Strategy begins with tactical asymmetry

What happens when every MBA has read Porter? or when every general has read Clausewitz and Sun Tzu? What happens to strategy when everyone knows about it?

What’s left is the exploitation of tactical asymmetry — usually in the form of a competitor’s inflexibility.

To see why, try a thought experiment: what if a natural monopoly opportunity is revealed simultaneously to two companies of equivalent resources and competitive position?

If firms were rational agents with equivalent information, then each would invest one half of the present value of the monopoly over its lifetime, and NPV across that entire industry would be near zero, no matter who won.

But real-world agents are not rational, and the bias is toward overinvestment. In particular, individuals within firms have personal incentives to overestimate market size and odds of success, and to abandon failed efforts only reluctantly. As a result, in the thought experiment, we would tend to get negative NPV in real-world cases.

This negative NPV results from the symmetry of the two positions: even though the industry may be a highly profitable natural monopoly in the steady state, no firm can reach a dominant position. Yet it continues to invest as if it can.

Historical examples abound. English canals and American railroads, obviously natural monopolies, yielded many investment failures in part because of such overinvestment.

The symmetry is the problem. So, to have a reasonable expectation of positive NPV in chasing a monopoly, you must begin with a significant tactical asymmetry over competitors — resources (money, incumbency), information (insight, access, surprise), or preferably all of the above.

For a venture capitalist, this would be the second half of an investment evaluation. The first half would be “is the market likely to be a monopoly (i.e., to yield supernormal profits to the winners) at all?” If so, then to have fair odds of success, there must be an tactical advantage that may be exploited as a strategy.

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