfect model for predicting how that's going to happen.

For example, if you look around at bottler markets, you'll find many markets where bottlers of Pepsi and Coke both make a lot of money and many others where they destroy most of the profitability of the two franchises. That must get down to the peculiarities of individual adjustment to market capitalism. I think you'd have to know the people involved to fully understand what was happening.

That's from a 1994 talk called "A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business" by Charlie Munger of Berkshire Hathaway.

It strikes me that the Kellogg example is a good one to reference when thinking about the appropriate amount of distributed authority. I can see a new-agey OD person advocating for pushing brand- and pricing-related decisions all the way to the edge, and incentivizing growth: New brands! Innovation! Customer-centricity! But that would be bad for the health of the business, so...eventually bad for employees, and bad for customers.

The correct answer to a question about the level of distributed authority doesn't just respond to the will of the people, or to some theoretical norm – it has to be in conversation with the market dynamics of the industry and the company's position in that market.