RE: Sanders' tenacity
Mary,
Good post.
I am concerned about the attempt to combine different competitive experiences into one theory, and your point about the differences of tech durables and consumer nondurables is important. Interbrand competition in consumables is tough -- and entering a habit market (e.g. Coke in Japan with 90% share in colas) I believe can only be achieved by sharp price cuts and a product with superior consumer acceptance for a substantial fraction of the users (remember the Pepsi Challenge?). Pepsi and Coke have fought awful battles in many markets with huge (50%) prices cuts on supermarket promotions. When the price is cut, sales of that brand mushrooms (they rarely both discount at once. Then we have immense payments to stores if they will only discount Coke or Pepsi (these have been attacked by anti-trust) or promotion allowances. These are attempts to create (illegal) exclusive dealing. Businesses in this kind of competition are often stuck in endless cycles of fight over share. Because the fundamental costs change little it is rare that anyone can knock out their rival, and there is always the threat of entry.
Chips are vastly different, but you do not have to knock out Intel to make a living. As a dominant producer, Intel has no interest in undercutting the price of a competitor (particularly if it cannot discriminate in price among segments). It can tolerate a stable price differential indicating the competitor has accepted a follower or secondary position (and a small stable share) in the market. If the rivals cuts price too much, the leaders signals by cutting price to close the gap. If the competitor announces a fixed ratio differential (AMD's infamous 25%), it signals the leader that it is challenging a price war. It is okay to decorously compete with the dominant firm but one must never challenge the leader to a price war, particularly while increasing capacity sharply. I believe AMD was aggressive in buying NexGen and that was okay. I think it was foolish to announce K-6 with a speed advantage over Pentium (a move that is said to have infuriated Grove) and before Pentium II. If you strike at the king, you must kill him, and this AMD has not done and shows little likelihood of doing. Intel is hardly bleeding, although profits could be better. AMD has sunk deeper and deeper in debt. If I were AMD, instead of buying NexGen I would have bought stock in Intel. I would rather compete with NexGen (which needed capital) than spend a bunch to buy it so I could continue to lose money competing with Intel. This is not a joke. One benefit of being beaten to a bloody pulp by a thug is learning not to fight him again, and another is knowing who to bet on if there is another fight. |
