Book Review: Monopoly Rules/How to Find, Capture and Control the Most Lucrative Markets in any Business

Situational Monopoly Is a 21st Century Profit Maker—Debunking Strategy Sacred Cows

monopolyrulesSince the 1990s, I have advised clients in many industries on using disruptive technology to change the rules, and one of the themes that has constantly recurred is companies’ decreasing ability to maintain high profits from product businesses. Products are not as profitable as they used to be. In the Industrial Economy, product life cycles were long because communication was infrequent and poor compared to today, which prolonged ignorance and novelty and product life cycles. It took years for fashions to cross the Atlantic, through the 1980s. Now fashions emerge simultaneously no matter where they originate. Today, novelty is consumed with alacrity, erasing differentiation and price premiums.

To reference one statistic, in 2011 two billion people access the Internet, one third of the global population. They have access to infinite amounts of information and relationships. They share information about using products and services to create value in terms of their situations, and other people find them and interact. When people interact, they make each other smarter, fast. They expose product shortcomings and opportunities, and millions of other people discover those conversations. Product ignorance is a diminishing quantity. Witness Hollywood “blockbuster” wannabes that die within two weeks of release because individuals panned them online; no matter how many millions in advertising support studios spend, the films never recover. On the flip side, films emerge the same way. YouTube is increasingly used to “pre-release” films.

Monopoly Rules provides some of the missing links. Milind Lele references product overcapacity and new competitors as I often have, but he provides a simple actionable approach to strategy that is very easy to understand and useful. Most businesses are still oriented around physical assets, but the key is to focus on situations, pockets of need, that emerge. If you can satisfy these pockets of need in an unusual way, you can create a monopoly and high profits.

Book Overview

Everyone in business probably dreams of having an unfair advantage, although most people would be careful about admitting it. But what if you could develop an approach for consistently creating an unusual advantage in any business? That’s exactly what Lele proposes in Monopoly Rules, which revolves around the concept of “situational monopoly.” Most relevant, however, is that situational monopolies are driven by shifts in customer needs, competitor businesses and industries, which are occurring far more rapidly in every business. Increased market dynamism is easy to understand once you consider that communication drives change, and our communication tools are an order of magnitude more efficient.

As usual, I outline the book’s chapters before adding my Analysis and Conclusions.

Part One: The Truth About Monopolies

Challenges conventional wisdom about “monopoly” while updating its definition and sharing numerous examples.

One: No Trespassing

  • Definition of monopoly: an ownable space for a useful period of time: capable of being controlled and producing high profits for a defined period
  • Honda minivan example: Honda debuted the Odyssey just after competitors had refreshed their models, so it had a monopoly on the fold-flat back seat feature for four years (major modifications of automotive manufacturing lines happen every four years)

Two: The Two Dimensions of Monopoly

  • Space has many possible definitions: geography (bottling plant), product/service uniqueness (Fedex’s early days), price difference (Walmart), emotional involvement (Apple, Harley-Davidson).
  • Fascinating example of jet Blue and JFK International. Due to its international focus, JFK was deserted during the middle of the day, so jet Blue negotiated aggressive landing fees with the airport authority.
  • Time is the “monopoly period.” The best way to think about this is patent, which is a monopoly for a defined period during which the inventor has a monopoly. General business monopolies, though, don’t have patents, but situational barriers provide the monopoly conditions. Market conditions provide the limits, as with the Honda example.

Three: Economics 101

  • Debunks standard assumptions about and attitudes towards monopoly: large, illegal, promoting collusion. The new monopoly is none of these.
  • Historical anecdotes: British (tea, spices), Romans (London only fordable spot on the Thames), Venice (salt), Spain (New World gold), United States (helium begetting the Hindenburg’s tragic use of hydrogen).
  • New monopoly: smaller, legal, niche market focus.

Four: It’s Not About “Sustainable Competitive Advantage”

  • Debunks SCA as having an incremental improvement focus, too limited for breakthrough in most cases. Will not guarantee unusual profitability, only monopoly does that. Starbucks had no SCA: not scale, uniqueness, experience curve, brand or cost.
  • Starbucks’ secret was using Coffea arabica instead of coffea canephyora, which was far cheaper and tasted awful, yet most of U.S. coffee suppliers had long depended on it. This coincided with the rise of two-family earners and (he doesn’t mention this though) the rise in the portion of U.S. college students going on foreign study and tasting real coffee in cafés. For example, one derisory French expression for U.S. coffee is “jus de chaussettes,” sock juice. Starbucks went to market fast in urban areas and did not franchise, which enabled it to control the taste of the coffee. Starbucks made monopoly rents because it had the best tasting coffee in the U.S.
  • Southwest Airlines: succeeds when it has a monopoly on cheap seats; competition is train or bus (this argument less powerful for some routes in 2011, as large airlines have merged and succeeded in getting their costs down). Southwest has a monopoly on price-conscious travelers in chosen markets.
  • Other companies that enjoy monopoly, not SCA: Whole Foods Market, Enterprise Rent-A-Car, Iams, Dell, Fedex… Walmart focused on delivering low prices in small town locations. Points out that these companies gained prominence in mature industries: grocery, airlines, car rental, computers. They thrived while competitors went out of business.
  • Is SCA the Anna Kournikova of strategy? (“lots of endorsements, but no tennis championships”). SCA does not guarantee high profits; it can enable a company to outperform competitors in defined areas; it can deliver higher profits but need not.

Five: Monopoly Flavors

  • Three examples: Pfizer Lipitor (patent), Coca-Cola (history, brand, trademarks, copyrights) the Super Bowl (also World Cup, Olympic Games).
  • Sports: short monopoly period; drugs fairly long; Coca-Cola decades.
  • Warren Buffett invested in Washington Post’s parent due to the Post’s monopoly on federal government news and gossip.
  • Clear monopoly vs. fuzzy. Patent is clear; Honda’s Odyssey was fuzzy.
  • Very useful point: assets vs. situations. Assets are traditional root causes of monopoly: natural resources, products, technologies. Situations are where most monopolies exist today: “the right product at the right place at the right time.” Enterprise Rent-A-Car’s monopoly on the insurance replacement car market. As of writing, it was the biggest rental car company in the U.S.
  • Situational monopolies are more subtle and complicated than asset types.

Six: Barriers that Protect Monopolies

  • Customer islands: how Dow chemical surpassed Monsanto by courting chemical engineering students with a comprehensive design handbook on heat transfer.
  • Midwest Express had a monopoly on luxury flights out of Milwaukee.
  • Harley-Davidson’s patented sound. Switching costs (cameras), network effects (eBay).

Seven: The New Competition and the Rise of the Situational Monopoly

  • Asset-based monopolies are losing influence in favor of situational monopolies. Kodak, Compaq casualties.
  • Dell: custom-order computers online or phone: circumventing the I.T. nazi (I.T. controlled what models, configurations, so business units ordered their own).
  • Earning monopoly rents from a commodity product: Egg Beaters.

Eight: Monopolies Drive Market Value

  • No big surprise here: monopoly drives stock price.
  • MQ = M x R (monopoly quotient = monopoly period x annual sales growth rate).
  • Playing with Apple, Google, Pfizer and others’ monopolies and stock prices to prove the point.

Nine: Monopoly Kaleidoscope

  • Lele uses the idea of the kaleidoscope to describe how fast-moving market conditions create different competitive opportunities.
  • Creating situational monopolies: recognizing industry shifts, competitor shifts and customer shifts. CNN, the only all-news cable channel for 16 years.
  • Examples: GM and Toyota & Honda; Kodak & Fuji…

Part Two: The Monopoly Rules

This is the guidebook to creating and managing (mostly) situational monopoly.

Ten: Understand Your Current Monopolies

  • Look for monopolies you may own: where are they, why are they there, how long will they last?
  • Especially useful: You have a monopoly when: five monopoly tests:
    • Do customers see only you? Windows customers, Enterprise, Apple.
    • Are you invisible to your competitors? Folgers & Maxwell House ignored Starbucks. Sears ignored Walmart. American Express ignored gold Visa. This happens because incumbents rely on false assumptions (don’t see the shifts). “Walmart’s a discounter, we’re a department store.” – Sears executive. (Did customers care? No.)
    • Are your true competitors outside the dotted lines? By definition, monopolies don’t have competitors but they can have substitutes that cater to similar needs in different ways. Blockbuster and Netflix.
    • Do you price like a monopolist?
    • Do you enjoy monopoly rents?
  • Why does it exist? Honda’s monopoly, did it exist due to its brand or due to the fold-flat feature. Later, when others duplicated the feature, the monopoly dissipated.
  • Is Apple’s monopoly the iPod? The iTunes Music Store? If so, its monopoly may prove short-lived (although many years on ;^). However, suppose its monopoly is the total system: then it could be far longer.
  • How long will it last? H&R Block: created when the IRS stopped preparing returns for taxpayers: since the need was seasonal and simple, accountants didn’t want the work, so H&R Block expanded rapidly; today, biggest threat is TurboTax, not Jackson Hewitt.

Eleven: Defend Your Current Monopolies

  • Mercedes and Lexus: “It’s just a Toyota.” – Mercedes executive. Product uniqueness is vulnerable to imitation. Often, management doesn’t understand the monopoly and mismanages it.
  • Sun Microsystems didn’t embrace Linux fast enough. Cadillac in the 1970s started pursuing volume, targeting the larger market of aspirational buyers, and largely destroyed its monopoly of the U.S. automotive luxury brand.
  • How to avoid surrendering a monopoly:
    • Don’t sneer at competition, especially from emergent sources.
    • Be sure you understand the true nature of your monopolies. Rarely are monopolies due to “brand” or “quality.”
    • Be ready to shift with market dynamics.
    • Keep your eye on the monopoly ball.
    • Don’t be complacent.

Twelve: Discover the Next Monopoly

  • Look for situations: emerging needs, incumbent inertia, new capability. Lele doesn’t go into it, but legal and compliance situations, licensing, etc. can also produce monopoly.
  • Examine an industry’s “core beliefs.” They are often vulnerable to shifts. Examples: “People rent cars when they travel.” “People buy coffee at the supermarket.”
  • Offshoring is threatening core aspects of professions, accounting, law, consulting, medicine, engineering. This trend is beyond the scope of the book, but it is disturbing the organizational structure of professional services firms, which were built on the assumption that they could pay top dollar for consultants/associates and bill them out to do basic research. Increasingly, research processes can be offshored, which confronts firms with changing the core of their structure. I predict that higher education will see similar trends within the next ten years.
  • Think like an entrant: if you weren’t in your industry already, how would you enter the market?
  • Validate ideas: how big is the potential space and how long will it last? Why does it exist, why isn’t anyone serving it? Can you create barriers that competitors might perceive?
  • Objectivity very difficult, but it is critical. The exercise involves using the insight you have due to your experience with the industry but stripping off assumptions you (and others) make because you’re in the industry.

Thirteen: Seize the Monopolies in Your Own Backyard

  • Sears failed to see the Walmart threat; Southwest failed to see the JFK opportunity; Ford passed on the minivan in the 1960s and 1970s. Lee Iacocca went for it when he went over to Chrysler. IBM and Compaq failed to see Dell.
  • Often businesses are so focused on performing within their rulesets that they miss opportunities. Discussion of frame blindness and how to avoid it: question conventional wisdom, don’t take yes for an answer, study adjacent markets, rewrite your formula, interrupt your mental routine.

Fourteen: Work Backwards

  • Begin with the end in mind. Monopoly is the goal, strategy is how to get there.
  • Copying Dell isn’t the same as being Dell. The Gateway example. Dell’s monopoly arose due to business unit managers’ ability to circumvent IT. Gateway served small business and consumer markets, so it didn’t have the monopoly.
  • The “new competition.” In the global market, new competitors emerge from anywhere. They don’t heed your industry’s assumptions. Market shifts are changing much more rapidly. Proprietary features are much more difficult to retain.
  • [Don’t let engineers or product managers convince you of the uniqueness of your products, or features. Or marketers talk about your great brand. They are usually incremental advantages, not monopolies.]

Fifteen: Focus on Speed to Space

  • This is an obvious chapter, as one half of the monopoly equation is time.
  • If you have true barriers, you have more time, but be honest about this. Southwest had a lot of time due to the mental lock-in of their competitors, who had killed off discounters in the past. Sol Price dawdled and lost the Price Club monopoly to Sam’s Club.
  • Starbucks focused on becoming a national brand from the beginning; jumped to Chicago rather than staying West Coast.
  • Microsoft has been very effective at maintaining its monopoly for many years.
  • But don’t focus on fast time to market if you don’t validate the monopoly and understand it. Several examples of Web 1.0 startups that rushed to market before they had a value proposition.

Sixteen: The Art of Monopoly Leapfrog

  • A short chapter whose main point is optimizing entry and exit from monopolies. Mostly companies are late to realize that their monopolies are ending. Blockbuster stayed way too long at the fair. Yet, Movie Gallery has a similar business, but with a monopoly due to its rural video rental focus.
  • Scenario envisioning is a structured process in which (usually) strategy consultants lead a multidisciplinary group of executives and specialists in consideration of possible shifts that could affect their business. [This can be very effective; I’ve led these sessions with clients, and it can be breakthrough].
  • Reverse engineering the future is a different tack. It posits an end state and asks what would have to happen to realize the end state. Describe the end state and work backwards.

Seventeen: What to Do When the Monopoly Ends

  • Every monopoly becomes a commodity at some point.
  • Try to set up a “country club” in which you are the leader and compete gently with one firm (duopoly) or two/three (oligopoly) if you must.
  • Examples of drugs market; how the patent holder raises prices as its drugs are going off patent. But this can’t be done through collusion, which is illegal. But it’s a common industry practice which most players understand.

Epilogue: The Monopolies of Tomorrow

  • Customers are changing: older in rich countries, younger in emerging countries.
  • Internet [and social technologies] is heavily used in emerging markets by default. People are much more educated, or can get educated about information very quickly.
  • Retail is going the way of Walmart and, so brands continue to lose influence. Lele reiterated this point throughout the book.
  • Excess capacity is the rule, which pulls the rug from under asset monopolies.
  • The dynamism of the market makes it easier to create situational monopolies, but the markets move fast.

Analysis and Conclusions

  • Practitioners of strategy will be familiar with most of the fundamental concepts in this book, but, although it is based on a few simple rules, I found its clarity and simplicity valuable.
  • The examples are excellent for illustrating how incumbents overlook new entrants; they don’t operate at a sufficient level of abstraction, so they miss shifts.
  • Lele implies but doesn’t say that creativity, that is, looking at situations in new ways, is the way to profit now. He dismisses SCA as the holy relic because it’s too often focused on a particular function or competency. There are too many other people in the world who can replicate an idea and execute it more cheaply. The final frontier is creative, or discontinuous, thinking. As he points out, this can be completely compatible with discipline and management.
  • He doesn’t mention it explicitly, but agility is a pre-requisite for exploiting monopolies you discover or develop. You have to out-execute potential competitors, especially when structural conditions or barriers to entry are fuzzy.
  • You may love your organization; you have created it, and you live by its fruits. However, customers don’t care because it doesn’t add discernable value to them. A widespread threat among management is that businesses fall in love with themselves, their brands, their products. What they fail to appreciate is that they became successful within a context of customer and market conditions. They developed a brand promise. However, those conditions change and the rate and degree of change are accelerating due to increased amount and quality of communication. Companies have to realize that very few customers are willing to go down with the ship; most customers really don’t care about the company or the brand, they respond to its ability to satisfy a need. This is humbling but in most cases a far more realistic way to regard a business.
  • Encapsulated within the monopoly proposition is barriers to entry for competitors. An key element of strategy is trying to embed within your proposition some distinctive competency that others can’t duplicate easily. However, it has to add relevant value to the customer, who doesn’t care about your business (and should not).

Opportunities for Monopoly Related to Social Technologies

  • Social technologies are critical to recognizing emerging possibilities for monopoly because an increasing spectrum of all communication occurs online, and this communication is more rapid than ever before.
  • A huge gap in understanding exists among management of established companies about “brand” and “word of mouth.” If you understand it, you can create monopoly. Social technologies create a third player to the familiar producer and the customer, the “friend” or “referrer.” Companies need a self-referential, authentic value proposition for the referrer, who is distinct from the desired customer. When they do this, social technologies click in as powerful accelerators.
  • TOMS Shoes is an example of what is increasingly called a “social business” because a key part of its value proposition is producing social value. One thing I mentioned but didn’t stress in my coverage of Blake Mycoskie is the importance of being organic. TOMS created the “buy one, give one” space in shoes and will imminently expand beyond shoes, and its employees and business partners feel the passion and authenticity of the creator. The connection to that authentic creativity is differentiating. If Hush Puppies did it tomorrow, it would be a copy. The creative spark, if managed correctly, is differentiating. People know it when the see it, feel it.
  • Socialtech is coming to B2B, but the barrier is that social “gurus” don’t have sophisticated business process knowledge, which is critical in applying socialtech to complex B2B businesses. Hence a significant monopoly exists in B2B.
  • We humans are social in our DNA, and socialtech enables us to be more social. We talk about notable situations in which we are using products and services, and this is what I call the social channel of value, and it exists for every product or service. Companies who can create situations that makes our social propensity easier can create monopoly. Marketers don’t understand the social ladder of participation, so they mistake small numbers of participation for little impact. One of my favorite examples is Sam Adams’ Long Shot.
  • Cross-border collaboration is a significant source of monopoly due to the intricacies of cross-cultural interaction. It raises the bar significantly for advanced social and management skills. However, I have long predicted that it would prove to be a deep well for creating uncommon value. Where there is extensive tacit knowledge, significant barriers are created. If you crack the code, you can create monopoly. Lele doesn’t say this openly but implies that (probably) half the challenge of creating monopoly is intention. For this alone the book is immensely valuable.
  • Companies are used to asking customers to interact with them to share insights, but that leaves money on the table if you want to understand sources of new monopolies. Smart companies pay more attention to customer-referrer-customer conversations, which are inherently much more customer focused. The fold-flat seat is one example. There are a million conversations, but companies have to look for them. But it doesn’t have to be an accident: for example, CSRA helps organizations create and nurture conversations that drive innovation with socialtech.

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