A topic that fascinates me is business and the decisions that are made by executives when determining how they will grow their companies, design and launch new products, enter new markets and most of all, deal with competitors. Few decisions are as important as how to deal with competitors yet most executives struggle with making the right decisions.

As a student of history, I often look to the past for examples of how countries dealt with threats, how countries managed their economies, and how companies overcame adversity to become the leader in their chosen industry. In many ways, business and war have similarities; primarily the need for a coherent strategy capable of defeating an enemy or an aggressive competitor.

Little has changed over the centuries.

More than 2,400 years ago, the Athenian historian Thucydides offered a powerful insight related to how a ruling power reacts to a rising power: “It was the rise of Athens, and the fear that this inspired in Sparta, that made war inevitable.” In the case of Sparta and Athens, it led to the Peloponnesian War that lasted from 431 to 404 BC. Thucydides noted that when a rising power threatens to displace a ruling power, the resulting stress makes a violent clash the rule, not the exception.

American political scientist Graham T. Allison performed extensive research on the topic. Allison coined the term ‘Thucydides Trap’ to validate that indeed when a rising power threatens to displace a ruling power, violence is the likeliest result. Allison wrote a book titled Destined for War where he argues that China and the United States are headed for war as a result of The Thucydides Trap – The rising power China, is challenging the leading superpower in the world, the USA.

I enjoyed reading Allison’s book but on several points I disagree with his findings. Nonetheless, the book is well-worth reading. You can find a shortened version of Allison’s opinions here.

Applying ‘Thucydide’s Trap’ to Business

In the world of business, the situation of a rising party threatening the dominant position of another player sounds all too familiar. Market-dominating firms are frequently challenged by rising competitors through the use of innovative and disruptive technology or business models. This gives rise to the question whether the dynamics of the Thucydides’ Trap are at play in business as well. Do firms end up in a conflict – such as a price war – or are the worlds of geopolitics and business so distinct that firm rivalry is resolved in less destructive ways?

What’s interesting is that when a company that is a leader in their industry is confronted by a company (competitor) gaining market share and customers, the leader often reacts in the same manner that Sparta did against Athens, with aggression. I believe the focus of using aggression (the desire to compete with or beat) a competitor, is actually a poor strategy. Instead of making decisions out of inspiration, executives fall into a trap of making decisions out of desperation to protect market share.

I also find it interesting that many market-dominating companies often fail to recognize a future competitor for one simple reason – the competitor has a different operating model leading which camouflages the company’s focus and intent. Why didn’t Walmart take Amazon more seriously in the 1990’s and early 2000s? Because Amazon didn’t look like a traditional retailer and therefore, Walmart ignored Amazon until it was too late. One of the biggest failures in business is Walmart’s failure to acquire Amazon prior to 2000.

TikTok is an example of a company that also camouflaged itself. Facebook, Google and other tech companies saw TikTok as a short-form video company. What I saw when TikTok became available in the USA is a retailer, messaging app and future media powerhouse. (This is why I recommended in 2019 for Facebook, Google or Microsoft to acquire TikTok. I evaluated IBM, Oracle and SAP acquiring TikTok but I don’t think either has the capabilities or vision to grow TikTok to its fullest potential).

Overlooking a future competitor is dangerous but it is becoming more common. As a competitor begins to increases its market share, it starts to pose a more serious threat to the incumbent market leader, usually triggering the market leader to respond more aggressively.

Extreme Competition

Although I can list several companies having a massive impact within their chosen industry, two companies in particular are driving what I refer to as ‘extreme competition’. I define extreme competition this way:

A form of competition whereby two or more companies strive for a common goal which cannot be shared and where in order to win, a form of ‘Total War’ ensues to remove the threat of the competitor completely. Executives, fearful of a rising competitor, make decisions and implement strategies to beat the competitor but instead, weaken their own company. 

The danger of extreme competition is real. Macy’s has wasted billions on their e-commerce strategy; Kellogg’s is wasting millions on programs to sell their products direct to consumers and provide breakfast delivery; Kraft-Heinz is launching a program to sell the Instapot and meals direct to consumers; and Kroger has partnered with Mirakl to launch a marketplace for products beyond groceries.

Macy’s invested in e-commerce as a way to compete with Amazon. The other programs I listed are also designed to compete against Amazon or another retailer. All of the programs will fail. Miserably. Why? Because the strategies were made out of desperation, not inspiration. Kroger is going to compete with or beat Amazon’s marketplace? Serious? Consumers are going to pay to have breakfast cereal delivered to their homes? Serious? The programs are wasting capital and weakening/distracting the companies from implementing more effective strategies.

Extreme competition is increasing with two companies, Amazon and Tesla, being the drivers. Let me explain.

Tesla

Tesla’s stock hit $1,923.90 on August 18th, 2020—another record—adding to the incredible year the company is having. Shares closed up 2.8% to $1,1887.09. The stock (ticker: TSLA) is up roughly 350% year to date and more than 700% over the past year. Tesla is now worth roughly $350 billion, and more than $425 billion on a fully diluted basis—accounting for management stock options. More important, Tesla is worth more than all of the leading car companies combined.

Although its fair to question if Tesla is actually worth $350B or if the stock is overvalued, what can’t be debated is the impact Tesla is having in board rooms at Ford, GM, Toyota and other leading car manufacturers. A phrase uttered constantly is “How do we compete with Tesla?”

An example of the impact Tesla is having on the auto industry is the Ford Motor Company. Although $155B in debt, Ford continues to borrow money with the intent of investing $12B over the next three years to develop electric vehicles. Ford has already invested billions on their electric car program. Ford will begin selling an all-electric Ford Mustang Mach-E; a car Ford believes will lure consumers away from Tesla.

I have my doubts that the Mustang Mach-E will sell as do many automotive analysts.

Ford and Tesla want to win the electric car race but only Tesla has proven to be able to manufacture a product consumers want. Ford has struggled so much over the years that they have signifciantly downsized the number of cars that they sell. Pickups, SUVs and the original Mustang are Ford’s primary focus.

The desire for Ford to beat Tesla, the rising power, may actually end Ford’s ability to compete at any level. If the Mustang Mach-E fails to generate sales, and if Ford’s other electric vehicles also fail, Ford will more than likely have to declare bankruptcy.

Ford should not attempt to compete with Tesla in electric cars, trucks or SUVs. A more strategic option would be for Ford to license powertrains and technology from Tesla and enter into a mutually beneficial alliance. In turn, Ford should address its smothering level of debt; even declaring bankruptcy if necessary.

However, the desire to beat Tesla is so great that I believe Ford will continue down its current path. At a time when Ford needs extreme ownership, the company is instead focused on extreme competition…and the decision may kill Ford.

Amazon

No company is rising faster than Amazon or generating more fear and angst. With a value in excess of $1T and growing rapidly, Amazon is a formidable company.

Amazon is also a company generating extreme competition with other retailers, especially Walmart. Target, Kohl’s, Macy’s. Kroger and other retailers may all technically compete with Amazon but none of them have any chance of ever surpassing Amazon or preventing Amazon from significantly reducing their market share in the coming years.

Walmart generated revenues of $514B in 2019. Amazon generated revenues of $280.5B in 2019. On every level, Walmart is a massive company.

Why then does Amazon influence the majority of decisions being made by executives at Walmart? Extreme competition. The desire to beat Amazon permeates throughout the executive ranks at Walmart on every level. I frequently have off the record discussions with executives at Walmart and the topic of Amazon dominates the conversations.

Walmart, once the leading superpower in retail and in a class by itself, now views Amazon as a rising power capable of threatening its existence. Walmart is both afraid and dismissive of Amazon and it shows. For example, Walmart acquired Jet.Com for $3.3B with the intention of significantly closing the online sales gap with Amazon. Did it work? To an extent. Amazon controls over 40% of all online sales and Walmart controls 5.8%.

Was acquiring Jet.Com the right decision? Asked another way, could Walmart have made another decision that would have generated better results and value for the company vs. acquiring Jet.Com? In my opinion, yes.

Walmart’s executive team views Amazon as a company they want to beat. In many ways, Walmart’s team of executives view Amazon as an object they can hit or strike, Hit Amazon hard enough and often enough, and the company will fall. Such a view clouds Walmart’s ability to make better strategic decisions. Acquiring Jet.Com was guaranteed to do one thing – Walmart would compete against Amazon where they are strongest.

Instead of acquiring Jet.Com, I believe Walmart should have acquired Shopify or invested in and formed a partnership with Shopify. Walmart could have also acquired Jet.Com as a combined Jet/Shopify would have provided Walmart with short-term and long-term benefits. (Walmart entered into a partnership with Shopify in June 2020).

Walmart continues to make decisions for one reason only – beat Amazon. Walmart+ is the latest example of such a decision.

Many retail analysts and opinion writers continue to champion that Walmart has an insurmountable advantage over Amazon because of Walmart’s 4,753 stores. Walmart executives often speak about the number of stores they operate. Amazon acquired Whole Foods and Amazon owns and operates books stores, Amazon Go stores and is in the process of building several grocery stores. However, Amazon has less than 550 stores total so on the surface, Walmart does have a massive advantage in stores.

But does Walmart have an insurmountable advantage because of its stores? Stated another way, is Walmart making decisions with the belief that their stores are an impenetrable defense against Amazon? I believe they are. I also believe such a view is dangerous. Here’s why.

Amazon has multiple ways in which they can close the gap in stores with Walmart. For example:

  • Acquire Target which operates 1,880 stores
  • Acquire JC Penney which operates 840 stores
  • Acquire Kohl’s which operates 1,158 stores

There are other companies that Amazon can acquire to increase their store count. Amazon can also lease available real estate and brand the stores as Amazon. Amazon can also build its own stores. Let me be clear, Amazon can build, lease or buy enough stores to significantly cut into Walmart’s lead. Can Walmart cut Amazon’s online advantage? Amazon’s efforts have thus proved to be underwhelming.

But what if Amazon does something different? What if Amazon, instead of letting Walmart’s insurmountable advantage in stores influence them to beat Walmart, instead motivates Amazon to do the following: Create a retail ecosystem that doesn’t require stores. Impossible, right? Maybe not. I am convinced that the next big thing in retail is the creation of Virtual Reality retail whereby consumers can enjoy the store experience without ever having to set foot inside a physical store. There are other options Amazon can pursue to minimize and almost eliminate entirely the value of stores to Walmart.

What if Amazon, instead of wanting to beat Walmart, instead focuses on playing an infinite game where the goal is to outlast Walmart and all other competitors?

Sparta won the Peloponnesian War when Athens surrendered to Sparta in 404 BC. Motivated by it’s victory over Athens, Sparta attempted to impose its will on other cities but the people living in the cities revolted and it led to disarray. The Spartans were harsh enough to their allies, namely Corinth and Thebes, to motivate these cities to seek an alliance with one another in opposition to Sparta. The combination of cities rising up against Sparta ensured their defeat. Sparta’s way of ruling and the Spartans way of life were marginalized to the point of extinction.

When it comes to Amazon and Walmart, Thucydide’s Trap only applies if Amazon is willing to respond with aggression in an attempt to beat Walmart. I don’t believe this will happen. Instead, Amazon will continue to play an infinite game with a focus on outlasting Walmart.

As for Walmart, with 4,753 stores, Walmart must do everything in their power to maintain its market share and maximize the value from every store it operates. For now, its stores are an advantage. However, in the coming years, I believe Amazon will marginalize Walmart to the point of extinction through technology and innovation. Such a claim may seem highly improbable in 2020 but by 2030 or 2040, it’s possible that Walmart will be a shell of the company it currently is.

Advantage Amazon.